What is 'outperformance'?

In our articles, we have not been kind to the journeymen of the business world; i.e. those 'competent' companies that 'cruise' without much of an appetite for vision, strategy - and, yes, also thus without much of an appetite for outperformance.

Whenever one presents a strongly opinionated thesis (as we do in our book), some of those who hear you will focus only on parts of your message and may then misunderstand the full intended gestalt.

So, the question is: What is our definition of 'outperformance'?

In short, outperformance must be of such a nature that it is:
(1) compounding(ly)
(2) good
(3) for an 'indefinite' period.

That's it. Simple as that.

If you're feeling lazy, you can stop reading right here. For the other nerds we will now simply discuss these three elements in more detail.

'Compoundingly'

We have discussed compounding and surpluses in another post. There we referred to Benjamin Franklin's quote "money makes money and the money that makes money makes more money" (i.e. compounding). And we discussed how surpluses allow for the creation of more compounding.

Outperformance is the achievement of compounding - the gift that keeps giving. Outperformance is when your creation becomes the platform for further creation and for further innovation. And this process will continue ad infinitum if you really get it right - and if you keep managing it correctly.

Interestingly, the phrase, "the gift that keeps on giving", originates from a 1920s advertising slogan for the phonograph/gramophone/turntable (i.e. the first device that enabled people such as you and I to play recorded music at our homes).

This is therefore a fortuitous origin story. This device brought goodness into society. And, the industry that was built on that device truly compounded thereafter - year after year after year. The phonograph is a great illustration of what we are referring to when we speak about outperformance: seeking innovation (however big or small that innovation may be) that will be of such high quality and design, and implemented so well, that it will enable future benefits that we cannot even foresee now.

The 'or small' wording in the previous paragraph is important. We will come back to that at the end of this post.

Compounding example

Let's look at an example of such compounding - an example that we know very well, namely 60-minute delivery of goods. And let's focus on the IT side there. But, this discussion will be just as applicable to 60-minute delivery's other elements such as, for example, Marketing and Operations.

If you have a good specification of a customer proposition, and you also have a set of good developers, and you manage the process well, you will probably then create a half-decent proposition.

But will that proposition, based only on such an approach, allow you to achieve compounding at a later stage? Maybe not. Probably not.

If, however, you look further ahead and you decide, from the start, to build a platform, an engine, an ecosystem and an asset — and, if you (continuously) re-consider whether you are still doing that — and if you tinker and pivot when necessary — and if you deeply understand concepts such as technical debt, technical investment and, especially, in this context, technical ambition and how to manage these — and if you cover all bases, down to, for example, planning for being able to deploy 500 times a day, even when your system is still new and still has only a few users — then you have a chance to achieve compounding when the rubber hits the road.

How does one achieve this? Well, please read the book. The recipes are in there. We cannot cover all of that here.

If you find this example disheartening ("Yes, Shoprite can do that, but we can't") then there is good news. Please read the last section of this post, below, for that good news.

What is 'good'?

How does one define and measure the 'goodness' of outperformance? The achievement? Its value?

Do we measure revenue growth? Asset growth? Profit growth? Numbers of customers? Numbers of eyeballs? What?

The answer to the measurement question is that it does not really matter which of these measures are eventually boosted by your creation. Outperformance means that what-you-have-birthed is so damn 'good' that 'any fool' would be able to see that it is good (without needing to measure to confirm that it is so). Great innovations will create outperformance in terms of at least one of the measures listed above (and/or in terms of other measures not listed here). It will probably create outperformance in terms of many of them.

Yet we all know that Peter Drucker said that "you cannot manage what you cannot measure"? So, how now brown cow?

Well, firstly this well-known quote is apparently incorrectly attributed to Peter Drucker.

Secondly, this outperformance concept is much more accurately described by Simon Caulkin's paraphrasing of F.W Ridgeway: “What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so”.

Read that last sentence again. We manage what we measure. When we start measuring, we invariably start managing - even if it makes no sense to measure or to manage. We really have to think deeply about what we measure. What must be measured and what must not be measured?

So, yes, we must measure every little part of the build and the implementation of the offering. And, then we must measure each and every IT incarnation of the solution. And we must measure each and every reaction to that offering; reactions from customers, from support personnel, and from anybody and everybody. And we must measure all of the parts of the operations surrounding the offering.

But we must leave quality undefined (as per Robert M. Pirsig's "Zen and the Art of Motorcycle Maintenance"). If we (the creators, not the bean counters) start measuring the success criteria (for reasons of defining quality or acceptability - as opposed to reasons of improving expected performance and/or finding new innovation opportunities), we lead ourselves to a small-minded narrow perspective.

True outperformance transcends measurement. Outperformance precedes measurement. Outperformance exists before it is created. It simply needs to be coerced into the land of the living. Outperformance, as we shall see later, can become 'immortal'. This paragraph argues that such immortally stretches in both time directions.

Measurement (in the Venture space) must be for proof of performance and as a means to inspire greater levels of performance, as well as a means to eliminate SLAs (due to having achieved perfection). Measurement must not be there if it induces fear of failure and/or if it prompts ultra-low change-appetites.

Measurement must not be there if it leads to people choosing 'acceptable' levels of failure (e.g. in the form of SLAs) which they think will be good enough to please their managers (or shareholders, or whomever needs to be pleased). Measurement can be bad.

Goodness (as opposed to the quality of the operational management of that goodness) is self-evident. It is "I know it when I see it", or as per the Sherlock Holmes character (in Arthur Conan Doyle's "The Hound of the Baskervilles"): "
"I know what is good when I see it."

What do we aim for when we envision outperformance? Outperformance should be about the creation of platforms, ecosystems, engines, assets and sustainable innovations. It should be about the creation of real value. It should not destruct other real value. It should add value widely. It should be subjectively 'good' to such an overwhelming extent that it will also be objectively good too (if you measure it).

Goodness in - goodness out

Now that we know that goodness is self-evident, the question is how we manage to achieve that level of goodness.

The methodologies (processes, management, leadership, approaches, ...) that you use if you want to achieve these outperformance results must be subjectively (and hopefully objectively) 'good' too.

What are these methodologies? What is the underlying thesis and approach here? Again, the answers are available to you. This post is too short to present those answers, but our book provides those answers.

Quality is not negotiable. Quality which we need not measure (see above) reigns supreme. Completeness, however, reveals itself slowly. It needs to be discovered - iteratively, bottom-up and through tinkering and pivoting.

For an indefinite period

Good for How Long? Good for an indefinite period.

Measurement (in a business context) has a time-element. True outperformance, however, transcends time. True outperformance, once it exists, should be indefinitely sustainable (as long as it is treated with the right amounts of respect and understanding).

Outperformance feeds itself and becomes even stronger over time. The performance compounds (as discussed above). Outperformance acts in a manner similar to compound interest.

Outperformance is immortal as long as it continues to be managed in the way that it was created: A never-ending process of tinkering and then pivoting in the next necessary direction.

Outperformance is immortal while it is ensconced in a corporate vehicle that respects its tinkering-needs, its venture-nature, and its strategy-defined birthplace.

Outperformance is immortal if the strategy that led to its creation, and the subsequent strategies that may eventually follow that initial strategy, continue to grant this creation ever-lasting life.

Even if there are major changes on the horizon and you cannot anticipate those changes yet, this creation, that you brought into being, and if it truly is outperformance, and if continues to be managed in the way that it was created, will position you better to react to those types of changes too.

Fake Outperformance

When is outperformance fake?

In short, outperformance is fake if:
(1) there is no compounding
(2) and/or it is not really 'good'
(3) and/or it is not sustainable

We often read that this or that company outperformed its competitors. Now, we did not create that word (outperformance) and we cannot therefore lay claim to it. In fact, we plagiarize all of the words that we use (from the dictionary). Conversely, though, we did add the adjective "compoundingly" to the dictionary (at the start of this post)

Either way, most of what we see 'out there' is not the 'outperformance' that we speak about.

Not-Bad Outperformance

The word 'fake', used above, only applies to our definition of the word outperformance. Many of these reported corporate performances are 'fake' outperformance according to the previous section's definition. But these are definitely not 'bad'. They merely lack the compounding and/or sustainability elements.

Ugly Outperformance

Here is an example of one type of ugly (and thus also 'fake') outperformance approach. There are, of course, many other types of examples.

If you have a measurement-first mindset (and that is the mindset that, for example, drives investment), you will focus on measurement. While venture capitalists will often focus on the building of an asset, the rest of the investment universe lean towards profits.

When CEOs and board members are incentivized along these same (profit-related) lines, this is where their focus will be too. These types of focus, of course, negatively affect strategy options and strategic wiggle-room.

So these (profit-)measurement-first mindsets are then shareholder-first (as opposed to customer-first) mindsets. And shareholder-first mindsets then often begat deadly treadmills. Higher profits have to be conjured from somewhere and this objective has to be achieved every 3, 6 or 12 months.

So, for many companies, this means that higher profits are then brought about through quick-fix methodologies.

These may include skimping on safety (which Boeing is currently being accused of), reducing product or service quality, shrinkflation, downsizing through staff reduction, wage reductions and/or too-low increases, and many more such tactical 'tricks'.

These approaches may lead to what others may see as 'outperformance' and may even last for a reasonably long time. But the corporate grim reaper awaits your arrival at some point along that chosen road. If ever-higher profits are achieved through means that are fundamentally unsustainable, the day of reckoning will eventually arrive.

"We know what is ugly when we see it." The problem is that we are often not allowed to see what is happening behind the "Wizard Of Oz's" curtain.

You might find it interesting to read some analyses of how we arrived at so much corporate ugliness. A good start might be "The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America--And How to Undo His Legacy" by David Gelles. The following is from the Amazon.com writeup:

"In 1981, Jack Welch took over General Electric and quickly rose to fame as the first celebrity CEO. He golfed with presidents, mingled with movie stars, and was idolized for growing GE into the most valuable company in the world. But Welch’s achievements didn’t stem from some greater intelligence or business prowess. Rather, they were the result of a sustained effort to push GE’s stock price ever higher, often at the expense of workers, consumers, and innovation."

Back to the 'Good'

Now that we have discussed the 'Not Bad' and the 'Ugly', let us return to the 'Good' and let us again touch on our discussion where proclaimed that some types of measurement may a bad thing.

We highlighted the word 'small' (where it pertained to innovations) above. Innovations that lead to outperformance do not have to be 'big' and there don't have to be 'many' of them.

If, however, they are 'good', and they are managed to be immortal, the compounding effect that they generate will eventually make them big. Thus, measurements of success (if these are performed) may initially indicate small amounts of success. Yet they may already be in the early stages of the process of booming.

Explosions, if you don't know that they are explosions, are difficult to detect during the first few nanoseconds, but eventually it becomes impossible not to detect them.

This means that any organization, no matter how big or small (or how successful it is, or how much it now struggles) can aspire to outperformance. The only caveat is that it needs to be done by employing the correct methodologies. The transmogrifier must be the right one.