It is a difficult balancing act for leaders. They must deliver performance quarter after quarter, while also creating the basis for sustained future success. In other words, they must balance:
The ability to make short term sacrifices for long term gain is sometimes described as a mark of maturity and self-control1. But short-term sacrifices, in terms of performance, are a luxury that most business leaders cannot afford. Of course, new products or channels must be delivered in the medium to longer term, but not at the cost of meeting target this quarter or next.
The great irony is that the cost of not meeting this quarter’s number is only a fraction of the cost of short-term thinking. It is 47% less revenue and 81% less profit according to McKinsey data!2 The business case for looking beyond the quarterly number is both clear and compelling.
The unrelenting pursuit of the quarterly number is a costly and dangerous myopia. Short term financial expediency often drives poor decisions. Examples include:
These are blatant examples of ‘bite your nose off despite your face’ behavior, but it happens in more subtle ways too. For example:
So, it could be said that there are two causes of short-termism: ‘One is needing the money and the other is not having the time’. However, there is often a link between the two, especially in organizations where urgency is all pervasive.
Regardless of the cause, the true cost of such short-termism4 has now been quantified, and it is greater than we could ever have imagined.
Want to grow revenues by 47% and profits by 81%? Then look beyond this quarter or the next, making those strategic investment decisions that will underpin longer term success5. This is the compelling McKinsey data that we looked at earlier.
As the following numbers suggest, the payback from looking beyond the short term is massive:
The message is clear: Strategy adds value, or at least acting strategically does. Growth, profitability and business value require looking beyond the short term.
Short-termism can be a vicious circle. For example In response to a shortfall in revenues or margins:
As the above examples suggests it can be difficult to break the pattern of short-term behavior.
Short term decisions are reinforced by quarterly earnings expectations and executive compensation packages. Also, by a culture of all pervasive urgency which can result in the following failures:
Moreover, high levels of pressure or stress and short-termism seem to go hand in hand. When we feel stressed our focus narrows and our ability to think or plan long term.
It is a simple, yet powerful way to distinguish between managers and leaders – the latter focuses on the future, while the former does not. Managers who aspire to be leaders need to free themselves from micromanaging the day to day and focus on the medium and longer term. Indeed, the more senior the manager the more they need to focus on the future and the longer the time horizon needs to be.
It was the perfect C-suite combination, although there was conflict and tension at times. The COO’s personality profile described him as short term focused with a low-risk threshold. The CEO was the opposite – long term focused with a relatively high-risk threshold. The result of this unusual match was a significant boost to investment in R&D, market development and talent, yet it did not appear to detract from short term performance.
‘…how to be clear about what success looks like and how to consider this over the long term while also delivering against short-term expectations of stakeholders. In many ways, this dilemma lies at the root of responsible leadership.’
The long term impact of short-term behavior on organizational culture can be disastrous. It is often attributed to the worse excesses of corporate greed (e.g. Volkswagen’s diesel scandal or Purdu Pharma and the opioid crisis)9.
‘When we lead with a finite mindset in an infinite game, it leads to all kinds of problems, the most common of which include the decline of trust, co-operation and innovation’.
The good news is that the majority of big companies have stepped off the quarterly performance treadmill and many more have turned their back on issuing quarterly earnings expectations.11 Indeed, some of the world’s biggest organizations have espoused thinking long term as a value:
‘Leaders are owners. They think long term and don’t sacrifice long-term value for short-term results.’
Amazon Leadership Principles12