Short Termism:
Caught in a Costly Short Term Time Trap?

A Difficult Balancing Act

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:

• Short term performance with longer-term success
• The drive for efficiency & control with the need for innovation & agility.
• The requirements of ‘Business as Usual’ with the need for ‘Business Unusual‘

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.

Corporate Short-sightedness

The unrelenting pursuit of the quarterly number is a costly and dangerous myopia. Short term financial expediency often drives poor decisions. Examples include:

• Cutting spending in areas such as research and development, marketing, maintenance and hiring to boost the quarterly number, irrespective of the long-term consequences. 
• Discounting sales in order to get them to close this quarter rather than the next
• Curtailing investment in projects or initiatives that can sustain performance, optimize efficiency, develop human capital or manage social and environmental risks.

These are blatant examples of ‘bite your nose off despite your face’ behavior, but it happens in more subtle ways too.  For example:

• Consumed by the busyness of everyday activities, leaders have little time to think strategically, reacting to daily events and meeting strategic opportunities or challenges with tactical responses.
• Caught up on the daily treadmill executives have little time to spend on the critical initiatives required to realize the longer-term strategy. They fail to make important strategic decisions such as where they compete and how they win with longer term value creation in mind³.

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.

The Cost of Short-termism

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:

• Short-termism has a serious long-term cost – an estimated $40 million per quarter in lost earnings for a myopic S&P 500 corporation⁶. Apply that across the S&P 500 and it amounts to a massive $79.1bn in lost earnings annually.

• Corporate short-termism is estimated to have cost the US economy $1 trillion over a decade⁷. Alternatively, the cost is estimated at $109 billion annually based on the S&P500 alone⁶.

The message is clear: Strategy adds value, or at least acting strategically does. Growth, profitability and business value require looking beyond the short term.

A Vicious Circle of Behavior

Short-termism can be a vicious circle. For example In response to a shortfall in revenues or margins:

• The organization cuts sales and marketing budgets, thereby further impacting on future revenues.
• By curtailing investment in product development and innovation, the organization loses out on opportunities to add value and boost/sustain longer term revenues.

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:

• Failure to prioritize and sequence projects or initiatives.
• Failure to align people, departments and teams behind an agreed set of priorities and results.
• Failure to manage multiple time horizons (short term, medium term and long term)
• Failure to commit wholly to a single course of action. Fudging strategic decisions.
• Failure to plan or to be more precise, a failure to ‘plan-do-review’. 
• Failure to make trade-offs and compromises

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.

The ‘L’ in Leader is for Longer 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.’
Tim Richardson⁸

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’.
Simon Sinek¹⁰

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