Tuesday, January 14, 2014

Two ways in which quotas can debilitate startups

Quotas(1) play a very important role in businesses. They are the chief instrument for translating business objectives into measurable milestones. Further, they translate measurable business goals into objectives for revenue generating functions in the business. Ultimately, they connect all other functions ranging from product development to marketing with overarching business objectives.

However, they suffer from two major weaknesses especially for startups who tie themselves to quotas like established businesses would.

Quotas are not actionable metrics

I was first introduced to the idea of actionable metrics while reading "Out of the Crisis" by Edwards Deming who used accident statistics as an example of an outcome-based metric that measures the result. However, it fails to provide any insight into what actions can be taken to improve the metric. Similarly, quotas are an outcome-based metric, which can't translate into actions as highlighted by Jason in this HBR article. Naturally, as Tom Tunguz points out in his follow up, they lead to anxiety in absence of actionable metrics (which are often process indicators) as they leave sales people powerless (2). Actionable metrics are important for sales as they result in constancy of purpose, and break business objectives down into fundamental metrics that can be acted on. In essence, actionable metrics translate sales into a machine that looks for continuous improvement as opposed to attainment.

Quotas can obfuscate reflection

Established businesses have a business model that works, they have a sense of market size and their customers, and therefore - business goals well informed. Startups are unlike established businesses. Business goals aren't informed by an objective market size, as very often startups are creating new markets based on their offerings, or fulfilling needs that the market didn't realize it had. This implies that unlike established businesses, startups are going through constant learning. A natural extension here is that startups  need to reflect about their sales processes independent of attaining quotas - way more than established businesses do. The challenge here is that quota attainment (or meeting budget) can sometimes result in inadequate reflection, and delay in actions which can debilitate a startup.

A question for more informed folks, especially those that sit on startup boards - Does measurement of leading indicators lead to better "retrospectives" by executive teams than meeting budget?

1 - I use quotas interchangeable with budgets here. I find that the difference between the two is essentially their probability weights. Budgets have 90% likelihood of being met, where as quotas might have 50%.

2 - In the face of goals, being powerless causes anxiety - a thesis proven by Mihaly Csikszentmihalyi in Flow