Profit Isle CEO John Wass: Systems Thinking Drives Greater Profitability
There’s a story that John Wass likes to tell to illustrate the value of systems thinking. A CEO is holding the end of quarter meeting with their executive team. They go around the table, and everyone proudly reports that they’ve hit their KPIs. There’s just one problem. The CEO hasn’t achieved the company’s overall profitability goals. “Why,” the CEO asks, “Am I not doing great when all of you are?”
Wass is the CEO of Profit Isle, a business analytics software company that gives companies better visibility into where their businesses are profitable and where they aren’t. He sees systems thinking as critical to this work.
Wass argues that systems thinking can and should be applied to profitability. When companies take a more holistic view, it helps break down organizational boundaries and increases communication and transparency. This leads to greater profitability required to sustain companies in the long run.
Citing Islands of Profit in a Sea of Red Ink, the work of his partner Jonathan Byrnes, Wass notes that within most organizations there are profit peaks and profit valleys. They tend to net out, so a company will appear profitable (or not). But if you go deeper, the situation looks different.
Systems Thinking for Profitability? Why Now?
Wass sees several ways in which the digital age has changed the way business works. There’s no longer any such thing as a single source of information, controlled by an organization. Products and services are increasingly customized, so there’s no such thing as a single price. And there’s no such thing as a single way that people acquire products and services, or the way in which they’re delivered.
Today’s organizations are more intertwined with a broad and geographically diverse ecosystem. And, of course, the pandemic is profoundly disrupting both supply chains and demand, as well as our entire economic system. Complexity is skyrocketing.
Rethinking Those Legacy KPIs
Relying on legacy metrics that maximized profitability in a less complex and volatile world will no longer work in this environment. Now is the time to take an integrated systems approach to identify KPIs that are flawed or don’t account for interdependencies.
Organizations need to get beneath the surface. Wass points to a client situation his company was involved in. One part of the organization wanted to ensure that salespeople were consistently productive and identified the KPI of number of orders booked each day. Salespeople gamed the system by splitting larger orders, to log bookings throughout the week.
A deep dive into how the organization’s different departments all worked together revealed that a key profitability driver was average order size. Making more deliveries for these smaller daily orders was costing them tens of millions of dollars. Examining the whole system revealed that fewer, bigger orders would keep costs down and increase profits.
The Human Factor
Profitability pitfalls can be identified by using analytics, but Wass warns organizations not to let computers dictate decisions. He advises his clients to double check any system-to-system handshakes that happen when no one is looking, and to maintain the human element of these interactions.
There may be valid reasons for doing things the old-fashioned way – maybe your most profitable clients still want human interaction with a salesperson, even though that approach is more costly than having them order online. When organizations start viewing business through an integrated systems thinking lens, they will be able to make adjustments that factor in both computer-derived “answers” and the human touch.
To learn more about applying system thinking in technical environments, explore MIT xPRO’s upcoming online System Thinking course.