People+Processes=Profit (P+P=P), the Business formula
This formula, People+Processes=Profit (P+P=P) might sound straight out of your algebra classes. And if you are like me who has a phobia for math, you wouldn’t want to continue any further!! But let me assure you, P+P=P is not a math or a scientific formula.
It is the cornerstone of every successful business. This ultimate business formula is the driving force behind every commercial enterprise. From multi-billion empires to the small Pop and Mom stores. Successful implementation of this formula ensures growth and profit for a business enterprise.
The objective of a business
The objective of every business or commercial enterprise is profit. This objective could change if you are running a philanthropic organization.
Profit is the ultimate reason why businesses exist. The shareholder is not investing his money in the company for charity. The shareholder believes that the management team is capable of producing returns for the money they invested.
Profit is the end result of things well done. According to Yvon, the outdoor industry billionaire, “Profit is what happens when you do everything else right”.
It is in this context that the above formula will be relevant.
P+P=P – The first P – People come first
Whether it was in the agricultural age, industrial age or in today’s knowledge economy, people always came first. They were and are the most valuable assets an organization can ever have. In the words of Peter Drucker, “The most valuable asset of a 21st-century institution, whether business or non-business, will be its knowledge workers and their productivity”.
It is rather ironic that in financial statements the people cost is classified under liability. We overlook the fact that the expenses incurred on the people, classified as a liability, is producing the assets on the left side.
People are an Asset
Employees, while called the human capital, they are rarely considered as the true wealth of any business. This capital unlike other assets in the company has less depreciation and with proper training and orientation, the value of the assets increases. There is no depreciation in the human capital if properly managed.
The traditional accounting method always carried the cost of human capital as an expense and despite so many financial standards, this has not changed. There was an attempt in the 1960s by Renis Likert to consider the value of human resources as a true asset that influences the growth and success of a company. This did not catch up, though.
Managers know that machines can have a greater output than people. But the person operating that machine can make a difference in the productivity of the machine. If that person is not careful, disaster could strike and the machine would malfunction or the production could be lower. Hence it is important to motivate the person behind the machine to ensure profitability.
People are not always an asset
Undoubtedly, it has been discussed and agreed that the popular quote of people being an asset is not entirely true. People are not your asset, but the right people are. Wrong people can become a liability and drain resources. But right people can improve the morale of the company and also contribute greatly to the profitability of the company.
The amount of time and money spent on the selection, training, empowerment and supervision of the right people will ensure that the end result of the formula P+P=P, the profit is rolling in.
A well-trained person with the right attitude would be able to take over new responsibilities in the organization. This would reduce the cost of hiring at the managerial level. The right person will also have a higher engagement with the company. The cost of keeping up the engagement and motivation of the right person is an expense that can be considered as an investment. The right person would also be the ideal candidate to take up higher positions in the organization. Promoting the right person within the organization would mean motivating others to excel and reducing the learning curve.
The Marriot case study
In an article in Forbes, management expert Rasmus Hougaard cites the case of Marriott International. They went on to become a Fortune 200 business from a humble origin. The secret? The leaders firmly believed in its mission “If we take care of people, they will take care of our customers and the customer will come back”. When the Great Depression hit their business JW and Alice Marriott, the founders reacted by hiring a staff doctor to ensure the health of staff. This served two purposes, it demonstrated their care for the staff and that they wanted a healthy staff to take care of their customers.
P+P=P – The Second P – Processes
The second P refers to business processes or business methods. Techopedia defines business processes as, ” A business process refers to a wide range of structured, often chained, activities or tasks conducted by people or equipment to produce a specific service or product for a particular user or consumer.
Business processes are implemented to accomplish a predetermined organizational goal. Business processes occur at all organizational levels; some are visible to customers, while others are not.
The term business process may also refer to the cumulative effects of all steps progressing toward a business goal. This sequence of steps can be most clearly depicted using a flowchart.”
Even with the best people on board, unless there is a strong, structured, and documented business process, the productivity of the team would be wanting. It is a must to have a strong business process, which is constantly reviewed and updated to ensure the team is able to perform to its optimum.
Types of Business Processes
Classical textbooks breakdown the business process into three types
- Operational Processes: these are the processes that are core to the business and constitute the majority of the work in an organization. For instance, in the case of a factory, it could be the manufacturing of a component or in the case of a bank, it could be the core banking function, opening of an account to managing the loan book, etc.
- Management Processes: This constitutes the processes that are designed to supervise, monitor, and manage the core operational processes. This would include the hierarchy in the organization and the relationship between the hierarchy to ensure maximum productivity.
- Governance Processes: this is the overall corporate, legal, social, strategic, governance structure that would give the above two processes their direction and boundaries. These processes enable the organization to develop its growth strategy keeping in view the boundaries set by the Governance Processes.
History of Business Processes
History is replete with examples of business processes. The earliest known process was the simple division of labour with the early humans, where the man was responsible for hunting and bringing the food and the woman managing the home. This is one of the earliest business processes which achieved the peak of its efficiency by dividing the tasks based on the strengths of the two partners.
The first documented evidence of the business processes comes from the economist Adam Smith, who described the steps involved in the production of a pin in a factory.
According to him the production of a pin consisted of eighteen independent and interrelated business processes some of which can be executed by the same person or different people. He advocated the process of division of labor where the tasks were separated and carried out by specialists which increased productivity by a large percentage.
“One man draws out the wire; another straight it; a third cut it; fourth points it; fifth grinds it at the top for receiving the head. To make the head requires two or three distinct operations and to put it on is a peculiar business while to whiten the pins is another … “
Development of Business Process
From the time of Adam Smith to the 21st century, the business process has evolved, constantly redefined, and updated by different experts. Frederick Winslow Taylor in his book, “Principles of Scientific Management” laid out the need for standardization, regular training and updating, and the roles of the management and workers.
And Peter Drucker expanded his views on outsourcing, decentralization, and the growing cult of the knowledge worker.
Japanese have been in the forefront of the business process development especially post World War. The defeat in the War and two cities devastated by nuclear bombs pushed the Japanese to the lowest ebb. Hence, it was imperative for them to devise new strategies to recover from the effects of the war.
Just in Time: Also known as the Toyota Production System, it was the brainchild of the Toyota Motor Corporation. It involves managing the inventory control to ensure the optimum level of inventories and using components just in time.
Lean Management System: Derived from the operating model of Toyota Production System, it focuses on minimizing waste and enhancing production by effective use of the resources.
Kaizen: This is a concept of continuous improvement where everyone works closely together achieving regular and incremental improvements in the process.
Six Sigma: This focuses more on quality management with a data-driven approach to eliminate defects. Introduced by Bill Smith while at Motorola in 1986 and Jack Welch adapted it in General Electric.
Total Quality Management: William Deming, developed this theory, and like Six Sigma, it focuses on the improvement of quality by reducing or eliminating errors in manufacturing. It also focuses on streamlining supply chain management, improving customer experience, and training for the employees.
To achieve profitability in the business the CEO should focus on taking care of the people. First, by hiring the right people and empowering them. The second focus is to have the right processes. This includes adapting proven business processes and investing in the right tools and skills. The processes have to be in place in terms of infrastructure, technology, working tools, monitoring tools, etc.
The CEO’s job is to manage these two dimensions of the business – People and Process. And in that order. Many organizations, especially family-run, tend to ignore this formula. The people aspect loses its credibility because of the incestuous appointments. And the processes aspect suffers because of lack of appreciation of the new processes. https://www.straight2thepoint.org/post/repetition-compulsion-in-business
Fine-tuning these two dimensions will result in profit. The formula is well enshrined and fundamental like any math formula. There can be no variables in math only absolutes. 2+2 will always be 4 and 4+4 will always be eight. Similarly, P+P will always have the same result of P!
“I have no special talents, I am only passionately curious“, Albert Einstein.
I echo with this sentiments. Curiosity is the hallmark of an eternal student. For a Curious Mind, life is never boring. It is an exploration of the ideas, theories and passions.
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I am a professional Risk Manager and an Insurer. I have a PhD in Psychology besides degrees and qualifications in insurance and marketing. As an executive I have been managing companies and people for over three decades in different parts of the world.