McKinsey count themselves as thought leaders and they lived up to that last week with their article on accountability = account x ability. A useful way of thinking about the importance of employee engagement, and a reminder of what holding people to account means in work terms.
I think this concept can be expanded to two other words.
Profitability is something I talk about and work with clients on a lot of the time. It too has suffered from ‘semantic satiation’ (to use the Leon Jakobovits term from the McKinsey article).
Profit comes from the Latin proficio, which means to make progress. When people talk about profitability in a business context, I have come across multiple definitions and meanings, many of which refer to how much money is being made, but not so much the ability to make it. Profit margins are an indicator of this, as indeed is everyone’s favourite finance term, EBITDA. When we measure the ability, I usually refer to return on capital employed as a measure of the company’s ability to make a profit: they make (for example) 40cents for every dollar of capital they ‘employ’ – or turn into assets, which they use in their business. ROCE shows what you get from what you have got – that’s ability.
Which brings us to a third word, one which has been receiving more use in my country over recent weeks – responsibility. Yes, I know the spelling does not give ability, but the sound does, so bear with me here. I recall when being trained in NLP by DR. Richard Bandler he referred to response ability: managing your ability to tune how you respond to stimuli: for example, what you say in response to someone in conversation, how you feel in response to someone’s actions, the choice you make which fits between the stimulus (all the things that happen in life) and our response.
I have found at times this word also gets confused with fault, so when something goes wrong, we use responsibility (and accountability) as a way of attributing blame.
It is our response ability which ultimately governs the accountability and profitability: these are down to the choices we make. The more we are conscious of our choices, the better our ability to respond. This theme is also seen in the work of Daniel Goleman on Emotional Intelligence.
The UK government’s approach to managing the next stage of the Covid 19 pandemic is to rely on the UK population’s ‘personal responsibility’ to protect themselves and others. There is a whole spectrum of opinion on whether this is a good thing or not – you will have your own view. Some in the UK consider this to be the Government absolving themselves of blame – and responsibility – for what happens in the next stage of the pandemic.
Over the next week I am confident that you will hear these 3 words at some point.
Two things connect them all: you can make 6 words out of these 3 words.
And the most important element of all 3 is your ability, not the account, profit or response.
Buzzwords of the Week – Return on Capital Employed
Definition – ROCE is a metric for analyzing profitability, and potentially comparing profitability levels across companies in terms of capital.
Capital employed is found by subtracting total assets from current liabilities, which ultimately gives you shareholders’ equity plus long-term debts. Instead of using capital employed at an arbitrary point in time, some analysts and investors may choose to calculate ROCE based on the average capital employed, which takes the average of opening and closing capital employed for the time period under analysis.
ROCE= Operating Profit or EBIT divided by Capital Employed where: EBIT=Earnings before interest and tax Capital Employed=Equity plus Long Term Debt.
Alternate View – IMHO the best measure of profitability. Make that profit ability. Margins are OK, but this shows what a company makes from what it has. The inclusion of Long Term Debt as capital more realistically reflects current millennium financing and interest rates.
The debate about Return on Invested Capital could be shortened if everyone agreed with me and used the current market value of the Equity plus Long Term Debt as the definition of invested capital.
Consistent ROCE or ROIC above the cost of capital tells a good story of long term performance.