Review of Rules to Break and Laws to Follow by Peppers and Rogers

Don Peppers and Martha Rogers have a new book out called Rules to Break and Laws to Follow.

Peppers and Rogers are delightful, brisk, witty and solid business thinkers. Best known for their One to One concept (OtO Future, OtO Manager, OtO Fieldbook), they deserve to be equally well known for their recent work in Return on Customer, and this book.

Don and Martha demonstrate their reliably good instincts around themes like trust, collaboration, values-driven management, and culture. They inhabit that slightly rarefied territory where new age management meets—and greets—old world success in the competitive marketplace. Left wing capitalism is the vibe it gives off, without compromising either, and I kind of like that.

Your mileage may vary, but what I find most interesting about their contribution is the stark, precise analysis it gives of just what’s wrong with short-term management, Wall Street financial analysis, and the modern-day obsession with profitability as the ultimate metric.

Their critique is not based on disempowerment, or cronyism, or the corruption of the soul. It’s how those practices manage to destroy shareholder value, pure and simple.

The (grossly) over-simplified logic is this. In a connected, small world, the supply of capital is greater than the supply of customers. Yet companies will fund programs that chew up customers to supply a higher return on capital, even while they reject programs that chew up capital to supply a higher return on customer. If customers are ultimately the scarce resource, then why over-weight return on capital? The shorter the long-run, the sooner the long-term results are going to show up on the short-term income statement.

The more corporations are willing to focus on annual and quarterly profit, the more likely they are to churn customers. Churning customers destroys loyalty, thereby raising customer acquisition and maintenance costs, thereby lowering long-term profitability.

The authors use simple math and real-life corporate examples to highlight the destructive financial results of focusing too much on the short term.

Their analysis is neither facile, nor squishy.

I remember a century or so ago studying in business school the idea of “quality of earnings.” In one case, we saw equivalent earnings (i.e., the bottom line of the income statement as a percent of revenue or of various measures of capital) from GE and from Westinghouse. But in terms of quality of earnings—basically the presence or absence of long-term, sustainable, repeatable, customer-nurturing behaviors—GE’s earnings per share were far superior. And it was reflected in share prices. (Not to mention continued existence: the saga of Westinghouse makes for interesting reading in corporate history).

This is a macro-level example of what I encounter in my seminars at an individual and micro-level: how do you do the “right” thing when all the “powers that be” around you are focused on the short-term?

The answer at the micro-level is to play your own game, live your own life, cultivate your own reputation—don’t let others do it for you. Unless you’re a year away from retirement and don’t care about your reputation, then focus on relationships, reputation, and the nurturing of customer relationships. For an individual, the best short-term results come not from short-term management, but from continuous execution of a long-term program.

The answer at the macro-level is the same. You’ll run a better company, produce better earnings, and be a better investor if you focus on the long term, and watch the short-term results take care of themselves. Warren Buffet would be a good example of this strategy, as is Apple, Starbucks, or a host of companies who know the value of values, not just the cost of capital.

Congrats to Don and Martha for a very refreshing presentation of a very solid concept.

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