The rational economist would like to think that most of us would choose £100 next month over £90 today. Yet study after study has shown that humans crave instant gratification.
We’re literally hardwired–in a behaviour sense — to favour short term, immediate gain over longer term benefits.
This is why we prefer sugary snacks to eating our greens, why we prefer buying that stereo over investing in our pension, and why we’ll put off going to the gym in favour of completing the latest boxset. It’s also why many companies prioritise quarterly revenue over longer term investments.
There are lots of reasons why this happens; the need to maintain cash flow, the desire to please shareholders, and the need to hit our yearly bonus. It seems like everything is encouraging us to prioritise short term gain.
These days, few people stay with their company for longer than a couple of years, with CEO tenures falling to an all time low. In light of this, it’s unsurprising that people want to get as much out of a situation while they can, rather than investing their time and effort into things that will pay off only once they’ve left. After all, you get the behaviour you incentivise against.
This problem is especially pronounced in publicly traded companies, where shareholders want instant gratification. It’s also one of the reasons why the lifespan of S&P 500 index companies has plummeted from 67 years in the 1920s to just 15 years today.
By comparison, some of the longest running, and most stable companies come from places like Germany and Japan. These companies are owned by private individuals and are often passed down through the generations, so there is a strong drive to invest in the future.
A few novel ideas have been floated to combat this trend, like paying out CEO bonuses over a much longer period, or offering shares that take 10 years to vest. Both these mechanisms are meant to encourage leaders to place long bets as well as short ones. After all, every good portfolio needs to balance a certain amount of risk.
I see this problem in the digital space all the time. Companies put the bulk of their investment in short term improvements, at the cost of longer term value. Shoring up old IT systems rather than investing in new ones; spending huge amounts on customer acquisition, rather than dealing with churn; focussing on incremental improvements rather than looking for that next potential revenue stream.
Companies often get so caught up placing short term bets, they forget to place medium or long term ones as well. When they do place longer term bets, they often go all in, rather than spreading their risk.
Balance here is obviously key, and every company has its own risk profile. I’d like to see more companies apportioning around 60% of digital budgets on business as usual and other short term wins, 30% on slightly longer term experiments that may take 18 months to hit the backlog, and the last 10% on long shots and moon shots, which may take 3+ years to develop into something meaningful, but could eventually be that company’s next big profit centre.
By looking at projects through this lens of Now, Next, and Future, companies can diversify their portfolio, ensuring they don’t keep all their eggs in the same basket, and they spread the risk a little more.