Newton’s Laws and Goodwill

In high school and college physics, I became well acquainted with Sir Isaac Newton’s Laws of Motion. After nearly four decades as a CEO, I’ve concluded that the concepts underlying at least two of those three laws apply to organizations – actually, to institutions of all kinds – as well as to the physical world.

For example, Newton’s First Law of Motion – the Law of Inertia – is often paraphrased as “A body at rest will stay at rest until acted upon by an external force.” How can that apply to organizations? It’s been my observation that the more an organization is removed from day-to-day competition (a powerful external force), the slower it is to adapt as its external environment changes.

When you are subject to competition on a day-to-day basis, there’s more of a sense of urgency, more of a drive to improve. You know that if you don’t improve, someone is going to take your customers (or in the case of a school, your students) away from you. For organizations that lack strong competition, the faster the rate of change on the outside, the more they tend to lag. They might survive, but they are likely to become increasingly ineffective.

This is not generally as much of a problem in the for-profit world as it can be in the public and not-for-profit sectors. In the for-profit world, if you don’t successfully adapt to external changes – including new or stronger competition – in most cases you will become extinct.

Newton’s Third Law of Motion – or a reasonable facsimile thereof – also applies to institutions. This law is often stated, “For every action there is an equal and opposite reaction.” A Corollary might go something like this: “For every excess there will be a proportionate reaction and correction. The greater the excess, the greater the pain associated with the correction.”

Think about that in light of the financial problems currently plaguing the U.S. and much of the rest of the world. For example, excessive spending (and related borrowing) by individuals, organizations, or governments will eventually prompt a correction. Sometimes the correction will come only after years of excess. But eventually it will come. And with the correction will come pain proportionate to the degree of excess.

Of course, excessive conservatism can also be a problem. Companies that do not spend enough to properly maintain their physical assets, develop and retain their human capital, and improve their productivity are jeopardizing their future. They can also jeopardize their future when they fail to invest in opportunities for which they are well-suited, thus leaving the door open for more aggressive, well-managed competitors to increase their strength.

Governments – cities, states, nations – that fail to adequately maintain their infrastructures will eventually have a huge price to pay – and you can count on a strong reaction from their citizens when the bill and the pain associated with it come due.

While we take nothing for granted, at Goodwill we’ve thus far been able to avoid the kinds of excesses that can jeopardize an organization’s future. Goodwill is also fortunate to have functioned in a competitive marketplace since its founding. From the beginning, we have operated a commercial enterprise that sells goods to the public as a primary means of accomplishing our mission. This has been a driving force in creating and sustaining the culture of our organization and is a major reason we’ve grown and evolved the way we have.

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An entrepreneurial culture

“Continuous improvement,” one of our Five Basic Principles, has become so ingrained in our organization’s culture that our people implement countless relatively modest, incremental improvements throughout Goodwill each year. Cumulatively, those mostly small improvements make an enormously positive difference in the quality, effectiveness, and productivity of our work.

In addition, though, we have an entrepreneurial inclination that has been a huge factor in how we have grown and evolved over the years. I recently compiled a list of 95 significant initiatives we’ve undertaken during the last 37 years. Some were completely new business ventures or mission-related services, while others were major variations or extensions of something we were already doing. The financial investments associated with those initiatives have varied substantially, and in several instances the risks to our reputation have been greater than the financial risks.

I classified the success (or lack thereof) of those initiatives in baseball terms. Here are the results:

  • 10 home runs (six with bases loaded)
  • 73 singles, doubles, and a few triples
  • 12 strikeouts (one with bases loaded)

I don’t know if there’s any real significance to the fact that the number of home runs and strikeouts have been approximately the same, but it might be a reasonable indicator of our tolerance for risk. Of course, the fact that we’re not only still around, but are doing pretty well overall, is evidence that we haven’t bet the whole organization on any of those initiatives. And the overwhelming success of the “grand slam” home runs has far outweighed the cumulative effect of all of the strikeouts.

The primary key to our ability to take this approach has been and remains our board of directors. They’ve not only given us the freedom to try lots of different ways of growing the organization and increasing its impact, they’ve also given us the freedom to fail at some of what we try and learn and grow from the experiences. Of course, it helps that our batting average over the years has been pretty good.

In a piece titled “Fail often, fail well” in the April 14, 2011 issue of The Economist, Schumpeter wrote, “The best way to avoid short-term failure is to keep churning out the same old products, though in the long term this may spell your doom. Businesses cannot invent the future – their own future – without taking risks.”

The same column noted that “there is no point in failing fast if you fail to learn from your mistakes.” We’ve been fortunate in having had a lot of continuity among people in key positions – especially at the board and senior management levels. This has blessed us with a strong institutional memory, which helps prevent us from repeating our mistakes. Of course, because we have strong entrepreneurial instincts, we’ll make new mistakes. But that’s OK as long as we continue to ensure that the risks we take are prudent and that we continue to learn and grow from our experiences.

The Five Basic Principles

Individuals who want to have a good reputation need to follow some pretty basic rules, such as:

  • Don’t lie, steal, or cheat
  • Do what you say you will do
  • Never do anything you wouldn’t want posted on the Internet for all to see

Organizations that want to maintain a good reputation must have people who follow the same basic rules. But organizations also need a culture based on a set of articulated values that, when exemplified in the way people go about their work, result in the desired performance. The culture must be one in which people understand that while achieving the business goals is important, how you achieve them is equally important.

As Collins and Porras reported in Built to Last – Successful Habits of Visionary Companies, companies that have managed to thrive over long periods of time have constancy of purpose and a few core values. But everything else changes over time.

Whatever the articulated values, it is essential to have an effective way to link the values with the business goals and ingrain those values into the culture. In our central Indiana Goodwill organization, the approach we take today started in the early 1990s when we articulated five basic principles we should apply in all of our work:

  • Respect for people. We strive to treat everyone in a respectful manner.
  • Customer satisfaction. We strive to meet or exceed the expectations customers, donors, and users of our services have of us.
  • Informed decision-making. We gather useful information and, to the extent possible, make decisions based on facts.
  • Innovation and improvement. We continuously seek better ways to grow, improve, and increase our impact.
  • Good stewardship. We are responsible stewards of all our resources.

For the next ten years or so, we didn’t do much with this set of basic principles. Then we decided to build our culture around and manage by them. They are incorporated into our recruitment and hiring, new employee on-boarding, and performance development review processes. We take these principles very seriously. We talk about them a lot, and over the last decade these five basic principles have become ingrained in our culture. I frequently hear employees refer to them in conversation.

We’ve also found that it’s a lot easier and more effective to manage according to a small number of values and basic principles than a thick book of rules and regulations. We have to have some of those, but we try to keep them to a minimum.

We’re far from perfect, of course. We have nearly 2500 employees, and all of us make mistakes. Still, with occasional exceptions, our employees apply the five basic principles day in and day out. If that were not the case, I’m quite sure we would not have enjoyed the kind of successes we’ve had over the past decade.

Early childhood development – a key to reducing a lot of social problems

Throughout Goodwill’s history, we have worked primarily with older youth and adults. Yet, the more experience we have and the more we learn, the more I have become convinced that if we are to substantially reduce the incidence of poverty in the U.S., we must dramatically increase our investment in children from the womb to kindergarten.

There is a large body of evidence illustrating the positive return to society of investments in high quality early childhood development programs for children in low-income households. For example, Nurse-Family Partnership (www.nursefamilypartnership.org) is a nurse-led, evidence-based home visitation program that works with expectant mothers from pregnancy until the child is two years old. Three decades of randomized controlled trials have shown incredibly positive long term impact, including:

  • 67% reduction in behavioral and intellectual problems in children at age 6
  • 59% reduction in arrests of children at age 15
  • 72% fewer convictions of mothers when children are at age 15
  • The Rand Corporation found a net return to society of $5.70 per dollar invested in Nurse-Family Partnership

More evidence comes from extensive research done by Professor James Heckman (www.heckmanequation.org), a Nobel laureate economist at University of Chicago. His work has confirmed high returns to society from investments in high quality early childhood development programs for children living in poverty. Professor Heckman emphasizes that many of America’s major economic and social problems – crime, teenage pregnancy, high school dropout rates, adverse health conditions – could be reduced as a result of early nurturing, learning experiences, and physical health from birth to age five – the most economically efficient time to develop cognitive and social skills, both of which are essential for success.

It’s sometimes useful to remind ourselves that no child had any choice about the circumstances into which he or she was born. Some were luckier than others. For children born into situations that lack advantageous educational and developmental resources, we can pay up front to help prevent problems and develop human potential or we can continue to pay much more downstream for public assistance, remedial education, rehabilitation, incarceration, and in all the insidious ways we all pay when economic growth is stymied by a poorly educated, under-skilled workforce.

Some say we have no money to do this. I say we can’t afford not to. Because there’s not enough to pay for everything everyone would like to do, we need to begin shifting more support from programs with marginal return to programs with demonstrated high long term benefits. Doing so will upset some people, but will result in a wiser, more effective use of the dollars that are available. The potential long term benefits are enormous.

Three essential characteristics of a highly successful social enterprise

Over the years I have read countless books and articles on topics related to organizations, leadership, and management, and I have learned more from the writings of Peter Drucker than any other author.  In part, that may be because he wrote for so long. In fact, in 1997, when Drucker was 87 years old, Forbes magazine featured him in a cover story titled, “Still the Youngest Mind.”

Despite all that I’ve learned from Drucker’s writings, though, the one book that has (so far) been the most helpful to me is Built to Last – Successful Habits of Visionary Companies by Jim Collins and Jerry Porras, published in 1994.  In it the authors described the commonalities they found among companies that had managed to thrive over long periods of time.  One of those commonalities was that the visionary companies did not brutalize themselves with “the tyranny of the OR – the view that you can be ‘A’ or ‘B’, but not both.  Instead, the visionary companies embraced “the genius of the AND – the paradoxical view that you can be ‘A’ and ‘B’, even if they are seemingly contradictory notions.  This insight helped me solidify my view that to excel in our organization, we had to be outstanding from both business and mission perspectives – not one or the other.

From that view, we arrived at an overall objective of maximizing mission-related impact while maintaining a financial position that enhances the organization’s long-tem viability.  In other words, we must have significant impact and be financially sustainable.

IMPACT is a function of your mission-related services.  How many people are benefiting, and to what extent are their lives being changed for the better?   Measures of real impact are much deeper than activity metrics such as “number of people served”  which may indicate you were busy, but tell us nothing about whether you actually made a difference.

SUSTAINABILITY is a function of the organization’s financial strength.  Do you have sufficient strength to be able to weather periodic downturns and occasional external shocks?  Organizations that are constantly struggling to keep their heads above water financially rarely do a good job accomplishing their mission.  They are too focused on simply surviving.  Neither are organizations that lack adequate financial strength likely to be able to invest in initiatives that might improve their impact and/or accelerate growth.

Even if a successful social enterprise such as Goodwill is having substantial impact and is strong financially, to remain successful over time a third characteristic is necessary:

ADAPTABILITY, which is largely a function of the organization’s culture.  Can you respond quickly and effectively as new needs, opportunities, or threats arise and as the external environment changes?  Organizations that cannot adapt well enough run a strong risk of becoming ineffective or extinct.  Actually, it’s better if they become extinct rather than ineffective.  At least when they’re extinct they no longer consume resources.

Even if you’re highly successful today, it’s wise to remember an old proverb Drucker frequently quoted, “Whom the gods would destroy they give 40 years of success.”  Organizations with a long period of success may be particularly vulnerable to the demons of inertia, complacency, myopia, and/or arrogance that could eventually lead to their demise.   With the pace of change today, this can happen much quicker than forty years.   The wise leader is aware and alert, as well as adaptable.