Companies with a long-term strategy significantly outperform their rivals

29 March 2017 Consultancy.uk

Short-termism destroys long-term business value, a new study finds. Companies with a long-term strategy have outperform all other companies over the past fifteen years on a range of key fundamentals: generating 47% higher total revenues, 36% higher average company earnings, 81% higher average company economic profit, and creating total market capitalisation of $7 billion more on average. Long-term focused companies also created more jobs, at around 12,000 on average. The wider cost of short-termism, all things being equal, stood at $1 trillion over the past ten years.

The effects of the phenomenon of short-termism in the business world, whereby companies focus on delivering short term boosts to results often at the expense of longer term strategies, has seen considerable debate over the past thirty years across a range of institutions. The practice is contended to destroy value for businesses in the long-term.

Demand for short termism has increased in recent years however; a recent McKinsey & Company survey showed that 87% of executives and directors feel most pressured to demonstrate strong financial performance within 2 years or less, while 65% of executives and directors say short-term pressure has increased over the past 5 years. In addition, 55% of executives and directors at companies without a strong long-term culture say their company would delay a new project to hit quarterly targets even if it sacrificed some value.

In a new report from McKinsey Global Institute, the long-term effects of taking a short-term strategy are explored – providing further evidence that short-termism is not only bad for companies, but for the economy as a whole. The research is based on a data set of 615 large- and mid-cap US publicly listed companies from 2001-2015, the data is used to create a ‘five-factor Corporate Horizon Index’ that maps the difference in performance of long-term focused companies against the rest.

Aggregate gauge of short-termism

According to the study, the phenomenon of short termism has ticked up since the beginning of the reporting period as more and more companies across the economy started to focus on short term results in the early 2000s. From midway through the decade, economic conditions, particularly increases in fixed asset investment and strong earnings growth, saw companies increase their focus on the longer term. The crisis and the years the proceeded it have seen increased focus on the short term.

Average company revenue and average company earnings

The study also sought to identify in how far a number of key company fundamentals performed over time, in relation to following a long-term strategy or all other strategies. Up to 2014, the total average company size by revenue for long-term companies was 47% higher than all other companies. The faster pace in revenue growth was particularly noted following the financial crisis, as the average annualized rate of growth from 2009 to 2014 hit 6.2% for long term focused companies compared to 5.5% for the rest. In addition, companies operating long-term strategies tended to have less volatile revenue growth over the whole period, with a standard deviation of average revenue growth coming in at 5.6% compared with 7.6% for all other companies.

The research also found that companies with long-term outlooks had 36% higher average company earnings than all other companies by 2014. Average earnings were also faster to rebound following the crisis at long-term focused companies than all others.

Average company economic profit and average market capitalisation

The research also noted that companies operating on long term goals had considerably higher average company economic profit, which, by 2014 stood 81% higher than that of all other companies. The strong performance in the category shows not merely that long-term focused companies generate higher profits, but also that they are more effective in using capital to grow the business by allocating it to the best available opportunities relative to other options – the companies didn’t only deliver more value than other companies, but were able to grow their margin of value creation systematically over time.

Long-term focused companies were found to have been able to leverage their stronger fundamentals to drive market capitalisation. Market capitalisation at the companies was $7 billion higher than at all other companies. Although, during the financial crisis, long term focused companies were harder hit than all other companies. The study also looked at the economic impact of the higher performance of long term companies on the wider economy, finding that if all companies has taken a long term strategic approach, all things being equal, market capitalisation of US companies would be $1 trillion higher, or around 4% of total market capitalisation.

Average job creation

The research further found that long-term focused companies create considerably more value in the long-term for the wider economy. The growth of long-term focused companies was partly achieved by their hiring more people. On average, long term focused companies have generated almost 12,000 more jobs on average than all other companies from 2001. Extrapolating across all US companies, had they taken a long term position since 2001, this would mean that the US economy would have had 8 million more jobs available in 2015.

According to the consulting firm, based on these estimates of job creation, the potential value that could have been unlocked had all US publicly listed companies taken a long-term orientation exceeded $1 trillion over the past ten years, or 0.8% of GDP per year on average. The firm notes that, if the current trend were to continue, then the average differential would grow to about 25,000 jobs by 2025, amounting to $2.7 trillion (in 2015 dollars) in additional GDP growth if all companies perform as well as the long-term firms over the next decade.

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Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”