Companies with a purpose beyond profit tend to make more money

It is a paradox that the most profitable companies are not the most profit-focused

One of the paradoxes of business is that the most profitable companies are not those that are most profit-focused.

In a survey titled “The Business Case for Purpose”, a team from Harvard Business Review Analytics and professional services firm EY’s Beacon institute declares “a new leading edge: those companies able to harness the power of purpose to drive performance and profitability enjoy a distinct competitive advantage”. This is a reprise of the findings of Jim Collins and Jerry Porras, who in 1994’s Built to Last found that between 1926 and 1990 a group of “visionary” companies — those guided by a purpose beyond making money — returned six times more to shareholders than explicitly profit-driven rivals.

© Andrew Baker

While 90 per cent of respondents in the new study said their company understood the importance of purpose, less than half thought it ran in a purpose-driven way. Why the discrepancy? One reason may be that to many, “purpose” looks like a “black box”, its workings hidden from view. While noting the impact on the bottom line, commentators tend to assume the performance jolt comes from hard-to-pin-down qualities such as inspiration, leadership or the motivational effect of working for a good cause.

Thus, the new survey defines purpose as “an aspirational reason for being which inspires and provides a call to action for an organisation and its partners and stakeholders and provides benefit to local and global society” — hardly something to put into practice on Monday morning. Porras and Collins called their outperformers “visionaries”.

Yet there is an eminently down-to-earth reason why purpose matters to every organisation — if it does not have a definable purpose, it cannot measure progress towards it. In the abstract, measures are arbitrary and unhelpful. Purpose dictates appropriate measures and measures give manageability, the capacity to learn and improve.

The truth is simple and profound, but not that obvious. As John Seddon, a visiting professor at Hull University and managing director of Vanguard Consulting, observes, in every organisation, whether its people realise it or not, “there is a systemic relationship between purpose (what we are here to do), measures (how we know how we are doing) and method (how we do it)”.

Because satisfied customers are the only source of long-term success, measures need to be related to purpose as defined from a customer point of view. When they are, employees can see how well they are doing and how they might do better. The Toyota Production System (TPS), whose purpose is to deliver an individually specified car to a customer in the shortest possible time, may be the best-known example of such a well-honed, feedback-driven system.

What happens in most organisations that have no overriding purpose other than profit? In a subtle alchemical shift, the metrics fill the vacuum, muscling out any wider purpose with the imperative of hitting the numbers. This transposition of ends and means is often disastrous because methods, now geared to meeting the metric, are detached from customer purpose — so banks sell payment protection insurance to people who do not need it, or VW managers manipulate emissions readings to meet targets. Look no further for the reason why companies lose their customer focus.

Because of the umbilical link with the way the organisation operates, purpose can be even more powerful than this suggests. Purpose should not be complicated or airy-fairy — but nor is it always as straightforward as the TPS.

When some UK local authorities considered the purpose of local services, they concluded that they were there to help citizens live well, in charge of their own lives. After all, people leading good lives make for happier, more functional communities that make less call on stretched public services.

That required new measures, which quickly established, for example, that most resources were consumed by a few chaotic families using multiple services. This led to a new way of working, in which multidisciplinary teams visit problem families to understand their lives in context. The result was greater welfare at lower overall cost. This has become known as “locality working”.

On its own, purpose is nothing more than an aspiration. It is its sidekicks — measures and methods — that make purpose tangible and keep managers on the straight and narrow. But it cuts two ways. Last decade, Toyota subordinated its customer purpose to a growth push in an attempt to overtake GM in size. Overexpansion led to quality problems and some spectacular vehicle recalls. Akio Toyoda, grandson of the founder, claims the lesson has been learned, but the jury is still out. Purpose is an unforgiving taskmaster: forget it at your peril.

This article has been amended to reflect that John Seddon is a visiting professor at Hull University and managing director of Vanguard Consulting.

Copyright The Financial Times Limited 2016. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.