Consider a relay race.
For each team, four runners run 100-meter legs. If one team’s runners each take 10 seconds to run their leg of the race, they get a cumulative 40-second time. If each of another team’s runners are 10% faster than the first team, taking 9 seconds to complete their legs, that team gets a cumulative 36 seconds—10% faster.
Thus, in a relay race, if everyone is 10% better, the team sees a flat 10% improvement.
If you apply this intuition to a company, you may think that improving each team by 10% may yield a 10% improvement for your organization. But the reality is different: within an organization, when everyone is 10% more productive across teams, that company sees a compounding effect, making the impact much bigger.
The multiplicative effects of having 10% better players across teams
Imagine two companies: Company A and Company B (very creative, I know). Both have marketing and sales teams, but Company B’s teams are both 10% better than Company A’s. Let’s see how that plays out.
Let’s geek out for a second, and write down a formula for how companies obtain new customers:
New Customers = # Leads * Close Rate
Company A’s marketing team brings in 1,000 leads, and their sales team closes 20% of them. So, they close 200 customers.
Company B’s 10% better marketing team brings in 1,100 leads, and their 10% better sales team closes 22% of them. So, they close 242 customers—roughly 20% more than Company A (21%, to be precise).
This is because the performance gain is multiplicative:
Gain = 110% * 110% = (roughly) 120%
In the relay race, every team member had to be 10% better for the team to see a cumulative 10% improvement. But in a business setting, when both teams are 10% better, there’s a compounding effect. Two teams doing 10% equals more than a 20% gain.
Companies have more than just sales and marketing teams. They also have product teams, engineering teams, customer success and service teams, HR and finance teams, etc.
Let’s expand on this exercise, and try to expand the formula to include the product price into the equation.
Revenue = # Leads * Close Rate * Average Revenue Per Customer
But even more so, for conventional business-to-business software, for example, the revenue per customer is a product of the Average Price per Seat and the Number of Seats; or:
Revenue = # Leads * Close Rate * Price per Seat * Number of Seats
Now, what if the Product and Engineering teams were able to create a product that’s worth 10% more? And, what if the Customer Success and Services teams were able to create a customer experience that resulted in 10% more users buying the software within their organization.
If each of these four items were 10% better at Company B than Company A, you’d see the same compounding effect. 10% improvements across the board would add up to a bit more than 40%, versus just 10%.
The same holds for People, Finance, IT, Strategy and on. What if people were hired and onboarded 10% faster? What if they were 10% or even 2% more effective in their day to day work? What if the strategy resulted in 10% more people focused on the right outcomes? When each team excels at its particular function, the cumulative effect on the company is multiplicative, not simply additive.
The cumulative effect of having better performance year over year
Particularly in the high-growth startup world, a 50% performance gap makes a huge difference as two similar companies scale.
Let’s assume that both companies start from the same starting point. After a year, Company B would be 50% bigger. After two years, it would be 125% bigger (150% x 150% = 225%). After four years, it would be more than 5x bigger. In reality, the difference would even be bigger, because as you become bigger, you can raise more funding and hire more people; if you throw those factors into the equations above, you’ll see how that adds to the cumulative effect. And, since many markets have a winner-takes-it-all effect, the impact on overall company value might even be bigger.
Look at eBay vs. Amazon. By the end of 2001, eBay’s market cap was $18.54 billion, while Amazon’s was a mere $4.03 billion. Twenty-one years later, eBay has grown to $35 billion, whereas Amazon has skyrocketed to $1.6 trillion.
A myriad of factors influenced their growth paths. But we can safely assume that most of Amazon’s functions and teams: strategy, product, engineering, support, etc. were better, contributing to a broader vision and execution than eBay. Over time, the difference has obviously compounded.
Relay racers improve by 10%. Cross-team enhancements have the potential to improve companies by 10x—or more.
How can you create a 10% improvement to create a 10x impact over time?
I don’t think there’s one formula to create better performing teams and most of us should continuously put effort into improving.
At Gong, we’ve recently put together a set of leadership principles, which try to guide all the leaders within the company on how to operate. We ended up with 11 such principles, but two touch directly on how to be better:
- Insist on great hires. When you hire simply to satisfy numbers, you often end up settling for average players. If you want to perform better than others, don’t settle for a B+ player but keep looking for the A players.
- “Hone your craft.” Every team should operate under the assumption that they haven’t yet reached their full potential. There’s always room for improvement, for learning, for developing new strengths. As we’ve seen, a small edge across teams becomes a big edge across the whole company, and a huge edge over time.
It’s up to your leaders to establish the principles and lay the groundwork for cross-team improvements. It’s a state of mind: once you understand the compounding effect (and realize that if you don’t execute on it, your competitors might), you’ll also want to find great people, and nurture continuous growth.