One of my favorite elements of the Medallion Bank work culture is the concept of “constructive tension”. Constructive tension is about designing the organizational structure in order to regularly have employees pulling against each other. At first blush, this sounds counter-intuitive. Isn’t that like having two oarsmen in a boat pulling in opposite directions?
To some extent, the analogy is a good one. We seek to have employees with differing incentives and, at times, opposing objectives. This is a good thing! First, while specific employees may have objectives at odds with one another, we all have the same goals. So, for example, it doesn’t make sense for some employees to pursue growth and others work toward shrinking us. Instead, we want differences in opinions and approach to how we grow.
Take credit and sales as the most obvious of our constructive tensions. The sales team has an incentive to develop relationships with contractors and put as many loans on the books as possible. Credit has an incentive to avoid unnecessary risk, which means putting as few bad loans on the books as they can. There are regularly times when the sales team thinks a loan application is an excellent opportunity to grow our portfolio but credit thinks it’s an obvious future charge-off. Because they are both pursuing the same goal of growth and long-term profitability, we find the balance. The constructive tension involved keeps us focused and making better decisions than if one of those two groups called the shots alone.
In a contracting business, an obvious place for constructive tension is between the sales manager (team) and the finance manager (team). We discussed some benefits of this constructive tension in a previous post. There are two obvious opportunities here. First, the sales team has the incentive to get the job sold, even if that means taking a much smaller margin on the deal by using promotional financing. Second, if you have a salesperson with…um…flexible morality, the credit application process is a prime opportunity to be creative in order to encourage credit approval. This may seem like a no-harm-no-foul situation, but it isn’t. There are potential far-reaching consequences of doing something like inflating income on an application, not the least of which is the personal impact on the borrower when under financial strain. The finance manager, with a practiced eye, high expectations and an appropriate process, can weed out these issues. Finally, the finance manager can always serve as the foil to the salesperson, being a softer hand in the sales process that helps put a customer at ease.
The best part of constructive tension is that it creates accountability. When individuals make decisions in a vacuum, it is easy to self-justify or ignore inconvenient issues. With others pulling a slightly different direction, some of those decisions see the light of day and require explanation. If that happens between a salesperson and a finance person, a better outcome is assured.