Wednesday, April 30, 2008

Measuring Efficiency; Ineffectively

Borrowing from my entry of two weeks ago on receivables management and reporting, So What, Now What, it never ceases to amaze me that the more people I speak with the more it emphasizes that receivables management is a problem in ever industry in every country. At a recent roundtable discussion at a CFO conference for telecommunication manufacturers, the issues of receivables management came up. Here are companies that deal in the tens of millions of dollars per bill and they have receivables issues! My first thought when I heard abut their issue was, why they aren’t using secured letters of credit? For some, letters of credit was par for the course when dealing with offshore suppliers, however domestically the old mantra of credit checks, billing and waiting for payment was the fare for the day.

With more probing the issue gained considerable depth. No matter who I spoke with they have their own ‘bell weather’ for determining how well they are doing with their management of receivables. Surprisingly enough, there are more variants of core reports in circulation than one can imagine, both in the professional services and in the corporate world. To make it even more surprising, each user swears that their ‘unique’ report is the best indicator.

My first thought after this experience was, I may be missing something in the remedy purported by all of these ‘unique’ reports. With this feeling of void in not knowing what the ‘best’ report is, I undertook my own research to find out what firms are using and what ‘authorities’ are saying about financial reports. As it turns out, today’s professional services firms have an enormous amount of reporting tools. They have reports from their billing systems and reports from their other systems. They buy custom reporting packages, they buy business intelligence packages and they even have custom reports written, all of which they trust as the gold standard. In the market place today, there is no shortage of reporting tools. The first thing the user must remember, the data is fixed it is only the spectacle by which we view the data that changes; the reports.

With the plethora of reporting tools available the user must really know what they want to analyze and why. Although these tools dice and slice the data in a multitude of ways, one should really ask oneself, is what I am analyzing telling me what I need to know? Do I understand the calculation being made? What is the logic behind the calculation? Until you can answer these questions you are stuck in the “So What” mode.

In an internet article I recently read Law Firm Business Model - Realization, the author discussed ways of measuring the various attributes in the firm’s cash cycle. So as we are on the same page, the cash cycle, begins with the entry of time and costs, through prebilling, final billing and ultimately the receipt of cash. The author contends that the only reports the firm really needs to operate are billing and collection realization reports. The contention is that realization provides the user with the measure of ‘efficiency’ by which a process operates, ie billing and collections.

This concept of efficiency continues to intrigue me. In the world of energy and thermodynamics, efficiency is the ratio of output per unit of input. By way of an example, a home air conditioning unit is said to be 67% efficient. In that regard for every kilowatt of energy taken in, 67% of the energy goes toward producing cool air. As an aside note, automobiles are significantly less than 20% efficient.

Back to the article, the author contends that managing the firm with these realization reports and current asset aging reports is essentially the key to firm profitability. In the article the author cites recent LexisNexis research on the average days for law firms to collect. According to the 2007 Law Firm Economic Survey, conducted by LexisNexis, the average North American Law firm will take 169 days to collect on a bill. This is about 30% longer than the findings of the ABA Survey in 2003. So in four years, law firms have showed a 30% increase in time to collect on a bill! However, almost within the same paragraph, the author, by way of example, presented several firms from the survey that had over 95% collections realization.

How could this be? These firms realized 95% of the cash billed, but the average time to collect their bills increased by 30%. The problem here, I feel, is that the true measure of ‘efficiency’ isn’t being taken into consideration. The missing component is – time. If we recall from Finance 101, money has differing values over time. Simply put, a $1 today is worth more than a $1 a month from now. Therefore the calculation of ‘efficiency’ really does need a time component, which in all of the reporting tools I know of – don’t!

Let’s examine the calculation so you can see where we are going. So by way of an example:

Patty Partner produces a bill for $525 and sends it to the client. After 45 days the client is contacted and is disputing a charge on the bill, a courier charge of $30. Patty agrees to write the amount off and within 15 days the firm receives payment of $495.

According to the standard calculation for cash realization, the formula is the ratio of inputs to outputs. Where $525 was the original amount of the bill and $495 was the amount paid. With that said, the realization is given by:

495 x 100% = 94.29%

That is pretty impressive! However it took 60 days to collect! The firm’s policy is payment is due 30 days from date of bill. Let’s alter the calculation to reflect efficiency based on time, which is really the true efficiency!

The firm’s policy is payment is due 30 days from date of invoice, if we add 5 days for processing, the firm should expect payment on or about the 35th day. However, payment came in on the 60th day.

If payment were to arrive on the 35th day, the process would be 100% efficient barring the deduction for the dispute. If payment arrived before the 35th day, the process would be more than 100% efficient, because the client paid early. While beyond the 35th day the process becomes less efficient.

The calculation of time therefore takes on the representation of:

Output 60 days
Input 35 days

However because the output increases, which operates contrary to energy models, we need the following correction.

1/ (output/input) 1/ (60/35)

Apply this to our example of Patty Partner, the calculation becomes:

495 X 1/ (60/35) X 100%= 55%

Therefore Patty’s collection realization for this bill is 55%. The reason for the radical difference from the cash realization report is it took at least 70% longer to collect on the bill than the firm policy dictated and there was a write down! This paints an entirely new picture of Patty Partner.

With this simple example, I hope you can see the need to understand what the calculation means and how it can or should be used to measure activity is vital. This is but a single example of a single calculation. With the number of reports being used, there is no doubt that each day millions of people rely on reports to make decisions, without really understanding what the calculation entails.

As for the article, we have just shown how cash realization can be 95% yet time to collect has increased 30% over the past four years. Realize that each bill for which you are awaiting payment has a time corrected realization that gets worse by the day and so many reports simply aren’t bringing it to your attention! Remember what you think you are measuring may not be in fact what is being measured! Understand the big picture before ‘picking’ a report!

Tuesday, April 22, 2008

Are you making Rain or making Mud?

I recently spent a week in Chicago meeting with financial executives of accounting and law firms. I wasn’t surprised how the two very different professions had the same types of problems in firm and financial management. It was almost as if these organizations were having internal battles as how to move forward and most importantly in what direction. Whether you are managing a huge global firm, a local firm or even a team within the firm you are constantly being plagued with direction and momentum.

Lately there has been an explosion of articles on how firms are changing to (re)establish direction and momentum. In The Lawyer, Julie Berris reported how one global firm radically downsized their management structure by 50%, as a means of focusing skills. Their expectation was to reestablish direction and momentum. While Martha Neil writing for the ABA Journal, discussed how a New York firm had undertaken to build a roadmap to partnership and rainmaker retention, by undertaking a ‘strength’ assessment of the professionals. Even the Partner’s Report published by IOMA went so far as to outline a seven step process necessary to establish focus and direction for professional services organizations. It seems these organizations realize they need to do something to maintain their competitive advantage in the market place, however their actions seems to be focused on downsizing and skills assessments.

Interestingly enough the writings of some of the business greats really don’t fit the professional services industry, simply because of the overall dynamic and structure of these organizations. The March 2008 issue of Partner’s Report spends a considerable amount of time expounding on the unique dynamic of professional services firms. However, as I view the entire situation as an outsider I can see that structure leads to form. The lack of a concerted direction of the organization has lead and will continue to lead the professional services organization into a state of confusion. The problem, I feel, is the management of today’s organization is not synergistic.

Even within these organizations, a lack of clear direction and management causes these organizations to become more attuned to fire fighting than overall management. I feel what organizations need now is a paradigm shift, a new way of looking at their business. Organizations must start to realize that all of their issues must be resolved from within. Chawla et al, in their recent publication: Learning organizations: Developing cultures for tomorrow's workplace, states “The human factor in business is more important than ever. Organizations must be responsive to their workers.” Although I believe that organizations must be responsive to their workers, they must understand the synergy created among staff. It is this synergy that makes the difference between greatness and mediocrity.

The idea of synergy between and among staff literally drives an organization in the designated direction. One conversation I had while meeting with financial executives reinforced this concept beyond realization. This firm, a global service provider, had recently had a change in their finance team. Before the change, the team was the most revered group in the organization. They were the rainmakers! However, since the departure of a key individual, they have slipped into mediocrity, had staff turnover and the staff remaining were disgruntled. With a single change, the greatness of the department was decimated and the dynamic was seriously altered.

What really happened, was the person who left a rainmaker? Or was the new hire so dysfunctional that the entire dynamics of the department was upset. The answer, I feel, rests in the huge amount of research done in the mid-1990’s regarding the success of ‘rainmakers’. At that time, it was the fascination of many business gurus that rainmakers who left their firm became average at their new firm, how could this be? What the research revealed was there was no single rainmaker – it was the team that ‘made rain’. As we extrapolate this from our departments, to practice groups and to the organizational level it becomes self-evident that it is more in how people work together that achieves greatness than a single individual. With this, I am reminded of a story from a North-East firm who had a corporate ‘rainmaker’. This partner would bring in some of the largest clients in the world and bill in the tens of millions of dollars per year. Through an internal issue, the partner left. Once announced, everyone in the firm began to ‘run scared’. Now two decades later, the firm continues to thrive and grow. The reason, the environment allowed for the creation of a rainmaking team.

Bob Bunting, partner with Moss Adams LLP, in his article Increasing Margins, makes a powerful statement regarding people and the success of the organization. According to Bunting “…recognizing that people are probably more important now than clients – but only if your firm has the best people.” Moss-Kanter, author of Change Masters:Change Masters: Innovation and Entrepreneurship in the American Corporation, professes that we are at a time of most change. She contends that the most important thing leaders can do for their organizations is to recognize the value of their people and the synergy they create and avoid top down management. The role of management then becomes one of transmitting values and priorities.

With that said, for those of us who manage teams we must recognize the value of the people in the team. Work to enhance the synergy of the team, as they are the rainmakers. It is the role of management to nurture the rainmaking team, as people leave managers not jobs; the team can soon fast become mud-makers.

Wednesday, April 16, 2008

So What… Now What?

My last few posts have conjured up a few questions from my readers, mostly along the lines of; ok Don, now tell us how to fix it. How, about identify the various cultures in organizations and giving us solutions to resolve the issues in each. As much as I would like to produce an “If-Then” matrix for the marketplace it would be essentially useless. The reason for which, is that organizational cultures are the product of their leaders, and as human beings are very complex beings which cannot be explained in simple terms, the task becomes almost impossible; somewhat like quantifying what ‘normal’ is.

In the last couple of weeks I had the opportunity of meeting with several CFOs and Credit Managers from a few very large firms. My area of interest in these talks was, although collections, it more focused around reporting requirements. I found it truly amazing that, for the most part, firms run pretty much the same. They predominately manage their work in progress, they have a billing process, they create bills and they collect on them. Yet, they have a mind-boggling number of very diverse reporting requirements. How can that be? The have essentially the same quantities they are interested in, yet they report on them differently.

As it turns out, financial reporting is as much a quagmire as the differing collections methodologies seen in the professional services sphere. In reality, what is being exhibited in reporting is the same thing that is seen in the treasury and financial management infrastructure; it is all culturally driven. How can one firm honestly contend that their reporting infrastructure is vastly superior to others in the market place? The entities are the same, just viewed/reported on differently.

For many years my contention was that organizations got into the mode of ‘analysis-paralysis’. Through the intense gyrations of twisting, turning and bending the data somehow the user would be awaken by a hidden secret or some mystery would reveal itself. When in reality, that never happened. The secret contortion didn’t reveal the secret to the firm’s competitive advantage. This gets back to some of my earlier writings, regarding the continuance of identical repetitive tasks all the while expecting different results is a sign of insanity.

Today’s professional services firm has a plethora of reports that deal only with client investment. There are many levels of AR, WIP, and cash receipt reports that analyze the same data from hundreds of perspectives. Basically looking at the same apple from different angles! I will bet as you read this you may conclude, yes we have a few reports which look at the exact same data – differently. The most extreme organization I have ever met would produce a partner report book that was 480+ pages in length, EACH MONTH! Amazing when you consider the cost of its production for the firm’s several hundred partners!

How does one stop this treadmill of reporting frenzy? I believe the answer lies in an accounting concept that only auditors really hold dear. The concept is called materiality. In the accounting/finance world it is the materiality principle. The materiality principle can be summarized as: An item is material if there is a reasonable expectation that knowledge of it would influence the decisions of prudent users of the financial information.

Implementing the materiality principle in an organization becomes the gateway to relinquishing the bondage of excessive reporting. The firm, in its cultural wisdom, must define what deviation from expectation that would cause a user to take action in light of the variance. Once a firm can get to this point, the number of reports will rapidly dwindle to a few key indicators that will readily provide pulse of the operation. From there, management decisions can quickly be enacted to institute corrective change.

The first question you are now probably thinking, how can this be done in my organization? The answer follows from where we began – with culture. I do know several organizations that have been successful in implementing a truly strategic reporting model, yet they are few and it came with resistance. One firm, I know, took the bottom up approach. Where they simply dropped one report per month until management realized the report went missing. As it turns out, they went from 22 reports per month to three. Yes, there were only three critical reports that drove the organization!

A dear friend of mine shared her experiences of analysis-paralysis, from her junior days in a global accounting firm, through partnership and now in a global law firm. Her simple statement is “When looking at the numbers on a report, you are either driven to saying either - so what … or now what?” If your reports tend to invoke a lot of ‘so what’, do you really need all of them saying the same thing?

Tuesday, April 08, 2008

The Best Kept Collections Secret

I have spent a huge portion of the last two decades, meeting with, working with and helping professional service firms achieve increases in the collections of their accounts receivables. I have also lectured on AR management, WIP management and the treasury function in professional services firms. During this time I have probably met with and been questioned by close to 400 professional services firms. Of the 100+ of my favorite questions, the following are from the top ten: “Should we centralize our collections function?” “How do you motivate billing and collections?” “How do we begin to clean up this mess?” “What should be our next step if the client continues to withhold payment?”

For the most part these firms ask the ‘How to’ type questions. These questions are direction seeking type questions, such as ‘show me the way’, and I will do it. Just give the secret. However, the problem and ultimately its resolution is much more complex than simply pulling out a text book, flipping to page 76 and in the second paragraph the answer is blazingly clear. To arrive at the solution, one must completely understand the problem. To find your way from being lost, you must remember the road you have traveled.

There was an interesting article in today’s edition of The Times paper entitled Slaughter and May v Clifford Chance: who is pursuing the best route? The article basically outlines UK law firm business strategy along a continuum. Author Dominic Carman outlines how firms like Clifford Chance has spent the past decade opening offices all over the globe, while Slaughter and May operated at the other end of the spectrum, in closing offices and focusing on the elite type clients. Carman goes on to explain how Freshfields has adopted the middle of the road approach somewhat more of a hybrid of expansion and contraction. The article is filled with quotations from each of the ‘magic circle’ firms’ managing partners how their approach is the best and the others are wrong. One interesting point emerges from the article, “Slaughter and May emerged as clear winners in profitability: its highest earning partners comfortably passed the £2 million-a-year mark”.

Upon a cursory reading of the article, the reader may be left with the notion that the Slaughter and May approach is probably correct because the profit per partner is higher than the others and as is the profit per top partner is highest. Others may argue that is only a current phase and with increased globalization those figures will flip and the firm that is truly global will be the leader in profitability. This article should raise many questions in the minds of the reader, what is the right approach? Is it sustainable? What will be the impact of increased globalization? Maybe with a crystal ball, the answer would be very clear. One question I ask you to ponder would be: Would one expect the same results of Slaughter and May if a firm like Clifford Chance were to adopt the contraction and focus model?

Based on my reading, I think the answer is very simple. Insight to the answer was determined about 10 years ago in business school research and publications. The focus of study was how rainmaking stock brokers lose their thunder when they move to another firm. The answer – culture. It is through a firm’s unique culture that they all achieve profitability in their own business approach. It is the culture of the organization that provides the environment for the rainmaking stock broker to be great at one firm and be average at another. It is the behavior and belief characteristics of an organization that define its outermost capability.

The best kept collections secret, begins in understanding your firm’s culture. That will define how you view your clients and what value is placed on billings and collections. This is not to say you cannot enhance your returns because of cultural limitations. Instead, once you understand your culture, you can then implement policies and procedures that are in alignment with your culture and thereby tap that enormous pool of aging AR and covert it into cash. This is exactly the Slaughter and May approach, know thy self and focus on thy abilities. You already know The Secret and it begins with introspection.

Tuesday, April 01, 2008

Bet You Don’t Get IT !

Last week’s submission addressed why organizations fail to reap the true benefits of implemented technology. After thousands, if not millions of dollars of investment they are marginally better off than they were before the implementation of technology. Essentially what they have done is put technology over bad business processes, the resultant – speeding up bad business… faster and faster.

The mindset of these organizations, sadly enough, dates back to the 18th and 19th century. You guessed it, the Industrial Revolution! The Industrial Revolution was kicked off in agriculture, manufacturing and transportation, through the introduction of steam power. No longer was human effort so critically needed, now machines did the lion’s share of the work. Tirelessly the machines outstripped people in its production capabilities. It was soon realized that making the machines go faster yielded greater production. Then better faster machines were built that further increased the process. Dr. Stephen Covey refers to these productivity gains as “output was a product of how much you can lubricate the process”.

In case you haven’t noticed, the world has moved on, very much since those days of steam power. Although, we are in the age of Intellectual Capital, the era of process reexamination, sadly enough, much of the world have Industrial Revolution mindsets. Many years ago I visited an organization that had recently purchased an ERP system. Through the implementation on their big beefy hardware, the users found the system deathly slow. At the time the vendor said, it’s your equipment. After many iterations of increasingly larger and more powerful hardware, without a sign of increased output, the CIO opted to bring in the hardware vendor. After days of analysis by the hardware vendor it was determined that the “software was poorly written”.

Somehow we are sold on the notion that the next release or the ‘advanced’ product training will yield better results. Sadly that is not the case. It is simply the mantra of those with a 19th century mentality! What is needed is a critical objective understanding of the business process to identify inefficiencies. In his book The Definitive Drucker, Peter Drucker makes the statement “If it ain’t broken, break it”. I feel the statement Drucker is making isn’t to simply go through organizations with a slash, burn and rebuild mentality. But rather to examine every business process, critically examine it in light of technology and new Insightful Thought, and then make changes. As an example, changing how your office orders coffee sugar will NOT have a great overall bottom line impact. However, changing how you do something like AR Management will.

After writing the last post, I stumbled on some research done by an independent body and published in Credit Today magazine. The article entitled “Formal Credit Department Training Programs Missing at Most Corporations”, made it blazingly clear that organizations spend a ton of money on hardware, software and go lean on product training and process training. The author made the following statement:

“Training is more critical than ever. Not only are technology and automation changing the way receivables are managed, but the regulatory and legal environments have witnessed significant changes since the turn of the millennium. On top of all this, we are at a point in the business cycle where cash flow and risk management are under an enormous amount of scrutiny”.

“Despite these factors, 77 percent of the respondents to Credit Today's recent Credit and Collection Training Survey indicated their firms did not have a formal training program for credit and collections.”

The survey presented that 89% of the sample organizations spent less than $1,500 per year on business process training, how credit and collections is changing and the tools needed in the 21st century to be successful. Organizations today expect sterling receivable agings and tremendous cash flow from a staff that have little or no credit collections training. This makes no sense! To put this into perspective, just because I have a saw and know how to use it – doesn’t make me a cabinet maker! Would you go to a dentist who has all the equipment, and training on the equipment, but no formal training and testing in dentistry? I bet not!

I feel that time has come to stop buying all the new ‘widgets’, all the new snake oil remedies and get back to basics. The basic question is “Are my staff properly trained in Credit and Collections?”, “Are my staff aware of and using all the latest techniques, in light of the current laws and economic situation?”

Face it, the newest widget isn’t going to do it for you, nor will all the training on how to use it. Where you will reap huge benefits will be in your core understanding of the process and what you need to achieve given the limitations. So go and get the training you need, the core training to be the Credit and Collections professional, and then be the Drucker in your organization, and break then rebuild those Industrial Revolution style processes.