Time for … Change?

What a word!  Just give Google the opportunity to identify change and it will reveal 348 million hits.  What a popular word! It is everywhere from the classroom to the boardroom. It represents a degree of impermanence with the current state. I have wrestled with ‘change’ as it applies to the business world for quite some time.  As the entire world continues to form and transform one would have to ‘change’ just to stay the same.

“If you want things to stay as they are, things will have to change” – Giuseppe Tomasi di Lampedusa in Il Gattapardo

Organizational transformation is probably the most publicized use of ‘change’.  Organizations undergo a series of formation and transformation for a multitude of reasons ranging from increasing market dominance to simple continuance. In her recent article Implementing Change, Merge Gupta-Sunderji unpacks the different elements of organizational change of culture.  All of the elements of change are in reference to how they impact employees.

Primary change is probably the easiest corporate change to implement and it has no impact on employees.  This type of change doesn’t have any impact on employees’ day-to-day activities.  Secondary change begins to encroach on employee behavior.  However, it is still in direct alignment with their current activities.  Secondary change would take the form of increasing customer service in a service oriented organization.

Finally tertiary change the ‘change’ with the greatest depth. With tertiary change the core culture of the organization must under go a complete transformation from the ‘old methods’ to an adoption of the ‘new methods’.  Tertiary change comes down from the leader; the vision must be ‘sold’ to every member of the organization.  Each employee must see the value of the new methods, embrace the vision but more importantly must ‘buy-in’ on a very personal level.

Merge walks the reader through the steps of orchestrating organization cultural change, from the leader’s presentation of the vision, the leader’s fielding of questions, empowerment through training and then ultimately through reward and recognition.  Merge concludes that cultural transformational change is gradual and leaders must be patient.

It has been my experience that underlying all cultural transformation there are deep underlying elements that require acknowledgement.  Any leader seeking organizational transformation must have the respect of the organization.  This goes beyond ‘lip service’, the team must believe that the leader is credible, knowledgeable and acting in the best interest of the organization.  Without this fundamental element of belief in the leader all transformation change is just a pipe dream.

The second most critical element to begin paving the way for transformation requires each person being able to see how they benefit from the change.  Without precipitating a tangential discussion, humans are basically greedy.  Therefore any type of change that is to occur in the organization, employees must understand how the transformation will affect them; people need to see how it brings them benefit. Reaching to Abraham Maslow’s Hierarchy of Needs, people must satisfy lower level needs before moving up the hierarchy.

As basic needs are satisfied, higher level needs become exposed and then addressed.  By way of an example, if a corporate transformation fully addresses one’s psychological needs this change will pave the way for the person to seek fulfillment of their self-actualization needs. If the employee cannot see how their needs are met or importantly how the transformational change will meet more of their needs, the entire process of transformation will be derailed.  It is because of this hierarchy of human needs that any transformation that focuses on attrition will not be received well or orchestrated well, other than at the executive level.

Good leaders know the power of the carrot and the stick in achieving goals.  Through Maslow’s model, leaders are able to demonstrate how more of ones’ needs can be met as a precipitate of adopting the new methods and embracing organizational change.  At the same time the stick is the combatant for those not embracing the transformation.  However, those seeking to preserve their position in the hierarchy often undertake silent conformity to transformation; they go through the motions of transformation but not committed to the outcome. 

Along with those who are in silent conformity, often in the midst of corporate transformation there are those who believe they have some ‘special knowledge’ that renders the leader’s vision futile.  They don’t embrace the actualization of themselves to a greater potential.  Instead these individuals, operating on their own self-centered motivation are the cancer that permeates the organization, to undermine the transformation.  Slowly they infect the minds of the team to undermine the vision of leaders.  Sadly, these sly individuals go through the motions of compliance, like those silent conformists, but are actively undermining the transformation.

For true cultural transformation to succeed the leader must know their troops and build rapport of mutual trust.  At the same time the leader must be able to identify those who are silent conformists as they are only parasites on the organization. More importantly identify those who are cloaked as silent conformists but are creating the political undertow in efforts to derail corporate transformation. There are many forces acting against transformation and the savvy leader must always be aware of the playing field.

Why Fish, when you could Farm?

Last week, I had the opportunity to spend my time at a CPA managing partner conference. It was a great opportunity to meet with some managing partners and to gain an understanding of the major issues they are facing. As it turns out, CPA firms are very much like law firms in their organization and practices, so much so that their WIP and AR management issues are almost mirror images of each other. After two days of meetings, and round table discussions it dawned on me that the problems faced by law firms and CPA firms, are deeply rooted in their organizational structure.

As we all know, law firms are built of varying legal acumen of the practitioners. At the bottom rung are the students who must learn the ropes; higher up the tier are varying levels of senior associates. The top of the firm is made up of department heads, non-equity partners, equity partners and the managing partner. In the accounting world, the names are different but the structure is somewhat the same. As I can deduce, the role of the managing partner is basically to manage the firm based on direction of the various committees. Now, depending on the firm, the managing partner may have their own practice; which really doesn’t lend itself to ‘managing the firm’. Then one must question, what really requires ‘management’ in today’s firm?

In his book, Collecting your Fee, Ed Poll makes a very blunt statement that law firms are the product of their own actions. They have no one to blame but themselves for the slowness of collections of their bills. I believe Ed is very accurate in this conclusion, however, I must take it a step further. The managing partner of the professional service firm is solely responsible for all of the delinquencies associated with collections of outstanding receivables. The managing partner must face the reality that they and only they can make a change.

You must be wondering how such a bold statement can be made without some support. Support really isn’t needed, as the managing partner is responsible for the ‘management’ of the firm. So having garbage receivables and poor cash flow is directly their responsibility! I feel that the managing partner is either spread too thin or simply doesn’t have enough power in making a change. Therefore, the firm continues day-by-day, month-by-month and year upon year to have sloppy accounts receivable management practices.

If you take a moment to examine how law and accounting firms are built you will begin to see where the flaws exist. It is these core flaws in the structure that leads to an ineffective managing partner. These firms come about principally by mergers, acquisitions or organic growth. For the most part, M&A, activity has lead to large national and global firms. During these activities, small firms become bigger firms, which become bigger firms and so on. However, with each M&A activity different cultures are forced together. It is the failure of these, often heterogeneous cultures to meld that is the basis for all of the problems.

Following an M&A event, there is the existing culture and the new culture. Well both cultures have ‘always’ done things a certain way. Who is going to change now that they are a single firm? The problem is exacerbated when the new culture is in a different location. It is much more difficult to discern if the cultural differences is a necessity of the local economy, the firm exclusively or some combination of both, therein lies some of the challenges. Post M&A activity, often the cultures don’t gel and the firms now have the essence of two companies under one name. As the firm continues in its expansionary plans each successive M&A activity increases the number of cultures that continue to do things ‘their-way’, all the while; operating as a single entity.

On a macro-level there can be several cultures, by virtue of the M&A activity, but what about firms who have grown organically? Firms also fall victim to micro-cultures. In the organically grown firm and also the M&A grown firm, all the partners make up the ownership of the organization. To that end, they each believe in how they should manage their practice and how the firm as a whole should operate. After all, they do own a piece of ‘the pie’. The compensation of the partnership structure acts to create an information hording mentality, where each partner is more focused on his or her own practice, through billable hours and client intake, rather than on the overall well being of the organization.

It is the presence of these multitudinous cultures that makes the managing partner completely ineffective. Essentially the managing partner is faced with the task of managing (depending on the number of partners) his or her own peers; who like them, have a practice and must generate revenue. So the difficulty of the task to keep all the partners playing the same game is almost impossible. All of this is compounded with the many active committees in the firm, each pushing or pulling for their own political agenda.

An example of this came to light during a recent conversation I had with a colleague, I found that the managing partner has no control on his firm; it simply continued as it had for decades. My colleague is the managing partner of a national firm. His firm has grown principally by M&A activity and with 10 offices across the United States the culture is radically different between offices. In each of the offices there is an office managing partner, to whom all local partners report. However, the situation that I used to bring reality to light is in the firm’s practice of expert witness in accounting/financial litigation.

In the firm, one partner in the head office manages a practice of expert witnesses for white-collar crime litigation. This partner has agreements in place with insurance carriers for this type of work and all such work throughout the firm goes through this partner, except for their west coast office. This head office partner sets her own rate in which the insurance company sometimes fails to pay. She then seeks compensation from the insured. The reality of the failure of the firm to act consistently was a bit of a surprise to my colleague; however, he didn’t want to address the issue, simply because, the ‘cultures’ are different. As dinner progressed, I brought to light how the firm was basically acting as two different firms when it came to this practice group. At the end of the night I closed with, if a single practice group is so heterogeneous, what is going on between all office practice groups and within practice groups? To that, I received a blank stare. It is no wonder that they have AR issues in the various practices in the organization.

With firms’ blatant failure to ‘gel’ and have one codified practice throughout the organization, the managing 

partner becomes nothing more than the tour guide for a group of fishermen; someone who simply makes ‘suggestions’. Each partner simply fishes in the sea of revenue to get his or her own catch. Instead, firms could reap tremendous rewards through leadership, direction and focus. All the partners must be focused and operating under a single codified set of rules. Once that is achieved, the managing partner now becomes the leader of the firm’s destiny; a farmer. As a fisherman, each person takes his or her chances. As a farmer, the foundation is laid; the rules are in place, everyone is in lock step together, and the end result – a bountiful harvest. Sadly, in today’s practice most partners are casting their lines into the sea of revenue, when they could be harvesting from the fields of profitability!

Can’t Escape from …Bud !

From my earliest days in my finance career I have never been a proponent of the mind numbing laborious task of budgeting.  I guess I was never part of the typical accountant stereotype of accountants; ‘number jockeys’.  I guess my alienation from the stereotypical accountant was rooted in my education, it was devoid of budgeting.  It wasn’t that the process didn’t exist, it simply wasn’t taught.  I often wondered where this ‘strange’ habit of budgeting found its origins.

In the mid 1990’s there was a movement away from the horrifically painful process embraced by those crystal ball readers.  The new age model was based on projections, and rolling forecasts not prophesying about the future. The early adopters of these new finance tools became the evangelists of what was perceived as a better way of running businesses.  Their core motivation for the escape from budgets was ‘agility’, the ability to change corporate direction at the first glimmer of a new opportunity.

Through the 1990’s and into the new millennium this new paradigm never took on pandemic dissemination. In principle it sounded good but it was the ‘betamax’ of the finance world. This redheaded step child eventually found its demise as the new millennium brought unprecedented economic downturn. The budget was not replaced; it survived the holocaust of progressive thought.

Like any yin-yang duality, innovative thought has again made its resurgence and once again attacking those crystal ball gazers.  As it turns out, the rolling forecast of the 1990’s has arisen from the ashes and has gained tremendous momentum with the elite of progressive organizations.  None a better time when the global economic is seeing some thread of international competitive advantage; this time, only the most progressive organizations are demonstrating that ‘Bud don’t know Jack’, February 2012).

According to Professor Kenneth Merchant at the University of Southern California’s Marshall School of Business, there are at least 100 companies across the globe that have or are in the process of replacing the budgeting process for more agile and timely reporting. The anti-budgeting Czar, Steve Player, contends that the budgeting process is a huge waste of time and it is part of the ‘dumb’ stuff that finance does. The process of budgeting is riddled with faults from its very inception!  In the most conservative organization managers attempt to predict the future by building an illusion of the coming year.  On the more liberal side, executive management establishes a target, say 25% growth, and managers rub the genie’s lamp and magically produce the smoke that satisfies those requirements.  Like smoke, the budget never endures for the year much less a few weeks if any.  According to John Hrudicka, CFO of Elkay Manufacturing, “With a budget, you’re requiring the company to stick to plans with little or no appreciation of how the world has changed”. To take it a step further, how the world WILL change!

Player professes that budgets are based on assumptions that are ‘wrong’. Therefore budgets are nothing more than building an empire on quicksand. From a completely objective position the entire budgeting process is an expensive exercise in time wasting which ultimately strips management of accountability. When management creates budget they either become tied to easily achieved targets, stripping them of motivation of achieving greatness and the organization suffers from seizing opportunities to create real value. At the other extreme, ‘progressive’ organizations are driven by unattainable budgets goals developed completely with no regard to the ‘economic world’ end up demotivating or completely decimating their labor pool as the goals set are completely unachievable. 

In his book Winning, Jack Welch famously griped: “It [budgeting] sucks the energy, time, fun and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity”.

With all of the knowledge abound, knowing that budgets are obsolete the moment the toner dries the last line, why do organizations continue to worship at the budgetary alter. I guess the problem rests with stepping out of the comfort of ‘we’ve always done it this way’.  Pat Hensley, CFO of Holt CAT (a caterpillar dealership in Texas since 1933), puts it well with ‘A budget is like a cockroach-you think its dead, but then you have to spray more Raid on it’.

As in the 1990s, only those organizations that have the desire to achieve greatness have buried the budgetary beast and have revived target setting and action planning. To be truly progressive and adopt the agility to achieve greatness the organization must break free from the Alcatraz of Budgeting, because only the best will survive the new economic world order...

Hei’ei’ wei a Hamma!

Listening to the communication of children is so refreshing. Some how they seem to understand what each is saying – because they share and understand a simple vocabulary. Somehow this basic foundation of communication is eroded through the progression of adult life. Over my years I have amassed a repertoire of words in the English language I don’t like and therefore simply don’t use. There is one word that is bantered around so much that its meaning has taken on a life of its own; the word ‘Strategy’. Even as I execute each letter I could feel the tension mounting. At one point the essence of strategy, to me, was the holy grail of innovation. Today it is the confetti of organizational communication. It seems that everything has been elevated to the level of being strategic; otherwise it is in not really important. Michael Porter (Why Do Good Managers Set Bad Strategies?, 2006) said it best “Strategy is a word that gets used in so many ways with so many meanings that it can end up being meaningless”. He is right!

So what is strategy or being strategic? Don’t Google it, as there are more definitions than hours in a year! They range from (i) the bridging of the gap between policy and tactics, to (ii) “Strategy has no existence apart from the ends sought”. However, my all time favorite is “Strategy is a broad, ambiguous topic. We must come to our own understanding, definition and meaning”.

For me, strategy is perspective, a way of looking internally and externally from the organization which gels, from all the possibilities, a direction and focus that guides an organization’s actions through tactical steps.

As a part of my Organization Life-Transformation Portfolio, strategic planning is something I have taught with great zeal. I relish the moment when I can move teams from the mundane to the incredible, my only requirement; a group of free-unencumbered thinkers. Through the exercise, teams are taught to fixate on creating ‘The WOW Factor’. This is an organizational unlimited unencumbered vision – the end. Sadly, however, when push comes to shove, strategic thinking flies out of the windows as the pressure to make budget or hit the quarterly numbers takes over.

Having a strategy or a strategic plan is not a static entity but more a living a breathing organism that is affected by and effects its environment. A strategy is impacted by and responds to environment, political, informational, social, technological, economic and legal pressures. Any ‘strategic planning’ that fails to embrace and include these elements represents an exercise in futility.

Recently I was engaged to lead a team through a strategic planning process. When I questioned the leader what was his expected outcome – I got the “deer in the headlights” look. To this executive, the activity seems so relevant that it was worth any price. The only problem – he had no idea what was to be the outcome. Although not part of the curriculum, he was lead to the vision ‘to transform the organization from ordinary to extraordinary (the wow factor) to such and extent that their landscape is indelibly altered.

Ultimately the first step in change is having a vision of what the organization will look like at some future point in time. If the view begins with the current organization in some form, then strategy may not be the tool of transformation but rather a tactical approach to change. Organizational strategic change seeks to create a new market space that makes current competition dynamics irrelevant. Instead of trying to ‘out-compete’ the current market dynamics a new basis of success; value innovation, changes the market place.

To be strategic is to be innovative in vision, thought and execution. Instead most organizations continue to be the breeding grounds for management communism which only serves to suppress any innovation. Each time I am faced with organizations seeking a strategic solution amidst their communistic culture the voice of a young Bristolian man, who explained how to remove an automotive headlamp, comes to mind... Hei’ei’ wei a Hamma! (Hit it with a hammer!). For these firms the innovation of a sledge hammer bears the finesse of their ‘strategic’ solution!

Bud don’t know Jack!

More recently than not, through the demands of my work, I have questioned if dementia has set in, as I cannot recall if my training in business and finance included studies in clairvoyance. At recent roundtables of financial professionals, the buzz of dialogue continues to focus on matters of budgeting and reporting. Through these moments of altered existence, I wonder if these people are really listening to themselves discuss the lunacy of budgeting.

I do vividly recall my accounting training on different budgeting models; how and when to apply and the value of the outcomes. What I don’t recall is how an accounting designation allows me to predict the future. Budgets are in essence a prediction of the future. The amazing part of this logic is management seeks budgets with tremendous degrees of detail. There are so many flaws with this level of thinking that it is borders on stupidity. An accountant is no better able to predict the financial position of an organization 10 months out as a meteorologist is able to predict the weather of Chicago on November 28, 2012!

The budgeting process is so ingrained in business that it is the cornerstone of management and the finance team. It consumes a tremendous amount of time to develop and it gives license to management to bayonet those who do not meet ‘the target’. Why do we still rely so heavily on The Budget? I feel the budget is the language of business because ‘we have always done it that way’ and no one is willing to venture into virgin territory, seeking a better way.

The most humorous part of budgeting is that one is able to create one’s own reality. This is best presented in the foundation of the budget – the top line or revenue number. During a recent engagement with an east coast aggregate supplier, I was introduced to their crystal ball mentality. The goal of the parent company was to increase the bottom line by X% and this required a 24% increase in revenue. So that became the starting point! What I found most interesting was no consideration was given to the current market, competition, elasticity of demand, or business process. This is what the parent company demanded, and this is what our bonuses will be derived from, therefore it was the starting point. Way to go! Now when the organization fails to meet the targets it will be a blood-bath in the ranks.

This type of thinking, based on my exposure, is so pervasive in the market place. My exposure to grant funded organizations has demonstrated a slightly different twist to this type of behavior. These organizations put together a budget of what they think they can do, then they put together a plan of how they are going to spend the money. The grant is written to get the money, and once awarded the agency’s mandate is to spend the money. The humor sets in during the tail end of the award period, when there is a scramble to avoid the ominous ‘use it or lose it’ deadline.

Budgets, I have found, take too long, are built on a plethora of assumptions, are mired in useless detail and have a best before date; which is the date it is printed. According to Jeffrey Pfeiffer (What Were They Thinking, 2007), “The average organization spends anywhere from three to six months creating the annual agency level budget. Then this huge expenditure of time and effort seldom produces anything of much value to anyone.” Dave Axson (Management Mythbusters, 2010), “The only guarantee with respect to budgeting is that the more detailed the budget is, the more wrong it will be.”

When I teach on budgeting, my emphasis is on realism not surrealism. The starting point for my protégés is to have a WIG. This is not egotistical self-jactitation. WIG is an acronym for Wildly Incredible Goal. Establishing a goal for what the organization can achieve in the next twelve months and push the limits… make it wildly incredible. From that point, one must work backward to achieving that goal, not based on the mental lockstep of budgeting models, but based on reality.

The plan has to be broken down to achievable goals in reasonable time frames. To this the numbers are added. The great caveat here, which differs from the classical model, is that the numbers attached to activities are based on confidence levels and ranges, and not discrete figures. By way of an example, rent may be set at $240,000 per year with a confidence level of 99% (because of the lease). Conversely the annual figure for transportation may be set at $50,000 with a confidence level of 50%; because we know for sure that the price of fuel will only increase – but what we don’t know is by how much. The reality of this example, vividly reminds me of a northeastern recycling company who, in 2007, built a budget when oil was $60 a barrel. When the price of oil shot up to $140 a barrel, the budget was useless and management was completely lost at what to do.

The reality is that every organization feels the life of the economy. Therefore, our planning must also be able to breathe that reality. Another great fault of the budgeting process is it makes one oblivious to economic opportunity. I recall a dialogue with a senior executive who was faced with an opportunity that had a stellar ROI, but was unable to act because ‘the budget was already approved and this opportunity was not known at that time’. What was wrong with this picture? Jack Welch (Winning, 2005) makes it undeniably clear in “…the budgeting process at most companies has to be the most ineffective process in management.” Mr. Welch brings reality home with “The budgeting process as it currently stands at most companies does exactly what you’d never want.” “It hinders growth opportunities.” “It promotes bad behavior-especially when market conditions change mid-stream and people still try to ‘make the number.’”

Yet, with all the knowledge of the ages we continue down the road of historical behaviors, either because we are so disconnected with reality that we don’t see the futility of our efforts or we simply don’t have sufficient internal confidence and knowledge to break this cycle of futility. Uncertainty has become the cornerstone of the economy, society, and politics and has become so great so as to render the budgeting most organizations still practice-counterproductive if not completely useless. Gladly, as for me, BUDget don’t know JACK!