Don Downey

Are we there… Yet?

2011-11-24T13:57:00.003-07:00

There is none like the piercing sound of a little voice breaking the silence only to gauge the point of arrival at the destination. On a trip, the arrival at a physical destination is populated with signs; however this may not be the case when anticipating change without progress markers. More often than not, change; personal or corporate does not occur in isolation. But rather it is a cog in a highly complex environment that is constantly undergoing transformation.

As the global economy continues its daily oscillation between financials bearing red or black, organizations continue to search for the silver bullet; that one illusive ‘magic’ fix that will catapult their organization out from this current economic turmoil. One needn’t look far to experience the explosion of seminars, webinars, articles and the like meant to help you catapult to a better tomorrow. What is so amazing is that many of them come at the right price – FREE. This pricing model is something that subversively attacks the very definition of value.

Several years ago I wrote on the concept of a market continuum, where organizations in a similar market niche become placed along the ‘success continuum’ based on their inherent nature to adopt change. At that time I argued, that their placement on the continuum is the result of organizational culture and its related risk sensitivity. Although I believe this still continues to be the case, I believe that market forces have exposed more elements to these phenomena. To get to these other forces, I believe we need to begin with an understanding of organizational change.

The only thing that is constant in the world is change and this is especially true at the corporate level. Organizations are under constant bombardment from economic and social forces that continuing along the status quo is the road to extinction. Organizations must continue to respond to their environment by making alterations [change] to continue to hold their place along the market continuum. It is the progressive organization that is able to leap out and upset the market continuum as a means of gaining the competitive advantage.

As an attendee at a recent symposium on change, I listened intently for something that I hadn’t heard before – me and 500 other attendees. What was spoken was none different that any 1^st year MBA student would gleam from a text book. After hearing it and reading it 100+ times, this time something was different. This speaker espoused his acronym that is the pivotal point to long lasting change – VIM.

Long lasting change is built on VIM - Visualization, Intention and Methodology. Although very simply in vernacular the essence is very deep. For successful change to occur, the change agent must be able to ‘see’ what the end result of the change will be – somewhat like arriving at the planned destination of a long trip. Without this visualization – any end result will do. In the corporate environment, this visualization must be in the hearts and minds of all. If there are nay sayers on the team, their negativity will be a force that derails the entire plan.

The second major facet of lasting change is the Intentional aspect. Intention is the motivation which is the force to continuing along the road to the visualization. The element of intention is the determination to achieve the end goals, this, however is where greater elements of leader ideals become apparent. The last and probably most important factor in change is ‘methodology’. Without having a clear plan of orchestrating the steps to long lasting change, all other elements of VIM are rendered useless.

The important thing to recognize is that these elements do not operate in sterile isolation. There are two major forces, I feel, at work in adopting change. There is the organizational stimulus to the market and the market response. The one thing that is never considered during change is the human element; those inner psychological workings that impact the very foundation of change. This element is probably not addressed possibly because one could assume that talent and human traits are evenly distributed in the market place, or possibly that authors are only attempting to extricate the human element and profess the academic side of change.

In his recent article 'Creating a Master Plan', Mark Wadell professes the road to reaching an objective begins with an examination of the present; the famous S.W.O.T analysis. For the MBA student, S.W.O.T analysis becomes second nature. It is easy to examine a sterile organization on paper and work out its position on the market continuum. But how do the challenges of present analysis and ultimate change become distorted when the conductor is not objectively looking in from the outside. Once inside the organization, all leader actions are veiled by inner persona which can be riddled with neurosis and even psychosis. Couple the myopic leader with a subordinate staff who, because of the economy, are fearful of being made redundant and the possibility of a distorted group think will run rampant.

The question begs, how are organizational goals to be achieved when there are so many forces acting on the organization? Should there be greater internal controls to mitigate the possibility of oppression of the narcissistic leader? Creating a model of greater internal controls meant to nullify the flurry of psycho-oppression may; in fact, stifle the brilliant eccentric who has the ability to catapult the organization beyond its current abilities, may be conceivably possible. Alternatively, the organization could be dealing with the myopic narcissist, who is taking the organization into an abyss.

Probably the best way to identify and thereby react to the organization’s leader comes from the culinary adage "The proof of the pudding is in the eating". The quality of an organizational leader is only discerned by the results of their actions. All leaders will indelibly change an organization, whether it is through tremendous innovation or sanguine financials.

Value – The Measure of Success

2011-06-04T15:23:00.001-07:00

The last decade has demonstrated how no individual is immune to economic decimation. The Great Recession, as termed by many scholars, could be as devastating as the Great Depression of the 1930’s. It is undeniable that almost overnight shareholder value vanished. As we look in the economic rearview mirror, many contend that this economic pulse was the direct result of failure to manage risk. The result, a cascade of events that obliterated value as it made its way across the globe.

The cause of the Great Recession will probably be debated for years to come, as economies continue to rebuild. What did we learn from all of this? Depending how the economic dynamic of the day touched our lives, the lesson learned will be in direct alignment. If the impact was nothing more than a graze like that of a bullet – then we will continue along unaware of the breadth and depth of the economic devastation. Alternatively, the suffering of economic hemorrhaging will indelibly alter our behavior for years to come. These findings are beginning to pepper economic and psychology journals.

One article that caused me to stop and take note was Shareholder-Value Based Auditing by: Kevin Shen. Shen argues that the casualties of the Great Recession could be traced back to management’s failure to mange risk. Shen postulates that auditors may be too focused on risk and not enough on value, or rather the origins of value. Shen contends that shareholder value can be traced back to lines of activities and the audit process should focus on the risk of those lines of activities.

Shen draws on the derivation of shareholder value, along with the Gordon Constant Growth model and the Capital Asset Pricing model to derive a model that quantifies value. The model defines value (V) as the result of the quotient of earnings/profits (E) by the net of cost of capital (K) and growth (G).

V = E/(K-G)

Shen continues to refine the model from the corporate level down to individual activity level and contends that the audit should examine these value contributing elements to be effective in preserving shareholder value.

It is undeniable that the souvenir of the Great Recession is understanding and preserving value. The thought that immediately came to mind was how value is identified in organizations that have a completely different dynamic such as governments and non- profits. One could argue that they don’t have value and are simply an anomaly not to be test scrutinized.

I believe Shen’s model holds merit in the for-profit entities and also for the non-profit (NFP) entities. The transition for the model, however, requires an unpacking of the terminology. Shen proposes the basis of the model as the value accruing to shareholders. But who are the shareholders; those who have an investment in a nonprofit. I feel that the shareholders or better the stake holders in a NFP or government are the community which it serves. The community accrues value by virtue of the NFP, whether by feeding the homeless, aiding the needy or providing safety for persecuted. This value can be quantified by the easing of the burden on the community’s services.

This value is derived by extrapolating on Shen’s model. Earnings (E) cannot be managed in the usual sense as these organizations must expend all of their grants/donations in a specific time frame. However, the Earnings component could be more of savings derived by less demand placed on community and emergency services. Possibly a second tiered level of earnings could be the economic value derived from individuals who have been retrained to be economic contributors in society.

To a NFP or a government body there really is no cost of capital. Funds are either the result of grants, donations or taxation. However these funds do come with a cost. Grants and donations require considerable effort on the agency to attract these contributions. These costs can be hard, soft and opportunity in nature. Once quantified, these costs can be applied to the Shen model.

The last and possibly the most difficult to quantify is growth. Shareholder growth is easily quantifiable. However, how does one quantify the growth of a NFP or government? Maybe growth is not the correct term as it conjures up heavily bureaucratic organization that achieves volumes of red tape. Maybe growth represents the change in the social service the NFP is meant to address. By way of an example, if a NFP has undertaken to serve runaway teenagers in a community. The figure for growth would represent the annual percentage of runaway teenagers in the community year upon year. As the percentage increases (denominator) the value of the organization addressing the issue increases. Likewise as the NFP increases their service and lessens the injustice, their value decreases.

It is undeniable that value has become the new measure of success. Value must be a yardstick to quantify the contribution of every entity.

That’s not Fair!

2011-04-06T08:36:00.001-07:00

Never a more common phrase barked amongst children as the inequities of a situation. Interestingly the phrase never dies, as adults; we continue to comment on the inequities of life. Not surprising that the very basis of the assessment isn’t the result of looking at those around us, but rather to those who we feel have somehow benefited more than we have. The yardstick of fairness is purely external. The most interesting thing about speaking up about inequities tends to surround our ‘lesser’ position compared to others. Should we possess a greater allotment than another – we are never the first to cry out ‘That’s not fair’. Granted, there are those who have compassion for the less fortunate, however the cry to fairness is deeper and more heartfelt when our ‘account’ is under review. I would love to meet the executive who receives a sizeable compensation increase, far in excess of her colleagues, and expeditiously approaches the executive committee with the inequity of her outrageous compensation The establishing of fairness, however, takes a different tone as one moves from the area of the school yard to the functioning adult of society. Inequities of the school yard are managed through primal instincts of ‘fight or flight’. The disparity is either resolved through force or the oppressed slinks away. As adults, we haven’t evolved beyond ‘fight or flight’. The passionate minority will take up signs, pump-up adrenaline and hit the streets. Then, often their passion for the oppressed runs right in the face of TV cameras and police night sticks. Conversely the majority, complain to everyone they meet of the inequities in the world and how they are hard-done by. Either the majority adults are passive-complainers who thrive on perceived injustices simply to have something to talk about. No change has come about from profuse complaints to a self-absorbed insular audience. Change in any forum requires commitment to the cause and using the established channels to achieve objectives by non-radical means. History has been indelibly altered by such greats as Nelson Mandela, Martin Luther King, and Abraham Lincoln who identified disparities and focused on bringing about change. On March 25 news hit the web of General Electric, America’s largest company, who had no tax liability for 2010 and received a $3.2B rebate from the federal government. This news took on a life of its own becoming almost viral. All of sudden there became a clamor of voices how ‘unfair’ this is. Even one media giant openly condemned GE for their ‘use’ of the tax system, only later to be exposed they had taken advantage of the same tax situations. What these pundits fail to realize is that GE and other huge organizations have done nothing wrong. They have chosen not to seek out inequities but rather focus on self preservation. They, like every tax payer, have access to the same Income Tax Act. They, like every taxpayer, have access to a marketplace of tax professionals. Last time I check there is nothing that precludes anyone from exercising their rights under Income Tax law. During my tenure in public accounting and even to this day I listen to the complaints of how the tax system isn’t fair. My only retort – if you don’t like it, vote to have it changed. Ironically, a well known Canadian Tax lawyer, Vern Krishna, C.M., QC, LL.D, FCGA, in his article Tax Simplification is Imperative, recently wrote how tax simplification is an economic, political and moral imperative. I believe we have come down a long and winding road of an enactment of statute to fund vital initiatives to a monolithic and virtually complex law. We should focus our attention away from those, like GE, who have enlisted the expertise of those who have assisted in their commendable tax position. We need to focus on two real issues at hand, those who have, in retaliation or otherwise have taken the ‘flight’ response and are thereby costing tax authorities hundreds of millions of dollars per year in searching efforts to bring these people to justice. We also need to take up our pens to write letters, to cast our ballots and to build coalitions to enact long term ‘fairness’!

Cost of Accuracy

2011-02-15T07:57:00.001-07:00

Organizations, for the most part, tend to fall into one of two analytical camps. There is the small, non-public organization which undertakes the drudgery of keeping a set of books only to appease the laws of the land. Their extent of their financial analysis is determined only by way of having enough cash in the bank to make payroll. In the other camp are the public and government associated organizations that are steeped in financial analysis. These organizations live and breathe on the dicing and slicing of analytics.

After spending considerable time assisting organizations in getting a handle on profitability, I feel a certain degree of financial analysis is paramount to a successful organization. To the small organization, an exercise in financial analysis will direct the decision makers to those critical areas where change can be made. Interestingly, “what isn’t reported isn’t important”. I learned this mantra many years ago when assisting a professional services firm to get a handle on its profitability. Through very simple analytics it became blazingly clear which lines of business were profitable and which were a drain.

In the other camp, I feel that financial analysis has hit the zenith of analysis paralysis. It is almost as if the analysis is undertaken for the sake of analysis. In one organization where I had exposure, their level of analysis went down to the 1/1000 of a penny! One only has to stop and wonder where the sense in this is. With their technology, reports were run and the data keyed and re-keyed in to spreadsheets and databases to undertake such granularity in accuracy. I have to wonder the cost behind this degree of accuracy. Then with two resource competing opportunities, is one selected over the other because it was more profitable by more than 1/1000 of a penny.

One of the most intriguing aspects of this degree of analysis is the allocation of costs. I have found that so many organizations fall into the trap of ‘what was done before must continue’. It is almost like paying homage to the Mecca of the author of the analytical model. These firms often never question why they undertake their processes but perpetuate the same logic decade after decade. Although I don’t profess to be a cost accountant, I do feel that cost allocation should be based on a reasonable natural dynamic rather than a theoretical model, which often cannot be justified.

In reviewing the literature on overhead cost allocation, I have found that probably no subject in all of managerial accounting has as much controversy as direct costing. The theoretical argument of overhead allocation is between direct costing and absorption costing. Advocates of direct costing argue that fixed overhead costs related to the capacity to produce rather than to actual production. While the absorption costing school argues that each segment must bear a portion of all costs associated with its production. So, who is right?

In the reality, the debate often comes down to square footage of use in the production segment. I prefer to think of the production segment as either a manufacturing area where specific products are manufactured, or an office setting where specific types of work are undertaken. By way of an example an office segment in a professional services firm would be that area that houses audit, tax and accounting teams. The allocation model takes on a whole new tone when teams argue about office size and the allocation of common areas. Of course this is reasonable as each segment seeks to mitigate their cost of production and thereby justify their existence on the basis of profitability.

What happens to this model if the number of large offices is exceeded by the number of small offices? Are segments unfairly discriminated against because of the size of their office allotment and their related cost of common areas? Organizations can’t, logically, squelch this argument by undertaking leasehold improvement simply to put some type of ‘fairness’ to the allocation method through drywall and paint.

Recently I had such a debate with a very progressive management accountant on this topic. As we dialogued about the inherent flaws in the square footage model it became clear that a natural dynamic was at work. The conclusion we came to was based on reality; what is segment costs were not allocated by square footage, but rather by the number of FTEs in the segment. As the number of FTEs grows so will their space requirements and hopefully their profitability, as their growth would be driven by basic market demands. With this model, the overhead cost allocation per segment seems to be more objective.

Taking this dilemma a bit further, what happens if funding for a segment originates from two very diverse sources, how should costs be allocated then? The segment produces indistinguishable outputs but the revenue stream is from two very different sources. Given this situation the square footage model is blown out of the water as is the FTE model. Since separate funding sources dictate that costs be allocated one must find a natural basis, I feel, of allocation. Recently I was faced with this very situation. Through careful examination of the segment I found the natural differentiator; it was a unique characteristic of the users of the segment. As it turned out, there were users that had a behavior that could be traced back to one single funding source and other users to the other funding source. Once this model was applied, costs and revenue recognition became perfectly clear.

I believe that organizations need to closely examine their activities to ensure that each segment is adequately contributing to the overall health of the organization. The onus rests with the analyst to exercise reasonableness in overhead cost allocation and the level of granularity to be managed. More often than not the cost of extreme granularity outweighs the value of the analysis. More over recognizing the natural dynamic of the segment will lead the analyst to the true differentiator of cost. Relying on historical model or textbook musings will not lead to valuable information but rather a situation where the baby slips down the drain, following the bathwater!

Cash: Master or Slave?

2010-11-30T06:00:00.001-07:00

As the economy continues to sputter along I continue to see more organizations tightening their operational belts, sometimes at the expense of future growth. As sales begin to decrease organizations cut the ‘extras’, these include R&D, marketing and many times sales staff. Often these core functions, although conserving immediate cash, acts to cripple the future of the organization; when the economy does begin to run again.

What should organizations do? Warehouse cash until things turn around or spend what cash they have on hand. I believe the answer lies within the culture of the organization and its place on the competitive continuum. Over the past couple of years I have written how organizations sit on an economic continuum predicated by their competitive advantage and their culture. I believe the organization’s place on the economic continuum will strongly influence how they manage their existence during this, and any, economic season.

Of late, for many organizations cash flow has been and will be generated by ‘slash and burn’ models. Basically these organizations cut expenses to the core to keep the lights on, pay down debt or act as a backstop to future financial meltdowns. For many of these organizations, the drop of the gavel has meant cuts to corporate assets, like property, plant and equipment; the very assets that could be leveraged towards a greater competitive advantage both now and into the future.

As organizations have slashed their spending, the free cash flow generated from this behavior, as a recent study shows – has been warehoused. According to a study by the Georgia Tech Financial Analysis Lab using data provided by Cash Flow Analytics, from December 2008 to March 2010 the amount of free cash held by 4,000 U.S. public non-financial services organizations doubled, from $14 million to $28 million. This represented the highest level of free cash flow in the decade. While over the decade capital expenditures as a percentage of revenue fell from 5% to 3%.

For many organizations has become, swap long-term economic health or enhanced competitive advantage for a short term ‘glow’. There is no doubt that holding cash in an uncertain economy makes sense. But warehousing cash without consideration to making the organization stronger and more resilient makes no sense. This behavior mimics the human physiology, in that a rapid drop in the food supply puts the body into survival mode and all fat burning stops. While a more concerted approach leads to consistent weight loss.

According to a study by Charles Mulford, a professor of accounting at Georgia Tech, a few larger public organizations have maintained an upward trend in their capital expenditures along with maintaining a healthy cash flow. Are these organizations operating in a vacuum? Are they not experiencing the daily ups and downs of this sputtering economy? Or do they know something else, some thing other organizations simply haven’t seen. These organizations, I believe, have a clearer understanding of the different types of organizational capital and their position on the economic continuum. From the study, these organizations had different reasons for their commitment to continued capital expenditures. However the most common reason was to maintain their market leadership (domestically or internationally) and keep competition at a considerable distance. The resounding mantra of these organizations was their adherence to a long term strategic plan

A commitment to a long term strategic plan carries more than consistent spending on capital expenditures it requires a complete commitment of the organization to managing a working capital portfolio of funds to meet current, mid-term and long term needs. An organization who hasn’t worked out the nature of their capital, their culture and their vision is destined to crash and burn under the weight of being a slave to cash. While the organization that is committed to their place in the future while having a strong understanding of their working capital composition, and their cash flows will be the master of their free cash.

Time to Reformat?

2010-10-13T12:14:00.001-07:00

Are we there yet? Try to sift through the media hype and you will come to the ‘I don’t know’ answer. It is extremely difficult to determine if the global economy is climbing out of hibernation or slowly sinking into a state of coma. The equity markets continue to behave like a buoy in the middle of hurricane Paula. However, from my vantage point there is still free cash and buyers in the economy; consumers are still making purchases. Granted not to the degree of a decade ago, but big ticket items are changing hands.

With the ebbs and flows of consumer spending, and with a hungry pool of commercial entities, how does an organization attract buyers to itself; in essence, away from other vendors? For many organizations they undergo a myriad of ‘strategies’ in hopes that something sticks. Success in this economic climate and beyond rests on, I believe, two main ideas. Success comes down to attitude and economic agility.

The attitude for successful sales is one of understanding your clients and prospects. The organization needs to understand the needs of their audience with the correct products and services. In unison with the right products and services comes the understanding of who the organization is; a niche high-end supplier vs. a low cost volume discounter. Through the understanding of the vendor’s market niche, sales are gained on a definitive quantity; value, price, options, etc.

Bottom line profits are the result of two entities, sales and managing costs. To drive the life blood [profit] of survival internal cost management must be scrutinized. For many the word ‘scrutinize’ equates to radical cost cutting measures similar to ‘slash and burn’. I have seen many organizations slash the very budgets that keep them visible in the market place. These line items include marketing, sales and R&D initiatives. It boggles my mind how an organization can expect long term survival, when it eradicates the market presence initiatives [marketing, sales] and the basis of product evolution [R&D].

What these organizations fail to realize is that their real wealth rests within wasted processes in their organization and not in programs that will assist in weathering the storm. For many years I professed the mantra of continuous process improvement. To that end, I always professed that an organization must view its processes and procedures under the microscope and at each step ask the question ‘why’. It is only through questioning whether a process or a step adds value will one determine those defunct processes.

For many firms, time has overlaid new policies on the tails of old policies, new procedures get back-ended onto existing procedures and at no time does any one stop and try to unravel this thick mat of policies and procedures. I always believed that in every organization there are a few processes that are near the peak of efficiency, and only minor adjustments are needed to gain optimization. However, after an in depth analysis of several large organizations I have realized this was not the case.

I have always believed the best way to gain new insight into existing processes is to bring an in outsider to oversee that process area. Many years ago I had the privilege of working with an organization which had all of their senior executives on a three year rotation through the executive management ranks. The philosophy of the organization was to increase sensitivity of the executives for various departments. However, a byproduct of which turned out that efficiencies in processes were gained. Bill Taylor, in his article Trading Places: A Smart Way to Change Your Mind, expounds on the value of how the most innovative ideas come from outsiders.

I believe the greatest success in effectively scrutinizing processes comes by way of an outsider with the idea of breaking what isn’t broken. In their book, If it Ain’t Broke, Break it!, Kniegel and Patler demonstrate that organizational success isn’t the product of doing things the same old way. Success is the product of breaking the existing rules and thereby breaking away from the pack. The pack of current competitive forces.

So after years of adding more applications to the system, more processes and procedures to the mix, the agility of the organization is crippled by the weight of all of this ‘stuff’. Just as computer geeks profess, when applications start running slow – it is time to reformat the drive and reload the operating system. For most organizations, now is the time - clear the clutter, get a fresh perspective and reload the organization with a fresh ‘operating system’. This may be your last chance before a system crash!

Is that Blue in the Red Ocean?

2010-07-09T17:14:00.001-07:00

The economic recession of the 21^st century has impacted more lives than any other recession in modern times. Some economists contend that the current recession has had a greater financial impact than the Great Depression. However grave the impact, this recession has, and will continue to, provide the soil of survival. People and organizations alike, being pushed to the limit must survive. Survival is an interesting concept; in the animal world it is the fight or flight response. In the modern day economic world it is downsizing to reengineering. What ever the action, the strong survive.

Organizational survival depends on culture and the willingness to change. Change is the tool of organizational survival. The ability to change puts an organization ‘in’ the game, not on the sidelines. All too often organizations, who reach a monopolistic level, believe they can weather any storm, only to find that they have been left behind because of their unwillingness to change. A while ago I had the opportunity of speaking with a senior board member of a global financial institution. As we were discussing organizational evolution she shared a story of the hiring process for a new CEO of the company. When the incumbent was asked what would be their first task as a new CEO, the reply was ‘I will make change’. It was this phrase that sealed this candidate in the CEO chair. The company’s resistance to change made them antiques in the marketplace.

In Spencer Johnson’s book, Who Moved my Cheese, the author takes a look at human behavior and how the unwillingness to change leads to death. The most riveting quote, I feel is, “If you don’t change, you become extinct”. It this inability to change that has lead to the fall of many organizations.

Over the past few years I have written on how organizational culture places organizations along the ‘survival’ continuum. The organization’s willingness to step outside of current and historical practices to find a new way to survive will be the organization that not only survives, but the one that becomes the leader of the pack. How do organizations ‘step out’? Stepping out requires a new perspective on how the business model operates. It is ALL about perspective. In the 1989 movie Dead Poet’s Society, John Keating, played by Robin Williams, has the students stand on their desks to get a “new” perspective on their class – world.

A new perspective on a historic vocation brings new demand from the quagmire of stagnation. How have companies, amidst heavy competition and economic downturn, like Casella Wines, Cirque du Soleil and Southwest airlines stood out head and shoulders beyond their peer groups? These organizations chose a new perspective and redefined their market space.

I believe the economics of the present day is the impetus for organizations to redefine themselves. Since 2008, North American law firms have shed thousands of legal and support staff. In addition, many legal practices have simply locked the doors and turned off the lights. Those that remain have either been sufficiently large to weather the storm, or have cut back costs to stay afloat. With little view of economic recovery in the near future, the pressure on professional services will continue to be high. The market place has become a red ocean; a kill or be killed strategy. What professional services need to do is recreate their market space away from a zero sum game. This re-creation is creating a Blue Ocean Strategy, according to W. Chan Kim and Renee Mauborgne; in their book of the same name.

Professional services have long been a self-fueling machine of inefficiency. What other organization charges their customers for training staff and being inefficient? The infamous billable hour is the ball and chain of inefficiency, and clients have unhappily dealt with it. One perspective contributed by “HK” on social media exemplifies the feeling “The billable hour, with its bizarre, client-unfriendly incentive structure, has made lawyers and their clients miserable for long enough.” In any other industry, paying for incompetence would not be tolerated. To parallel this archaic model, one would be faced with an increasing cost of groceries the longer one had to wait in the check-out line.

Historically, I have argued that the billable hour is archaic and inane. Over the years, such approaches as fixed fee engagements and contingent cases have stepped onto the scene, but nothing has really taken hold. Realistically with all of the wealth of knowledge and precedents within the legal community, surely something better than the billable hour should have made its way from the swamp to dry land!

Change happens. I believe the fertility of the marketplace is at its highest for a new approach. Recently I stumbled across an article of a law firm with a fresh new approach. Sue Wang, partner at Clarity Law Group, uses the following description for her firm, “Clarity Law Group is designed like a timeshare, where clients pay a set fee for access to the entire firm.” According to their website, the firm provides the convenience of in-house counsel without the costs and headaches associated with the employee/employer relationship. In addition, the firm exploits 21^st century technology to minimize cost and inefficiencies.

Clearly the billable hour is inane, just look at the receivables of any legal practice. Clients simply hate to be charged for ‘training’ and inefficiencies. If the business model was fair and reasonable, firms would not carry such huge receivables all year and have to discount them within the last ten weeks of the year! It is very possible that the Clarity Law Group may have created their own Blue Ocean and, in time, will leave the billable hour mongers wondering “where did my clients go?”

Beware of - The Herd

2010-06-08T23:24:00.006-07:00

After a three year hiatus, this year’s credit conference was once again in sunny Las Vegas, Nevada. I always enjoy these credit/collections type conferences as the presenters and attendees have a lot to share. For some it is intense research in the field of finance that is shared during their one hour time slot. For others, it is the less than scientific grasp of the economic system that is poured out along side a tonic and gin. Regardless of the information, I always come away from these events with a deeper appreciation for our economic system and basic human nature.

This year’s conference was filled with many exuberant speakers (and guests). Although it appeared that attendance was seriously down from previous years, most sessions were well attended. The underlying theme of the conference, as with all conferences, is to navigate the sea of information toward finding a way to getting one’s accounts paid. After all, the life blood of any organization rests in its ability to be compensated for the goods and services which it provides its customers.

For any organization, non-profit or for profit alike, is the basic need of liquidity – cash. Without cash, the greatest product in the world will never leave the drafting table. However, it continues to bemuse me how little commitment some organizations pay to their ‘fluid-of-life’. Take for instance, Christine, a credit manager for a large national professional services organization. Christine sports a business degree from a small local college and a few years work experience as an accounting clerk. However, four years ago she landed her current position as a credit manager. She talks about her diet of BI reports and meetings, yet her receivables continue to age. Christine shared with her business specialty unit her firm’s frustration with their current cash flow predicament. However, not surprising that many in the room chimed in with their similar frustrations, at one point, a peer shared his experience at a recent conference where he attended a session ‘What others are doing in collections?’ Without missing a beat, that session was now re-enacted … here.

Here I was in Las Vegas listening to a session that occurred a few months earlier, as one attendee said, almost verbatim. What I found most interesting about this dialogue was that everyone was sharing their ‘efforts’ in getting their bills paid, but no one was sharing if these ‘tactics’ were effective, much less if their organizations had a similar receivable portfolio. It was almost as if a major firm is doing ‘it’, ‘it’ must the right thing to do.

Later that evening, I had the opportunity of dining with academics in the field of finance and credit. What became very apparent to me was that many attendees to these educational sessions only pick up tidbits of the core knowledge they need to be successful. What many firms are failing to realize is that the customer, who holds the checkbook, controls THEIR cash flow. So the big dilemma is what must YOU do to get YOUR bills paid – on time.

Most organizations have a standard diet of customer intake which includes a credit application, a credit check and some type of order. The credit application and credit verification, when completed and processed, is simply a means of heightening the probability in your favor that your bills will get paid. There is no guarantee at this point, and your terms are simply your SUGGESTED terms. The customer will do what the customer CAN do. Once the product or service transaction is complete, then the process of collecting on the invoices becomes paramount.

Once the bill/invoice is out the door, firms don’t believe they have options. For Christine’s firm, the daily dose of BI deposited in everyone’s email is ‘believed’ to generate payment. For a small portion of her portfolio, statements and dunning letters fill plastic bins awaiting postage. This unscientific ‘spray & pray’ approach yields its expected results. It is no wonder that her receivable portfolio has accounts that have aged beyond two years.

Amidst the conversations, Mary-Ann shared her tactics for getting her accounts paid. Her firm, with their 30 days net due, is currently running at 45-52 days past invoice date. Her take on the economy, ‘If my customers are not getting paid on time, how can I expect to?’. Mary-Ann, instead of filling the postal system with printed correspondence, has chosen to reach out to her clients to understand their pains and provide options that ultimately have her bills getting paid. Mary-Ann’s approach has kept her organization alive while several of their competitors have either perished or already on the slippery downward slope.

Organizations have the essence to their survival, cash, tied up in receivables and so many undertake a careless stance in getting their bills paid. Vincent Ryan in his article Lien on Me, looks at how organizations are exploring many different approaches to keep their blood flowing. Ryan discusses how many finance chiefs are finding receivables-based financing a stable source of fast funds. Although the funds are fast, it is no panacea, reporting requirements are strict and there are hefty costs. Guy Guinn, a partner at Squire Sanders Dempsey says “The lender has an iron grip on the company’s cash flows”. However, Ryan reports that many companies welcome the discipline that an asset-based loan brings to receivable management and collections. Although factoring is the most expensive and stringent approach of turning receivables into cash, Ryan suggests auctioning off receivables in an electronic market as a means of turning receivables into cash without relinquishing total control.

I believe that firms have many options available to them when managing their receivables, all of which come down to how much, and the timeliness, of the cash they need and how much they are willing to invest in their most valuable asset. If their modus operandi is herd mentality, then continue to ‘do what others are doing’ and the herd will eventually fall from the cliff. Alternatively, get in touch with your clients (Mary-Ann). Seek to understand their pains and suggest options that are mutually beneficial. And when all else fails; remember there are STILL options!

It’s all about …ME

2010-05-11T19:20:00.000-07:00

So often we go through our days fighting the current fire and stashing a little time away for the long term projects. It isn’t until a radical change comes to light that it often leads one to have a double-take. Sometimes the double-take is that two second ponder and then back into the trenches. Other times, it spawns a whole thought process that causes one to critically analyze the how’s and why’s of the ways things are done.

Several weeks ago I was engaged in a lengthy engagement with a geothermal engineer whose company was struggling under the weight of the current economic climate. Although the geothermal energy represents a constant and almost infinite energy source, its adoption has been stymied because of several key factors.

During our numerous discussions, a concept that Tony had been pondering for some time came to light. Through our discussions he referred to it as ‘margin of error’. The concept of margin of error finds its basis in the world of statistics, wherein the margin of error defines the credibility of the data. For Tony, he defined it as the amount of deviation from doing the job ‘right’ that is permitted.

In following the seed of Tony’s thought I found that the amount of error we tolerate in business is so complex and so multi-faceted it is amazing. Why is it that an earthquake in Haiti creates devastation while a similar quake else where doesn’t? This was the point Tony made. From our discussion, it became apparent that tolerable error in this type of case is rooted in socio-economics. Simply the regulatory bodies don’t exist in Haiti to adequately oversee construction of buildings.

However, in business the same deviations from ‘acceptable limits’ exist. Recently it made the news where an investment banker had years of tenure with his employer because of falsification on his resume. When questioned how this could happen, the hiring committee rested on ‘we didn’t have the bandwidth to complete a full and thorough background check.’ About a decade ago, a Stoney Creek (Ontario) doctor was found to be practicing without a license, for almost a decade. The investigation revealed extraneous entries in his past were never thoroughly investigated. Recently a person on the ‘no-fly’ list made it onto an international flight.

What, I feel, is evolving consists of a mode of behavior where workers are doing the basic that is required and often less than the minimal. So long as no one identifies the less than satisfactory performance, it simply goes unknown. Unknown, until the deviation is so critical that it is a full blown problem. It seems that our quest to output more from less has driven us to the realm of higher degrees of personal acceptable error. This concept was reinforced by a recent engagement with a statewide food distributor. The main receiver, Sandy, has a comic framed on her desk. The comic depicts a manger approaching an employee saying ‘Why aren’t you working?’ The employee responded with, ‘I didn’t see you coming.’

Although Tony refers to the concept of margin of error, there is an accounting concept that is analogous to the behavior; materiality. The concept essentially says that if the amount of the change is enough to cause a reasonably prudent person to make an alternate decision, the amount of the change is significant; or material.

What ever the term, margin of error or material exception, it points to a business mantra of ‘it’s all about ME’. Possibly economic recovery may find its roots in a kaizen like philosophy of continually striving for making a better product and not making it better for ME!

And...Size does Matter !

2010-03-08T18:02:00.001-07:00

I would be hard pressed to recall a conference, seminar or corporate material I have read in the last few months that doesn’t tout the miraculous change of some company’s process or widget. It appears that many organizations have jumped on the recessionary band wagon with the intent of using the moment to peddle their wares. I strolled through the vendor area of this year’s Law Firm Financial Management Conference and spoke with a few vendors, as I was introduced to their latest offering. I was then given canned pitches of how their offering would make a difference in my practice.

It wasn’t until I was saturated with these presentations that I engaged a sales manager in an introduction to macroeconomics. As I proceeded to explain the complex web of global economic dynamics and how a ‘quick’ fix of a $25,000 piece of technology greatly missed the mark of remedying not only my organization, but the global economy as a whole, I could see the glazed look become part of his demeanor. As I ended my soapbox rant with the idea that no small fix is sufficient to remedy a wallowing economic system I realize that to move beyond our current economic circumstance, something significant needs to happen.

From a cursory review of much of the economic thought of the day, it has become blazingly clear to me that what the global economic superpowers need now is a significant jolt to the economy; almost a radical “kick-start.” Continuing along as we have with small local changes only drip-feeds the economic engine to continue along its path; granted its path is slowly making a turn around. However, this turnaround according to the literature is 5 years in the making. With that said, the some of the current literature professes the US unemployment rate will continue to hover in the 10% range and prime lending rates will continue to be at an all time low.

The ‘kick-start’ must be significant enough to jolt the economy back into a positive momentum, somewhat like a strong earthquake. To make an analogy, most earthquakes although significant in attracting attention only a few have reached ‘significant’ proportion. One such quake recently occurred in Chile. According to Richard Gross, a geophysicist at NASA's Jet Propulsion Laboratory, the 8.8 quake was enough to shift the earth’s axis by 3 inches, resulting in a 1.26 microsecond shortening of an earth day. Previous to this was the 2004 earthquake off the coast of Sumatra that again moved the earth’s axis. Before this, it was in 1964 when an earthquake was enough to alter the length of a day. These were ‘significant’ jolts!

It was from the January 15, 2010 Harvard Business review that cited a recent Ernst & Young study on innovation, that leads me to believe that our ailing economy hinges on something ‘big’ happening. The article presents survey statistics of companies in the $5M to $5B range and how there is simply a lack of big idea innovation in these organizations. I am beginning to believe that our small innovations represent only tiny blips on the heart beat of the economy. These small innovations get swallowed up in the volatility of consumer sentiment with each passing day.

This “kick-start” innovation must not only be large, but it must be radically different than any other offering currently present. In addition, its appearance in the marketplace must also be innovative; otherwise its true value will get diluted. For many organizations, this concept of radical innovation is nothing more than repacking the old bag of goods in a new wrapper or modified business process under the guise of ‘innovative strategy.’ Sadly this ‘bag of tricks’ simply won’t cut it any longer, as a viable strategy; I believe that “strategy” is probably the most overused word in business. In my experience with many organizations in several different markets, business strategy is not much more than the documenting of historical tactical approaches. Chan and Mauborgne in their book Blue Ocean Strategy, support this belief of strategy in saying “…a closer look reveals that most plans don’t contain a strategy at all but rather a smorgasbord of tactics that individually make sense but collectively don’t add up to a unified, clear direction that sets a company apart.”

With the lack of corporate innovation and a ‘mish-mash’ of bringing mediocre ideas to the market, it is no wonder that the economic engine continues to sputter and will for probably the next decade; if not longer. Our only hope – an 8.8 or higher jolt with innovation!

No Savior in Technology

2010-02-09T00:29:00.001-07:00

The global economic melt down has given rise to a whole new form of economic organism. The organisms are almost purely parasitic in nature and their survival depends on their ability to manipulate organizations currently struggling toward survival. Hardly a week goes by when I don’t hear about some new company with their ‘new’ analytical tool that will unleash the power in a firm’s data.

As organizations continue to feel the pressures of recessionary economy, they become easy prey for those who believe they have the power to release the bull [market] from within their data. Sadly no matter how one dices, slices or purees the data – the reality is pretty much the same; figures don’t lie.

I believe weathering this economic storm goes beyond data mining and data analysis; it comes down to understanding your purpose and acting in alignment with your vision. The organizational adoption of a mission and vision statement ranges from a deeply rooted effort of the company to put something together at the local print shop that now hangs in the lobby.

The Mission Statement is a clear and succinct representation of the enterprise's purpose for existence. This is the reason the organization exists in the first place. Although the mission statement is the cornerstone management literature so many organizations continue without giving it [the statement] a moment’s thought. In the hay days of economic boom, companies were coming online by the hour. Almost no thought was given as to their purpose. They had a widget and they had a market to sell it in – and they were off. Sadly these organizations, who could not explain their purpose, have fallen prey to the storm.

Whether the Mission Statement is displayed throughout the organization or is something discussed at the coffee station, it defines the culture of the organization. What is more interesting; some organizations may have more than one Mission Statement, the one on display and the one that drives management directives. It is the unpublished statement that is more in alignment with behavior and therefore becomes the compasss for the organization.

It is actions more so than the gold inlayed plaque that determines the fate of the company. Many years ago I happened to meet the president of a company whose mission statement, proudly professed, “We are here to have fun, and make money.” As the statement professed, the company was predominately about a fun upbeat positive environment and secondarily about producing goods for their niche customer base. However, after a decade of ‘fun’, competition came from over the horizon and the company was depredated.

Conversely, a southeastern United States service organization which I had the pleasure of working with, proudly has their mission statement framed throughout their building. There is hardly a corridor in their offices that does display their Mission Statement. However, I don’t believe anyone in the company is able to repeat their statement much less follow its premise. The reason, the actions of their president, George, continues to act contrary to their mission. George’s every action resound with ‘Our goal is to make the numbers we need to satisfy our shareholders’. With that mantra, the organization slashed staff, and instituted a deep furlough policy. Currently, the company continues to hobble along, with most of the staff disconnected from their roles.

I feel, knowing your organizational purpose [Mission] and keeping it as the foundation of your every action solidifies your place in the market place. Keeping your mission as one to ‘serve’ a certain need in the marketplace keeps the organization focused on the basis of business. With the organization’s identity solidified, the plan for the future is paramount, the plan – the Vision.

I have found that small to medium sized organizations give almost no time to the Vision Statement. Without a goal or vision as to what we are working toward, how do we know when we have achieved success? For many organizations success may be year-over-year increase in sales of X% or simply making budget and getting our distribution. What ever the ‘vision’, more often than not, if the Mission is in place, the organization will achieve their vision. In an upcoming contribution, I will share some radical thought on how there is really no limit to organizational success and the correct framing of the Vision Statement is the first step.

The Vision Statement, when acted under the pretense of the Mission Statement will take the organization down its charted path. Organizations can also have more than one Vision Statement, the one proudly displaced in the boardroom and the other is the product of management actions. Either way, the result is the same, vision leads to action which leads to results/expectations. From my endeavors, I am amazed how tight this correlation is. Kathryn, the president of a small consumer products company, openly professes her company’s vision during board of directors meetings as ‘we are changing the world, one [expletive] at a time.” What I found so ironic is, Kathryn constantly complains about her market and customer base; probably because they are seeking the wrong customers?

Recently I had the opportunity of meeting Wendy, the president of a small consulting company in Glendale, California. Wendy’s dedication to her clients and her vision was the clearest and strongest I have experienced in a very long time. As I congratulated her on her strong business acumen, she shared something very profound with me. Her organization has a staff of less than 20 people; everyone knows, and embraces the organization’s mission as well as the board’s vision and can explain their part in the puzzle. What I found most amazing, beside the plaques of the Mission Statement, and Vision Statement was a plaque with the following:

Watch your thoughts; they become words.
Watch your words; they become actions.
Watch your actions; they become habits.
Watch your habits; they become character.
Watch your character; it becomes your destiny.

For Wendy, it is important that every person in her organization constantly manages their thoughts to continue to be in alignment with the Mission.

Over the years the power of a ‘serving’ Mission Statement and a solid Vision Statement continues to be enforced as the very foundation of a good organization. Without a solid foundation and hope for a goal in the future, all of the analytical technology available will not make a difference. Maybe it is time for organizations to return to their foundation.

The Love-Hate Duality of Change

2009-11-27T08:20:00.000-07:00

As we pass the 24th month of this turbulent economic climate, organizations have resorted to many different means to weather the storm. For some, the fare has been, slash and burn – the eradication of ‘unnecessary’ staff. For others, it is a complete retooling of business lines. Although the economic storm is weakening, the dawn of new economic vitality, according to some experts, won’t be seen until 2012. In one article I read, economic vitality won’t return until 2016. Regardless of the timeframe, organizations are doing what they can to survive.

Survival during these times demands more than sitting and waiting. For those organizations that have chosen this path, their chapter 11 filing is probably in the process. These are probably the most vibrant times for business consultants; where every snake oil salesman has ‘the’ remedy to fix the ailing business. Recently I had the opportunity to be part of one of these traveling road shows. I watched first hand how a major national law firm believed their huge investment in improvements would yield… change and ultimate survival.

I was contacted about 9 months ago to assist a national 800 attorney law firm retool its business for survival during these economic times. My contribution to this effort was very small; basically I had to revamp their current asset management processes (accounts receivable and work in progress). The general contractor equivalent of the project basically brokered all of the deals with the various contractors. The goal was, get the best of breed contractors to get the best practices possible in place and fast.

During the weeks and months of the engagement I watched as the broker racked up hundreds of hours in system upgrades and trainings. Through all of this I wondered when the business process of re-engineering would begin. Upgrading hardware, software and training people which button to press does not and never will generate positive bottom line results.

Unlike the training feeding frenzy, my contribution was to be based on some of the most cutting edge thought in the business community. At the onset and through the engagement I produced many documents demonstrating how organizations used current business intelligence tools to move their receivable and WIP management to a risk based model and in so doing, have had multi-million dollar gains.

The meeting took place in their mid-town Manhattan office. As the change broker ushered in her updates of all that has happened over the past several months. I was amazed that no one questioned the return on investment thus far. It seemed as if there was a fear to question her divine business wisdom. After the break and a brief introduction, I began my high level explanation of how the firm could reap huge savings by shifting their receivables management from an ad hoc approach to that of a risk based model.

The discussion focused around using their newly acquired Business Intelligence tools and their current receivables management system to educate their partners in making the most educated financial decisions about their clients. Empowered with hard facts, attorneys could make the decision whether to proceed with the engagement or cease. The model would remove the mystery about collections and look at the probability of default of certain clients and engagements.

After my presentation, the floor was open for questions and discussions. The concepts presented represented such new thinking that most everyone in the room cocooned themselves into their old lock step management style. With defendable figures I demonstrated that the firm could reduce their overall receivables by 30%, receive payment from clients much faster and reduce the interest on their operating line by $1M per year. Following what felt like hours, but was in fact minutes, the chief executive asked ‘How many AMLaw 100, firms are using this approach?’ Followed by a litigation partner who retorted ‘We cannot turn away work on the possibility of the client not paying?’ After fielding the questions, which were fired like arrows it became very clear that the firm who wanted change, wanted change only to the point where nothing would actually-change.

As I recounted the events of the past eight months while boarding my flight out of New York, I realized that the firm was sold onto the concept of change; a change that would not involve upsetting their current business practices. Change, and thereby survival, requires alterations be made that makes the organization more versatile. This firm had sought a means of survival in acquiring best practices, but instead it should have focussed reengineering their value to their community.

In a brilliant Harvard Business Review article by Susan Cramm ‘How are you defying Best Practice?’ Cramm clearly outlines that organizations should not be seeking the ‘best practice’ of others, but rather develop their own best practices. Best practices are developed by a specific organization within the realm of their culture at a specific time; therefore they are often not portable. Cramm also contends that sometimes the best simply isn’t feasible in terms of time, money or other constraints. For my client, having the best system and all the training, simply was not the best use of their resources at this time.

For many firms, consultants have all the answers. The need for change is at odds with the desire to change. These organizations need to have an introspective moment and build their own best practices based on their culture. They need to stop comparing themselves to others and define for their clients the best balance of quality service they are going to provide. But above all, change comes through experienced people who understand the fundamentals and know how to think critically, strategically, and creatively.

Perspective, Outside of the Box

2009-11-08T17:22:00.002-07:00

Several months ago I contributed a perspective on reporting with So What, Now What¸ At that time I made a call to action oriented reporting, where the users of management reports are motivated to taking some type of positive action. Since then I have extolled the virtues of different types of reporting to unearth the true dynamics of the organization. For most organizations this is an aspiration far beyond their comprehension.

For many organizations their reality finds itself in a certain ‘comfort zone’. This zone is steeped in traditional reporting where the reasons have been lost in the annals of time. As I left one such company, a biomedical device manufacturer in North Carolina, headed for the Credit Research Foundation (CRF) conference in Pittsburg, I had 7 hours of windshield time to ponder this dilemma.

Miramiller (not their real name) has been producing molded biomedical devices for almost twenty years. The last eight years of business was under the ownership of a European parent company. My engagement with the organization was an assessment of their current asset management policies. During the engagement the company migrated to a new financial management system, which was driven by the need for consolidated reporting across all of the business lines. As I watched this project unfold, one startling thing screamed to be acknowledged. Miramiller was building their new $2M system to be like their old system. The reporting of the existing system was ‘ported’ into the new system. Then through all of this the organization spent thousands on software training. This was synonymous with buying a new car, but investing thousands to make it drive like your old truck. With that said, why even move to a new system? The motivation was ‘better reporting’. For the firm, better reporting was the same old reports from a new system. This exercise in futility was essentially a $2M economic stimulus package to the software company!

How can organizations be so blind as to seek a new competitive advantage, but at the same time fall into old business practices? The seed to this behavior is a fear of change – a deltaphobia of sorts. Organizations get so imbued in process which is steeped in history that no one has the confidence in trying something new. It is for this reason; organizations replace or retool old systems and continue to dice and slice old reports. All under the auspices of change, when in fact they have remained stagnant and the world is changing.

The CRF conference was much of the same of what I have been hearing for the past year, the application of old solutions on today’s problems. How can someone reasonably believe that the exercising of ordinary solutions will move organizations through extraordinary times – they can’t it is a false sense of security. The reality is that current times are extraordinary and require a different approach for success.

Although I have professed a new prospective for quite some time I have yet to find many organizations espousing that mantra. It wasn’t until I attended a lecture series put on by a regional CFO group that I had the pleasure of listening to a comrade of change. The key speaker, David Saxon, explained the nature of the changing world order. His mantra of new management reporting was emphasized in every aspect of his lecture. During his lecture he destroyed the concept of budgeting and forecasting. Realistically he demonstrated that any type of organizational plan beyond 90-days is like throwing pennies in a wishing well.

David closed his presentation with a case study, an examination of a large bulk recycling company. This company, ABC, watched as its gross margins dwindled between 60-90% from 2007 to summer of 2009. With margins hemorrhaging away, the corporate leaders realized that the same old methods would not work. Acting expeditiously the organization migrated to new technology and completely changed their types of reporting. The new reports, now produced within hours rather than weeks, examined new metrics that the company never examined before. With this act of executive responsibility ABC not only survived but is now positioned for strategic growth.

Saxon in his book, Best Practices in Planning and Performance Management, extols the need for organizations to drive their reporting and performance analysis based on business focused metrics and not on historical general ledger classifications. It is only through this fresh start that I feel; organizations have a chance of surviving these extraordinary times.
Perspective, a new look at current circumstances, requires open-mindedness and knowledge. Organizations will be better equipped for tomorrow’s challenges by redirecting training dollars to education activities where staff and leaders a-like can dialogue about a new perspective for their organization’s survival and growth.

Mind the… GAAP?

2009-09-23T10:03:00.002-07:00

Several years ago I read a research paper that added a new twist to human memory. The basic contention of the researchers was that memories are really not historical but rather a series of new memories as a result of accessing the incident, retrieving the memory, processing the memory and ‘re-filing the memory. Therefore we don’t remember the initial event, but rather the repetitious memory of the previous memory. It is for that reason, according to the study, that memories get distorted through the passage of time.

Recently I received a letter from a south Texas law firm that precipitated the Pandora’s Box of business memories. Almost eleven months ago I was retained by a South Texas multi-media organization to build risk based revenue models. This company had been in business for almost twenty-five years. Through which time, they have always operated on very simple business models, but as the economy softened they needed a means to ‘out-run’ their competition. As it turned out my end of engagement meeting coincided with a meeting of their external auditors. As the CEO, Mike, and I added closure to my engagement he expressed to me the auditor’s opinion of their financial statements. Mike was extremely agitated that the auditor’s opinion questioned the viability of the company and made such a reference in their disclosure. As this would not be a good thing, Mike pushed the audit partner to have the issue of ‘going concern’ dropped. After much wrangling, Mike got what he wanted – financials with a clean bill of health. Now eleven months later, the company was forced into dissolution!

Almost six weeks ago, I was in discussion with a heavy machinery manufacturer regarding our engagement. During one of our meetings an issue of a contingent liability came to light. The essence of which basically was that the company could stand to be liable for $364,000 in damages should a particular event occur. To the company, this would be a material event and would definitely send up red flags on their financials and eventually part of their SEC filing. Although this issue wasn’t part of my engagement how the firm was going to treat this event intrigued me. During lunch with the divisional CFO (Annette), I probed how she planned to address this issue. After considerable avoidance, I came out point blank and said ‘Annette, according to GAAP if there is a reasonable expectation that this event will materialize – it must be disclosed’. As it turned out, the situation was beyond ‘reasonable’; the event was materializing as we were speaking! However, the response I got from Annette was ‘we cannot make a full disclosure as it will trigger a bank audit, the investors will need answers and we already have a very soft year’. So now, this material issue remains known by a handful of people.

Just this morning, I was speaking with the revenue manager of a New York based law firm who openly disclosed that his firm ‘fixed’ the revenue numbers for 2008 to show a profit instead of a loss. Robert’s contention ‘it isn’t right, the partners demanded it and I have to put food on the table’. With these events a plethora of memories overtook me. In the last twenty years I have met organizations who have ‘made allowances’ to paint the right picture for the right reader. Whether it is using fictitious clients to overstate revenue or related companies burying profits to avoid tax liabilities; all of this behavior does have an impact on someone. To the perpetrator, I am appeasing some external body. However, the information does matriculate into the larger folds of the economic community.

All of this is synonymous with a ‘little white lie’, what harm could it be? The harm is tremendous; one only has to look at our current economic climate to realize that the unqualified issuance of credit has caused a global economic meltdown of the banking community. To this day I still cannot fathom how those who ignited and fueled this disaster didn’t realize that no matter how much you dice, slice and sell bad loans – they are still bad. However, the feeding frenzy of wealth and bonuses fueled this behavior. This was exactly the argument presented by one writer on the Enron demise. His contention was, the investors demanded gains that simply weren’t possible without ‘fixing’. Therefore the investors’ greed is to blame! The question is: did anyone suffer from these ‘fixings’? I am not sure; one should ask those whose retirement have been irrevocably altered or any of the 14.5 million unemployed people that are a casualty of our economic misfortune.

To those in the finance community the guard rails of their actions have to be Generally Accepted Accounting Principles (GAAP), the codified explanations how financial transactions must be recorded, otherwise financial statements become every company’s unique fairy tale. But what is at stake, for some it could be reprimand or even the loss of an income. Now that is something to put on one’s resume ‘I was fired because I didn’t bend the rules; I didn’t compromise my integrity’.

One doesn’t have to look back far in history to find the billions of dollars vanished and the countless lives impacted because of some type of falsification of information. Those companies, who strong-armed their auditors for the ‘right’ outcome, strong-armed their staff for the ‘right’ profit is contributing to an economy with a fragile economic infrastructure. The current meltdown and the elusiveness of repair could be the result of years of ‘adjusting’ the outcome.

Sadly this behavior is so pervasive in our economy. You would be too naïve to believe that ‘we are the only company that made a small fix’. Just to give you a recent example. I recently picked up a package of my regular detergent, luckily before my current supply end. As I looked at the two packages in the cupboard, I thought it odd that the sizes were just a bit different. As it turns out, the price remained at $4.39, but the package size went from 24 oz to 22 oz, in the matter of four months. I feel if the company wanted me to know they would have put in bold letters, Look our smaller size, we needed to help our profits! But they didn’t, I guess they didn’t want me to know. They needed to aid their bottom line, but knew full well that the price elasticity of the soap would not lend itself to a price increase; so I got a size decrease and they got a profit increase!

Throughout my career, I am thankful that I have always chosen the road of integrity regardless of the circumstances. It has not been easy, as clients simply take their money and go for ‘what they want’ rather than what is right. I only recall one incident where the client, after much dialogue realized that the method of foreign currency reporting she wanted was non-GAAP and would have been misleading. However, I rest assured that I have not and will not contribute to a fragile economic infrastructure. However, it causes me to ponder GAAP, has it evolved from being the guardrail of financial treatment to a list of ‘suggestions’, should be renamed to GAP (Good Accounting Presentations) to be more reflective of our behavior.

The next time you are out making a purchase, whether it is a plasma television or a steak dinner, think of how your purchase may have been compromised for the sake of the company’s rosier financial presentation – for the GAP!

Attitude, the Unmitigated Cost

2009-08-26T19:08:00.000-07:00

If you are an aficionado of management literature, the mantra of a “habit” would not be foreign to you. I have often heard of ‘habit’ being the melding of knowledge, skill and attitude. It is tremendously important for organizations to ensure their staff operates under the corporate attitude, using their knowledge and skills. Interestingly, attitude is one thing that the organization can influence but cannot control.

A recent engagement for a national food service organization expounded how knowledge, skill even technology were no match for attitude. The scope of the engagement was to understand how, after a multi-million dollar investment in technology, recruitement and training didn’t present huge cost savings with inventory management. Several years ago, ABS ltd, invested several million dollars to implement an inventory management system to manage their 750,000 products that were warehoused throughout the continental United States. Through the use of hand held devices, workers had access to a wealth of information regarding the company’s products. The level of detail was phenomenal, including the knowledge of how many green widgets were shipped on the second Tuesday in March – for each of the last three years!

Concurrent with the implantation, the company invested in a complete training of all of the staff to ensure that they would have the skill necessary to operate the system and most importantly leverage on the system’s ability to mitigate costs in inventory management. Over the three years following implementation, the learning curve was replaced by cost savings. However the savings were never close to that of what the software vendor proposed.

For anyone in an industry which provides tangible products, there is no surprise on the number of forces acting on inventory management. Very basically, the organization must carry the products that customers are seeking. The products must be at the right quantities and at the right price to continue to attract buyers. Holding too much inventory ties up working capital and not having enough for demand attracts a high opportunity cost. Equally carrying products of zero or negative profit margin is the necessary anchor to more profitable product lines. To the astute organization managing the profit margin on inventoried products requires complex modeling. All of this complexity is further compounded when the products have a finite shelf life!

The ABS inventory management system basically informed the local purchaser when the inventory count went below the threshold. The threshold amounts were manually maintenance by the warehouse management and in some cases anyone who had a handheld device. As it turned out this was part of one of three main problems with ABS not realizing tremendous benefit from the system. The inventory management system, CAO, simply kept track of what was delivered, sold/shipped, damaged and where products where located. There was no related technology in the system to recognize the profit margin, or carrying cost, for each product. The result, orders were made on ‘feelings’ not on a concrete financial basis.

The haphazard order process brought a wealth of other problems. As product arrived they were stored in non-customary locations. This meant product moved around the warehouse many times before finding its resting place, and in the movement a certain percentage of products was lost or damaged. In one analysis, a product was ordered on five successive occasions until it was realized that each shipment was ‘temporarily’ stored throughout the warehouse.

A resolution for the organization was to link their CAO system with their sales/invoicing system through an analytical tool. Within the analytics each product was subject to the Harris (1913) economic order quantity model. This model examines the right time to order product and in the correct quantity to mitigate costs, although the model identifies carrying costs as warehousing, insurance, transportation, etc. We built a mathematical model that altered the cost based on the number of times the product had to be moved/handled until it came to its final resting spot. Depending on the product type, each move coincided with a probability distribution measuring potential breakage and expiration.

As a means of combating competitive pressures, several years ago the company opted to hire only part-time staff to operate the warehouse functions. As part of their vision, this labor pool could shrink or expand as demand changed, training costs could be low and there were no ancillary benefit costs. As it turned out, it was this ‘non-committed’ labor pool that contributed quite extensively to many of the inventory problems ABS were experiencing.

Although not explicitly realized, ABS experienced increasing differences between online inventory counts and actual counts. As a means of combating the problem the warehouse was peppered with surveillance cameras as it was believed that employee theft was the problem. However, even after all of the high tech surveillance there were inventory related discrepancies.

The study revealed that one of the sources of inventory discrepancies was related more to part-time employee ‘attitude’. As it turns out, the high turnover of the warehouse positions didn’t lend itself to those who sought out a career with ABS. To that end, they would mishandle inventory and equipment, often to the destruction of both. In addition, with the ‘I don’t care’ attitude, received product was randomly placed throughout the warehouse. This attitude infiltrated all the way to those managing inventory counts. Needles too say, inventory data would become increasingly more corrupted as time past the annual audit increased.

For the organization that seeks to shine above the competition, I think it is high time to merge the many silos of data that exist within the organization. Profits need to be driven by the knowledge of how much each product contributes to the bottom line. Finally, realize that one’s sphere of influence should extend to the human element of operations – getting to the right attitude of the right people

Success Following Ego Check-In

2009-07-13T19:55:00.001-07:00

This year marked the 113th Credit Conference. Although the venue was perfect, it appeared that attendance was down on both the vendors and the participant’s side. As always, there were a host of great educational and networking opportunities. However, I was seeking the secret answer. The answer that no one seems to have right now; how do I get my bills paid before the other vendors waiting in line? Instead I received insight into all of these ‘tools’ which I could use to get more information on my customer. Although knowledge is power, I came away not knowing how to navigate this economic storm so as to ensure the continued viability of my organization.

It wasn’t until the closing night party, the Luau, that some of my questions got answered. Interestingly enough, it was those feeding me with corporate viability solutions that were completely unaware what they were doing. Even more ironic, they were liberally sharing the solutions for corporate viability while their organizations where sputtering along. How is it these who have the answers are not saving their organizations? The answer to this question, I believe, is the problem with Western business models and this will ultimately position Asian business models as the global first.

The industrial revolution made a profound effect on societies and cultures across the globe. Since then commerce flourished and profits were tied to production output. Then as with any model, the process hits the glass ceiling. It is at that time when the ‘same old’ methods simply don’t produce any increase in output. For the industrial revolution, the refinement came as we continued to lubricate the process. An examination of each step in production to make the overall process better and reduce waste so as to increase output and therefore profits.

Since World War II, business processes have flourished. Today anyone who has been in a commercial entity for more than a year feels they are able to pen the next great management book. With all of this ‘knowledge’ abound I wonder why North American enterprises are floundering while those in Asia are growing and thriving. The separation, I believe, comes down to management style and culture.

During dinner at the Luau, Greg proceeded to tell me how his company, a national food supplier, continues to undertake the ‘dumbest’ processes. As background, the company ABC ltd has diversified holdings in other consumer goods, much more than their competition. According to Greg, the executive management team is a well seasoned team and makes corporate decisions from their marble empire hundreds of miles from the ‘line’. Greg, a 20 year veteran of the company, was not shy in sharing the lunacy of the internal reporting and many of the company’s policies. Listening to his dissertation of how disconnected his staff is and how they fill in the little boxes in the reports to satisfy head office. Through the questioning it became clear that the elite management wasn’t interested in what was happening at the front lines, they were more interested in their modeling and their reports.

Miles, the chief credit officer of a global building material supplier, quickly chimed in with his views on corporate management of his company. His company, XYZ Inc, based in Europe simply fires off mandates to their various offices and awaits reporting. The XYZ mantra is more sales with more margins or more terminations. Their pseudo-Viking mentality of beat the peasants for more sales until they are dead or the sales come in is their mission statement. Miles was quite vocal in sharing how the company orchestrated a round of terminations, followed by pay cuts and then furloughs. Throughout which, human resources made it clear that anyone speaking about their actions will be terminated immediately.

Basically these two gentlemen shared the inner workings of their companies, which are classical top-down management. Essentially decisions are made in some cherry embossed boardroom and then the peons in the field have to follow the process. Interestingly enough, Greg knew what his company should do to increase their cash flow. The sad part is the management structure above him had all the answers and didn’t need input from below. Here are two companies that have embraced so much of ‘in vogue’ business practices while continuing to struggle like their competition. Amidst their ‘processes’ they simply fail to recognize their purpose and more so where hides their key to success.

The key to corporate success, I believe, comes down to knowing the corporate purpose and having a culture that allows for the free flow of ideas. There are two basic mantras in business management; top-down or bottom-up. The top down models are shared by those I met with at the credit conference. In these models, executive management outlines the strategy and everyone has to follow in lock stop. The bottom-up model contends that line personnel have an intimate knowledge of the customer and their feedback is vital in decision making. From my readings, these two models seem to be mutually exclusive. I feel a hybrid model is the ideal. Key stakeholders define the direction and vision of the enterprise. The information is diced up and disseminated through the ranks. However, in the hybrid model, those being closet to the customer and their transactions should have the confidence and value to share, upward, those changes that need to be made to fine tune the corporate vision.

This freedom to flow ideas upward through the corporate hierarchy is culturally rooted. If line people feel their information isn’t of value, critical information will not be received that could determine the fate of the organization. This is an area I think most western corporations fail; the cherry boardroom executives feel they have all the answers and they don’t foster teamwork with those who are in direct view of the customer. It is this failure to meet the customers’ needs that cripples companies. A wonderful book that addresses how corporate decisions fail to meet the customers’ needs is, The Milkshake Moment by: Steven Little

Mr. Little attended the Credit Conference and shared, in an open address, how so many companies simply fail to listen to their customers. Since customers communicate with their wallets, these companies suffer. To share one of Mr. Little’s many stories. Mr. Little ends up at a very upscale hotel after traveling all day. He quickly picks up the phone and dials for room service. To the young gentleman who answers the call he requests a vanilla milkshake. The response which he received was, Mr. Little we don’t have milkshakes on our menu. Steven, through a series of questions, realizes that the kitchen has all the ingredients for a milkshake; they simply don’t have the option on their computer room service ordering system. The story ends, with Mr. Little getting all the ingredients and making his own milkshake in his room. The take-away, the organization has failed the customer.

Corporations all too often fail the customer, by simply not listening to the customer’s request. Whether it is the decisions of the cherry boardroom, or the limitations of the customer request system, the customer is essentially ‘hog-tied’. Companies need to wake up and realize that within an industry, sales represent a zero sum game to all the players in the industry. Only one company will get the sale, make sure your ego doesn’t get in the way of winning the deal.

Wow… Great Game !!!

2009-06-15T13:18:00.000-07:00

You may have heard the expression; “Can’t get blood from a turnip!” It is the very thing some try to do when pushed to the brink. I have seen this phrase played out several times over the last couple of weeks. As the economy continues to sputter, companies continue to seek ways to stay afloat. For some businesses, there is quest for survival, and management tactics have gone from the logical to the completely illogical.

Recently I was talking to Sheila, the CIO of a major law firm. It may have been the executive management pressure or simply the need to shield her from the upcoming lay-offs that caused her to ask me, “How can we use technology to win more business?” It was one of the few times in my career when I was left speechless, probably because I never associated technology and closing a deal. To move the conversation along I threw out a few off the cuff remarks and we continued to discuss current trends in technology. However, several days later I continue to ruminate on the question.

I guess Sheila feels she is under the microscope as she had spent upwards of $750k to bring some of the latest technology to the firm. Now the managing partner wants an ROI, not on paper but in a tangible form. The return, in the eyes of the partner, must equate to landing new business. Equally, she feels a need to contribute to the success of the firm, but she is unsure how this will come about.

After dissecting the question, viewing it from several perspectives and conferring with several colleagues, I don’t believe that one could use technology to ‘win more business’. Technology is a tool to manage and run businesses. It is a tool no different than a photocopier, a telephone or a ball point pen. Technology in and of itself won’t lead to the landing of new business no more than owning a pen leads one to being an author. Instead technology will make the task of business management easier, more cost effective and more insightful. The value of technology in business, I believe, has a tiered effect. Where some technologies are vitally basic, others add tremendous cost savings and others are ‘nice-to-have’.

Very simplistically, a business in any industry needs a basic amount of technology to exist. As an example, every business needs a telephone – a way of connecting with the outside world, without which its chance of survival is slim. Having a basic amount of technology puts an organization in the ‘playing field’ with other organizations. Beyond the basics, the addition of more technology acts to streamline work and reduce costs. With the addition of differentiated technology, organizations obtain more information about themselves and their market, thus providing more insight into better ways of obtaining business. There is a ‘critical mass’ in the addition of technology to an organization. There is a point at which the addition of more technology has little if any impact on the organization’s cost saving.

Going back to my CIO colleague, Sheila, I had to ask: What makes your firm different in your local market? What technologies have you adopted that are different from those firms in your market? I was not surprised at the response I received. As it turns out, Shelia’s firm is one of six firms of comparable size and practice demographics in her area. Further, the technology she has adopted is similar, to a large extent, to that of the comparable firms. What I gleamed from her response, her firm’s market space consists of six firms all competing for the same business. Also, the adoption of technology by Shelia’s firm was a ‘basic’ requirement to keep her firm in the same playing field with the other five firms.

While asking more probing questions, I was not able to get a sense that Sheila could quantify what made her firm unique in their market space. The uniqueness of an organization is its competitive advantage. It is the defining attributes that make customers/clients chose one firm over another. Dialoguing with Sheila, I tried to find what made her firm unique, and I couldn’t. Interestingly this isn’t as rare as one would think. So many organizations, especially in the professional services arena cannot explain their competitive advantage – their uniqueness. With fierce competition and the consumer not conversant with the goods/service, professional services firms have often commoditized their offering. To the client/consumer, the services of law all come down to price. Legal services have become a commodity like, comparable to auto fuel.

In Sheila’s market, the providing of legal services has become a commoditized zero sum game. There is a finite amount of work and it must be shared amongst the six competing firms. Clients will chose the firm based on relationships and price, that is it! Not surprisingly, the price of legal work has become the determining factor in a client’s selection of a firm. Since all the firms have adopted similar technologies, they all maintain the same competitive cost structure. To break out of this lock-step with the competing firms, Sheila’s firm must: (1) determine its uniqueness, and separate itself from the other firms (2) leverage technology to provide the best cost structure possible to providing their services.

I believe that the best way to understand the firm’s uniqueness is to put together the firm’s ‘elevator pitch’, that 100-150 word, 30 second sales statement that makes the firm uniquely different than all others in their market space. The firm’s ‘elevator pitch’ must be the mantra of everyone in the organization. It must be emblazoned in the hearts and minds of everyone’s contribution.

Once the firm can explain their competitive advantage, then they should seek to strategically deploy those technologies that also support the values of its ‘pitch’. In a December 2008 interview, Nishith Desai, the founder of Nishith Desai Associates (Mumbai, Indai), says, “Technology has always been our value driver and has helped make our firm global”. Essentially, the firm specializes in cross-border transactional work with a focus on the financial services, IT and telecom, pharma and life sciences. The firm incorporates technology to streamline the operational and service processes thereby increasing the value (ROI) of the engagements.

As we continue to navigate this economic turbulence, consider ‘what makes my organization unique in the marketplace?’ and it shouldn’t be ‘what technology I have’. Your organization’s survival comes down to its Darwinian Genetics, “What makes us uniquely different than out competitors?” Then as the elevator doors close and all eyes are fixated on that LCD screen of breaking news, look to the person beside you and think can I explain my company’s unique qualities and purpose before the doors open, instead of saying – Great Game…eh!

Beyond The Best Before Date

2009-06-06T18:16:00.003-07:00

Unless your chosen profession is to manage accounts receivable you would find it difficult to believe that accounts receivable have a shelf life. It is this shelf life that becomes the shackles of many organizations when they seek to optimize the resources from their operating line of credit. As a continuance to my contribution, I Need More Money; Give Me More Value! I will continue exploring the management of an operating line of credit through the management of accounts receivable.

Anyone who has read my contributions knows that I am a strong proponent of timely collections of accounts receivable. My colleague, Ed Poll in his book, Collecting Your Fee¸ contends that the collections process begins at the time of the initial meeting handshake. Failing to collect outstanding receivables not only causes the organization to profit on the engagement, but in addition the costs of production are also forfeited. Additionally, as the organization allows the receivable to age, they are penalized through the covenants of their operating line of credit on the value placed on the receivable.

Several years ago, a colleague of mine wrote an article, Accounts Receivable, Asset or Liability? In this article, he alluded to the hidden liability of an accounts receivable which manifests with age. This shelf-life or best before date of receivables is often not known by the credit manager. The probability of a receivable going from an asset to a liability is based on many factors; risk being the greatest. In an earlier contribution I expounded on risk analysis as a basis for credit management.
Organizations that use their receivables as a means of securing an operating line of credit are under even more pressure through the covenants of the agreement. Based on my earlier contribution the following covenant exists for ABC Ltd. Receivables are valued at 70% for all those who are not more than 90 days past normal due date. For ABC, whose terms are N30, the limit is 120 days.
i. Excess Delinquency: Where a single client has an amount of receivable in excess of 120 days which is at least 25% of the total due – the entire account has no value
ii. Credits: All credits over 120 days are excluded from valuation
iii. Concentrations over 10%: Where a single client represents more than 10% of the total receivable their entire receivable has no value.
It is clear that immediately after billing, the financing company will extend to ABC Company only 70% of the value of the billing. This limitation is the first in the financier protecting their investment. They know, through statistical analysis, that there are probabilities of default for every receivable. It is this knowledge that so many organizations use to buy and sell receivables through the factoring process.

To ABC, the bill of today has a finite valuable life; 120 days. After that date, the financier considers the risk of default beyond its risk tolerance level and the valuation of the operating line of credit pays the price for it. This black cloud of 120 days past due also acts to draw in potentially good receivables. In section i, the financier indicates that if any 120 past due amount is at least 25% of a customer’s entire receivable, the entire receivable is removed from the allowable operating line.

With this said a seriously delinquent receivable now immediately devalues all receivables for that customer and removes the proportionate amount from the operating line. The organization can reasonably increase its available operating line, by clearing up these extremely past due amounts. As I have said in the past, receivables go unpaid because of a disconnect in the transaction between what occurred and what was expected to occur. Therefore, in working receivables it is imperative that accounts never reach their bank imposed expiration date. The organization must be sensitive to the effect these delinquent receivables have on their short term operating line. As a result, organizations must work diligently to resolve the issue and remove these items from their books.

Several years ago, I had the opportunity of working with an organization whose client base was uninsured doctors. The credit manger at the time explained how highly lucrative the practice was, however after 60 days if a bill wasn’t collected – it was written off. It was known that the probability of collection of the bill beyond the 60 day mark was almost impossible and that timeframe put considerable limitations on the firm’s operating line of credit.

A receivable portfolio littered with credits is an indication of ad hoc business practices. Where the credits go unapplied into the covenant trigger date tends to mask the hidden issues of seriously delinquent bills. It is for this reason that banks disallow credits based on the same date thresholds as valid bills. It is to the organization’s advantage to first notify the client of the credit. Secondly, the organization must ensure that the credit is taken and properly applied. A credit beyond a 120+ days past due, acts to disqualify valuable accounts receivable simply because of its age.

Concentrations of client receivables will act to seriously hamper the availability of an operating line of credit. To the financier, such concentrations bring a certain amount of risk to the organization. Should a concentrated customer default on the entire account, the remaining receivable portfolio may be beyond the risk tolerance of the customer. How to manage such concentrations is the responsibility of the company who needs to use that value in their operating line of credit.

One of the best ways for preventing receivable concentration by the client is to provide incentives for the client to quickly reduce their outstanding balance. I am in no way suggesting offering discounts for early payment as the cost of which becomes nothing short of extortion. What I am suggesting is the crafting of the relationship wherein the client may be offered preferential margins for a certain volume of business paid on a certain schedule.

Recently I had the opportunity of having an in depth conversation on receivable concentrations with the credit officer of an electrical component supplier. As it turns out the company, sold electrical components to the big box retailers and as an inevitable offshoot they had concentration points in their receivables. I was amazed to find that supplier took a two pronged approach for dealing with these concentrations and as a result, freed up over $2M in their operating line of credit. The electrical supplier provided the big box retailers with very attractive pricing and terms, provided that the payments were made in a very short window following billing. In addition, they also undertook to build their client base to such a degree that the big box retailers were no longer considered concentrated receivables.

The moment a bill is created it battles the forces of being an asset or a liability. When an operating line is present, the bill is immediately devalued. Then with each passing day its probability of being a liability increases; as the chances of getting paid decreases. Once the bill hits its best before date, it will eradicate value from conceivably good receivables. Remember all receivables have value and a best before date; however greatest value is had before the best before date.

Value to Find

2009-05-19T20:50:00.001-07:00

One of the areas in which organizations can leverage their value of in their operating line is through the effective use of their inventory. Regardless of the type of organization, inventory exists in one form or another. We have all come to know inventory as shelves or pallets of ‘stuff’. However, inventory can take many forms. Organizations that are aware of the presence of inventory will become more aware of the inherent hidden wealth of the organization.

At a very high level inventory is either tangible or intangible with a finite shelf life. By way of an example a grocery store has tangible assets (food) that has a finite life (expiration date). Equally, a building a supply store has a tangible asset in marble floor tiles, which have a finite life. Yes, marble floor tiles have a finite life! Once market demands move away from marble floor tiles, their ‘life’ or value has diminished or expired. On a more theoretical perspective of inventory; accountants, attorneys, engineers represent intangible inventory. Hiring an associate, affords the organization with a potential inventory (hours per day) which can be sold. Once those hours have gone by and not billed, their life or value has expired.

This contribution is not meant to expound on the virtues of asset management as there are countless contributions on: TQM, Kaizen modeling, Six Sigma, Lean manufacturing and the like. With this contribution, I am only hoping to demonstrate the many values of an organization’s inventory and how the asset can quickly become a liability. Very simply, the diligent management of inventory; the movement of inventory to sales, is the very essence on which profitability is built. Organizations that can move inventory at a higher price than acquired easily demonstrate higher gross margins.

To continue from the previous contribution, ABC ltd. is securing its operating line with inventory and receivables. To the financing institute these entities are current assets. However, ABC is limited in receiving the full value of these assets. In restating the covenant, ABC is advanced based on 50% of the acquired costs of the inventory, valued using FIFO, excluding inventory in excess of 120 days.

If ABC were to dissect this covenant they could easily unleash hidden value in their inventory. The financier is excluding all inventories in excess of 120 days. Basically they are taking the position, if the inventory is that old it has lost its merchantability. This is similar to a grocery store with two week old lettuce or a retail store with winter coats remaining in July. To ABC, this inventory has $75,000 in value – to the rest of the world it has no value and $75,000 in cost. It has become an asset of no value – a liability! It is weighing down its borrowing base!

For ABC, this inventory has no value and is tying up capital. However, depending on the type of inventory they may be able to unleash some hidden value. If this inventory is made up of computer hardware, they could bulk-sell the inventory for anything between $0 and $75,000 and thereby gain immediate cash. This would immediately positively impact their borrowing potential from their financier. It would be toward ABC’s advantage to closely monitor its inventory and move out, at what ever price, those goods which will expire in the foreseeable future.

Some goods may have a long expiration or the organization isn’t faced with an age covenant on inventory, yet there still remains a cost of holding onto slow or defunct inventory. Recently, I had the opportunity of working with an electronics provider, who in order to gain a new customer, took 180,000 transformers it purchased from a competitor. This inventory was taken in to secure a new customer, however in doing so my client had this entire inventory – at no cost! As cases of this stuff sat in warehouses throughout the country, I had to lead them to the tremendous inherent value in this inventory and the tremendous cost they were incurring to keep it. There was no acquisition cost of this inventory, but it was taking up space in their warehouses, and was being insured under their policy. Although it had no ‘book’ cost, each day it cost them floor space. The potential value was tremendous – they could sell this inventory at what ever the market would bear! As it turned out, they converted this ‘valueless’ competition inventory for forty cents on the dollar and came away with approximately $100,000.

To ABC, the inventory valuation covenant provides a 50% valuation based on the FIFO method of valuation. FIFO or First in First Out, uses a perpetual inventory system which ensures that the cost of the inventory is most reflective of current market prices. The financing agent, however, only attributes 50% valuation to such inventory. This perceived restriction should be seen as a benefit. This should be a clear indication to management that using short-term, operating line funds isn’t a reasonable way to build up inventories. With rapid order to delivery, drop-ship, EOQ models, and the like there is no reason why organizations would need to build up inventory. The less amount of funds tied up with inventory is more funds to grow the organization.

There is tremendous value to be had in closely monitoring inventory. Organizations often stifle their potential by holding on to defunct, damaged or obsolete inventory. The single most important thing in managing inventory is to ‘move – it’. Moving inventory is acquiring it, and then moving it onto the end user as fast as possible.

It isn’t surprising that the current economic condition of the world has lead to some very progressive thought and actions on means of managing inventory. Aside from all of the technology employed in managing tangible inventory, several professional services organizations have moved to managing their intangible inventory. Emily Heller of The National Law Journal in her May 5, 2009 article, Downturn May have an Upside for Contract Attorneys, explains how many law firms are simply shopping on a per need basis, for specific legal talent. Lisa Solomon of Ardsley, NY has been operating as a ‘hired-gun’ since 1996. Solomon says “business is growing, there is a demand.”

The current economic climate may be the Ice Age of the 21st century which radically shapes professional services organizations into streamlined brokerage houses for ‘hired-gun’ talent. To the professional, this provides a strong motivation to be the best and at the same time, rewards of diverse engagements, possibly far greater than those possible at a single firm.

Inventory is all around, in every organization. With each passing minute some of its value is diminishing. It is no wonder that modern day ‘inventory’ comes from the Latin word Invenire – to find. There is value in all inventories, tangible and intangible. I urge you to find it, and use it for what it was intended – Sell it!

I Need more Money; Give me more Value!

2009-05-03T19:23:00.000-07:00

A recent engagement galvanized for me, how many organizations fail to understand the valuable role that banks play in the success of their organization. As many would contend, I am a strong believer that managing financial resources is the key to business success and growth. Success in business can be boiled down to: selling a product or service for more than producing it, and the product or service must be desired in the marketplace. Within this realm there are a few defining rules; keep inventory to a minimum by regular timely/accurate billing, timely collection of outstanding debts and keep expenses in check. However in the course of business there are times when more funds are needed than those available, hence the importance of banks. Banks can play many roles in the life of a business: short term funds, long term funds even an equity interest. Regardless of the role, like any investor, the bank needs to see value.

Many years ago I had the opportunity to work with a person who inherited a company through familial succession, yet had no concept of running the business; beyond making coffee. Through our time together I impressed upon Daniel some of the foundations to maintaining and growing the business; one of which was the importance of a good relationship with the bank. It wasn’t until recently that I saw Daniel’s frantic frustrations with the bank manifest itself in others. The frustrations boiled down to these people wanting more money from the bank, while the bank wanted to see more value in the companies. With these companies, the banks provided an operating line of credit which was secured with assets, current assets.

As I continue to advise firms on financial management, I feel it is more important to present this topic on managing operating lines. In a subsequent contribution I will present techniques to unlock hidden value in current assets to gain enhance one’s operating line.

As a foundation, banks and investors provide funds to organizations based on known risk and expected return. The level of risk assumed by these funding bodies determines their desired rate of return. Essentially, how much must they be compensated to assume this level of risk? To mitigate some risk, depending on the investment, these bodies will seek some collateral. In the case of an operating line of credit, the collateral is made up those current assets which can be quickly liquidated. In the case of stock or angel investment, the collateral is the vision of management.

An operating line of credit is short term money; it is intended to bridge the gap in converting inventory to cash. I have written extensively on using the ‘right’ type of funding for the ‘right’ type of activity. With this said, the institution is providing access to funds as a means of bridging this gap. In an earlier contribution I explained that the rule of thumb on the amount of ‘bridging’ required is determined on how long it takes to be completely repaid. The rule is, one year.

In determining the amount of the operating line, the institution looks at the economic viability of the organization, its history, its management team and their vision. As a means of mitigating some of their risk, they seek collateral. The most common sources of collateral for an operating line are: accounts receivable, inventory (WIP), and cash. Institutions will extend funds based on the value of these assets. As a caveat to the agreement, the institutions will clarify the value they place on the assets presented. This is clearly outlined in the agreement at the inception of the relationship and emphasized throughout the relationship by way of timely reporting.

It is by way of this disconnect between the institution and the business that frustrations arise. By way of a simple example, it becomes clear how frustrations can arise. ABC Ltd is a local supplier of consumer products; they do not manufacture the goods for sale. They simply add value through combining products to produce a convenience offering. ABC is in a fixed demand niche with very little cyclical behavior and they are one of several suppliers in the area. Their profit margin on inventory is 30% and requires a significant amount of human intervention to get the product offering to market.

In negotiating an operating line of credit, ABC Ltd is made aware that there will be certain limitations on the amount the institution will advance. Some of the most common limitations are:

Inventory: Inventory is valued at 50% using FIFO (First in First Out). All inventories older than 120 days are excluded from valuation.
Receivables: Receivables are valued at 70% for all those who are not more than 90 days past normal due date. For ABC, whose terms are N30, the limit is 120 days.

i. Excess Delinquency: Where a single client has an amount of receivable in excess of 120 days which is at least 25% of the total due – the entire account has no value.

ii. Credits: All credits over 120 days are excluded from valuation

iii. Concentrations over 10%: Where a single client represents more than 10% of the total receivable their entire receivable has no value.

Depending on the industry some other limitations on valuation are: accounts with Government bodies, affiliates, foreign receivables and third party relationships. These limitations are set to mitigate the risk of not getting paid should the company fail to be a going concern. Should this occur the institution would enact immediate measure to recoup most of their advanced funding.

The ABC demographics:

Sales: $10M per year

Inventory: $500K average, $75K excess of 120 days

A/R: $750K, $100K beyond 120 days, excess delinquency $65K, $150K in client concentrations.

To the organization, they see $1,250K in value to which they are expecting an operating line equal that amount. However, to the institution the true liquidity of the assets is $647,500, about 52% of expectation! Therefore ABC Ltd is only eligible for $647,500 in operating line. On top of this the institution may further penalize ABC for its inherent risks by imposing a less than sterling interest rate for borrow.

Clearly there is a disconnect between what ABC sees as value and what the lending institution sees as value. Hence the opposing duality, ABC stifled needing more cash and the institution demanding more value.

In my next contribution I will explore actions which ABC Ltd can undertake reduce the suffocating hold which they are under and have a better working relationship with their lender.

Of Course I can fix it; I am a Mechanic

2009-04-28T19:37:00.000-07:00

The resurrection of a failing or even dying organization is often fraught with a sense of panic. To some the panic is so mild that the leaders believe, in their own self-righteous wisdom that they can ‘weather’ the storm. For others, complete chaos ensues and the downward spiral begins to accelerate. How organizations choose to move beyond their current circumstance rests almost entirely on management and corporate identity. In the past I have written a great deal on corporate identity and ‘knowing thyself;’ in a turnaround situation these concepts are jugular.

Organizational change finds its basis with a vision; centrally a vision of something greater than itself. I do have knowledge of organizations whose vision is to wind down and shut down. However, for organizations which have a drive to achieve their true potential; a vision and a visionary are paramount. As I try to distance myself from my recent South East engagement of a turnaround organization, I would like to share some of the ‘DOs and DON’Ts’. Organizational turnaround requires very specialized talent. It requires a leadership team that understands the dynamics of the organization, the market place and how to institute cultural change.

Through my engagement with the firm, one of the senior executives based her entire turnaround process on one of her management books, Good TO Great, by Jim Collins (2001). In the book, Collins examines companies over a 20+ year period to identify those characteristics of companies that catapult them beyond their peer group. Barbara (not her real name) was so connected with Collins’ work that it became her bible, so much so she had everyone on the management team study it. As the executives undertook meetings and strategic visions, they often changed the phrases dispersed throughout the book. In the short time I was engaged by the firm, I was so overwhelmed with the Collin’s mantra I had to get the book myself.

In reading the book and looking back on the organization I am able to see some glaring flaws in Barbara’s vision. Collins professes “get the right people on the bus.” Essentially, have the right people in the right positions and they will do the right thing. My question was, “Who are the right people?” I have come to realize, the right people are those who have the self-discipline and the knowledge to do what needs to be done. They have the unencumbered role to make hard decisions while implementing the vision. These ‘right people’ must be selected from the hoards of candidates in the market place.

Here is failure number one; Barbara’s organization was unable to identify the ‘right’ people. The first assumption in finding the right people is whether the person undertaking the selection process is, in fact, one of the ‘right’ people. Secondly, when seeking a person for a specific role, such as a turnaround, it is essential that the candidate must have done this type of work in the past. As an example, no matter how astute the hiring manager is, hiring a VP of global tax requires knowledge of taxation. Just because the person indicates they have the skill, doesn’t mean they can convert knowledge to action. In a turnaround, time is of the essence, the wrong people on the bus equates to a timely crash!

Often the organization does not have the judgmental skills to identify the required talent necessary to meet the actual needs. To overcome this barrier, organizations should seek the advice of their outside advisors, auditors, tax advisors or their legal counsel.

Having the ‘right’ people also means having the right leader. All the brilliant people in the world, without a great leader will only produce mediocre results. Collins discusses different types of leaders. He settles that the leader must put the company above all else, bring forth humility and professional will. The leader must have ambition first and foremost for the company and concern for its success, well beyond his/her own personal ambitions!

With a strong Collins Level 5 leader and the right people, the organization still must be disciplined. They must know who they are and a vision to their destination. Organizations that chase around the next money making fad end up getting trampled by those organizations that are focused and on the road to greatness. Barbara’s organization is caught in the dilemma of not knowing who they are, what they are good at and what they can be great at. During my short engagement, they believed they were a professional services organization, a software development company, a Six Sigma services organization, and a consulting firm on specialized techniques. Sadly, the company continues to be a sailboat in a typhoon – chaos with no leadership.

One of Collins’ mantras about great companies is their ability to focus on the intersection of three man ideals: i) Being passionate about something, ii) Understanding your economic engine, and iii) Being the best at what you do. Organizations that can achieve all three in a harmonic balance are great. Those that cannot are somewhere on the continuum of mediocre to good. ,

Organizations have the power and ability to change their circumstances. Collins sites numerous references of how companies leap way ahead of their peers and achieve true greatness. In a world overrun by management faddists, brilliant visionaries, ranting futurists, fear mongers and motivational gurus, the achievement of greatness is still possible. It begins with the right leader and the right people; those who have the experience doing what needs to be done. Then doing it! Management research, analysis and literature are no replacement for self-disciplined experience and determination. If this were the case, my reading of Clymer Automotive Manual has made me a class ‘A’ mechanic.

Turnaround or Turn-Around

2009-04-16T21:22:00.001-07:00

Hardly a day goes by without an array of contrasting signals from world markets. However, it is the person on the street that has the true sense of where the economy is and where it is going. All people communicate their desires with their wallets. I have heard it many times over, “you can always tell what is important to someone by where they spend their time and their money”. It is the pervasiveness of positive sentiment that will drive the economy from bear to bull. Once people feel the economy is recovering their wallets will accentuate their feelings. Until then, we wait.

The connotation of ‘waiting’ shouldn’t be taken as an idle stance until some magic day. Instead organizations have become diligent about ‘change’ and orchestrating such change to keep them afloat; to weather the storm. For many organizations on the edge, the process is a known as a turnaround. The phrase can be used to identify a situation as a turnaround from poor performance or from the brink of bankruptcy. Regardless of the type of turnaround in question, the process is pretty much the same; analyze, assimilate, decide, focus and orchestrate.

Recently I was contacted by a colleague, with whom I have done considerable work, regarding a professional services organization turnaround. The Florida based firm had been in business for thirty plus years and have since been struck with rising fixed and variable costs. Also, with the economic downturn the firm was dealing with a drastic reduction in revenue. In meeting with the executive management team it became very clear they needed a fix but didn’t know how to get from where they are to where they need to be.

During several of our meetings, the management team bantered their views on the local market, their vision(s) and their strategies for bringing the firm to greener pastures. With all of this ‘talk’ I wondered why I was there. They have the ideas, so why isn’t it happening. It struck me like a ton of bricks – no one had a clue what they were doing or going to do to get out of this mess. The strategies where there…but they weren’t relevant. There was talk of cost cutting, new technology, job-sharing, etc. there was no talk about fixing their problem.

Over the last while there are a few words in the English language that have given me spine chills and strategy is one of them. Strategy has become the buzz word for the solution of every instance of derailment. All too often, the pie-in-the-sky strategy results in nothing more than spending more money and drilling the organization deeper in the hole. For me, strategy and strategic thought is more about getting back from where you want to be to getting to where you want to be. Strategic thought should look at the process of getting from where I want to be, back to where I am now. The vision of the future should be clear, tangible and totally unencumbered. Once you are fixed on the vision, then strategic processes will get you to your goal. The process of bridging the gap between the ‘here-and-now’ to the future should be a product of unencumbered thought. A great work on this process was presented by Edward deBono in his book Lateral Thinking. The process, forces the incumbents to avoid linear thinking, a,b,c, etc, and get to a more complex matrix of thought.

These processes are far beyond the average organization, as it requires talent and time. Both of which are not available to the smaller organization. Therefore their resort to their ‘strategic rumination’, a process of moving things around hoping they will hit on the magic button of change. My firm in Florida did just that, they culled the employment ranks only to rehire within 6 months. Because all of the experienced talent had left the area, they had to hire and train. They bought thousands of dollars in computer equipment, only to find they had the cost but no more efficiency. Their failure was a direct result of both lack of leadership, a wealth of chaos and ‘strategic rumination’.

Successful strategic fortitude is a result of a diligence for unencumbered thought. However, strategic planning does possess some potholes; realized by the true strategist. Edward Barrows, in his paper Four Fatal Flaws of Strategic Planning (Harvard Business Review, 2009, UO904A, clearly outlines the flaws of the novice strategist. Organizations’ skipping of a rigorous analysis tops the list of ‘strategic flaws, business managers simply fail to realize that experience is no match for a critical analysis of the situation. Secondly, Barrows clearly demonstrates how the novice believes that the organizational saving strategy can be developed in a day. My firm honestly believed that a boardroom filled with ‘c’ level management could hammer out a plan for success in 6 hours. Even after 6 such sessions in the span of 4 weeks yielded nothing more than great flow charts and rising debt.

Once organizations can make it beyond the first two flaws, often their strategic plan becomes part of the ‘file of bad ideas’. This, according to Barrows is the failure to link strategic plans to strategic execution. Executing strategy requires the work of the entire organization, whereas strategic planning requires only the top team. In his article “Obstacles to Effective Strategy Implementation” (Organizational Dynamics, vol. 35, No 1, 2006) Lawrence Hrebiniak of the Wharton School of Business notes that ‘Strategic success demands a ‘simultaneous’ view of planning and doing. Managers must be thinking about executing even as they are formulating a plan”.

The strategic plan is a living organism, once initiated it takes on a life of its own. With that, it must be nurtured. All too often, the plan is executed and then the team moves on. Barrows sums up that ‘dodging strategy review meetings’ is a killer of often great strategies. Organizations simply fail to follow up and fine tune a great plan, resulting in the flame of success fizzling out.

In turning around a business, the key players must be able to critically analyze who they are and where they want the company to be. Then, they must work from the today, bilaterally to the vision, to build a plan of success. A phenomenal orchestration of strategy is how Smucker’s moved from the jam industry to packaged snack food. For many organizations, strategy isn’t an option; change must come by way of a pure tactical approach.

As for my firm in Florida, they are not a turnaround. Instead they have opted to be a turn-around, and around. They have and will continue to spin their wheels going in circles.

Too Much Clarity; a call for Perspective

2009-03-22T19:10:00.003-07:00

In February I had the tremendous opportunity to participate in the Concrete World Conference held in Las Vegas, Nevada. This annual conference is the largest of its kind and draws construction professionals from ever facet of the industry. Although attendance was down this year, the forums were packed. The buzz this year was thinning margins, higher competition, and downward economic pressures.

A CFO roundtable discussion was almost completely engulfed with the need to lessen the red on the financials, belt tightening and doing more with less. As a newbie to the industry I just drank in all of the information. Through the discussions, the industry vernacular faded out and the core economics and financials came through. For decades I professed that all businesses are the same; each business’ goal should be to sell something for a price more than they pay for it.

As the debate raged on, I was amazed how increasingly more circular the discussion was becoming. Each constituent sharing their ‘savings’ or their ‘strategic approach’ yet they all continued sharing their pain. Even the most progressive organization, claimed their approach only yielded marginal returns. This comes without surprise, each industry and its organizations settle into a way of doing business that sets them on their industry continuum. They make marginal gains, but there are few who are able to unlock from their position. On March 12, 2009, The Harvard Review Daily Stat reported that cost cutting only has short lived marginal impact; while an in-depth restructuring can yield up to 75% in total savings. In addition, the new structure has greater longevity and has a direct impact on competitive advantage.

With so many organizations feeling the economic pressures of dwindling revenues, the question of survival becomes increasingly more important. Survival in these economic times will not be the result of a series of marginal changes like cost cutting. Survival will be predicated on more Darwinian type changes; core changes in the organizational DNA that redefines the organization. This macro-redefinition relocates the organization on its industry continuum to a very different location.

Chris Zook, Profit from the Core, makes the statement that organizations need to restructure to focus on core competencies. These focuses will ‘turbo-charge’ their growth, as a result. I believe the point Zook is making is to seek out one’s competitive advantage, and restructure to differentiate the organization from others. Then throw the resources at the restructured organization.

It is all well and good to talk restructure, the changing of organizational DNA to move up the continuum. However, there are a few core limitations with the concept. Restructuring requires deep cutting change; but how? Of late, I have noticed that all of the restructurings have been based on financial survival. Restructuring has been focused on getting out of a grave financial situation, and very few have been focused on changing the core DNA of the organization.

The deep cutting organizational restructuring I see that is needed doesn’t come by way of cost cutting, nor having more or better reporting. It is the result of dramatic change. So many of today’s organizations are heavily married to their internal reporting rituals that they get stuck in the minutia of cost cutting and fail to see the bigger picture. The bigger pictures don’t come from the clarity of reporting, but instead by the perspective of the company. In the 1989 Peter Weir film, Dead Poet’s Society, the English teacher, John Keating, has the students stand on their chairs. This simple act was meant to show the students a different perspective of their classroom. Different perspective; I contend that it is immensely difficult for business leaders to orchestrate deep organizational genetic change, simply because of their perspective.

Each day as leaders trudge through their daily duties, it becomes increasingly more difficult to see beyond the organization and the industry. It is difficult to gain a far greater and different perspective. Many years ago, an organization with which I had dealings piloted a project of rotating senior executives through different departments. The idea was to gain ‘perspective’ of the organization from the eyes of a different department. These biannual stints gave executives a greater power in responding to competition and other environmental pressures.

This internal rotation gave department leaders organizational perspective; the result a more agile and balanced organization How can organizations get beyond this? How can they take this model to the next level which will catapult the restructured organization beyond that of its peers? Organizations who desire this radical change must seek out new DNA; DNA from a new species. New ideas don’t come from within an industry, they come from outside. New organizational DNA must come from outside of the industry. This practice is taboo and more so in this economic climate. However, companies who go down this road easily become way ahead of their market peers. These organizations bare their practices to the eyes of a new comer; someone who brings a whole new perspective. Penn Millen, the head of client communications for a prominent US law firm, practices this philosophy to move his firm beyond the capabilities of others. Millen had made a habit of borrowing successful business development ideas from other industries and tailoring them to fit his firm’s needs. (Rachel Zahorsky, The Closer Look, ABA Journal, March 2009)

The time has come for organizations to stop all of the hiring from within; the incestuous gene pool sterilization. Survival will be for those who look to other industries to seek out talent, ideas and practices that will catapult the organization to a new dimension; leveraging on a new gene pool, with new perspective.

Are we there…. Yet?

2009-02-17T11:52:00.002-07:00

A phrase well known by anyone who has taken a trip with young children, the anticipation of arrival is coated with all of the perceived excitement. It is the many ideas that have been brewing of the amount of fun and excitement the destination will bring. It is for this very reason; the voyage toward the destination always seems to take longer than the return.

It is almost as if time is measured by a different scale, the scale of anticipation of excitement. In today’s economic times, there are many chanting “are we there…yet?” These moments are more in holding onto the hope and dreams of better economic times. The chanters are holding onto memories of better times and promises of a better future as a means of swallowing the bitter pill of the present.

I have briefly written on these times and I have had comments on my writings. True economies move in cycles. There are periods of growth where demand outstrips supply, prices move upward thereby increasing inventories and the market calms down; a recessionary period. History has shown this to be the process since the Depression of the 1930’s. Interestingly enough I had lunch with an economist who, through tremendous research, could peg when the next recession and recovery would hit!

These times are not like any other we have seen since the 1930’s. Although statistics profess that the unemployment rate is in the mid 7 percent range, some economist contend it is in the double digits. This coupled with countries like Iceland going bankrupt and the World Bank seeking financial funding from the US bailout money, signals a direr situation.

How does one gauge reality through these times? Certainly not through rose colored glasses believing that these times are temporary and will behind us shortly. Based on economist wisdom and lately government press releases, ‘it will get worse before it gets better’. These times, I feel, will reshape the economic landscape forever. From this vantage point, the hay-days of yester-year will be a memory as we won’t see anything close to them again.

As organizations continue the bloodletting process, they continue to dump billions of economic value of intellectual capital in to an inventory pool. As this pool churns and people get slowly reemployed the economy continues to remain depressed, stagnant and scared for the next step. Thursday February 12, the US legal community took another blood bath with 6 major firms trimming their ranks by 679. Debra Cassens Weiss in her article More Bloodletting Predicted for 2009, reports that the bloodletting frenzy in law firms will continue well through 2009. In a citation, Weiss reports that “that up to three-quarters of the nation’s top 100 law firms are considering partner reductions”. In another of her articles, Weiss reports how a prominent Philadelphia law firm cut associate salaries by 10% across the board.

Over the past week, huge electronics manufacturers were quoted as dropping in the tens of thousands of employees. Today alone the State of California is poised to trim 20,000 people from their ranks. This would mark the second trimming of ranks in California Government in almost two years. There hasn’t been a week since 2007 where some company wasn’t crumbling under the weight of a deteriorating economy, and thus shed staff.

But the question ‘are we there… yet?” continues, have we hit the bottom? When will the turn around start? In the plethora of articles written on this subject; no – we are not there yet! We, as a global economy, are still on a nose-dive trajectory. The nice thing, the bottom is fast approaching and reality, hopefully, will hit us in the face! The turn around following the face-plant will not be as fast as many hope for. The build up of inventories will take many years to dwindle; many years until the economic forces absorb these inventories.

Sometime today approximately 7 million Americans and an awaiting world are hinging their hopes on the ‘economic bailout’ to be signed into law. This 790Billion dollar bill is their glimmer of hope from the economic pit of despair. This hope hinges on borrowing billions to spend now, in the hope that it will kick-start the economic engine.

The starting of the economic engine continues to get harder with each recessionary period, because we simply fail to fix the core problem. We continue to borrow more and more expensive fuel to start the engine rather than fix the core problem; dwindling productive capacity.

Currently the USA national debt is rapidly closing in on $11Trillion, with no end in sight. To every American that is more than $35,000 that should be remitted to the government to relinquish the debt. Borrowing more and listing to Tim Geithner who contends that ‘fixing’ the economy will take $3trillion; that easily adds 30% to our civic responsibility. As we feed the national debt monster by borrowing more, the closeted monster only gets bigger and more ferocious awaiting its next visit.

“Are we there… yet?” That all depends, are we at a point where we will stop borrowing today and become fiscally responsible, thereby charting a true course to financial freedom. Are we at the point to borrow more today, feed the debt monster only to await his return in 2018.

Maybe we should stop asking ‘are we there … yet?” and first understand where we are and where we want to go!

The Werther Effect; 21st Century Darwinism?

2009-01-23T20:22:00.000-07:00

As global economics crumble under weight of historical bad management, organizations scramble to eek out a means for their existence beyond today. As the bail-out-billions begin to flow and the Dow Jones continues to fall, signals to a hopeful world that there remains little confidence in the market place. Organizational survival during these times is trying at best, as firms are squirreling away their capital while trying to get consumers to spend.

The current economic climate has precipitated a wealth of writings how best to ‘solve the problem’; I admit, I too have added my two cents to the mix. The most interesting aspect of this burst of knowledge is very few organizations are using it. It seems the blinders have gone on and the solutions for today’s problems are drawn from historical approaches. It is almost as if continuing to replace a light bulb would create light, during a power failure. It is no wonder that so many organizations are failing at this time.

The professional services world, specifically law firms, has really fallen into this lemming mentality. To fix today’s problem, we will replace the light bulb, because that solved the problem in the past. Over the last eight weeks I have spent considerable time working with large west coast law firms, and upon reflection. Their actions now are predominately no different than they were two plus years ago. The one difference, more layoffs, but with a twist! The twist; keep the status quo!

During a dinner meeting with the CFO of a huge international law firm, the topic of 2008 profitability came up. As we spoke, I realized quickly this person really had no strategy beyond December 31st; other than a 14% reduction in staff. When I countered with, do you feel that the staff reduction will enable the firm to weather the climate, the answer I got startled me. The answer: “Don’t know, but as long as I get my annual bonus I will be fine”. The firm ended flat line on their operating budget for 2008, they shed staff and the remainder of the people got bonuses. As for my friend, he has no idea what to do in 2009! A Harvard MBA and an accountant, and he has no plan, other than possibly further layoffs.

The tools of creative thinking, although plentiful, seem to have been lost or have been stifled in so many professional services firms. It seems that the ego driven ‘me’ mentality has individualized those in firms to seek their own means of survival. What everyone is failing to realize is that the ‘me’ mentality limits our survivability!

William Henderson, a professor of law at Indiana University, believes that more large firms are building up their equity from non-equity partners while many firms are moving to an ‘eat what you kill model’. For those firms who have moved to higher equity contributions, this was probably the best move in the history of the firm. In my experience, professional services firms have been undercapitalized for decades. Having a strong equity base will make the firm more resilient to external pressures. However, the ‘eat what you kill model’, completely throws evolution out of the window. The firm is devolved from a strong arm going to battle for a common cause, to every person for themselves; like my CFO friend! With that type of model, survival is measured in billable hours and days, not months and years.

For some, this Werther Effect among firms, signals the big law firm bubble is about to burst. According to law firm consultant, Brad Hildebrandt, “the bubble won't burst.” However, Hildebrant affirms that survival will be based on a scrutinizing of management models more closely. I strongly support Hildebrandt’s contention regarding the bubble, however at the same time, I feel that the landscape will be littered with the remains of many dead big law firms. As many large firms have already demonstrated their unwillingness to change, their Werther Effect mentality, through their current actions.

The recent release of Legal Week Intelligence’s (LWI’s) 2008 Client Satisfaction Survey states that more than a fifth of companies (23%) are planning to scale back the amount of work they send to private practice law firms over the next year, with that figure increasing to 28% by the end of 2009. Firms who are into survival mode rather than copycat mode, should be retooling their management, practice and compensation structures to deal with the changes in the market place. However, current articles are suggesting that there is more of the former activity happening than the latter.

The economic challenges of today will never be overcome with historic solutions; survival depends on a critical open-minded analysis of all the variables. An excerpt from, "Flaws in Strategic Decision Making," (The McKinsey Quarterly, January 2009)., outlined decision-making practices and compared them with decision outcomes. Decisions that were made after a company's executives sought out contradictory evidence and opinion were more likely to turn out well. In cases where decisions turned out poorly, only 25% of respondents agreed that the decision makers had sought out evidence contradicting their initial plan, compared with 51% who strongly disagreed. But in cases where decisions turned out well, 43% of respondents agreed that decision makers sought out contrary evidence, and only 23% disagreed.

With wisdom at our fingertips, ultimately we choose our organizational destiny. We either evolve because of changes in our environment or we copy those failing around us – it is in our hands!

Prefix ‘Fr’ may be set for 2009!

2008-12-31T12:49:00.001-07:00

With only a few hours left in 2008 many around the world are looking for hope in 2009. For many, 2008 will be the year of financial decimation, a year like none other. The last recorded time of such financial collapse was the Great Depression. It is no wonder why some economists have referred to 2008 as the “mini-depression of 2008”. When the first signs of financial collapse began showing signs in 2006, organizations kept pushing forward – at full throttle. That full throttle pushed the global economy into a huge downward spiral. Even after the global injection of over $3 trillion, world economies are trying to find direction. Recently the Wall Street Journal published their 10 predictions for 2009, any single of which alters the world as we know it. More than three occurring will completely change the economic world order.

It continues to baffle me why, with all of the indicators, we continue down our historical path. Failure to act on indictors was something I wrote on before. Recently I found this to be the sentiment of others. While being delayed at Chicago’s O’Hare airport I met an energy mogul from Toronto, named Mike. Through our lengthy conversation on renewable energy he expressed how the majority in the market fail to internalize that “dino-fuel” is coming to an end. However, in his quest to build renewable energy resources he also spends considerable time studying human behavior. He shared that the human brain uses emotions to solve problems. That is why we are where we are today; we didn’t fix the problems, we stuck our heads’ in the sand and pretended they didn’t exist.

I sense that 2009 will be the year of ‘reorganization’. It will be a time in which economic markets shed more deadwood. It will be a time of more organizations crashing and little hope for the financial markets. It will be a year of ‘succession’, a rebirth, a time for antiquated companies’ thinking to die away to make room for new and innovative companies’ thinking to germinate and grow. Results of a literature review, prove this idea isn’t all that far fetched. There are countless articles on the next generation, who will survive, and the new economic order.

In cross posts on the Legal Profession Blog and the Empirical Legal Studies Blog, Indiana University Law Professor, William Henderson, predicts that more big law firms will collapse in 2009. Henderson says “a large proportion of big firms are in “one hell of a vise” because of the potential for weak collections and continuing costs after layoffs. Firms could be stuck with “vast expanses of Class A office space” after layoffs while making severance payments to its former lawyers”. A November survey of the nation's 700 top law firms by Altman Weil found that most were collecting fees at the same rate as last year. But the legal consulting firm did note “some softening” in balance sheets, particularly in firms with more than 250 lawyers and in major legal markets. It sounds that that these large firms are ‘fr’agile. This ‘fr’agile position, probably a result of being imbued with historical ways of thinking/operating, leads to being ‘fr’angible. As Henderson contends that the destruction of these firms results in pieces, of once revered practices, go ‘flying off’.

Lindsay Fortado of Bloomberg reports Thacher Proffitt & Wood, a 160-year- old New York-based law firm, will close down after the subprime crisis slashed demand for its structured-finance practice and more than half of its attorneys left for a competitor. Delving deeper into the cause of the demise reveals the old school mentality; emotional reaction instead of practical action.

However there are some firms that are not only surviving but thriving and growing. These firms have broken out of their bondage of emotional reaction, making them ‘agile’ in today’s economic space. Susan Berson of ABA Journal reports that attorney Nancy Jochens who specializes in construction law sees expansion in her Kansas City, MO practice. Her practice is prospering by way of practical action, by being involved in international ventures. For 2009, her firm is planning a Dubai office. Why? Because, Dubai is in a construction boom! “You have to be willing to go where the opportunities are, even if it means learning something new, like the language and customs,” Jochens says.

The succession of 2009 and beyond will be characterized by a single word, ‘agile’. Each organization must choose their pre-fix; some will choose ‘Fr’ and as such die a painful death. While others will forgo a pre-fix, and be a true reflection of ‘agile’, by way of their survival beyond 2009!

Survival comes down to losing your ‘Fr’ prefix and making 10 core changes. (http://www.abajournal.com/magazine/recession-proof_your_practice)

Getting to the Focal Point

2008-12-16T11:34:00.001-07:00

As the economic rollercoaster continues to hurl the world through insane curves at breakneck speeds it is almost impossible to believe that one day this economic turmoil will be a fleeting memory. How organizations move from this 3G ride to a sense of sanity and survivability is determined how they live out each day. The focus of today, I feel, will dictate the rebound of tomorrow. I feel the approach organizations take to survive these times will solidify their fate when the markets settle. Their focus today defines their future.

Each day global markets undergo huge swings from red to black and everything in the middle. As a means of surviving organizations undertake cost cutting measures while trying to increase revenue. These survival techniques cause me to question where their point of focus is; survival for today or beyond. To me, the slashing of head count screams a short sighted approach to long term survival. Granted, many organizations need to prune their ranks and what better time than now. However, it begs the question why wasn’t pruning done before? I suppose the dead wood have been around before this economic downturn.

Although I am not aware of every company’s circumstances, I do find it interesting how similar organizations take grossly diverging tactics given the exact same environment.
I believe that an organization’s priorities or focal points are a direct reflection of their culture. Their culture defines how they view their circumstance and ultimately how they will react to the situation. It is almost seems like some innate law that ties culture, through perception, interpretation into behavior. Lately, however, it is almost as if brilliant business minds have resorted to simplistic survival tactics of head-count reduction. It almost seems to an outsider that the approach is purely a knee-jerk slash and burn.

The question begs, what was their focal point? Surely the primary focus is survival in this economic turmoil. But, what is the secondary focus? Or was there even one? If the organization’s focus is simply to pare back costs to survive, this is purely a very short sighted view. Organizations must take a broader and more far reaching view as their primary view. The focal point at this time should be customer satisfaction and identifying additional competitive advantages. The organization that focuses on these focal points at a time when head count shrinkage is the norm for their competitors, they now create their kick start when the economic storm blows over.

Until recently I haven’t been aware of organizations adopting a more strategic approach than culling the ranks. However, two recent articles bring to the forefront of discussion how organizations do have options beyond ‘slash and burn’. Ian MacMillan and Larry Selden in Change with Your Customers – Win Big (Harvard Business Review, December 2008); contend that organizations must exploit the economic downturn by identifying and meeting emerging customer needs. When all one’s competitors are downsizing etc, the break-away organization that evolves with their customer now creates a bond with their customer, where the switching costs later becomes enormous. That firm now has a customer for life!

The changing with your customer model requires a strong customer focus as a core belief of the organization. This may be well beyond the capability of some if not many organizations. However, organizations can also gain value by introspection before eradication. An in depth view of the organizations, the skill set of its staff and the geographical business demands can allow organizations to keep their intellectual capital away from the guillotine of redundancy. Luke McLeod-Roberts in Managing the Downturn: Alternative Endings (The Lawyer, December 8, 2008) suggest that organizations need to look beyond the hard cost savings through redundancy and see the enormous soft costs being bled away. The loss of the organizational knowledge and the intellectual capital often far outstrips the costs savings of redundancy. McLeod-Roberts interviewed the leaders of prominent legal practices regarding how firms navigate the road of survival. Once again, to me, the lack of diversity in solutions seems to be culturally rooted. It is interesting how McLeod-Roberts proposals where shot down by some firms and embraced by others. The plethora of options other than redundancy seems so clear to those who are not culturally entrenched in their belief of their uniqueness:

“I don’t think creative alternatives to redundancies are being played out sufficiently,” says Weedie Sisson, principal coach at Peer Professional Development, a career consultancy for the legal profession. “These alternatives take a little more effort and conversation than going through the redundancy process, which is a specific route.”

Organizational survival at anytime is more than a matter of increasing revenue and reducing costs; it is a matter of competitive advantage. In times of turmoil, the focus of the organization must be to survive not only until the economic storm clears, but to focus beyond. It is those who have positioned themselves well during the storm, will be the ones blazing new trails in the new economic era.

See-Saw Capitalization

2008-12-07T08:50:00.000-07:00

With another day of doom and gloom news hitting the streets, many organizations are frantic about how to survive the current economic climate. Simply peruse the news sources; companies are screaming for more revenue and slashing costs in hopes to keep their heads above water until January 20. According to published polls, “things will be better in 2009.” However according to economists, yes 2009 will show signs of turnaround… in Q3! Survival during these times requires more financial savvy than has been needed in the last 50 or so years.

It is interesting to spend some time examining different organizations and how they are reacting to this climate. In the corporate world, businesses are shutting offices, stores and cutting back production shifts in manufacturing lines. In professional services like accountancy, organizations are staffing up to provide companies with ‘Survival Services.’ In the law firm arena, many firms are cutting staff anywhere from 8-12% and shutting offices. While others slash, burn and bonus the remaining staff. The question begs, what is the right survival technique for these times.

In watching this economic climate slowly meltdown over the past 24+ months, I am confident in saying that survival is based on reading and reacting to the market indicators. I am reminded of a luncheon more than 24 months ago when the first spark of a credit problem struck. I spent the remaining hour foreshadowing what was to unfold. Reading and interpreting the market indicators are so very important, but even more is to react to them – do something. It is in the doing something that many companies fail.

Following a law office CFO luncheon in Texas, I was approached by a CFO who indicated that his firm was feeling the economic climate very hard and if I had any suggestions. In keeping the conversation light and trying not to come off as the oracle of economic wisdom, I suggested better client relations, more direct marketing and revaluating the firm’s capitalization. This simple suggestion precipitated a plethora of questions, first of which, why not cost cutting? I have always felt that cost cutting measures are secondary to putting the customer first. I explained to my colleague, that cost cutting before sterling service leaves the firm vulnerable to a competitor who provides better customer care. Also, cost cutting for fiscal responsibility should be at the forefront of financial management.

Within a week of my return and of my last submission I was asked on two occasions what is the optimal amount of working capital for an organization, one firm engaged me to help them in that area. A simple Google on working capital will bring back over 11million entries; everything from definitions, to books to companies who have ‘figured it out’. Personally, I don’t believe there is the ‘right’ amount of capitalization for any company, as there are so many contributing factors. However, with a few simple rules the ‘right’ amount may be very closely approximated.

Working capital is defined as current assets less current liabilities. In reality it is the amount of money I need to satisfy my current obligations. Borrowing from accounting theory, current is the time period of 1 year. So working capital is the amount of money I can generate on an ongoing basis to meet my current financial obligations. What inventory can I turn into cash to pay the expenses of my operation. That is it! Granted, in normal business operations cash flow has peaks and troughs. However over the course of a year the cash position should be net positive. If not, the firm is undercapitalized. Likewise, an increasing surplus of cash is suggestive of an overcapitalized position.

Excluding risk, market verticals, taxation, etcetera organizations should strive to have a statistically net positive cash position at some point in their fiscal year, and have it for a certain period of time. A great rule of thumb would be at least one financial quarter. For those periods where cash flows are more in the trough, the use of operating lines of credit help as a flattening agent. However, at some time in the year the operating loan should be repaid and the firm should be in a statistically net positive cash situation. If not, the firm is undercapitalized.

Getting the right capitalization has many components, however the simplest of which is budgeting for the next year. The organization needs to examine what their goals are for the upcoming year and the costs incurred in reaching their goals. A manufacturing organization that may be faced with heavy retooling costs to achieve a 12% growth of the coming 3-5 years would require a heavy capital injection. Without adding tremendous complexity, this would be best served through a public offering of sorts. However, a professional services organization seeking to bring a few new partners on board would have the incoming partners contribute capital to meet the new capital requirements of the organization. Conversely, a firm seeking to grow its market presence in different cities would need to solicit increased capitalization of all the existing and new partners.

There are a whole host reasons why organizations are becoming statistics of the economic crisis. The survivors will be the ones that are reading the market indicators and acting, also the ones who are adequately capitalized.

The best rule I have heard was, use short term money to pay short term commitments and get long term money for long term commitments. Managing the organization’s capitalization is essentially balancing the firm’s self-investment portfolio to smooth out the up and downs.

Stop the bleeding, connecting with Cassandra

2008-11-18T19:08:00.001-07:00

I have always professed that organizational profitability is very easy once you embrace the three vital elements to any business. For a business to be successful, the product or service offering must make sense, the product or service must be sold at a price greater than its production, and there must be enough buyers for the product or service to continue into the future. If you apply these rules to products it is easily understood how some businesses become wildly successful and others fail. Compare the life of the garbage bag to the life of the famous Pet Rocks of the 1970’s.

Once an organization can get beyond the vital elements, then those savory terms of every MBA move the organization from a rudimentary business into a viable entity. The likes of decision making models and S.W.O. T analysis forms the foundation of strategic modeling which puts organizations on the economic continuum; which I have discussed so much in the past. However, somewhere at sometime organizations lose focus of the road they have traveled and other subjective approaches to management kicks in.

During a recent conversation with a senior partner of a global law firm, it became evident that management of the firm went from being objective through verifiable facts to subjective with ‘gut feelings’. This multi-million dollar organization prided itself on assimilation of the latest technology. In their eyes, it made them more efficient and effective in producing their services. In reality, however, all of the expected efficiencies were really masked by the atychiphobic behavior of the product evangelists.

It is in the fear of admitting failure that many of the firm’s project evangelists continue down the road of doom, pushing harder and more determined. These project evangelists drag their colleagues down a blood-letting experience of downward spiraling profits. David Maxwell contends that the signs of project failure are being read by the very people who are installing and often initiating the project; this is known as the Cassandra Curse. In his research of 589 project managers, the Cassandra Curse is alive and well. He contends that project managers often see the future, but are simply unable to convince others to change the course of action. It seems that saving face is more important than saving the organization, in the eyes of the project evangelist.

During lunch with this distinguished litigator, I came to understand how his firm had undertaken so many projects that either got stuck in the bureaucracy of perfection or never yielded the expected windfall professed when they were launched. I believe these emotional interjections in the decision making process leads to organizations losing millions of dollars. It is almost as if management gets caught up in Confirmation Bias (Plous, S. The Psychology of Judgement and Decision Making, New York: McGraw-Hill, 1993). I believe it is the degree to which organizations allow emotions to alter their decisions, which roots them in their economic continuum.

A huge amount has been written on the decision making process. In a very simplistic view the extremes can be defined as subjective and objective. A purely objective decision model would be likened to automatic stock trading algorithms; when certain criteria are met, an action is initiated. Conversely subjective decision making can be all feeling based. In business, and most MBA’s are trained this way, the objective side of decision making is the mantra. Figures don’t lie.

Many years ago, I articled with an accountant who ultimately took a position with an oil exploration company. During our many conversations, I learned that these types of companies are run by objective decision making. The finance role in these organizations has a wealth of technology and very sharp individuals that are constantly reviewing the ROI of every project and proposed project. In their emotionless drop of the gavel these companies lose no sleep on cutting a project as soon as the ROI drops below their threshold, regardless of the money already expended.

In a recent contribution, I mentioned an interview with Sir Richard Branson whose advice to today’s company is “batten down the hatches”. I think now is the time organizations need to bury the atychiphobic, bury the ego and recognize that a project destined to failure will suck up more money and time than simply walking away regardless of how much has already been spent. Stop feeding the Cassandra Curse.

Knowledge Begs Action; Culture Alters Reaction

2008-11-09T12:54:00.002-07:00

Unless you have been hiking through the Congo and trying to avoid cholera you would see that the economic landscape of the world is extremely delicate and changes erratically with each passing day. During an extensive tour of Western Europe and attending the CFO conference in Brussels I was plagued trying to internalize, why some organizations simply fail to read the indicators of change.

Almost two years ago, the indicators of today’s economic meltdown were already making the news. Interestingly enough, while dining with a colleague I speculated that the economic sputters of 2006 would manifest into a meltdown. As I reflect on that conversation I remain dumbfounded how the indicators were there and so many organizations simply continued along – status quo. What is even more surprising, I along with countless others began writing on the importance of organizational change as a means of weathering the pending economic crisis, yet so many simply continued on the road of status quo, not taking advantage of this powerful knowledge.

Today, the inklings (I had) in 2006 have manifested into a global economic issue where so many organizations are saying, ‘what’, ‘huh’ and ‘what now’. It is almost as if these organizations have been living on a different planet for the past 24+ months. Now in a state of panic, they are downsizing, rightsizing, and all other forms of sizing. What they are not doing is revising!

One of my most favorite activities is meeting with organizational leaders to understand how they view their market and where they see their business going. Although in North America the variations are large between organizations and market niches they pale in comparison to those seen around the globe. The focus of the Brussels CFO conference was on Working Capital Management. As always, I have found, these CFO conferences provide a tremendous opportunity for learning as they attract some of the most brilliant minds in the financial/economic sectors.

With the wealth of indicators and a plethora of insightful analysis of these indicators it is a wonder why all organizations simply don’t have their act together. As I have written in the past, all organizations find their resting spot on this economic continuum. Their position, from the extremes of wildly successful or bankrupt, is self regulated and is based solely on their culture. Although I have professed this for years, the concept gelled during Mr. Schaafsma’s, CFO Europe of Royal Wessanen, presentation on Sharpening Staff Focus on Working Capital Management. Here is a company that built a culture that focused on tying results to the generation of cash. Here is a company that read the market indicators and acted; based on facts. This was in radical contrast to the story told by a CFO of an electrical components supply company. During our conversation, Helmut, explained to me how his company was so focused on market penetration that they bought back, from their resellers, almost 2000 electric motors which had a street value of almost €200 000. As we talked about this ‘strategic’ move I realized here is a company that was driven by ignoring market indicators and working on an ‘agenda’.

There are many market indictors, those which impact globally, nationally and geographically. They are endemic in our everyday life; one would be hard pressed not to be impacted by them. However, so many organizations simply choose to ‘go it alone’. Through my numerous conversations with many people, I realize that it is the organization’s culture that will place them on the economic continuum.

As the world dances on the economic self-destruct button and as the $3 trillion cash injection has failed to make a difference toward economic stability, it has become very clear, at least to me, that survival in these times must be based on acting based on the market voice. [A phenomenal presentation on the current credit crunch and how a company was dealing with it was hosted by Rafnur Larruson, head of treasury of the Actavis Group.] We should not be reacting to what ‘we feel’, or what ‘we want’. This reminds me of a flow audit engagement I was part of almost two decades ago. Our audit senior made five recommendations to this large multi-jurisdictional organization on achieving an immediate positive effect on their bottom line. The feedback was:

“We have been doing business this way for the last 150 years, and we are not about to change now”.

That culture has, whittled that organization down by almost 30% in the last two decades.

As a leader of an organization, you can choose to read the writing on the wall or not, it is completely up to you. Leading with knowledge and insight empowers you with the abundance of action. Leading from a self-righteous attitude where you ‘think’ you know better than the market will force the organization into an option-limiting reactionary mode.
Options that come from Acting are limitless; options that come from a need to react are limited.

Making Fondue, Personal

2008-10-12T08:26:00.002-07:00

Unless you have been backpacking through Nepal or practicing ceremonial dances with the tribes of New Guinea, you not only would have heard of the global economic crisis you have been a contributor to its momentum. In the last two weeks the global economic meltdown has stripped away trillions of dollars in wealth all across the globe, early in the week Iceland teetered on the brink of bankruptcy and continues to search for ways of gaining some stability in its economy.

In a recent survey of top economists 89% indicated that the world is in a recessionary cycle a small number of which is using the “d” word. Where ever the true position is now is the time to ‘batten down the hatches’. Amongst other things this was the recommendation of Sir Richard Branson in a recent interview. Survival of corporate and personal economies at this time requires two very important events. First and foremost the economic community must instantiate measures to protect the credit markets around the world and secondly consumers must believe that these measures will work. As of midnight Friday the G7 financial leaders have put together a financial plan to stabilize the global economy, now we must do our part; act responsibly.

Over the last few weeks major publications were peppered with professional services organizations disbanding, moving to foreign markets and some even merging. With all this action, the question arises regarding whether there is thought behind these actions. A couple of my favorite articles indicated that firms are in the midst of an economic meltdown. Some firms are increasing their billable hour quota and some continue along their merry way with pay increases and the like. Either these firms know something the rest of us don’t or they are operating in their own world!

During the current economic malaise, the corporate world is cutting back on superfluous activities. For many, such activities include a more discerning eye on their use of outside legal counsel. With this position, it is unfathomable to understand how firms can expect to bill more and, more importantly collect more. In the coming 18-24 months, time taken to climb out of this economic swamp, many professional service organizations will fail to see the new economic light; as they will be a causality of the transition.

In the post recessionary world, the landscape will be peppered with a few professional services organization, those who have taken heed to the call of many authoritative figures calling for these organizations to drop the shackles of history and run their firm like a ‘real’ business. As prophesized, by many writes, the “behavior of law firms cannot continue”, the day of reckoning is nigh.

Is there time for turnaround, possibly yes, practically no, as today’s firms are so imbued in historical process. The one single most important thing that today’s law firm has going for them is that some investors believe they are of sound value. Janet Conley, Bankers Still See Law Firms as Good Credit Risks, reports that although banks see law firms as a good credit risk, law firm loans will attract increased scrutiny and carry more covenants and conditions. Behind some of these new conditions are issues that have plagued law firms for years, Dan DiPietro of Citi Private Bank states:

“Like many banks, Citi looks at firms' cash flow, receivables and work in progress when assessing their creditworthiness and how much cash to advance on revolving or long-term lines of credit."

"DiPietro said Citi is giving existing loans a higher level of scrutiny and is looking more closely at firms on an individual basis to assess how the economic turmoil might affect their receivables.”

As I have, and others, have professed for decades, professional services organizations need to operate like real businesses in managing their most valuable assets – client net investment. With the current economic season, this will be at the forefront of banker’s minds and could mean the difference between dying in the quagmire and surviving the next 24 months.

Take heed the economic meltdown has already hit the legal community and has begun squeezing firms. One prominent firm, Heller Erhman, has already fallen victim and has begun the dissolution process. The firm purports several reasons for their dissolution one of which being the global credit meltdown. Niraj Chokshi, Leaked Document Gives Details of Heller Debt, Assets, reports that the firm is 90% confident in successfully collecting their $174 million in outstanding receivables. Based on my experience that is an overly aggressive and highly optimistic position. In recent talks with senior members in the credit/collection community, “those are unrealistic expectations!”

The economic woes are coming from all directions with a strong force; the economic fondue will be shared by all. For survival beyond this day, we must each internalize some portion into our own organization and ‘batten down the hatches’, otherwise we will be left behind after it all.

The Thralldom Coin

2008-10-04T12:36:00.000-07:00

The perceived end in acquiring technology is marked by the contract. The contract or agreement cloaks its polarized nature; being either very good or torturous for both parties. All too often the contract is not seen as another exercise in due diligence. Commonly, the prospect accepts the negotiated amounts imbedded in the contract and within thirty seconds the prospect is transformed into ‘client’.

In the contract phase of the relationship, one must recognize that the contract represents a huge negotiating piece. Since the contract was prepared by the vendor it is meant to protect the vendor’s self interest. The licensee therefore must exercise their position to ensure their needs are met. The contact sets the stage for how the relationship between the parties will operate in good and bad times.

The contract has two major components, those stipulations expressed in the contract and those implied either within the contract or through external bodies. Due to the very nature of the exchange of intellectual property for compensation, local, national and international laws define the rights of the licensor and the licensee. In the best case, the licensee has technology which supports their organization for decades. On the downside, the licensee is ensnared with financial obligation for technology which they simply cannot use.

From the licensee perspective, the rule when dealing with the contract is having more ‘eyes-on-deck’. Basically the more people who review the agreement increases the probability that the licensee’s needs are met. The agreement review should proceed through multiple iterations addressing issues by way of increasing complexity. As part of the due diligence process, the final review of the agreement should be done by a lawyer who specializes in the type of intellectual property that is being acquired and ensure that contractual nuances are being met.

The appropriate address of intellectual property contract analysis is best served in another forum; however there are key issues the layperson should be aware of: ownership, warranty/support, jurisdiction, and export provisions. Of these issues, and there are many more as depth in the analysis increases, the simplest to address is support and the most complex is export provisions.

The warranty/support issue should be at the forefront of the licensee’s thoughts. Basically, the importance of the contract is at the forefront when the technology breaks: how quickly will the licensor respond and how; will they provide a fix, a patch or a replacement; and how long will they continue to support your technology. Keep in mind that the technology may be jugular to the licensee’s operation and a resolution to an issue should be swift to ensure no loss of business operation. An immediate ‘red-flag’ is where the licensee doesn’t operate a support center during the same hours of operation as the licensor. Another important issue that the licensee should ensure is document is the licensor’s escalation policy for dealing with licensee issues.

On the other end of the spectrum, what does the agreement say about exporting the technology outside of the jurisdiction where it is purchased/licensed? What do federal laws say about the export of the intellectual property? These are issues of paramount importance should the licensee have operations outside of the contract jurisdiction.

The contract/agreement represents the glue that binds the licensor and the licensee. The euphoria at the time of signing can easily become a point of a litigation should things go awry. Take the time, continue your due diligence and if all is done well, you and the licensor will share a ‘two-headed’ coin!

Demystifying Technology Pricing

2008-09-17T19:19:00.000-07:00

Once you have gotten to the stage of the technology you need and the vendor from where it will come, the next issue is to determine the price. Interestingly enough the more one delves into technology pricing models the more the reality of no set pricing becomes the norm. How vendors arrive at their price list runs from complex modeling to what the market will bear. However, looking at pricing from the buyer perspective there are some touch points that can greatly affect the price. There are many factors that will drive the price-point for the desired technology; this can be broken down into two main classes, the buyer and the vendor demographics. It is the vendor and the buyer demographics that begin to formulate ‘the price’.

Right from the starting gate, the vendor will need to know the size of the buyer organization, amount of current or intended use of the technology whether or not the buyer will need training or what other technology services will be employed. It is at that point the vendor consults their ‘price list’. Basically this ‘price list’ can be highly scientific or epitomize subjectivity in the wildest sense. The vendor price list could be built on market analysis, profitability or basically random numbers pulled out of the air. The astute buyer will always get the best price once they understand how their chosen vendor has built their ‘price list’.

The main divisional breaks on technology pricing are: hardware/software/consulting and public vendor/private vendor. These main breaks in pricing models will determine how much flexibility the buyer has with getting to a palatable price. These divisional lines sit along a continuum, the most rigid pricing of which is hardware/public company vendor and the least rigid is from software/private companies. The addition of consulting/services places the price for those services more along the continuum, rather than the extremes.

The production of hardware technology is built upon verifiable research and quantifiable components. The vendor is well aware of their variable and fixed costs of production, therefore they are cognizant of their break-even points in production. To this knowledge, add the ‘motivation’ of shareholders as in a public company and the profitability lines will be established; which infers the margins. With these strongholds on pricing, hardware technology from publically traded companies doesn’t lend itself to large discounting.

Where hardware technology organizations provide consulting/services, this is the area where the buyer can negotiate strongest. Very often the hardware vendors will loosen the reins on service margins to maintain hardware margins. To the buyer, keep in mind that empirically most vendors will charge between 2.0 and 3.5 times their cost of providing the service. The buyer’s strongest position comes when the buyer knows the vendor has idle consulting resources; as the vendor has a sunk cost with their labor pool.

The pricing model is radically different in the software technology realm. The production of software bears with it a certain number of hours of planning, programming and ultimately testing. All of these hours are verifiable and quantifiable and therefore a cost of production of the software can be derived. These costs represent fixed or sunk costs, and the company bears these costs whether one software copy is sold or one million copies are sold. Notice how different this is from hardware pricing; with software the costs are recognized when the software is built – no matter how many copies are sold. While with hardware, there is a certain fixed up front cost on the research side, however once in production each until attracts a cost. The buyer is more likely to achieve a better price if they know the vendor has considerable inventory, new models are about to be released or the purchase time is nearing the vendors fiscal year end.

The buyer should now recognize that the pricing points for software have tremendously more flexibility than those of hardware purchases. This price point flexibility is further enhanced whether the software company is public or private. Publically traded software companies have a strong external influence to meet shareholder expectations and therefore are less likely to entertain or sustain deep discounting; this is where the demographics of the purchasing organization can have tremendous influence. For the buyer, the best time to get to the right price would be through knowing about the vendor. The buyer should make it a point to find out the vendor’s year end, often four weeks to the vendor’s year end, and less so near quarter end, will make the difference between the ‘price list’ and the ‘best price’.

The buyer’s best pricing will be derived from privately held software companies. These companies tend to be smaller and often do not have a grasp of the cost of software production. To that end, they could essentially discount the software to nothing simply to ‘get the deal’. Where the buyer’s switching costs are high, a nil price on the software shackles the buyer to the vendor. This shackled relationship may or may not be in the best interest of the buyer and it must be a source of further investigation. Since the privately held enterprise may not be legislated by strong external forces, like shareholders, the concept of quarter and year-end periods are not that important to getting to the ‘right price’.

More often with software companies than with hardware companies, a considerable amount of revenue is the result of additional services. To the software company, consulting and services may be their only sustenance between sales. The services could be anything from training, data conversion to expert consulting. Like with services provided by hardware vendors, software vendors tend to offer services at 2.0 to 3.5 times the costs they incur in providing those services. As these costs represent sunk costs to the software vendor just like with the hardware vendor; this becomes an area where the buyer can realize the greatest savings.

Your responsibility to your organization goes beyond getting the right tools; it is getting the right tools, the right training and all at the right price. Recognize that the price list is only a suggestion and the right price comes down to how well the buyer and vendor can ‘work’ together on closing the deal. Keep in mind there are so many contributing factors to price; which far exceed the elementary view of “price”, as professed by economist Adam Smith.

“The real price of every thing ... is the toil and trouble of acquiring it as influenced by its scarcity”.

Adam Smith
The Wealth of Nations (1776)

When two becomes one; partnering?

2008-09-03T20:26:00.002-07:00

The acquisition of enterprise level software or simply software for a specific use in one’s organization is much more than dropping the Amex card at Best Buy. It never ceases to amaze me how such enormous, even jugular, purchases are handled at a very cursory level. More consideration is spent on the price and the contact than on the relationship. That is like spending more time negotiating the price of the car than choosing the car!

I am not sure where the problem lies, whether software companies have commoditized their product offering so the only differentiating factor is the price or the buyer is simply not connected with what they are getting involved with. Organizations really need to slow down on their technology acquisitions and realize what they are doing is forming a relationship with the vendor.

A relationship is a connection between two parties; they can take many different forms and are unpredictable in their duration. However, the vendor purchaser relationship, especially of enterprise technology, should be viewed as a major undertaking. From the purchaser’s perspective, they are entrusting the vendor with vital elements of their operation both now and into the future. Therefore, there should be many many more questions other than price. The vendor, who is in the business of building the technology, must realize that they must stay attuned to their customer’s needs and therefore not only follow the trends but strive to be ahead of the curve.

Organizations who fail to under take a process of due diligence when acquiring technology are really compromising the competitive advantage of their organization both now and into the future. Keep in mind, price and contracts are static. How the vendor works at the relationship will go on long after the contact is signed and monies paid.

Ideally organizations should connect with 3-5 vendors who produce the type of products/functionality they are interested in. Then, as discussed last week, have a list of requirements graded 1-5, must have to a nice-to-have. At this point, the firm should look at the top 2-3 vendors and begin the due diligence process.

The due diligence process should quickly reveal whether the technology vendor is focused on their products of today and if they have vision of tomorrow, or even if they will make it to tomorrow. Remember the market leader today could be the market laggard of tomorrow. Following are a list of some major things the purchaser should rank vendors by:

The company’s economic viability now and into the short term; this is readily accessible with credit reports or public filings if they are a public company. What are the plans of the future of the company (product diversification, internationalization, etc)?

What are the skills, experience and composition of the vendor’s staff? What is the staff turnover and why?

What is the vendor’s current technology base? What are their plans for adopting new technology platforms?

How many new releases, not upgrades or bug fixes, the vendor produces per year? Who determines what goes into the future release? Is new functionality confirmed by a consensus or a regulatory board?

Is the vendor certified with the tools or processes they are using (ISO, Microsoft, SAP, etc)?

What is the timeliness on which the vendor will respond to a warranty issue? How are warranty issues reported?

Is the vendor’s customer service available when my business is open?

Does the vendor provide project management to get the technology up and running at my facility? If so, what type of training/certification does the project management team require before they are able to go out in the field? Does the vendor offer configuration services to ensure that the technology will work properly in my organization?

The type of questions one could ask could go ad infinitum, however, it is imperative to get a good understanding of who your technology provider is and will they be around to provide you solutions into the future. Before either side begins to think of the contract, they must understand if their aspirations and dreams are in alignment anything less is a recipe for a costly disaster.

Remember negotiating a contract is easy; cutting a check is easier – trying to get broken technology fixed – will cripple your organization one way or another!

Thought, Actions, ROI – Almost Inseparable

2008-08-24T14:27:00.000-07:00

With all of the frustrations conjured up each and everyday because of computers and software, one would be very hard pressed to confess they would rather return to a world without technology. The conveniences of modern day living is a direct result of technology. With all of its problems, software technology brings value to every use, to some degree. This value can be tied directly to the choices made as to the type of technology and its implementation.

Over the next week close to three thousand people will converge on Dallas Texas for the International Legal Technology Association (ILTA) annual conference. This educational based forum affords leaders from today’s law practices to acquire and share their knowledge with their peers. As an added benefit the forum presents an opportunity for these leaders to meet many of the companies who furnish their organizations with software technology.

With so many vendors presenting their latest solutions, one is very hard pressed to identify the right fit of software for their organization. This dilemma is easily dissected into its component parts. Vendors will proudly profess their value proposition; the value their solution brings to the market. This ‘value’ is demonstrated in all of their literature and hidden in their graphics, logos, presentation and even in their references. Very simply all software will provide user some value, even those camouflaging old technology.

With three or more vendors touting their value, it becomes difficult to select the ‘right’ solution. Or does it? Software selection is a two part process. The first and easiest part is to understand what is available in the market place. The second step in selecting the right fit is in understanding the environment where the solution will be used. This is the area where most organizations have and continue to fail.

Know thy self written by Socrates about 350 B.C. speak volumes on why some organizations fail and others succeed in implementing the SAME solution. This is also the reason why today’s market is filled with consultants selling their expertise under the realm of Six Sigma, Lean Manufacturing, BPR, JIT manufacturing and the list goes on. Armed with the knowledge of what is available, the leader should critically examine their current process which will lead to the ‘right’ fit.

A critical examination is more than a cursory review of how bills get created or how checks are approved. It is a full documentation of the entire process, followed by a critical examination asking ‘why’ at each step; why do we do ‘this’ like this? Six Sigma methodologies refer to this as the DMAIC sub-process. The sub process is outlined as: define measure, analyze, improve and control. The belted consultant would critically review the process asking ‘why’ at each step with a view to make the process more efficient and less prone to errors.
The greatest return on any software solution will not be derived by the solution itself but rather by the revising of the underlying business process. Overlaying a historical business process with new technology only acts to speed up the arrival at the ROI glass ceiling. There are so many examples of organizations changing the tools but keeping the old process. Take for instance the Dvorak Keyboard of the early 1900’s which allowed for higher typing speeds. However it was replaced by the QWERTY Keyboard because of mechanical constraints of manual typewriters. Notice, in today’s age we have yet to return to the Dvorak keyboard; we are too entrenched in history. The world of software is no different; firms continue to muddle through software acquisition and be satisfied with their 10-15% ROI, because of the mentality that the process has always been done this way and we cannot change it. However, the astute firm who reexamines their entire process, making the appropriate changes to streamline their process and enhancing the new technology, enjoys the 40-80% ROI. In the five years from 1995-2000, General Electric learned firsthand how the act of reviewing each process with a critical eye before launching yielded a $10 billion benefit!

A new look at an old process will immediately reveal historical inefficiencies. Once the process is re-scripted, then one is better prepared to ask the critical questions necessary to separate one solution provider from the next; this is what clarifies the difference between average and extraordinary returns on investment. So as you stroll through the vendor halls listening to vendor value propositions, recognize that you, and only you, control your true ROI with any new solution!

My Caffeine…My Way!

2008-08-14T19:58:00.003-07:00

Over the past several weeks, I have received numerous questions surrounding software selection and licensing. Therefore, I feel compelled to spend the next few weeks demystifying this entity we refer to as “software.” This will be accomplished to the extent that we get the solution we need, how and when we need it, as well as including some of the common ‘gotchas’ associated with acquiring software.

It is impossible to make it through a single day without using some type of software or even being the beneficiary of it. Software is such a part of our daily life whether we see it or not. It starts with the electricity and running of water which makes its way into our homes, the alarm clock in the morning, the cars we drive, elevators we ride, and even into the production and storage of the food we eat. But what is software? The term ‘software’ first made its presence into the English language in 1958. Since then it has become a widely used term, but the definition is somewhat illusive. Merriam-Webster defines it as: “the entire set of programs, procedures, and related documentation associated with a system and especially a computer system; contrasted with hardware.” While other dictionaries define it as anything from “not hardware” to “a codified set of commands that direct microprocessors to perform certain functions”, what ever the real meaning is. Software makes things in our lives work, be it phones or electricity; we have conveniences because of software.

During the first thirty years of its life, software meant ‘you get what you get and you can’t throw a fit!’ Because for a long time people lived with the reality that any automation was better than none at all since the manual approach was much more difficult. However, as benefits of software were recognized more people entered the software development field, which resulted in new and innovative technologies being produced; ultimately making their way to market. The market turned into a ‘you get what you want’ arena; but at a price. This ‘having it my way’ fed the software production engine more and more fuel through the 1980’s to today. The resounding theme through all of this expansion was, you have to pay for what you want. As each product offered different strengths, one would have to choose the product that met the highest number of their functionality need; then put out the money. They often paid the price for functionalities they didn’t need or even want, simply because that was how the product was packaged.

From the late 1960’s the costs of purchasing (licensing) software was very subjective, with a common theme of ‘expensive’. Essentially software companies were on the pharmaceutical model, recoup all the R&D costs per unit sold. Sometimes their model was flawed and the company went broke, other times the model was profitable and the company flourished. As more firms caught on, the competitive pressures clarified the model and produced other options for recouping the R&D costs.

Today there are a plethora of options to get the needed functionality you need at the ‘right’ price. Following are a few of the most popular models.

The Classical Model has the user paying a lump some amount of money for the software package. This package would often include other components that the user may or may not want. Sometimes in this model there are additional fees, such as support and maintenance. If it is consumer software, the price on the package is the price you pay. However, if it is enterprise software, the book price is the starting point for negotiation.

A progressive variant of the Classical Model is known as the SaaS Model. The acronym stands for Software as a Service. Here the user only pays for the use of the software when and if they need it. This model began gaining popularity after Microsoft launched the SaaS model in 2000 for its Office Suite of products. This allowed organizations to ‘rent’ software applications on an as needed basis; the savings were phenomenal! No longer did firms need to buy (license) the entire suite of Office Professional, they could, a la carte, satisfy their users needs.

In the early 20th century, there was a rise of the Free Culture and the Open Source Culture. The Free Culture created the concepts of Freeware, Shareware and Public Domain software to the world. The Free Culture was, and continues to be, a hard core group of software engineers who, through different motivations, goal is to put solutions into the world. Freeware tends to provide specific functionality, such as converting MS Word documents into another format, and is made available to the public for a voluntary fee. Shareware is a little more advanced than Freeware in that it has limited capability and is offered on trial, where the full version can be purchased at any time. Public domain software is completely free for anyone to use, however they want.

It was the Free Culture and the Public Domain movement that gave rise to the Open Source Model. In this model, software is provided free or at a nominal charge to the public, more often than not, under a licensing agreement, however, the user has access to the ‘software code’ which allows them to make changes to the software. With the Open Source Model, the user can now add functionality that they specifically need. Until this point, adding ‘your own’ functionality never existed. Another progressive thought introduced with Open Source was that newly added functionality must be returned to the public domain, where everyone can enjoy the new functionalities. According to the Law & Life: Silicon Valley blog posting of April 4, 2008; by 2012, 90% of businesses will use the Open Source Model in some capacity.

In addition to the diversity of software features available one must recognize there is also diversity in getting what you need. Over the coming weeks, the journey of selecting YOUR software solution and how to acquire YOUR solution will be addressed. Recognize that your working environment isn’t rigid any more; you have options! The classical model often binds you to a ‘packaged solution, the SaaS model allows you get ‘what you need, when you need it’ for a fee, while the Free Culture presents the low or no cost alternatives. With that said your email needn’t originate from within a suite of products; it could be used ‘as and when needed’ or can be the Java Open (Source) Office completely free solution.

I am glad I can have my mocha java latte, with cinnamon!

Credits Calling from the Abyss

2008-08-07T10:31:00.002-07:00

It is amazing that the life blood of modern day commerce rests on a system devised over 500 years ago. In 1494, Luca Pacioli documented the technique of double-entry bookkeeping, and from then became know as the ‘Father of Accounting’. One could only speculate that his reasoning for this technique was to accurately reflect the transactions of a business at any point in time. Over the years the complexity in commerce imposed tremendous challenges to double-entry bookkeeping; however the Pacioli model remained steadfast through generations.

Today’s methods of recording transactions are tremendously more complex than that practiced in the early 1500’s. However, accounting bodies all over the world actively postulate the best and fairest means by which to record complex transactions. With the rapid globalization of commerce, the International Accounting Standards Board works tirelessly to instill some order in complex global transactions.

Interestingly enough the bulk of the accounting problems faced by today’s organizations are not rooted in complex transactions, but rather the most rudimentary type of transactions. Over the past month, many organizations shared some of the difficulties facing their accounting departments. The two most prevalent difficulties were billing and cash receipts. Although both of these transactions seem so very simple; today’s business has created a wealth of unnecessary complexity from simplicity.

Payments come into all organizations by way of some type of negotiable instrument. For the most part, the person empowered to deal with these payments have been trained to know what to do. Often this training is ‘hand-me-down’ knowledge and is therefore often diluted. Very simply the negotiable instrument should be placed into the bank and the payment recorded in the organization’s financial records. However, I have seen organizations hold onto payments until they can ‘figure out’ how to treat them for accounting purposes; sometimes days if not weeks. Somehow organizations don’t realize that securing the payments and recording the receipt of funds are two very separate functions. The banking of negotiable instruments is a treasury function and is of paramount importance. The second most important activity is properly recording the receipt of funds. It is in the recording of these payments that organizations have conjured up a huge amount of complexity.

The best clarifying agent for the recording of cash receipts comes directly from accounting principles, known as GAAP. The one differentiating factor in dealing with incoming cash receipts is to determined if: a) revenue is earned and therefore payment due, b) or revenue is not earned and payment is not due. If the customer has remitted payment for goods or services rendered, revenue was earned and therefore the payment is due. Therefore recording of the receipt of funds becomes very simple; relieve the customer’s outstanding debt in the organization’s ledger. Even something this simple causes organizations anxiety. A moment spent examining the customer’s payment should provide insight to what bill they are paying. If this information is not readily apparent, it is the responsibility of accounting team to make contact with the customer to get the correct information. This simple customer exercise ensures that both the client’s records and the organization’s records properly reflect the transaction.

The receipt of payment when revenue is not earned and payment is not due, is experienced by many organizations in many different markets. In this situation, the customer is advancing payment for a specific purpose, often to be in compliance with the terms of engagement. Depending on the type of organization these funds could bring with them a whole host of special rules. In manufacturing or construction, these funds could be a deposit on an upcoming invoice. Therefore in the financial systems for these types of organizations there would be a method to reflect the receipt of these funds as a credit on the customer’s account.

In more service type establishments such as the practice of law, land title agencies, or real estate organizations there are specific rules as to the treatment of non-earned customer receipts. Each of these types of organizations must follow protocols as determined by their governing body. Often these rules differ by local jurisdictions and definitely by country. In my career I have had the greatest exposure to the cash receipts rules of legal practices. From my experience, commonwealth countries have the strictest rules by which client monies must be managed. In these countries essentially all non-earned cash receipts must be segregated from the firm’s operating funds accounting and a sub-ledger for each client must be maintained; in exceptional detail.

Law firms’ cash receipts can be sifted down to three main three types: a) payment for outstanding bills, b) payment for disbursement on a transaction, and c) payment as a retainer to an engagement. Very simply, the payments received are either in consideration of a bill or are not. Funds received as part of transaction type b or c create a tremendous amount of frustrations for most US firms simply because they are not related to a bill.

The treatment of unearned payments (b & c) is really very simple. The American Bar Association (ABA) has dedicated an entire section of their website to addressing these types of payments http://www.abanet.org/legalservices/iolta/. The site also provides links to local state bar association statutes and even foreign statues for dealing with these types of transactions. In addition to the ABA’s treatment there is an excellent book that adds clarity to managing law firm cash receipts: Accounting in a Law Office by Kenneth Laundy. In his book, Laundy demystifies all of the theories between earned and not earned cash receipts and their related treatment to remain in compliance with statutes. Firms must understand that unearned funds are NOT the property of the firm. Therefore they must be segregated from the firm’s operating funds and managed through the firm’s billing system sub-ledgers, by client. With that said a retainer is not earned revenue until billable hours or disbursements are added to the client’s ledger and a bill is produced. Equally, just as receipts as part of a settlement to litigation are NOT the property of the firm and therefore must NOT be comingled with the firm’s funds.

Cash receipts are the most fundamental part of any business. Their management should be as easy as Pacioli documented in 1494, they shouldn’t get lost in the abyss of complexities. There are governing bodies abound that provide direction for record keeping. So, simply deposit the instrument into a bank, properly record the transaction in the financial ledgers and… move on!

Time to Ride

2008-07-30T18:35:00.003-07:00

Over the last several weeks all of the pieces to an effective credit policy were formulated. By now, the astute person would have this framework awaiting approval. Policies are essentially useless unless they are put into action to initiate change. The beginning of change comes with the collection policy and related efforts.

The collection policy essentially outlines the systematic steps that must be applied to manage the accounts receivable. Recall that the credit policy established the guidelines on which the organization will manage their client relationships. The collection policy starts the moment accounts receivable is generated in the relationship. If you are following this process closely, the question you should have is, “How is inventory (work in progress) managed?” The management of inventory is defined in the assessment of client risk, as it is the sum of inventory and accounts receivable that designates the investment in the client relationship.

After years of research into the reasons for delinquent accounts receivable, the causes can be reduced to: relationship, billing and/or economic. To the credit/collections professional, these issues can all be resolved. The easiest issue to resolve is that of billing. A simple flow audit through the organization will unearth some of the issues surrounding billing. For a bill to be accepted, it must conform to the terms of the engagement. i.e. meet the terms of the Purchase Order, or engagement letter. The bill must clearly outline what goods and services are being billed for, with identification of the timeframe the bill covers. Most importantly the bill must identify a specific recipient, date, when payment is due and any supporting documentation. One of the faux pas with professional services firms is the use of the caption ‘payable upon receipt’. Turning to Webster for clarification, payable can be defined as, “capable of being or liable to be paid’. Sounds a little illusive, how about “payment due upon receipt”, which removes any ambiguity!

Delinquent receivables are the result of client related economic issues, and this is a tremendous opportunity for the organization to establish client good will as well as solidify a long term relationship. Economic misfortunes may or may not be the result of client actions. It is the astute firm that can use the situation to complete or continue the engagement while ensuring payment is forthcoming. This is where the savvy collection sense of the credit department can leap in to action. In so doing, provide payment options for the client so as to maintain the relationship.

The most difficult issue surrounding delinquent receivables occurs when there is a relationship breakdown. When this occurs, the client has essentially professed their position with their check book by silently stating, “I am not paying you!” At this point, firms have options. They could simply walk away from the receivable, otherwise known as a write off. The firm could turn the account to an outside firm that may litigate and possibly recover some of the amounts. This option brings a significantly reduced payment and the possibility for counter claims. Therefore, the firm must be sure that they did everything according to the original engagement. Can you see why it is so important to get the relationship off the ground correctly? The last option is for the client representative to go back to the client and attempt to rebuild the relationship. Rebuilding the relationship isn’t negotiating a settlement, it is accepting that a relationship has two sides and it took two to break up the relationship.

What ever the cause of the delinquent receivable, it is the task of the credit department to flush it out and get the cash flowing. There has been much written in this area, sadly much of it unprofessional. The best piece of advice in this area is to become familiar with the credit/collections laws in your jurisdiction. In the United States credit/collections falls under the, Fair Debt Collection Practices Act. Keep in mind that there are or could be laws for local jurisdictions based on your type of business. A good layperson’s resource written for the US market is The Credit & Collection Manual (CCM), put out by the Credit Research Foundation. This text packs a tremendous amount of resource information in a small handy text. It is a definite must have for any credit department desk.

Regardless of the cause of the delinquent receivable, the first action is to flush out its root cause. The best way to do this is by way of monthly statements of account. For many organizations the sending of monthly statements is deemed to be a waste of time and postage. However, the recipient of a statement can quickly identify what they owe and discrepancies in the billing; whether they choose to act on it or not. For a publically traded company this information is paramount, as a reconciliation of payables is one of the areas investigated during the annual audit. Sending statements is even more important for law firms’ clients. For clients who require an annual audit, information as to the involvement in a lawsuit is paramount, and a statement from the law firm makes it clear to the auditors.

In addition to the monthly statement, the credit department must make contact with the client. According to the CCM, computer generated form letters provide substantial saving in time and expense while being marginally effective. Keep in mind, in light of an economic or relationship distress a ‘nasty-gram’ letter won’t open a dialogue to getting the issue resolved and receiving payment. The text goes on to say that individually prepared collections letters only give the recipient evidence that someone is monitoring the account, but the results are somewhat the same. Collections letters will only generate payment when the recipient simply hasn’t received the billing or truly wants to pay the account but has simply fallen behind. This means of communication isn’t really aimed at problem resolution, it is simply and audit trail toward litigation.

The best approach to flushing out an issue and begin problem resolution is direct telephone contact. This approach is heavily encapsulated in laws; therefore it is only for those well versed in collections laws. Ed Poll in his book, Collecting Your Fee, refers to this time as dial and smile. When done correctly credit professionals will flush out the root cause of the nonpayment, relationship or economic, and thereby begin to formulate a resolution.

There is no mystery to getting your bills paid; it all comes down to having a plan. The plan begins with understanding your affinity for risk, then building a policy for managing the risk. From there, gauge every client relationship against your risk profile while making sure both sides knows what is expected in the relationship. Do the best job you can to fulfill your obligations and have a procedure for managing those few accounts that become delinquent.

To most organizations, the concept of change seems like hiking Mt. Everest. Firms can continue along doing what they have been doing and expecting the same results – that is insanity. Change takes courage, vision and determination. The fork in the road must not be an obstacle, but the chance for a new beginning – choose a direction and let’s ride!

“Insanity: doing the same thing over and over again and expecting different results.” Albert Einstein

“When you get to a fork in the road, take it!” Yogi Berra

"When you look for excuses not to change...they will be found. It takes courage, determination and fortitude to get off the merry go round." S A Miller

Want GiGo free Accounts Receivable?

2008-07-22T19:51:00.003-07:00

The last few weeks were spent building the foundation of a credit policy. If one were meticulous and honest in working through the steps, you would be close to a policy that now reflects the organization’s affinity for risk and one that would form the basis of a collections policy. Although the organization owns the client receivable and work in progress, certain individuals must accept responsibility to ensure the inventory is maintained according to policy. This final contribution on building a credit policy focuses the client and the inventory custodian; the credit department.

Contrary to what may be said, people show their likes and dislikes by how they spend their money. Essentially, they buy from people they like. If the bond doesn’t exist, a sale, no matter the price, isn’t forthcoming. Ed Poll in, Collecting Your Fee, sums it up very well with: You can judge the quality of a relationship by the way it ends…a client who genuinely respects you and the work you did will pay your bill in a timely manner. For me, that statement says it all, barring extenuating circumstances on the client side. There are two ways to achieve and maintain that respect, in order to facilitate payment by establishing the foundation for a good relationship from the very beginning, the first meeting. Then once the relationship is established, open regular communication is essential for maintaining trust.

It is during the very first meeting that the professional must establish the foundation for the relationship. Here is where information is exchanged, including costs, fees, terms of payments, and terms of engagement which must all be discussed and documented. It is also the time in which the professional must seek information about the prospect. PROSPECT. The person on the other side of the desk is a Prospect until such time as they meet the organization’s criteria of acceptance into “client-hood”. It is for this reason that he professional must obtain a completed credit application during the meeting, as this is the only means by which the organization can assess where the Prospect fits regarding the firm’s affinity for risk. At the end of the meeting, the professional should have explained the nature of the engagement and provide all discussed to the Prospect, either as an engagement letter or proposal; which must be signed and returned. The professional should have a fully completed and signed credit report.

The credit report form provides core insight into the Prospect’s business; their inherent risk. At this point, the firm must quantify the risk and compare it to their affinity for risk. The process by which this is done was discussed earlier in Crystallizing Goals. The part of the organization that is responsible for making this determination is – the credit department. This responsibility must be clearly documented in the credit policy. Depending on the size and complexity of the organization this section may involve a varying degree of detail. By way of example, here are a couple of options that will seed thought:

The credit department establishes credit limits for all prospects and active clients. These limits are based on D&B or TRW ratings, credit references, financial statements, security, or other information obtained directly from the applicants. The credit department must review large client investments on a periodic basis. All limits are subject to revision, based on changing levels of credit worthiness. Only executive management has the authority to override limits established by the credit department. All overrides must be fully documented and the requesting professional is fully responsible for their collection.

Or

Professionals will obtain a completed and signed firm designated credit application from each prospect. This will contain bank reference and three trade references. Through due process, the credit department will determine the prospect’s ability to pay and the level of risk they pose should they become clients. Should the prospect be accepted as a client, a credit limit will be assigned through the use of scoring tools and techniques. Where the professional determines the credit limit is insufficient for the engagement, the prospect must provide 2 years of financial statements or must maintain, on deposit, the equivalent of 1/3 of the expected cost of the engagement. Only executive management can override this policy.

Having a clear delineation of responsibility for the credit department, the professional and the executive officer ensures that the credit policy is adhered to. With the sign off on the entire policy, all people in the organization will act to ensure a consistent approach for dealing with clients. Your AR is a direct reflection of your organization, if it is full of delinquent garbage AR, you put it there through your practices. Only you can stop the build up of garbage AR – build a garbage-free client portfolio!

In closing,

"When you look for excuses not to change...they will be found. It takes courage, determination and fortitude to get off the merry go round"

Organizations are not the victims of their delinquent clients. You and your organization cause your collections problems by not telling your clients from the beginning what you expect from them. Ed Poll

Who’s on First?

2008-07-14T18:42:00.002-07:00

To continue with the series of building a credit policy, identifying who is on first is the initial step in beginning to gel the entire policy into a workable procedure. Previously, we outlined the mission of credit within the organization, and then we examined risk and the organization’s affinity to risk. This exercise has set the foundation for what is to follow, integrating the foundation into the structure.

Identifying and empowering the group who will transform the written policy to a way of life within the organization is the most important part of the credit policy. How the responsibility and authority is divided will either produce a highly effective credit department or a serious cost burden on the organization. Senior management, at this point, must clearly define the credit authority and responsibility of the chosen individual or group. Once established, management must uphold the decision of the credit group throughout the entire management infrastructure. If the credit responsibility and authority is not held steadfast by senior management, the credit function will be riddled with squabbling, poor morale, and horrid results.

Ideally, the credit function should report to the most senior of management; treasurer and / or finance committee. At this level of authority, the decision makers have already established the organization’s affinity for risk. Therefore, they must be the body that determines if the organization should accept an engagement for a client which poses a higher than acceptable amount of credit risk. Following are examples of how the credit responsibility section of the credit policy can be worded.

The credit department reports to the office of the treasurer (managing partner); it includes all functions relating to the extension of credit, collections and cash application. The credit manager establishes all credit limits, has final authority to hold or release all engagements when credit problems exist, decides when credit privileges should be revoked and decides when formal credit activity should be initiated.

Recognizing that certain engagements can be beneficial to the organization, the policy could carve out sections that cap credit limits to the credit department and permit management some slack in accepting the engagement. An example for which as follows:

The credit department reports to the office of the treasurer (managing partner). The credit manager may establish credit limits up to $ XX,XXX, and the manager may delegate up to $X,XXX of authority to other credit personnel. Higher limits MUST be approved by the office of the treasurer (managing partner). Those parties requesting higher credit limits than established by the credit department must submit a comprehensive business model as the amount of credit requested, terms of payment and means by which the credit risk is mitigated to firm established limits. In the event an engagement is being withheld because of credit problems, all parties including the office of the treasurer (managing partner), must meet to gain consensus on a solution.

The clarity and authority by which this section of the policy is written will determine the effectiveness of the credit function in the organization. Organizations need to realize that they needn’t accept every engagement. It is interesting to witness the number of organizations that accept engagements from clients who have a higher probability of default than making payment terms. Organizations fail to internalize that doing work for which no payment will be received is known as ‘charity’. As mentioned previously and will be again, the suggestion isn’t to shun these engagements, but rather build a payment arrangement, through retainers, COD etcetera that will allow the organization to accept the engagement through the mitigation of risk to an acceptable level.

There are many tools available to the credit manager and the organization that will allow them to mitigate credit risk while accepting less than sterling engagements. However, the first step is to relinquish any ambiguity of credit responsibility and know definitively ‘who’ is on first!

Crystallizing Goals

2008-07-01T11:00:00.009-07:00

Continuing on the theme of building a credit policy, once the firm has a feel of their affinity for risk the next step is to understand the client dynamic. As was presented in the last contribution, clients bring to the firm a certain level of inherent risk. For the most part, the amount of inherent risk is unknown to the firm. However, there are tools in the market that will give insight into the nature of the client. Although your client profile may appear like:

In reality, each of the above bands hides carries with it the probability of default as given by:

With the firm’s understanding of its affinity to market and inherent risk, the goals of the credit policy can be established. Miller, in How to Write a Credit Policy, contends that one can establish true numerical goals or more fluid goals, but I believe the true numeric goals bind the organization to a dedicated practice of receivables management.

A true numeric type goal is as follows:

Our goals are to limit bad debts to X% of billings, Days Sales Outstanding to Y days, and receivables agings to no more than Z% beyond 60 days.

Alternatively, the more fluid type goal is as follows:

The credit department strives to meet goals, established by senior management, that relate to bad debts, receivable agings and Days Sales Outstanding.

Although goals change, having a clear numerical definition for the credit department and the firm will establish a clear commitment to the credit team and the entire firm. Once this goal is established, the firm should undertake to build a credit application. The credit application is the first means by which the firm obtains financial insight into the client – the inherent risk. There are a plethora of examples on how to build a credit application. Ed Poll, in Collecting Your Fee, provides a very simplified yet very functional client intake/credit application form. The information to be captured must include, at minimum: Full legal name, address, telephone/fax, type of company, tax id, owner/manager information, SIC number, trade references, Bank References and signature of the prospect/client to accept financial responsibility of invoices. For professional services organizations, this information should be included in the engagement letter. This letter must fully document the type of relationship, firm policies on billings and when payment is due, firm contacts, who will be working on the file, and billable rates.

With this information in hand and concurrent with a conflicts check, the firm should undertake a credit check of the prospect. The credit check will determine if the prospect’s ability to pay is in alignment with the firm’s goals and ultimately the firm’s affinity for risk. The first step in gaining insight into the prospect is by way of a credit report. The credit report is a very powerful tool that will give the firm insight into the prospect. The three key credit reporting agencies in the North American market are: Dun & Bradstreet (D&B®), Experian, and Equifax. Although these companies use different algorithms to arrive at their metrics, the metrics you receive are very close amongst the three companies. Using the Dun & Bradstreet system, the following information will be included.

Paydex Score

The Paydex® score is a unique, dollar-weighted indicator that provides an instant overview of how a prospect has paid bills in the past, and how they are likely to pay bills in the future. This is a very important score when it comes to being approved for credit terms or financing. The Paydex® is a 1-100 dollar weighted numerical score of payment performance, calculated using up to 875 payment experiences from trade references reporting into D&B®. Following is the scale and legend.

Therefore if the prospect is slow 90 days and the firm’s policy is 60 days, the first red flag should go up. It doesn’t mean that the firm should not take the prospect on as a client, but rather alter the terms of engagement understanding the client’s past behavior. This may include a larger retainer than normal or more frequent billing with the stipulation that all invoices are due immediately.

In addition to the Paydex information, all credit reporting agencies will provide information on the prospect's collections history, financial statements and if it has ever suffered any liens or judgments. This information will provide the firm a good understanding of how they should anticipate the client behaving when faced with the firm’s billings. One of the pieces of information that most corporate environments find most helpful is the overall rating. This information essentially ties together all of the information provided by the prospect into an overall rating. The overall D&B rating is as follows:

If Dun & Bradstreet has current financials on the prospect, a rating anywhere from 5A to HH will be provided. The 5A to HH ratings reflect the prospect’s size based on Net Worth or equity. If the prospect has supplied financials that show it has a negative Net Worth then the company will not be rated, but will have a – where a rating should be. The second half of Dun & Bradstreet’s rating on the prospect is D&B®’s Composite Credit Appraisal. This is a number from 1 to 4 and follows the 5A to HH rating. The Composite Credit Appraisal reflects D&B®’s overall assessment of the prospect’s creditworthiness. This assessment is based on the financial statements supplied (using financial ratios) in the report and payment history. A 1 is the highest credit assessment you can receive and a 4 is the lowest.

With the crystallizing of the terms of engagement, a result of the firm’s affinity for risk, and some due diligence, firms can essentially mitigate their collection woes and will have the cash flow they expect. With simple tools and structure, firms can mange their cash flows, instead of the clients managing it for them!

Cost of Goals

2008-06-26T13:40:00.003-07:00

Continuing from last week’s contribution on building a credit policy, we continue further down the road of building the core foundation. Once the organization has established the mission of the credit department, the next step is to get a grasp on the goals of the credit department. The goals will define the end result of what is to be achieved. For many, this is seen as probably the easiest part of putting together the policy reflecting the belief, “I want to collect this amount of billings and it must happen.” However, this mindset is seriously flawed. This is a product of an isolationist mentality, basically I can want anything, but doesn’t mean I will get it. Sadly many firms begin the year with the ‘want’ and get something seriously different.

The gap established between ‘want’ and ‘received’ is a product of external forces. The components of collecting receivables are a product of internal and external forces of the organization. They are a product of everything from culture to global economics. The first step in bridging the gap is to “know thyself,” and this is much more complex than it appears. For “thyself “is a compilation of organizational culture, as well as local, regional, national and international economics and most importantly the organization’s tolerance for risk.

One’s goal for the credit policy is to have a strong understanding of the organization’s affinity for risk; that chance of loss. The risk each firm faces can be broken down into inherent and market risk. Every client in the firm’s portfolio brings inherent risk and market risk. Market risk is very easily understood; simply look at the US credit crisis (now moving through Europe). It is the probability of default as a result of the impact of the economy. However, inherent risk drives deeper; it is the cultural make up the client, most specifically the management and culture of the client. Take for instance the airline industry, all air carriers are faced with ‘market risk’. However, how are some able to maintain profitability while others can’t – culture. Those profitable airlines have a management team and culture that mitigates their inherent risk to the market place, in light of the market condition. Inherent risk is the risk that each client brings to the market by virtue of their management culture. Thus the firm’s responsibility now rests on how much ‘risk’ (market and inherent) it is willing to bear. Essentially, how much is the firm willing to lose in taking on the engagement that is the ultimate question?

The firm’s first step is to establish how much risk it can tolerate. In simpler terms, how much is it willing to write off for the sake of getting the business? By way of a couple of examples I would like to share two firms I know personally.

The risk seeking firm is located in Los Angeles and their business is based almost exclusively on defending uninsured doctors in medical malpractice suits. According to the CFO, this is a highly lucrative business line. However, the risk of default is HIGH.

Conversely, a Washington, DC firm focuses exclusively on public relations law for the Federal Government. This practice is considerably not as lucrative; however the risk of default is LOW.

Your organizational affinity for risk is essentially a trade off of probability of loss and probability of gain. The following chart pays respect to the gains and costs related to one’s affinity for risk.

There have been countless books written on understanding your client risk portfolio. My favorite is Financial Risk Analysis, by: Jerry F. Dean, CCE. The text is definitely not for the mathematically faint of heart. Dean expounds on many complex models and their relevancy to specific industries and economic climates. However, for sake of simplicity I will present a simple model using some of the variables found in the Capital Asset Pricing Model (CAPM).

The CAPM attempts to valuate the market risk of an investment. The riskiness of the investment as it relates to the market is designated ß (beta). A ß=1 establishes standard market risk. A ß>1 relates to more risky and ß<1 equates to less risky. This model, as applied to a hypothetical firm demonstrates risk tolerance as it relates to overall market risk.

As there are many economic indicators, I have chosen Gross Domestic Product (GDP) as my standard. I would caution the use of inflation as an indicator because of the current economic climate. Let’s assume that annual GDP is 3.9%. During the firm’s budgetary process it is determined that the firm seeks a 7.5% (excluding write-off or write-down) increase in profits over the previous year. Therefore, the firm’s ß becomes 1.93; the percentage return expected by the firm over GDP. To bring this into reality, if the firm’s increased profits are $375,000 over the prior year and the risk model is ß =1.93, then the firm should feel comfortable with a year end return between -$348,750 (loss) and $375,000 (profit).

Once the firm comes to the point of being comfortable with their potential loss and the range of profit to loss, then the greatest loss amount ($348,750) or X% of billings then becomes the firm’s risk tolerance. We as a firm will lose no more than X% in the coming year. From there, the X% must be allocated over all practice groups in light of billings AND economic climate (keep in mind the credit crunch). At that point, each practice group will have their thresholds set; upper 7.5% increase in billings and not write off more than X%. The final step is to adjust the X% to a per client level to adjust for the inherent risk.

It is at this point, that the goals of the firm can be clearly documented, as the firm should be well aware of their potential costs in achieving their goal.

Got Commitment?

2008-06-18T09:46:00.003-07:00

The effectiveness in managing an organization rests on the commitment of those in management to always operate in the best interest of the organization, sometimes at the detriment of their own self interest. Within the last few months there as been a considerable amount written about lack of commitment in today’s professional services organization. I, myself, have presented a contribution as to the secrets of growing a professional services practice through committed players. Just yesterday, the Wall Street Journal published an article how a lower Manhattan firm has partners scampering to other firms because 2008 profits will be lower than expected.

Today’s professional practice has partners of various commitment levels to the overall profitability of the firm. Those on the lower end of the spectrum are the ‘bad apples’ to the firm and will pull the firm profitability down. Remember that doom and gloom disseminates much faster than excitement and fanfare. For those not committed to their firm, it is time to go searching for that pot of gold at the end of the rainbow. Firm profitability doesn’t start with the partner next door or the department head, it starts with you! You Ms. Partner must stop being involved in collections and become committed to the firm’s profitability through a strong positive cash flow.

As presented in my last contribution, a collections effort is essentially the remnants after the war has been fought or cleaning after the parade has past. Waiting until the work has been completed and billed will essentially close the doors to strong cash flow. Recall, that the collections process must be based on a policy. The collections policy must be a mirror image of the credit policy. Only then does the firm have a strong footing on which to reap a strong positive cash flow. Therefore the first step for the firm is building a credit policy.

The word ‘policy’ conjures up negative connotations of heavy bureaucracy and inflexibility. However, a well constructed policy provides tremendous value to the firm. The top four contributions a credit policy brings to the firm are: 1. It focuses everyone in the firm that client portfolio management is important and serious, 2. It ensures consistency among practice groups, 3. It establishes a consistent message sent to clients and prospects, 4. It reinforces the value of credit and collections to the firm. In building the credit policy, there are two main issues to be observed, the understanding of the firm’s culture with respect to risk and documenting how the firm will manage this risk as part of their client portfolio. The one main reference guide I would suggest to anyone seeking to build a credit policy is: How to Write a Credit Policy, by Cliff Miller. The publication is put out by the Credit Research Foundation. It is extremely well written and walks the reader through the process of creating a credit policy.

The first step in building the credit policy is to understand the credit department’s mission to the organization. This will establish where they fit in the hierarchy and their importance in the eyes of management and all partners. Keep in mind that the credit department and collections department, ideally, should be separate. The credit department’s mandate should be based on the issuance of credit based on the firm’s risk tolerance; this requires a very analytical skill set. While the collections function is more an assisting and encouraging role that works towards getting bills paid; people centric. Both of these functions are encompassed by the firm’s tolerance for risk. Over the coming contributions, the concept of risk management of the client portfolio will be interspersed with the building of the credit policy so as to provide a uniform progression toward a completed policy.

The first question the firm must answer is: What is the mission of the credit department? How this is answered will ultimately determine the firm’s cash flow. I feel the credit department must operate under the direction of the most senior of management, as this department has a tremendous impact on the firm’s cash flow. The mission statement may turn out to be the precursor the identification of the firm’s tolerance for risk. Keep in mind, that the mission statement may possibly be revised by the end of the credit policy. For once set, the credit policy will be the foundation of future cash flows. Here are some examples to seed thought:

The firm in Expansionary Growth Mode (risk seeking)

“It is our policy to provide credit to all potential applicants, regardless of payment experience. The credit department will attempt to screen out clients who obviously will become bad debts. We will attempt to build relationships with all our clients and effect collections without jeopardizing the client relationship.”

The firm who understands their affinity for risk

“The credit department is responsible for maintaining a high level of quality in the client portfolio in direct alignment with the firm’s risk profile. We will act to provide flexible mechanisms to protect the firm’s substantial investment in the client portfolio, while not negatively affecting client engagements.”

The conservative firm who has a strong market position

“The credit department is responsible for managing the firm’s investment in the client portfolio within the risk levels determined by executive management. It is our responsibility to assume no unwarranted risk. We will advise executive management of clients who become risk situations and will make efforts to limit the firm’s credit exposure in these areas.”

Once the firm has established the mission of the credit department, the foundation will be set. From there the firm will establish its commitment toward firm growth, longevity and cash flow. Firms must start with knowing what they want for the firm now and into the future.

Know thyself
Socrates

The Cash Flow Vacuum

2008-06-05T12:46:00.004-07:00

In the last four weeks there has been an explosion of articles written on practice management issues in today’s law practice. Over this time, they have become increasingly bolder and more hostile. Although I believe it is time to make a change regarding the management of today’s legal practice, initiating change is better accepted when it is a product of educating rather than bayoneting the wounded.

All business entities whether commercial or professional services are interested in managing their cash flow. The management of cash flow, a scare resource, is the entire basis of economic modeling. Organizations, as a whole face both an inward and outward cash flow. No one would argue it is the sum of these cash flows that is of greatest interest to an organization. How organizations manage the incoming and outgoing cash flows determines their long term economic viability. Although the management of these processes is entombed with management culture and market dynamics, they can be refined.

The management of outgoing cash flow is easily for most law firms. For the most part, the organization’s vendors communicate how and when they want to get paid. For the law firm, this dynamic goes unquestioned. In all my years of working with and within law firms, 99% of the time vendor bills get paid on time. Whether it is the preservation of a sterling credit rating or the demonstration of financial worthiness, payments are made based on terms.

In today’s legal practice, however, incoming cash is not as well managed. Anyone working in today’s law firm on the collections side would easily attest that cash receipts are dictated by the client’s attitude; where the firm’s bill fits into the client’s priority structure. The important thing for today’s professional services organization is to make sure their bills are at the top of the client’s payment priority structure!

Today’s professional firms are simply operating in a vacuum in how they manage their profitability. In today’s Law.com article Should Small and Midsize Firms Create Strategic Plans? (http://www.law.com/jsp/law/sfb/lawArticleSFB.jsp?id=1202421933007), consultant John Remsen Jr. concludes “Firms often steer clear of crafting the plans because the process is "hard" work and often raises unpleasant issues”. To that I would add, for the most part attorney’s simply lack the acumen to look at the environment and the firm as an economic ecosystem.

Although most firms really don’t undertake planning, other than isolated rudimentary budgeting, there are those who do plan but very few undertake building a strategic vision. On the collections side, most firms that ‘plan’ how much money they will collect each year. However, what I have found to be the most amazing part of the ‘cash receipts plan’ is that it is made in isolation. It is built in complete isolation of the economy, the inherent risk of their client portfolio, the current inventories, and the culture of the firm. These firms rest their entire existence on, essentially a wish rather than a probable reality. This lack of planning is supported by Remsen with “… attorneys often are more focused on short-term issues rather than the longer-term outlook. They also tend to be autonomous in their thinking, and they don't like risks or change”.

Today’s firm have a multitude of interrelated issues, none of which can be resolved overnight. This is also true for commercial entites;as they too have issues. However, commercial entities tend to have more planning and strategic vision as part of their operations diet. One of the first places firms should start, I feel, is achieving a better management of incoming cash flows. Firm’s have to realize that delinquent client payment isn’t a product of a poor collections policy or staffing. It is almost entirely based on the management of risk and client intake. The management of risk must be covered in the firm’s credit policy. In my two decades of working within and around law firms, I have yet to encounter a firm that has true credit policy. Credit and collections policies are meant to work hand-in-hand to firmly ground the organizations relationship with the client; to establish shared expectations.

It is only from tightly coupling between the credit policy and collections policy that firms can establish the foundation on which to accomplish more than budgeting. Firms can begin to strategize about their future, enhance their competitive advantage to become the leader of their peer group.

Whether you (firms) like it, believe it or not – change is happening in the legal market space. Sadly a few firms are initiating change while the market is forcing change on most. Clients are becoming more disenchanted with the practices of today’s firm and the results are being manifested in depressed cash inflows. Jason Mendelson, a VC and lawyer, had this to say to Law.com in the article VC Slams Attorneys on Salaries, Overlawyering, (http://www.law.com/jsp/article.jsp?id=1202421919452) “I've been working on a thesis for quite some time that the entire business model of law firms is going to have to change, or it's going to get uglier."

The issue of having a solid credit and collections policy is, I feel, jugular to the overall financial management of the organization. In order to help firms to act, now, rather than react, later, the next several postings will focus on establishing credit and collections policies in today’s economy.

Practicing Business or Business Practice?

2008-05-30T08:54:00.001-07:00

Over the last few weeks I have been fixated on the concept of change within today’s professional services. As an outsider to the law firm environment, yet with tremendous contact within firms, I sit in awe of the next call or email talking about the firm’s trials and tribulations. It is amazing how an outsider can see, in real-time, what is happening yet those in the very midst are simply unaware of the metamorphosis that is occurring within their firms.

In the past week I had the opportunity to have a round table discussion with corporate CFO’s on the concept of financial management and budgeting. I was amazed that so few corporations build budgets based on current economic trends and are revising their position each quarter. Often these organizations see the budget as the Holy Grail, and any negative divergence creates frustrations and animosity among the ranks. I also hear of this type of behavior in today’s legal practices. Firms create their budgets for the upcoming year in a vacuum, and then etch them in stone. When the firm doesn’t live up to expectations, frustrations and dissension permeate the ranks.

Since my last posting there has been a lot of news articles hitting the press about what is happening with law firms. For the most part, law firms are facing the same economic pressures every other organization is facing. With these pressures some organizations soar while others sink. The reason for which, each firm reacts differently to these economic stimuli. Their response all dependent on when the ‘realize’ the stimulus, their management, their culture and a plethora of other factors.

On May 28, The Wall Street Journal published an article about a Midwest US firm making the decision to trim their ranks by 124 people. (http://blogs.wsj.com/law/2008/05/28/sonnenschein-lays-off-37-lawyers-plus-87-others/). Since the release of the article several firms throughout the US had meetings to tell their staff that their firm isn’t immune to such cutbacks. Since the melt down of the US real estate market and the subsequent credit fiasco, US law firm trimmings are not uncommon. Each month, some firm steps up to the table and realize trimming ranks is their only solution. This behavior is a direct response to a stimulus in the environment. One could argue that astute leadership would have seen the stimulus coming. I would argue, whether you see it coming or not the reaction may have been the same.

However, one day later an article in legalWeek.com identified a firm whose revenue rose 24% from last year. http://www.legalweek.com/Articles/1130817/Bird++Bird+flies+high+with+24+revenue+rise.html How could that be, here are two firms facing the same economic environment and their response is very different. The answer is definitely not simple and would require a thorough understanding of their practices and their management. On a very simplistic note, change happens and firms have to react to change. How they react is a product of their management and their culture. How they react to stimuli will determine their place on the competitive continuum.

I personally feel that those who change their position on the continuum rest in how they develop a response to a stimulus. A much stayed organization will seek to apply ‘old’ solutions to new problems. As such they will slowly get left behind. It is the progressive firm that steps outside of the status quo, challenging the norm that will leap ahead of others. In a recent webinar by Kevin O’Keefe, (www.lexblog.com), on attorney blogging, O’Keefe made a subtle point of how different firms assimilate attorney blogging. For some firms, it is the taboo because of the social pressures of the other attorneys and the Bar hasn’t made any statement on blogging. While for other firms reap huge benefits. Both firms faced with the opportunity; one stayed and the other innovative.

A great example of a firm not choosing the status quo response was published by LegalWeek.com on May 22. In not knowing the background, one can only speculate the firm had a decline in their litigation practice. When faced with this stimulus, they came up with a ‘cost-free’ litigation program for their clients; which they named CONTROL. http://www.legalweek.com/Articles/1128480/Article.html

Change happens all the time, what happens to your organization rests solely on how you respond to it. You can seek innovative ways or hammer in the ‘tried and true’, the choice is completely yours. Keep in mind, old solutions work for old problems. In difficult times, innovation is the fuel for your organization to gain the competitive advantage. Choosing old solutions is simply business practice. Today, law firms need to be practicing business– treating the practice of law – as a business.

Change Happens, Initiate it or React to it!

2008-05-20T10:48:00.003-07:00

In 2007, I realized that after spending almost two decades in professional services it was time to speak what those in firms all around the world were thinking. Looking back on my original writings on this form and in publications, although the topics changed; the theme didn’t. The core theme which I have been professing has always been the same – it’s time for change. Break free of the bondage of your ancestry and lead the pack!

In the academic world there are volumes upon volumes of articles that address organizational change. Everything from being a change master to managing the process of change, some of the great business writers lately have been very bold in putting forth their ideas. With all of this going on, there is one thing for sure – change happens. Several years ago a great little book was written Who Moved my Cheese by Dr. Spencer Johnson M.D. The book took a light-hearted approach in explaining the human behavior of failure to change, as demonstrated through mice in a maze. This is definitely a must read for anyone who feels they are no longer growing or changing.

I have found through the years that society is built up of institutions that assume positions along the ‘habit/status quo’ continuum. There are those institutions that constantly push the status quo, with their developing of the latest and greatest. While there are others who are more stayed in their behavior. Those who push the status quo, evolve more, learn more, earn more, and do more for society. Conversely, those who are stayed they experience decreasing membership in their institutions, soon they wither and die. Several years ago a colleague shared with me his experience with a financial institution that found its roots in the 17th century. When he joined the organization their business processes probably dated back to their origins. During his tenure, the board of directors interviewed for a new president. Throughout the interview, the candidate responded to various questions with the same line, ‘I will change things’. Finally the interviewer asked what will you change? To whom he replied, things. The point to be made here, was that a change was needed, any change. The organization had become stagnant over its life and this visionary saw that a single change will be the precipitate to many changes. Today that organization has now in 120 countries around the globe and in many of those countries, has become the leader in the financial markets.

My contribution of last week precipitated several comments. The one that I feel is most relevant to share is from Ed Poll. I have known Ed for a few years and I have always been inspired by his writings. I feel he is the voice of change in the legal management community. Ed’s closing remarks on last week’s contribution was: “Nevertheless, there is much about the operation of law firms that needs to be examined more closely and then changed if the "institution," called a law firm is to survive and thrive.” Ed’s statement comes at a time, I feel, when today’s law firms are at the cusp of a business management change. No longer can firms continue along the antiquated behavior of doing the same things month after month, year after year, decade after decade and not only expecting the same results… but better results!

The cascading changes that law firms will face will probably come by way of one or two very progressive forward thinking organizations. They will be the fuel that fires the change of the legal landscape. In reviewing the literature of today, I feel this impetus to this type of overwhelming change will come from a smaller firm outside of North America. The seed to change will be from a firm not imbued in processes of their history; they will push the status quo and thereby make change. In the last two years, we have seen considerable change in law firms outside of North America. One such firm, an Australian law firm went public. Currently in the Asia Pacific regions, companies are no longer accepting the status quo for legal services and legal fees. Corporations are undertaking statistical and probability analyses to identify their return on investment in legal engagements. It is this type of analysis that will determine if they proceed or halt the engagement.

On May 7 LawFuel, a New Zealand publication, ran an article entitled Are Lawyers getting away with Blue Murder on fees? The author cites that there is a considerable increase in outside consultants who review the legal engagements and assist in getting the costs ‘seriously trimmed’. I feel these two incidents are very important to the future of law firm viability as we see it today. One firm, taking a proactive approach in adopting more business behavior through outsiders objectively examining their business management, while there is a growing malcontent in the market that will push law firms to change. One firm is taking a more proactive, non-status quo approach, while the others are being subjected to increasing pressure to change. Either way change is happening and the institution of the practice of law as we have come to know it; is ripe for change.

No matter what you choose to do, you will be affected by change. Metaphorically, you can lead the pack or get trampled by it. At this point, the choice is yours. However, when market change begins, and it will fast and pervasive, you will be in your defined spot and will have to suffer the consequences. Maybe it is time for firms to empower their business managers to critically examine the firm and make it part of the change and not let it fall victim to being a product of change.

A MAP got us in this mess, only a GPS will get us out!

2008-05-11T08:59:00.005-07:00

Over the last couple of days I had an interesting opportunity; I was asked to comment on a friend’s homework who is working on their MBA. For many this would not be considered an exciting opportunity. However, I saw it as such. Other than my personal research into my own ‘pet projects’, this was an opportunity for me to be academically challenged. After working through the assignment and speaking with other students in the class I realized that a decade has passed since the completion of my MBA. However, what really struck me was the immensity and diversity of business thought currently being presented in the academic world.

As I pondered the experience a statement that I had heard from a Nobel Prize winner a few years ago came to mind. The statement goes something like ‘…there have been more advancements in science, technology and insight in the last century than in all preceding time’. As I thought on this, I could name many of the greats of the last century, but I would be hard pressed to go back much further. The deduction I came away with; knowledge seeds knowledge and to that end, we will continue to see increasingly more ideas presented in our world.

With all of these new ideas it shouldn’t be amazing how the world continues to change so rapidly. These changes are the result of people assimilating new ideas and changing their world one tiny bit and as a whole the effect is commutative; hence more pronounced change. However this isn’t the case with everyone and every organization! There are a plethora of reasons why people simply do not assimilate new ideas. These could be self-imposed or a product of their ‘perception’ of the world; either way the gradation leaders and laggard continues.

A few of my recent readings have challenged me to make sense of why some organizations tend to be leaders and some laggards. I feel this gradient of success is a result of self-imposed limitations or narcissistic traits. Interestingly enough, in my career, I have visited organizations that continue to hold their place along the continuum of success, given the wealth of business knowledge at their fingertips they continue to run as they did a century or more ago.

In a recent article in The Lawyer, one of the London City firms had decided to increase rates by 11%, while other firms have upwardly adjusted their rates by 4%. While at the same time, more peripheral firms have refused to alter their rates while some have shed some associate staff, while on the other side of the globe, in Australia, a new industry is blossoming; that of legal advisory. Australian commercial clients are engaging advisors to determine a fair and reasonable cost for their legal work. The clients then present the findings to firms to see who will accept it for the specified rate. While several large US firms have trimmed staff and stabilized their rates. This radical divergence of behavior at a time of economic contraction is indicative of how people assimilate, the current thought and how others continue in their historical belief.

In my career and travels I have found that in the case of law firms, the non-US law firms are more amenable to change. Even though some continue in their pre-Cambrian ways, they still undertake change; often begrudgingly. In my 2007 contribution Taxation the best Collection Motivator, I addressed why countries who have a Value added Tax system and those governments who impose accrual accounting on professional services firms are much more focused on current asset (WIP and AR) management. In the US firms hide under the veil of cash basis accounting and a much more lenient taxation structure. It is the lack of external forces in the US firms that diminishes the urgency for betterment.

Throughout history professional services was the ‘class’ of the elitist. Those of professional designation could hang their shingle, acquire clients and get financing without any formal business constraints; other than those imposed by their professional association. It is within this self-perpetuating comfort zone that professional services continue, often oblivious to what is going on around them. They operate without a clear vision of where they are going or a clear mission of who they are. This is made clear through the diversity in reactions to an economic softening of the global economy.

Interestingly these are the same organizations that maintain a mantra of higher rates equates to higher profits per partner, when in fact profit is a multi-faceted entity comprised of billable fees, related costs, overhead costs and write offs. It never ceases to amaze me how these ‘head strong’ leaders simply overlook all of these components to profitability. During a conversation, earlier this week, with Ed Poll, author of many works on how to manage legal practices, I was reminded of statement Ed had made quite some time ago “…in many law firms collections is almost an afterthought with as much as 30-40 percent of their billings are collected in the last two months of the fiscal year”. It is surprising with all of the knowledge out there, so many firms continue in their historic practices; the fire fight mentality. While the rest of the world has assimilated the ideas that profit is the culmination of many components and requires a multi-pronged approach for its growth.

This position is the result of, what I perceive, a misaligned accountability process (MAP). Simply put, it is the failure of all of the firm’s partners to be held accountable for their contribution to the firm’s profitability. Since there is no external body like taxation, corporate organization or Sarbanes-Oxley to instill a methodology of accountability the historical practices continue. One would argue that the professional services regulatory body would set guidelines for behavior. However, in my experience this has proven to be ineffective. The article Learning the Hard Way, by Stephanie Ward from the May 2008 issue of the ABA Journal, gives insight as to why some firms continue to act as they have always acted. According to Litigator Michael Burke “Lawyers often think they are smarter than anyone else”, the article continues with many examples of how some lawyers’ self-empowering narcissism has pushed them to the top and caused them to crash and burn. I feel this makes a tremendously powerful statement when one fails to understand why firms resist change.

I feel it is high time that change enter the professional services market. The change that is required must begin at the partner level, first through the deflation of ego followed by the assimilation of ideas into the practice. Firms have to empower their highly educated support group to read market indicators and bring forward new and exciting ideas that will not only catapult the firm forward but begin to erase the negative stigma in the market place. Today’s professional service organizations need a good strategy for survival and growth that comes as a direct result of reading the market indicators, assimilating new ideas and acting in a concerted accountable approach that will yield success. This great practical strategy (GPS) must be the new insightful technology to lead the firm forward, as the MAP has really gotten the firm in a quagmire.

Gauging our Relationship

2008-05-06T09:08:00.003-07:00

For the past week I have been stuck on the topic of this week’s contribution, as I felt there was more to say. For this week, my first thought was to explore credit report analysis, which is a growing activity in commercial entities. However, the need to put closure to last week’s contribution on efficiency had been overwhelming. Over the past week I thought the analysis on collections efficiency was fair, but what about billing efficiency and how the two should relate to one another.

As a starting point, the article of last week Law Firm Business Model-Realization, defined billing realization as the ratio of time and cost recorded versus time and cost billed. The author defined this as ‘efficiency’ in billing; the realization. In legal practices today we can see this figure assume a value of less than 1 to greater than 1, depending on how the billing partner identified the value of the work undertaken.

Taking a step back and recognizing that the transaction to billing and ultimately to collections are not sterile, like the purchase of a gasoline or even a meal. These transactions are rooted in a ‘relationship’; the attorney client relationship. If you care to, go back and read some of my writings in 2007 about the nature of these relationships. Relationships are a very complex phenomenon, in that both parties must contribute something to the entity in order to both derive benefit. With that said, Ed Poll in his book, Collecting Your Fee, addresses a means by which the attorney can gauge the relationship. Ed’s statement is “…the client who genuinely respects you and the work you do will pay your bill in a timely manner”.

Poll’s point is synchronous with the cash collection realization concepts developed last week. In that the client who has a respect for the relationship will pay in a timely manner, the timely manner being the time sensitive cash realization. The question remains, how do we assess the attorney side of the relationship? Once we are able to quantify the attorney contribution to the relationship, we then have a yardstick by which to assess the relationship.

According to Poll, the attorney’s contribution to the relationship is based on quality work, in a reasonable time, and which meets the terms of the engagement letter. Conceptually, if the work produced is in alignment with the expectations embodied in the engagement letter, one could reasonably assume that the quality of work is ‘reasonable’. However, price reasonableness, although tied to the engagement letter, is the result of basic economics; supply and demand. Pulling these concepts together, the amount billed to the client should be a ‘reasonable’ reflection of the, engagement letter dictated, quality of work done. Therefore, during the billing process, if the attorney believes that the amount of WIP is a fair and reasonable assessment of the quality of work done, then she should bill it at 100%, if not it is either discounted or set to a premium. The concept of premium billing, to me, seems a bit odd. Basically the statement being made is “… the quality of work that I have done exceeds the value I have placed in WIP.” As this concept, I feel, is rooted more in psychology than economics, I will shelf I for the time being.

With that said, billing realization is a reflection of the attorney’s contribution to the relationship and cash collection realization is an indication of the client’s contribution to the relationship. Therefore the product of the billing realization and the cash collection realization should be a bell-weather to the attorney client relationship. By way of an example, let’s take a look at this.

Paul Partner accepts a case which is consultative in nature. During the course of the month he and his colleagues record $1,000 in fees and $525 in costs. In believing there was some redundant work, Paul produces a bill for $1,400 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. Paul agrees to write the amount off and within 15 days the firm receives payment of $1,370. Ignoring the concept of timing, the relationship gauge becomes:

Billing Realization X Cash Collections Realization

1,400 ....X.... 1,370 = 89.84%

1,525 ............1,400

(note, periods are added to the formulae to maintain correct spacing in html)

Therefore the attorney client relationship, as a whole, is probably running at about 89% efficiency. You should be asking, why the calculation is based on a product and not the average of the two realizations. As this is all theoretical in nature, I feel that an average raises one party’s value while lowering that of the other party. However, in real life that isn’t the case. When two people are disenchanted with one another, at a distance they are fine they have their respective degrees of disenchantment, however when they are together the tension increases, as each acts against the other and there is a combined effect.

Now taking it a step further and realize that this entire scenario is not operating in a timeless vacuum, we need to add some reality to the calculation; the concept of time! In Paul’s firm the rule to billing is that 80% of all WIP must be billed within the first five days of the new month; following the month worked. We must assume, to keep the calculation controllable, that 80% does not entail any division of a particular file, but rather 80% of Paul’s entire portfolio on a per file basis. Let’s say that Paul produces the bill on the 45th day; 10 days after the billing cut-off. In addition, 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.

Using the same logic, as last week’s contribution, on looking at the impact of time on efficiency, the calculation now becomes:

1,400 X [1/(45/35)] X 1,370 X [1/(60/35) = 45.37%
1,525 ..............................1,400

With the inclusion of time, the relationship gauge is almost half of it was without time. Is this realistic, of course! The reason is both sides in the relationship are governed by time to meet their respective obligation, and they both failed! The attorney failed by ensuring timeliness and correctness in the billing. The client responded by not paying the bill in a timely manner, thus the compounding effect of the relationship degradation.

In closing, attorneys and clients are in a relationship, by virtue of the engagement letter, each must fulfill certain obligations. When either side fails, the probability of non-payment of the bill increases; dramatically! Maybe now is the time to check the vitals in your relationship.

Measuring Efficiency; Ineffectively

2008-04-30T11:20:00.005-07:00

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%
525

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.

Given:
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%
525

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!

Are you making Rain or making Mud?

2008-04-22T10:42:00.002-07:00

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.

So What… Now What?

2008-04-16T13:39:00.000-07:00

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?

The Best Kept Collections Secret

2008-04-08T07:56:00.001-07:00

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.

Bet You Don’t Get IT !

2008-04-01T08:05:00.002-07:00

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 18^th and 19^th 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 19^th 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 21^st 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.

Accounts Receivable Collections; Get with IT!

2008-03-23T14:10:00.003-07:00

Lately I have been pondering why AR collections in the professional services have been lagging behind their commercial entities. Over the past few weeks I have given insight into some of the major reasons. It wasn’t until reading the article, “Watch These Fast Growing Technology Trends”, in the March 2008, Credit Today magazine that I began giving more thought on the finer details of the causes for delinquent receivables.

The last 50 years have brought more technology to the market place than all preceding history. Each day more companies are bringing better and faster tools to the market than currently available. With the onset of electronic commerce, technology built on the other side of the planet becomes easily accessible by organizations in small towns. With all of this influx of technology, why aren’t organizations reaping the benefits? For the most part they are, however not to their full potential! The gap in productivity between potential gains and actual gains plagued me during my early years as an accountant. I saw the rise of technology and I myself assimilated it into my professional life as fast as it was available. I adopted technology quickly, but it seemed that the rest of the world did not realize the same gains. As I moved from public practice into a law firm, I realized that the problem was even worse than I had experienced previously. It wasn’t until my first few years in the technology field, that the problem became blazingly more pervasive.

My fascination with this ever growing gap between potential gains and actual gains due to the introduction of technology began to become the focus on my thoughts. I often wondered if I was the only person who saw this problem so clearly. In the late 1990’s, I speculated that the gap was the result of organizations simply failing to put in the 3rd and 4th most important element in the assimilation of technology. I reasoned that organizations spend a fortune on hardware, software, and then go lean on training and almost nothing on business process reexamination. Here were organizations that were spending a fortune on the latest tools, but they reaped only marginal productivity gains. The result, a faster way to undertake the old processes!

Interestingly enough, through my quest to understand this phenomenon, my research, and ultimately my thesis, lead me to the Productivity Paradox. Although first identified in the mid-1960s, it didn’t become a concept of intense study until the mid-1970s. The concept in research literature is defined: As new technology is introduced into business, worker productivity decreases. Turban et al (2008) redefined the stance as the “discrepancy between measures of investment in information technology and measures of output at the national level.” Suffice it to say that this topic is vigilantly debated by economists all the time.

Whether the underlying reality of the paradox is solved or not, should not impact our here and now! We need to understand the role of technology in our environment, and realize that it is always changing. What we need to be very cognisant about is to not only understand the new tools, but most importantly take the time to reexamine our business processes so that we do more than simply speed up our old processes.

On that note, I will leave with you one of my favorite quotes. In speaking to Ed Poll on the same topic, Ed said “technology is only a tool for collections, never to replace the human element”. A substantive quote was made in his book, Collecting Your Fee. Tools without knowledge of their use and more so the lack of insight into new ideas, simply aligns new tools with the functionality of old tools.

In receivables management, Getting with IT, should have you focused on getting with Information Technology – all the new tools available to you. In addition, getting with IT should be getting the Intellectual Training to understand the value of the tools, but more importantly the Insightful Thought on better ways of undertaking current practices.

Good Luck!

Through the Looking Glass

2008-03-15T20:58:00.003-07:00

You all must remember the novel; it is the sequel to Alice in Wonderland. Oddly enough, author Lewis Carroll denied the novel was a sequel but rather a work to stand on its own. Although characterized as literary nonsense, I realized this week that, from an economic perspective, the novel carries tremendous merit.

This week I spent a significant amount of time in conversation with some of the most astute business minds in banking. Here was a group of people who internalized and projected from not only national vital statistics but those of a global economy. At their level, money was quantified by billions and hundreds of billions rather than the units we carry around in our pockets. I was amazed and my thoughts were validated that the US economy is stepping into a recession and more specifically stagflation. However, for these people the results of measuring vital statics were numbers; objective, cold heartless numbers! The barrage of reports and analysis could fairly predict where the economy was going and how, in their capacity, their institution should react.

I have always professed that the economy screams at us, every day, hour and minute what it is doing and what are its intentions. However, like Alice in Through the Looking Glass we don’t see our reflection; we are more enthralled with what is on the other side of the mirror. We aren’t interested in the reality which is being screamed at us, we choose to create our own reality; our illusion of reality, the one on the other side of the mirror. Once we get into our illusion, separating it is based on our ability to deflate our ego and recognize the world around us.

Right about now you should be wondering, how does this relate to AR management in my organization? Surprisingly enough… it is a DIRECT REFLECTION. In our professional practice we often live in this delusional mindset that we, the principle, know all about the environment and the client. When in fact we are looking through Alice’s mirror and failing to see the true reflection of reality. As a principle or partner, I accept a case where I really don’t undertake any due diligence before I establish the client relationship. I believe the engagement is important for my career and that the client will pay the account in full. There is my illusion; for payment of an account is based on a series of compound probabilities. Without a due diligence investigation of that wonderful client, which could be a deadbeat in disguise, the reality of the client not paying, may have a negative impact on my career.

Now when my ego is blended with my illusion of reality, the simple problem gets worse. The work is done and the AR is sitting on the books steeping with each passing day, week and month. Not to mention the cost value of money as that account reaches antique status while sitting on my books. You know the situation all too well, that account is out there for everyone to see, and your sense of reality is faulted. You were looking through the mirror instead of into it. YOU didn’t see the signals. However, it gets worse; you are the partner a well learned person, an authority in your field. How can I be wrong, the client will pay – I guarantee it? What you are doing now is protecting your fragile ego; you must admit that you pushed the card and landed yourself into the fork in the road and now there is no going back! You are left with only two choices, admit your error and write the bill off or seek validation that the client will pay, by leaving the account on the books and maybe even taking on more work in hopes that the client’s cash flow will increase and all accounts will be cleared up. This is your second illusion!

When illusion mixes with ego, it is a recipe for a downward spiral – a train wreck. How can I go back to my partners and my committees and say I was WRONG. How do I resolve the problem, learn from my mistake and most of all spare the firm all of financial losses, and essentially turn back time. The resolution is a two step process, which doesn’t include going back; in the here and now, admit your fault, write the bill off and go on. This also means coming clean with all those who are involved.

The second and most important situational resolution is putting processes in place that prevent you from misreading reality again. Although the client’s ability to pay is important, deflating your ego is probably the most important prevention mechanism. Recognize that you DON’T know everything. You may be the best litigator or possess the best M&A mind, but you do not know everything about credit management. Marcus Buckingham in his book, Now Discover Your Strengths, professes that we should focus and train to increase those attributes for which we have an affinity, and pass onto those the things for which we have no affinity. In his recent speaking engagement at Arizona State University, he spoke how Tiger Woods’ trainers made him practice more at his shots from the tee and not his putt, as he has always been a poor putter. So to emphasis his winning ability is to get the ball closest to the cup.

To put this all into perspective, do what you do best and let others do the rest. Never fall into an illusion of reality. Looking into the mirror is the truth instead of looking through the mirror, and creating your own reality. Finally, as Alice awakens from her experiences of her dreams, she blames her black cat. Like Alice, we often blame others when we look through the mirror and create a train wreck. Maybe it is time to stop the vicious cycle, listen to the numbers, seek the knowledge from those in the know, do what you do best and most of all destroy your ego and admit when you have erred. The costs of illusions are high!

When is Enough, Enough?

2008-03-04T10:35:00.000-07:00

Although it is a faint memory, the 4^th quarter of 2007 has left its skeletons. If you don’t think it has, sit back and peruse your aged receivables. You know those skeletons, they are sitting there, now better than 120 days old. They amount to a river of broken dreams. In the back of your mind, the words of that partner still ring clear, “I am almost reasonably positive the money will come in by December 31^st”. While they were being uttered you hung onto every syllable, for that meant the difference making the target or missing the target.

Now as you reflect on those hectic times, you can see where things started to brew into the train wreck 2007 had become. I have already written about the moderate growth that some firms experienced in 2007. Well if you are up-to-date on your reading, you would have caught the February 25^th ABA article, Large Firms Prepare for a Slower Year, by Debra Cassens Weiss. Face it, the global economy is heading for a recession and the world powers are denying it. They sort of won’t tell you about the “800 pound black bear” before you go into the woods. I have written about it and anyone with a television set and at least one channel would know.

Over the past few weeks I shared with you many of the mantra held by the corporate world when it comes to collections. Now more than ever it is time to take heed, otherwise the 2007 train wreck of year-end will pale in comparison to that you will experience in 2008! My recommendations now are get yourself a subscription to Business Credit and learn what your corporate counterparts have known for years.

With Business Credit tucked under your arm and a plethora of caustic blog entries, you may be well suited for the recessionary jungle of 2008. My secret for you is...I perceive that the global economy will begin to see a recessionary reprieve in 2010! However, with that said, and the plans in place – best of luck! Keep in mind that many are vying for your client’s less than stellar cash flow. Make sure your bills are at the top of their list.

Now that your processes are in place to have stellar collections in 2008, there are those legendary receivables. Those that have been around as most office furniture or the first service patch of Windows 2000. At some point, you need to come to the realization that unlike wine, receivables don’t mellow and get paid with age. Instead, the client becomes more calcified and less likely to make concessions. Although calcification is an interesting phenomenon, there is something even grander – the statute of limitations and the Fair Credit and Collections Act. All I can say is make the move to collect on something where the statue has run out and you should consider yourself lucky if you are able to walk away with just an earful of profanity. Instead, you should consider a “Don-ism”. For anyone who has worked with me enough you will know the phrase.

“You derive no benefit in life by proving someone else wrong”

Remember, in collecting receivables you can only state your case so many times and in so many ways; if the client doesn’t move then you need to. Imagine the surprise when I saw that Susan Raush, a corporate credit manager who authored Best Practices: Collections, have the same mantra. Her statement goes as follows:

“When you have a legitimate dispute, you need to weigh the costs against the benefits of continuing the dispute. Sometimes it just isn’t worth it to be ‘right’ and you have to graciously give in to the customer’s demands in the name of goodwill and future profits.”

When the time comes, and you know it has for many of your receivables, you simply need to learn from the experience and walk away. Not walk away in the light of one day the payment will materialize. But rather, do three things: internalize why the receivable never got paid, put in safeguards to prevent it from happening again, and the hardest thing – write it off! When you write it off, it will be like a “therapeutic cleansing”; a rebirth of your purpose in managing receivables!

Managing receivables is probably the most difficult role in an organization. It is important to know when you have done all you can and when to simply walk away. I have learned everything has a beginning, middle and an end. It is important to know where on the continuum you are. Know when you have reached the end, clean up the skeletons and bow out gracefully. Always remember, as you exit the stage, all what you have learned. Most importantly, repeat successes not failures!

Actions, Not Expectations, Determine Results

2008-02-19T11:39:00.001-07:00

Whether we choose to believe it or not, everything in this world is driven by cause and effect. The effect is in essence the result of the cause, which in turn drives other causes. We cannot view the effect or the result as the termination of an event or series of events. The result is simply a snapshot in time. As effects lead to causes which precipitate other effects and the continuum continues ad infinitum. The concept of viewing results, as a snapshot in time was first documented by Erwin Schrödinger in 1935. Although Schrödinger’s experiments related to superposition of subatomic particles, his theory on a macro scale basically indicated that causes and effects are synonymous and it is only at the time of observation that we can assign result versus cause.

This cause effect continuum is in every aspect of the world. For the most part, nature has in itself scripted a series of events that culminates in a series of results or effects that in turn lead to new effects. Take for instance precipitation; the occurrence of precipitation is a continuum of precipitation, absorption, percolation, absorption, transpiration, evaporation and precipitation. At any point, a snapshot, the preceding events are termed the causes and the item under investigation is the effect.

Another example that is probably closer to home is the management of receivables. The management of receivables is the ‘result’ of prospecting, undertaking the engagement, billing and waiting. The ‘result’ of managing receivables brings possible outcomes: getting paid or writing off the balance or in the case of professional services, allowing it to steep like tea. The outcome, whatever it may be, is the cause for future events and causes. This continuum of cause and effect has continued and will continue ad infinitum.

The cause effect continuum of the universe, for the most part, cannot be altered. There are certain things for which we can manage toward a given result. We can create arable land through the redirection of rivers. The effect is arable land and the cause is introduction of water. Then the new cause is arable land and the new effect is climatic changes; and a new cycle begins.

This management, or redirection of a continuum, is also attempted in business. In many cases, the ‘result’ isn’t what was expected and therefore another ‘cause’ must be instituted. For one to have a desired ‘effect’ one must institute more than a single stimulus or cause. There must be several changes operating in unison to bring about an irrevocable change. Using our arable land example, one simply cannot remove the trees and hope the river will jump the lower banks. In similar fashion, one simply cannot cut an arm from the existing river that will lead to the land. It is a series of changes that must be made.

Probably one of the best articles I have read on the many changes that must be made as part of better receivables management is by Susan Rausch, Best Practices: Collections, in the January 2008 issue of Business Credit. In last week’s entry, I expounded on the importance of the pre-engagement side of receivables management. This week, we will look at Rausch’s second most important aspect “Training or Re-training Your Customers”.

The concept of training, according to Webster, is to bring about an event or effect through a series of consequences. As we already know, the event or effect is the seed to more consequences that will lead to more events or effects. In Rausch’s address of the training issue, she makes the most powerful statement in a single sentence. “By never calling your customers on a consistent basis we actually train our customer to pay consistently beyond terms”. I believe it goes much further than this in the professional services world. By having an annual collections budget and tying it to partner compensation, we ‘train’ our partners into a lackadaisical mindset about collections throughout the year and to create the year end pandemonium. Rauch goes on to set out how we, as collection professionals, must go about training our new clients and re-training our existing clients. This is a process that has to happen both at the client level and at the partner level, in my opinion For without significant change or retraining, the process is self-perpetuating; as in the year-end ‘push’.

The training and retraining process is to arrive at the desired effect, by altering all the proceeding events. Rausch professes calling customers early and frequent so as to stay on top of receivables. The consequences or causes are being altered to derive the given effect: better receivables management. This is, however, is contrary to what occur in most professional services firms. The event or effect is determined, a certain cash budget, while the causes or consequences leading up to the event don’t change. Without the training, how do firms reach the desired result? They don’t! Firms simply go from year to year expecting a different effect, even though they didn’t make any significant changes to the causes. Swaying away from Webster and drawing on the urban vernacular: Insanity is the result of doing the same thing but expecting different results!

Today’s firm must STOP and recognize that they are part of an economic continuum where every event seeds future events, where every engagement can lead to payment and referrals or to antique accounts receivable. Whatever the outcome, more events are seeded. The process continues to either be a wildly successful cash rich organization or a train wreck. As I see it, firms have really only two choices: alter the cause and effect continuum to a desired outcome through training and retraining the clients, associates and partners or bask in the delusional insanity of greater cash flows while not changing anything. Luckily, the choice is yours!

All Roads lead to Rome

2008-02-10T19:25:00.000-07:00

Success in business can be sifted down to two very simple activities: producing a product or service that makes sense, and selling it for more than it costs to produce. These two very simple activities form the very basis of every wildly successful company. Equally, look at the failure of any organization and it could be attributed to one of these being out of alignment.

I recently returned from Legal Tech New York, an annual technology show focused on the legal industry’s needs. This venue has been running for 27 years and each year it has attracted more and more technology companies that are trying to get a foothold into today’s law firm. Each of these vendors are purporting that their latest high-tech gadget will provide tremendous value to the operation of today’s firm. However, they often fail to demonstrate the business case on how their ‘snake oil’ is better than the competition. Although they fail to recognize it, they are attempting to reduce the costs of the operation of today’s legal practice, thereby making your firm an ongoing viable entity. In speaking with several of these vendors this year and many over the years, their focus is clear: they want the ‘deal’ and are willing to use their canned lines which they hurl at the attendees, in hopes to land them, hook, line and sinker.

With a sea of technology abound and more coming to the market each day, today’s firm must gain a full understanding of their business, where the revenues are being derived and where the costs are being generated. Only then can an astute decision maker objectively look at solutions and make an educated decision as to how to enhance the bottom line while enhancing the quality of service their organization brings to the market.

In all of these relationships, be it from the vendor side or the customer side, we all too often take the big picture for granted. We simply fail to see all the pieces of the puzzle. To the sales person, it is the ‘deal’. To the firm, it is the cost saving of the new widget. The underlying idea we all fail to either realize or simply not consider is that the underlying medium of all of this is cash. Without the ultimate exchange of cash, the entire model breaks down. The once great ‘deal’ is nothing more than a bad debt. The latest new widget, if it doesn’t live up to expectations can at best not have any effect on the firm’s bottom line. At worst, it can enhance the hemorrhage of funds.

The first step in effective cash collections, regardless of the business, is establishing the rules of the business transaction. In the commercial world, the starting point is the credit application and the purchase order. These are informational pieces that later becomes legal documentation following the sale. In the professional services world, it is the engagement letter.

In the January 2008 Business Credit article, Best Practices: Collections, author Susan Raush sets out that the best collections happens long before the account is past due. She stresses it happens at the credit application. This contention is strongly supported by Ed Poll in his book, Collecting Your Fee. I, too, have shared this belief for many years. It amazes me that with all of this knowledge in the market place so many firms have either no engagement letter or an ineffective one.

During my recent travels, I had the opportunity to meet with several large national firms. At some point in our meeting I got the opportunity to review their engagement letters. For the firms who had these documents, and they are few, they were essentially a form letter that every prospective client received. I found it amazing and sometimes humorous that somehow the firm thought that every client was the same and every case was the same. If the firm didn’t believe this, why would they send all of their clients the same engagement letter! My one suggestion on engagement letters is to tailor them to the uniqueness of the engagement and the client. I am not saying that these letters run rampant. What I am saying, is that within the limitations of the firm’s credit and collections policy, the engagement letter should be tailored to the uniqueness of the situation. Here are some ideas that, I hope, will seed some thought in engagement letter evolution:

This engagement falls under “Pro Bono” work as defined by our firm, XYZ LLP. Under such engagements only the legal fees are “Pro Bono”, all costs and disbursements are to be paid within 30 days of receipt of our invoice.

The outcome of this type of engagement cannot be determined with any degree of certainty. It is only by way or a court judgment that the true position of this case is known. Therefore, I, ABC Ltd (client) agree to remit payment for all billings within 30 days of receipt. In addition, should any funds be disbursed into escrow, XYZ LLP retains the right to apply those funds to outstanding billing and remit the remainder to ABC Ltd.

It is important to keep in mind, no matter if we are a vendor, a client or a professional services firm, that our ultimate goal is collecting for services rendered. Steven Covey professes “Begin with the end in mind…” essentially he is saying to recognize that every action and client interaction must bring you closer to – getting paid.

The Romans were masters at never losing sight of what was important. Following all of their battles, the Romans would build elaborate roadways. The roadways, would lead from the town to Rome. Never did they build roadways between adjacent towns. The reason, the towns could rally together and oust the Roman invasion. The key here, focus on the task at hand and bind it! In every engagement, solidify the relationship such that “the road to Rome” is payment for your billing.

Prospecting with Receivables

2008-01-28T12:13:00.000-07:00

A few times in the past year I wrote about the radical difference between organizational management in the corporate world and that of the professional services world. These differences permeate every facet of the entity, from vision to what type of coffee is available. It is for this reason that professional service organizations operate under a profit-limiting glass ceiling unlike their corporate counterparts. After years of research in this area, I have concluded that the managerial organization of professional service organizations is inherently flawed and this is the reason for the rampant inefficiencies that plagues all of these organizations.

The greatest absurdity placed on today’s law firm partners is the expectation that they have skill in all areas of organizational management. Although they may be well versed in reorganizations or stock issuances, they don’t have the unique skill in managing their own partnership. Then because there isn’t a single leader but rather a sea of partners, jugular issues are sacrificed for the sake of status quo. Regardless of the firm, today’s partners must maintain a threshold number of billable hours per year. They must manage billing and collections realization, manage junior professionals, build their client base, bill for services and collect on their billings all within a 168-hour week! Given time for sleep and commuting, all aspects of today’s partners’ time are sliced down to the 1/10th of an hour!

Following a few conversations with three partners of a prominent global firm, I would like to share some of the highlights of our discussions. The conversation on prospecting came about when I made notice of a significant achievement the firm had achieved in a new practice. My colleagues shared with me how difficult it was to get their practice where they needed it to be. They were pressed with the demands of keeping on top of the workload they had and prospecting for new clients. Although well versed in their area of specialty they had difficulty in getting hold of and conquering the prospecting function.

Prospecting is probably the most difficult job in an organization. The position is well suited to a person with a true hunter instinct. This individual must seek out organizations that could use their product or service, find the correct individual, get beyond the gatekeeper and make contact. Once contact is made, a relationship must be initiated, then nurtured either to the point of a sale or a parting of ways.

In the corporate world, businesses have specific people whose entire role is to be the hunter, to find the prospect and open the dialogue. Once the dialogue is opened then a product/service specialist is introduced. The specialist, through fact-finding, attempts to close the gap between the prospects needs and the firm’s offering. In a highly sophisticated organization, a closer is brought to move the process to the ultimate sale. However, in the professional services world, this entire process rests on the partner’s shoulders.

Sadly enough today’s partners don’t realize that prospecting is already at their doorstep. Some of the best prospecting leads are on the pages of their receivables listing! The beautiful thing about prospecting within the receivables listing is you already know the clients’ business, if they are good payers, and you already have a relationship. There are essentially two types of prospecting which can be done from a receivables listing, service expansion, and service extension.

Service expansion is a process of providing different services to the same client. By way of an example, suppose the firm has a client, a company in the business of automotive parts manufacturing. That client would definitely have a need for patents and trademark work because of their R&D technology. They may also require advise in employment law, possibly litigation, immigration and maybe estate planning for the principals. Today’s firms have to realize that their receivables listing is an untapped goldmine of new work just waiting to be mined! The first step in tapping this valuable resource is communication. It is the partner’s responsibility to maintain regular communication with his or her client and to find out their needs to see how the firm may be able to be of assistance. In addition, the partner should keep other departments and practice groups informed as to the type of client for whom they have just completed work. Essentially the firm must ensure that each client is aware of all of the services the firm offers. This type of behavior is slowly being realized when firms offer lunch-and-learn sessions on current topics. However, this “shotgun approach is better than nothing. Truly, what is needed is a highly refined strategic approach, such as a personal call to the client with information of a new law that could impact their business!

Service extension is much more involved and requires the partner to be more in tune with the client and what is going on within their organization. A good example of this was provided to me by a Director of Administration of a national firm. During our conversation on the topic of delinquent receivables, he brought up that one of the firm’s large national clients had requested better payment terms. When faced with this type of question, the firm must have a plan on how to react. Although my colleague’s firm did issue the extended terms, they got nothing in return when they should have!

In the December 2007 issue of Credit Today an article entitled: When Your Customer Asks for Extended Credit Terms, by Doris Solis, explains how this question opens the door to a myriad of opportunities for both the client and the organization. Solis expounded on the many reasons why clients seek extended payment terms and how a true credit professional must research the company before making a decision. This is a critical juncture in the relationship. The client wants something, extended terms and the firm wants something, payment of receivables. The key area of research for the credit professional is in the basis for the extended terms and the client’s ability to pay essentially the client’s credit score and their circumstances.

I shared the article with my colleague and explained how the firm took the wrong approach with the client. When faced with the question of extended credit terms, they should have undertaken a thorough analysis of the client and their ability to pay. What they would have found was that the client was a good credit risk and wanted better terms because they were undercapitalized while they were in a strong growth phase. Where the firm made their mistake was in not seeking something in return for the better credit terms! As it turned out, the client had legal work placed in nine other law firms. The firm should have opened a dialogue with: “we recognize that you are using ten firms to fulfill your legal needs. We could offer you extended payment terms and possibly better hourly rates if you agree to move, where possible, 50% of the work you place with other firms to our firm.” The end result, if taken, the firm would have new business from a good client without the hassles of prospecting for new clients!

Today’s firms have so much technology, that they simply fail to see the opportunities right before their eyes. The receivables’ listing clearly outlines the good, the bad, and the ugly clients. From there, firms could easily take the next step in expanding their business – learn more about the clients and communicate with them. Having a receivables listing in hand and knowledge of the client’s business, most of the prospecting hard work is done! Start using that collections intelligence wisely – prospect from your receivables!

The First Step…

2008-01-12T09:41:00.000-07:00

Now that the dust has settled or at least started to, I want to kick the year off with some reality. My last entry returned a flurry of responses, the nicest of which were, the modern day, “raspberries”. Some of the others made suggestions as to where I should dislodge my head from. Wherever the readers are in the spectrum of responses, one response prompted today’s entry. The note basically made it clear that I had no idea what was happening in their environment and that all I do is hurl inflamed statements regarding business management and don’t provide any direction for a resolution. Freedom of speech is a wonderful gift!

Dear writer, I do know what the professional services world is like. I have been here for almost two decades both on the front lines and working with clients. As an outsider, I see the reality of all of the firm’s actions without the emotional connection. The problem with today’s professional services organizations rests with those on the ground in the finance team. They are so disoriented and therefore cannot see the way out of the forest! They have fallen victim to ‘status quo’. They have decided that their fat paychecks carry more weight than making a change. They don’t want to go beyond doing what they should be doing which is to begin increasing the financial health of their employer. On a like for like comparison, people in the finance departments of law firms make more money than their corporate counterparts and do less work; less meaningful work! They are paid for complacency; a sort of ‘hush’ money.

Following my last entry, one of my colleagues, Charlotte, from corporate America, stepped forward with some suggestions on how to get legal collections into the 20^th century. Once firms see the return on investment of modern day business management, then a movement into the 21^st century is possible.

I met Charlotte at the 2007 National Association of Credit Managers (NACM) conference in Las Vegas, NV. The NACM is an organization of credit professionals from all industries who emphasize a better management of credit decisions through education and knowledge exchange. Over the past few months Charlotte and I have spoken to great lengths on credit laws and practices in today’s industry. Charlotte heads up credit and collections for a multi-billion dollar organization that has 40 plus offices in the United States. Her organization is currently in the acquisition mode and has assimilated several smaller entities in the last few months. Working with her staff of two, Charlotte has consistently over the past 10 years received accolades from executive management as her team has kept their DSO hovering around 37 days for net 30 credit terms. In listening to some of the trials of this large organization, I can appreciate that managing a multi-billion dollar AR portfolio requires strategy and skill and not MBC (management by crisis); more brains than brawn! Even through the several acquisitions, Charlotte’s team have managed to take torn and tattered AR portfolios and turned them into stunning gems.

Here is Charlotte’s roadmap for today’s legal firm.

1. I would recommend starting a process for new clients in 2008…it would be a bit overwhelming to get this going for all clients right off the bat. Established clients will not be receptive to the process of providing credit information; however, they should not be excluded from the collection process. Perhaps a modified collection process would be more in order for these accounts.

2. Start simple with credit policy (standard practice)…more can be added once the basic info is established. Application should include full legal name of client, address, contact info, credit references and contact person for payment. It should include the terms of payment & consequences of non-payment; spelled out terms in layman's language. (Do attorneys have an internal network to see if their clients are spreading out work? If so, you may want to consider sharing credit info with those attorneys as well to learn if they are getting paid).

3. Qualify the client and their ability to pay. Options to qualify--credit reports, personal guaranty, bank LOC, retainers, etc. Establish a credit line based on credit info record. If charges are near or exceed the credit line and the account is past due, a collection call should be initiated. Charges for new work should be reviewed and approved before additional work accepted. Total credit exposures include the WIP & AR and calculate accordingly to know total risk.

4. Explain the client collection policy and keep it simple. Would not recommend late fees or finance charges starting off but may want to consider it as an option if account goes beyond a certain predetermined time.

5. Be sure the client understands the billing; invoice regularly and in this environment may want to provide some way client knows about WIP. Also be sure client knows who he or she may contact within the firm to discuss invoices & charges. This person must be qualified to explain charges so the call does not escalate to the attorney.

6. Hire a customer friendly, credit professional to manage all aspects of the above while keeping attorneys out of the picture. (Not sure how to say it best for this environment, but in my world…the sales rep is the good guy and I am the bad guy…it works well in my world). My favorite adage is: "You can attract more bears with honey than vinegar any day of the week". Never back the customer/client into the corner but always give respect and offer options for a win-win solution. Finally, smile as it comes across in the communication.

There you have it, the first step to getting off the mark. All I can say is…start now, as October 1, 2008 will be too late to avoid the usual year-end train wreck!

Post War Blues

2008-01-02T06:29:00.000-07:00

Welcome to 2008! Depending where you on the planet you could have been recognizing the birth of a New Year as much as 24 hours ahead of the rest of the others. Through the festivities to ring in the New Year, there will be hopes, dreams and resolutions for the New Year. At the same time, there will be memories of the ending year.

For those firms with a December 31st year-end, the stress and anxiety of the final day in 2007 is now history. For accrual-based firms, the mad dash was to get the work in progress converted to accounts receivable. While for cash-based firms, the goal was to get as much accounts receivable converted to cash as the budget dictated. Regardless of the type of goal, the deadline has past! At this point, there is nothing you can do to alter 2007. Now, depending on your organization, you will be faced with the year-end audit; the numbers are what they are!

A faint memory of my days in public accounting, I recall that auditors were those who came in after the war was lost and bayonet the wounded. For many, the war was considered lost when the actual outcome was significantly different from the budget. I would guess that today, many finance people are reflecting on their firm’s 2007 goals, their degree of success, while many are feeling quite wounded. Regardless of when you return to the office, the remnants of 2007 will be everywhere and the task of clean up and starting a new year will begin. I am reminded of those feelings; post the April tax deadline when in public accounting and post December 31 when I was at a law firm. The medical world had identified those feelings and labeled it as postpartum depression. Although medically it relates to something significantly different, I can identify with the symptoms. It is the day after the war, the point when all stress and anxiety has diminished and only a sense of emptiness remains.

Over the coming weeks those feelings of emptiness will wane and will eventually be replaced by the day to day excitement of the New Year. We will settle in on becoming aligned with our new budgets and our new goals for 2008. By mid-February we will vaguely remember the long hours, the stress and the adrenaline rush of the last 90 days of 2007. The most important thing we will bring forward from 2007 will be our old habits and 2008 will unfold as 2007 had. It is important to realize that there are many roads to success in order to meet expectations. However the path chosen is what's very important. In achieving the goal of a certain profit figure, one could increase the revenues, decrease the expenses or affect both the revenue and expenses at the same time. Regardless of how you get to the goal, some roads to success are less burdensome. Maybe 2008 is the year to try a new path.

Over the years, I have written a lot about the year-end crunch and how it is the time bomb of insanity. On those occasions I brushed on doing things new and in different ways. I would encourage you to kick 2008 off with a paradigm shift; a radical new way to look at your business and the management of inventory and cash. Isn’t now the perfect time, as we are forming the foundation to December 31, 2008? In my earlier writings I basically outlined that there are only 3 reasons why clients don’t pay bills: relationship, billing and economic. I have also professed that not all clients are the same, therefore a one size fits all credit and collections policy simply doesn’t work! Therefore to make a radical impact on cash receipts, firms should look at their policies and practices as they impact the key reasons why clients don’t pay.

The first step down this paradigm shifting experience; recognize that all clients are not the same! Recognize that the world is constantly changing. Your cash flow is directly related to the economics of where you operate, the clients and how the economy affects them. The foundation must begin with a credit policy, a policy that recognizes a dynamic economy affecting your firm and your client’s operation. Now is the time to set a credit policy, not a policy where any client can be extended any amount of work. But a policy that looks at how much risk, in each client, the firm is willing to absorb. The credit policy will form the basis of the collections policy, which will determine how the process goes from billing to ultimate cash receipts. From here, firms must establish benchmarks and milestones throughout the year to ensure they are on target.

According to Dr. Charles Gahala, CCE, Professor of Finance at Benedictine University, setting milestones and benchmarking performance are some of the best tools available to identify focal points for improving credit deparment operation. Dr. Gahala goes on to state, in his article Practical “Best Practices” to Integrate Benchmarking into the Credit Department, that the setting of milestones and firm management through benchmarking requires the buy-in of top management. Basically, the entire partnership must be in full agreement that the new process of establishing a reasonable credit and collections policy and its monitoring, is what is needed to achieve the desired results, without the anxieties of the past.

Terry Callahan, CCE in his article Benchmarking to Measure your Performance, makes a very strong statement in “Tell me how I am rewarded, and I will tell you what my focus is”. The partnership must recognize that the better way is at their disposal. However, it takes a leap of honesty to conclude the current methods are not working and a change is needed. With a solid credit policy and a process for collections, today’s firms can reap huge financial benefits without the stress and anxiety of the year-end push. Today’s law firm doesn’t have a problem in communicating, with the voluminous reports that are created each month. The problem with today’s firm is that no single leader exists that is willing to admit that the current methods are simply not working as they have. The old adage hold, if it isn’t broke, don’t fix it. While many brilliant minds of today say, if it isn’t broke, ‘break it” and rebuild it better.

To break away from the insanity of the past, the firm must establish realistic goals and also realize that as the economy changes the means for achieving the goals must change. In 2007, the US economy suffered a series of financial blows in the sub-prime mortgage sector. The economy changed, but many firms didn’t! Today, those firms are now sitting with millions of dollars invested in those sub-prime lenders with really no way to collect. Moreover, those same firms are now overstaffed in corporate groups with associates having no work. I have read about on east coast firm that bantered with the idea of downsizing their corporate group. But there had never been lay-offs in the associate ranks in the history of the firm. Obviously no one recognized the economy changing or they were too afraid to make a change. Too bad!

It is high time that the professional services world looks at the corporate world for direction on how to truly run a business, that is, if the firm wants to run like a business. If you have been a regular follower of my commentary you will recall my reference to Slater & Gordon, the world’s first publicly traded law firm. They took the quantum leap in May 2007 and today they continue to tout their unprecedented growth in profits and increasing market share. Success in today’s firms must now be marked with the words: credit policy, collections policy, profits, milestones and benchmarking. To get the ball rolling, here are some facts from corporate America that set out the road ahead.

1. The median cost of performing the credit function is 0.028% of billing.
2. The average corporate firm will experience AR turnover of 8.88 times per year. That is average days to pay, based on net 30 terms, is 41 days!
3. Most credit professionals manage a portfolio of 700 customers.
4. In corporate America, 52% of companies use an auto-cash application system that automatically applies payment to over 80% of the bills.
5. 52% of all companies assign a risk code to their clients.

Here we are at the fork in the road, we can make 2008 a mirror of 2007 or we can do something different, something better. Now is the time to act, as December will be too late!

“Two roads diverged in a wood, and I -- I took the one less traveled by, and that has made all the difference" - Robert Frost

The Ending Twelve…

2007-12-15T13:11:00.000-07:00

As we approach December 31st, all of our hopes and dreams will be indelibly encrypted in the annals of time and only the memory will continue. Sadly enough, the human mind never remembers the original event, but rather a memory of the memory. Through time and new events the facts of the original event gets distorted and frayed in our minds. It is only through reviewing evidence of history that the memory, or rather memory of the memory, comes to the forefront of our minds.Current research into how memories are maintained suggests that the original facts of an event can be lost forever. The research suggests that the senses take precedence over memory. In the study, the researcher took a sample of people who lived through the 1989 events of Tiananmen Square. The sample population was separated into two groups. Group A, were shown pictures of the actual events, while Group B were shown altered pictures of the event. Group A recalled the 1989 event as it occurred. However, Group B had a completely different recollection; very much in alignment with the pictures they were shown.As I watch the sun breaking the horizon, the finality of 2007 is at the forefront of my mind. For the most part, it was a good year filled with successes and tremendous learning experiences. However, as I undertake that arduous task of clearing up emails I am catapulted back to some of the most interesting events of 2007. Until this moment, I had truly lost appreciation for the events that have shaped 2007 and me, personally and professionally. Those events are now lost in time and unless I make the effort to seek them out, I will continue, as always, looking forward to tomorrow. All the while, failing to learn from the past, make the best of the present with the view of reshaping my future.Today is day twelve for cash basis firms with a December 31st year-end; the twelfth deposit day until 2008. To these firms, the race to the finish line is in the home stretch. At this point, nothing is of value but to make the “magic number”. All success is based on the achievement of that goal. However, sadly enough – it doesn’t matter! It doesn’t matter because midnight December 31st marks the end, whether or not the goal is met. From that point, a new goal begins. The events of 2007 will then be packaged in the hearts and minds of everyone and we will step into 2008.Although I am not one to follow popular culture, there is a piece of music that resounds of the finality of the endings and the perpetuation history. Closing Time by Semisonic has a line that screams what we have been discussing…“Every new beginning is from some other beginning’s end”. Every event in our lives is gauged against the yardstick of beginning, middle and end. What we fail to do is to understand this continuum and learn from events. We tend to be so caught up in “what’s next” that we fail to learn from our past.Last week I had the opportunity to have lunch with a CFO of a national firm, at a time where every minute is precious. The conversation at hand was how his team has some exorbitant amount to collect before December 31st. The number, which he shared, was significantly higher than in previous years. We spoke about the number and some of the other dynamics of the firm. I came to realize that the feat that was to be accomplished was simply impossible! When I said, with my usual bluntness, Terry (not his real name) that goal is impossible. The deafening silence that resulted was pierced with a sullen ‘I know’. The conversation went down the road of what the partnership needed was a specific number; but all of the dynamics through the year didn’t point to that growth. Instead the events pointed toward 15% shrinkage of the firm.In cleaning up my emails, I found emails from Terry that marked highlights of 2007. These range from adoption of new technology, new processes and expansion into new markets. But today, none of those things matter. What matters is the end, the countdown to the end. The joys and expectations of early 2007 will culminate in disappointment and failure. Sadly enough, 2008 may be fraught with more of the same, as 2008 will begin with new budgets, new expectations, new goals and aspirations, but sadly the same practices. This process calls to mind something I have heard a while ago “insanity is the result of doing the same things the same way over and over, but expecting different results”.In reflecting on 2007, I feel that we fail to have a postmortem on events, personally and professionally, to learn from the past in order to reshape the future – to ward off insanity. Regardless of what the next twelve deposit days bring, realize that the fate of the outcome has been predestined with each passing day of 2007. Once the beginnings of 2008 rain in, take a moment, dig up those old reports, the minutes to 2007 meetings, check emails, and reflect on the actions of 2007 and how they have culminated into the outcome. Keep in mind that the past is recreated in your mind by the information you use to trigger the memory. Create the ‘correct’ image by reviewing ALL the facts – not only the positive ones. Without the ‘correct’ view of the past, the will to change the future will only be a recapitulation of what has already happened.

Newtonian Physics and Law Firm Collections

2007-12-01T13:05:00.000-07:00

My entries of late have stimulated a flurry of responses from my colleagues in the corporate world. To them, the practices of law firm collections are completely unfathomable. It wasn’t until the trailing end of last week that several conversations triggered my analysis into, why behaviors of law firms are the way they are and why they will continue without change. On November 26, the thought provoking conversation took place. My colleague said, “Precedence has been set and it takes one (firm) to break away from the pack, to make change...” That single statement had two very powerful elements. Firstly, the precedence has been set and secondly, the concept of breaking away, which in itself bears with it a question of the effect of breaking away.

In dealing with the first part of the statement, “the precedence has been set”. We have to realize the practice of law, like any other profession is steeped in tradition; for which many practices have continued through generations. With such tradition, there was and continues to be no compelling need to change. Essentially historical practices have set the stage; to be the mold that shapes the present and the future. The second key concept questions, what if there is some stimulus or reason for a single firm or firms to break away from the status quo and undertakes change, what would happen? With such a radical change, will other firms follow suit or will the firm breaking the status quo be alienated from the market? The answers to these questions, I feel, date back to the mid-1600’s during the inception of classical physics.

To sum up briefly the questions to which we seek insight, are: (i) the precedence is set and what is needed to break away from the status quo, and (ii) how will the break away affect the firm and market as a whole? Insights into these were first postulated by Sir Isaac Newton in 1687 in his treatise, Philosophiae Naturalis Principia Mathematica. At the time, Newton was simply examining the physical world, seeking to understand why the world behaved as it did. This treatise later became the very foundation of some of the most pivotal laws in physics.

Newton’s First Law of Motion states that every object will remain at rest or in uniform motion in a straight line unless compelled to change its state by the action of an external force. Well isn’t that today’s law firm, when it comes to collections practices? Each year we do the same thing! January to March we assess the wounded and close the year. April to July we are into reporting. July to September we are talking to our partners about WIP and AR. October to December we are manic trying to make the ‘budget’ number! Basically, we continue to do what we have because there is no force providing the impetus to change. Our inertia propels us forward on a pilotless trajectory; it has always been this way and we have done well, so it will always be this way and we will always do well.

Unlike the Laws of Physics, the pilotless inertia of current law firm collections practices needn’t go unchecked or unaltered. It is our own failure to make change that is at fault here and not the environment. Ed Poll in his “holy grail” of law firm collections, “Collecting Your Fee”, explicitly states that firms have only themselves to blame for their collections woes. I feel this is partly the case, Newton’s First Law suggests the reason why these bad habits perpetuate – there is no external force to change! Borrowing from the medical profession, at one point in history, they (doctors) too were poor collectors, just like law firms. But what happened, an outside force got involved – insurance companies. The insurance companies took over the financial management of medicine and left the practice of medicine to the practitioners. The actuaries of the insurance companies did what they did best – profit management. The practitioners were left to do what they did best – practice medicine. I feel it will take some extraordinary outside stimulus to corral the legal profession into a more refined business model. One where financial management has been stripped away from the firm and placed in the hands of a body who has such expertise and leave the practice of law to the lawyers! (For those who have been following my posts, I suggested this direction several months ago.)

Let’s say for the sake of argument that one firm, on January 1, decides, “we are going to break away from the pack behavior and do things right”. We will have solid engagement letters clearly outlining our terms, we will have our dockets done by the end of each business day, bill all WIP by the end of the month in accordance with the engagement and our collections team will be on the client by the 35th day; what will happen? If your immediate answer is, that firm will be grotesquely profitable and everyone will get enormous bonuses. You are wrong!

A firm that engages in such a ‘radical’ departure from the status quo will not get the results, as theory would suggest. No Newton’s Third Law of Motion states that for every action (force) in nature there is an equal and opposite reaction. It is the client’s ‘reaction’ that is not being considered, that would lead one to believe the firm would be immediately grotesquely profitable. Any action that the firm undertakes will be received by and reacted on by the client and often in opposition to what we expect. If you don’t believe this third law, let’s deviate for a second to aspects in life to which we are familiar. Let’s say, the government hikes up interest rates. The effect, everything for the average person gets more expensive. They lower interest rates, everything gets cheaper. This impact affects our discretionary income and therefore our spending. Another good example, but complex, is the effects of taxation. In the simplest sense, the government needs more money. So they raise taxes, that begets them the government more money. Where does it come from? The taxpayer’s pocket, which then through the multiplicative effect of taxation, the population’s discretionary income decreases and so does spending!
Returning to our firm that undertakes a full 180-degree change to become more in alignment with better business practices of the corporate word. I postulate such an avant-garde firm will endure a very rough and rocky financial future. For the clients who have become used to a 120-day plus collections term and are now faced with 45-day terms, will seriously rethink their engagement with the firm. To these clients, up to that point of change, the law firm was their banker through interest free credit. The problem is further compounded since lawyers have commoditized the practice of law. Any radical move in client management, I feel, would drive clients to the other firms that offer more palatable practices. Personally, I would like to carry interest-free debt for 120+ days, oh and negotiate a deal at year-end instead of paying my bills in 45 days. Imagine how wonderful it would be to carry your MasterCard bill, interest free, for 4-6 months then within the last couple of weeks of the year get a 10-20% discount. Who wouldn’t think that is great and who wouldn’t get upset at the departure from that ‘status quo’!

Does this spell doom and gloom for today’s legal practice? I don’t believe so. I feel that eventually firms will hit the glass ceiling on profitability. It may be this glass ceiling that is the impetus to change. Until then, firms will continue to settle in on what they have had instead of what they could have. However, if they were to stretch to what they could have, through small incremental changes in their business practices, they will achieve immense success. The refreshing reality is, some firms have undertaken the journey. I personally know of six. One of which I met last week. On Friday, November 30, I had the privilege of speaking with the CFO of one such firm, an eastern United States firm, who has been in existence for over 100 years. Throughout our conversation I was amazed how the CFO and the collections manager were so calm. I asked if they had a December 31st year-end and why they weren’t completely manic like all of their U.S. counterparts. To which she (CFO) answered: “if you batten down the hatches all year long, there is no need to go ‘manic’ in the last few weeks of the year”. She was referring to a consistently applied methodology for running the firm that achieved profits throughout the year, not in the last 22 deposit days. Anything is possible, there simply needs to be an external stimulus to change and then management of the cause/effect of the stimulus.