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
Wednesday, August 26, 2009
Monday, July 13, 2009
Success Following Ego Check-In
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.
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.
Monday, June 15, 2009
Wow… Great Game !!!
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!
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!
Saturday, June 06, 2009
Beyond The Best Before Date
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.
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.
Tuesday, May 19, 2009
Value to Find
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!
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!
Sunday, May 03, 2009
I Need more Money; Give me more Value!
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.
Tuesday, April 28, 2009
Of Course I can fix it; I am a Mechanic
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.
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.
Thursday, April 16, 2009
Turnaround or Turn-Around
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
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
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
Sunday, March 22, 2009
Too Much Clarity; a call for Perspective
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.
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.
Tuesday, February 17, 2009
Are we there…. Yet?
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!
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!
Friday, January 23, 2009
The Werther Effect; 21st Century Darwinism?
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!
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!
Wednesday, December 31, 2008
Prefix ‘Fr’ may be set for 2009!
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)
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)
Tuesday, December 16, 2008
Getting to the Focal Point
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.
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.
Sunday, December 07, 2008
See-Saw Capitalization
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.
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.
Tuesday, November 18, 2008
Stop the bleeding, connecting with Cassandra
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.
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.
Sunday, November 09, 2008
Knowledge Begs Action; Culture Alters Reaction
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.
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.
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