Why Fish, when you could Farm?

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

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

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

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

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

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

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

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

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

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

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

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

Can’t Escape from …Bud !

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

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

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

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

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

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

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

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

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

Hei’ei’ wei a Hamma!

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

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

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

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

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

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

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

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

Bud don’t know Jack!

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

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

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

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

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

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

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

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

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

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

Are we there… Yet?

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

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

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

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

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

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

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

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

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

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

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

Value – The Measure of Success

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

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

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

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

V = E/(K-G)

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

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

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

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

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

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

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

That’s not Fair!

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

Cost of Accuracy

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

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

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

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

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

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

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

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

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

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

Cash: Master or Slave?

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

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

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

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

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

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

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

Time to Reformat?

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

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

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

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

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

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

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

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

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

Is that Blue in the Red Ocean?

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

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

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

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

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

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

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

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

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

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

Beware of - The Herd

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

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

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

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

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

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

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

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

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

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

It’s all about …ME

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

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

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

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

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

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

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

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

And...Size does Matter !

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

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

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

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

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

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

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

No Savior in Technology

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Love-Hate Duality of Change

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

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

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

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

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

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

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

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

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

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

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