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.

Perspective, Outside of the Box

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

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

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

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

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

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

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

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

Mind the… GAAP?

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

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

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

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

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

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

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

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

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

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

Attitude, the Unmitigated Cost

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

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

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

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

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

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

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

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

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

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

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

Success Following Ego Check-In

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

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

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

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

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

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

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

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

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

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

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

Wow… Great Game !!!

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

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

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

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

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

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

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

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

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

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

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

Beyond The Best Before Date

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

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

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

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

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

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

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

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

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

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

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

Value to Find

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!