Too Big to be Honest with Itself?
We watched the CNBC reporters breathlessly describe the financial fire burning inside the headquarters of mammoth companies that essentially didn’t or wouldn’t have enough cash to pay their bills as they came due. Reporters, economists, politicians and central bankers babbled the companies were “too big to fail.” Whether they were or not is the subject for another time.
How did those companies reach their Thelma & Louise moment of driving over the financial cliff?
At some point, they stopped being honest with themselves about the state of their business. They stopped or never asked questions looking for objective answers regarding what was working, what wasn’t and the real risks the company faced. They all had opportunities to stop or change direction.
“Too big to fail” is a status 99.999% of companies will never reach; however, all companies even the smallest must fight the temptation of being too big to be honest with themselves.
As companies grow, they tend to pack on the complexity pounds and then must fight from starting the slide down the slippery slope to the ultimate reason for avoiding the truth.
The slide starts as operations become more interwoven with steps, processes, people, coordination and things to remember to avoid making prior mistakes and deliver promised results. The whole organization tends to get wrapped into the details of operation focused on the next deadline and there is never a requirement to step back and question how things are done and what is no longer necessary.
Second, to provide the carrots to reach targeted growth and profitability, compensation plans grow and increase in terms of dollars to be earned or lost. The employees see the large possible payouts which can blind them to issues that may delay or reduce those payouts.
Along the way as the business is growing, its people make commitments to their bosses, the board, lenders, investors, employees and community that can be difficult to break but sometimes become necessary to revisit. There is a natural tendency to avoid admitting failure or objectively examining the reasons for failure until it is overwhelming obvious or an external party forces the realization.
And finally the company reaches the precipice, it has complex operations, many more employees than it used to and managers that have already spent their yearend bonuses in September. Looking into the abyss and questioning what is working and what isn’t, may deliver some answers that will delay success or cause pain through layoffs & terminations. Many make the choice to sprint to the next milestone instead of stopping to check the map and measure progress towards its ultimate destination while questioning what unnecessary weight they are carrying.
By questioning assumptions and looking as an outsider at the scorecard, there is a better chance for the symbolic light bulb to go off and illuminate the waste and distractions that are slowing the progress towards achieving its ultimate goal. Questioning why and how things are done directly or indirectly questions individual roles within an organization and people tend to defend their role or contribution as critical and objectivity & honesty are the first casualties.
A sign that a company is able to be honest with itself is the ability of its leaders to objectively discuss and adjust their actions based on these types of questions:
Current Condition Questions:
How is each part of the business doing?
What parts are doing well?
Which are underperforming and the reasons why?
What parts of the business are deadweight?
What is the true financial condition of the company? What does it really owe and the timing of those payments?
Does the company have the right people for its current situation?
Where is the company focusing its efforts for breakthrough success?
Why do customers choose to do business with the company? Why are some choosing not to do business with the company?
What is the company doing that is a waste of time or capital?
What are the distractions?
Future Condition Questions
What will the company have to do in the future to be successful?
How is the market changing? How might the market change overtime?
Will the company have enough cash to pay its bills if an unforeseen event occurs?
What are the types of risks the company faces?
What would its financial condition be if the price of oil, interest rates or key raw material increased by 25%?
What opportunities does the company have? Which opportunities will the company consciously direct its efforts to achieve? What resources does the company need to realize the selected opportunities?
What does the company need to be great at? What are the core things that will lead to success?
Does the company have the right people to realize these opportunities?
There are many reasons for a company to kick the can full of hard questions down the road, but once the can is kicked over the cliff it is difficult to change the outcome.
Does your trade show booth broadcast your company’s murky strategy?
There are thousands of business strategy books and ways to look at how a company is positioned in the market, but the rubber meet the road moment is when a company displays at a trade show. The trade show is an opportunity for the company to focus its message, energy and resources.
When I work with new clients, the initial focus is often digging through the numbers to see where they are making or losing money.
It is a relatively straight forward process to determine what is working and not working financially. The mining often discovers plenty of low hanging fruit to expand profitability. Many times there are business segments that are unprofitable or not making enough compared to the management time & capital invested.
Once the numbers are clear and the low hanging fruit is plucked the focus turns to how to really grow profitability which inevitably leads to the big picture: what is the company’s strategy? How is the company and its products positioned in the market (why would a customer buy your product instead of the competitors’ offerings)? What problems does the company solve for customers? Why would someone hire this company? What are the company’s strengths?
Granted there are many types of trade shows, but at their heart, trade shows are trying to convince potential or existing customers to buy from the company. There are often thousands of booths. People do not have time to concentrate on each booth. If they are interested they want to sum it up quickly in their mind or in their text message to a colleague. You are lucky if they can remember one sentence about your display and you don’t want it to be confusion.
If you meet with existing customers does the message of the booth reinforce why they should continue to do business with the company? Or does it give them a reason to do less with your company? If they see the company is involved in a number of unrelated products does it give them concern that you cannot focus enough management time or capital on what is important to them? If they see an obscenely large expenditure on your booth do they assume they are paying for it when they buy your product? Or if your display is so cheap, does it transmit that the company can barely afford to invest in marketing let alone R&D and product development?
A display cannot do everything and it is probably easier for a booth to confuse a customer. It all starts with the message the design needs to transmit. There is limited room for text, pictures, audio and visual displays. If there is too much to communicate it could signal a lack of focus. There are a range of ideal outcomes depending on the company and type of show. The ideal outcome is determined by the company when they are designing the booth and how it fits within the company’s overall strategy.
I find that the companies that can distill their insights into what is essential and create understandable displays are better able to communicate what is important within their companies and align their activities and decisions to execute their strategy successfully. The process of distilling down the message to what is important will pay dividends at the trade show and throughout the company.
The Flashy Financial Dashboard: Do I need it? Is it one size fits all?
There is a lot of talk today about financial dashboards which for someone like me who loves numbers, measurements and visual presentations is great as long as the information is tailored to the company’s situation and the numbers are relevant and easy to understand for the user.
The financial dashboard is the equivalent of the car dashboard to be used by managers to drive their business.
Have you ever sat in a new car and seen the pretty dashboard light up with amazing colors and digital gauges displaying what appears to be magical information? You think wow, it is incredible, all this information beyond just the normal speedometer and tachometer there is engine temperature, tire air pressure levels for each of the tires, traction control alerts, estimated arrival time, average MPG, miles traveled since last fueling, miles remaining until empty, etc, etc, etc.
There is a lot more data on the typical car dashboard today. Does it make you a better driver? In addition to more data, the dashboards are more visually appealing which helps justify that sticker price of $63,487 plus tax.
How much of it is it of value? You use the speedometer all the time to determine if you are going too fast or whether the car in front of you in the carpool lane is driving too slowly.
Do you ever look at the engine temperature gauge? When I was a kid, my dad obsessed about the temperature gauge when traveling over the mountains. The air conditioning was always turned off. We were always looking for any signs of overheating because we had a car prone to overheating. Today even Obama Motor cars have generally been able to master the engine temperature issue and how many people actually know the average temperature their engine operates at since it is rarely an issue?
What should your financial dashboard have?
What is relevant & essential information that you need to keep up to date with each or morning at the end of each week? When you see the police officer with the speed gun, you need to know now how fast you are traveling. When you have a quarter tank of gas and plenty of fueling options your distance to empty is not as important as when you have half a tank while driving at night from El Paso to Tucson and there are few filling stations then distance till empty becomes the most important number in the world and you want constant updates.
If there are too many things on your dashboard, what do you do? You tune out the noise and possibly miss something important.
The Essentials: A dashboard is not one size fits all.
A dashboard should provide information on 1) the essentials such as cash and sales, 2)parts of the company that are causing a headache for the CEO and 3) the key drivers for generating positive cash flow, growing sales and managing expenses.
A dashboard should also provide context. If you suddenly look at your inventory levels but have no idea where they have been in the recent past or how much inventory you have in relation to annual or monthly sales, how do you know if it is getting better or worse?
If you are having a problem with inventory buildup or shortages then daily or hourly monitoring may be appropriate. For a company that doesn’t have an inventory issue just providing current levels is sometime adequate, for a company with extreme issues the dashboard may need real-time detailed inventory information. It depends on the company’s situation and business model.
Utilize Others and Automatic Warnings
The cockpit of a typical commercial airliner seems to have hundreds of dials and indicator lights. Does the pilot look at all of them constantly or typically just keep an eye on the key gauges and allow warning lights and alarms to notify him when there is an issue requiring their attention? Pilots have thousands of hours of training to be able to understand their dashboard. If you do not understand the hundreds of key indicators on your dashboard you are more likely to miss the key indications and need the help of others to spot the issues.
During your management meetings, ask your team if any of the key indicators are getting close to the danger zone. Assign responsibility to your team to notify you if they see an issue with an indicator in their department. Help them to establish the danger levels for key indicators.
Evolving Dashboard
Your dashboard from year to year should be changing. If you have a new sales initiative or strategic objective, monitoring the related key performance indicators can provide feedback and allow for course corrections before momentum is lost.
Financial dashboards are a great tool if your dashboard fits your company’s situation. Question what is important to you and will you be able to recognize an issue when it appears on the dashboard?
One question that can balloon your profit:
IS IT ESSENTIAL?
Planning my weekends are often difficult for me. This morning I was lying in bed looking at the ceiling and my head was jumping between different topics: updating the personal finances, thinking about whether to prepare my grandmother’s tax return or outsource it, dealing with 600 unread emails, hitting golf balls, squeezing a workout in, planning for next week and other non-family related items.
Life and business share the similarity that things tend to get more complicated over time as the todo list inevitably stretches unless the value of items are questioned.
Are there things that were important but are no longer relevant or could be reduced dramatically and produce the same result or better?
Could I increase my satisfaction with the weekend by focusing efforts on the essential and shrinking time spent on tasks that are still relevant?
The question “is it essential” can swell profits in two ways.
1. It can help expand revenues by focusing the product on the things the customer feels the greatest value or erases their biggest problem.
2. It can lower your costs by cutting the extra time and money spent that are not absolutely essential.
Customers only care about what is important to them. They have their own todo lists and tight budgets and they don’t care about your cost structure. By continually questioning what is essential to your customer you can deliver a product that hits specific targets.
Once you have a grasp on what is essential to your customer, you can look at all your costs through the prism of whether that expenditure is truly essential to delivering it at a price the customer is willing to pay.
Accounting firms often have very nice offices in the nice parts of town. For some customers this is essential, since it gives the appearance of success and permanence. To many clients, they understand they will have to pay for these marble offices and the partners’ big houses in high cost neighborhoods. Can a firm provide what is essential to different types of customers with a high cost structure?
Southwest Airlines provides low cost air travel to customers that want air travel they can afford. Their airplanes have no first class section which shrinks costs since there is one type of seat, one selection of food & beverages, only one type of service to train employees to provide, and there are no people at the corporate office in charge of selecting wines, silverware, glasses, and pictures for brochures telling how great their first class section is compared to the competition since it is not essential to their core customer.
Do you have a firm grasp on what is essential to your customer and how your product hits or misses their target?
With a firm grasp on what is essential to your customer you can go through each aspect of the product, internal processes, expenditures and positions with the question is it essential?
How is product made, are there steps in the process that no longer need to be there?
Processes by default get longer and more complicated to deal with issues that arise. Without a deliberate effort, a process will never cut the fat on its own.
What does each department do that is critical to delivering what is essential to the customer?
If the department does not deal directly with the customer, are their functions essential to supporting the front line divisions. To justify their existence, have they created more work and process that compound the cost?
Is the hiring process too long or does it not do enough to reduce hiring mistakes?
By practicing restraint in what you try to provide to the market and the types of customers you are trying to serve, then it is possible to shrink your cost structure while increasing your revenues.
In the end, I decided to outsource the tax return (to a CPA with a nice but not fancy office), spend twenty minutes unsubscribing to junk emails, scratched the golf practice since it isn’t essential to having fun, wedged in a workout, and gave myself fifteen minutes to schedule the week and stopped myself from spending an hour on a schedule that was inevitably going to change.
Why is That Company Worth So Much More Than Mine?
What makes a company valuable? The ability to profit from its own secret sauce again and again.
The secret recipe starts with an insight or intuition about the core reason why a customer would hire it (1).
The secret sauce develops over time as the company watches the faces of customers savoring or wincing while tasting its sauce.
A secret sauce does not appeal to everyone. Taste is subjective and cannot appeal to everyone since the compromises would dilute it into a bland paste.
By default, a recipe for a secret sauce excludes many things.
It takes more than an amazing insight or list of closely guarded steps to create a valuable company. To survive and create the value it must do four things with its sauce as the basis:
1.Hire the right people to make the sauce
2. Develop and improve products
3. Sell its products
4. Deliver the product
5.Profit from its activities
Reference (1) Clayton Christensen concept of hiring a Milkshake to perform a specific job.
Worth the Time
There are no shortage of business books with ideas and concepts.
A great concept has accurate insight which is easy to understand and apply.
In the book “Focus Your Business,” chapter 3, Excel at One Thing, in eleven pages summarizes the trade-offs a business must make in order to develop a competitive advantage (the company’s answer to the question how are we going to win?)
Visuals help me to understand abstract ideas and author’s Steven Brandt’s Competitive Triangle makes is easier to see the trade-offs between convenience, product superiority, applications expertise (great customer service or sales capability) and price.
The entire is book is good. Wish it was available on Kindle.
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Are Some of Your Customers Sucking Future Growth From Your Company?
You pick up a company income statement (or P&L) and the accompanying mini-P&Ls (or analysis) showing profitability by product and customer. Some products appear very profitable and others are producing a giant sucking sound. Read the rest of this entry »
Interesting Perspective on Financial Incentives
A friend sent me this link to a YouTube video of a lecture by Dan Pink regarding incentives. The animation for the video is interesting by itself. The lecturer quotes two economic studies that produced results that are counter-intuitive for how you think people would behave when offered financial incentives.
The results of the studies are interesting. The lecturer’s conclusions are his own.
What’s more frustrating, improving your golf game or your business?
There are so many things to work on for each and plenty of people telling you need to work on this or that, or do it this way.
For golf you can improve your swing, grip, alignment, tempo, golf course strategy, putting, chipping without even starting to work on the mental aspects of golf or dealing with all the equipment and practice devices that look so promising on those infomercials.
In business there are plenty of things to address such as your strategy, pricing, customer experience, products offerings, productivity, organizational structure, hiring practices, employee performance assessment, sales process, marketing before you get to the intangibles such as culture then there are products, software, books, and equipment that are presented to you to help your business.
I put together a list of things in golf that have a lost brother in the business world.
Driving Distance = Sales
Golf Score = Profits
New Super Driver = New Sales Person with lots of established relationships
Selecting New Equipment = Hiring Process
Club Selection = Delegation
Golf Course Management = Strategy
Short Game = Expense Management
Alignment = Planning
Golf Pro = Consultant
Measuring Performance = Measuring Performance
The irony is that a number of things out there will help your business and your golf game but one of the biggest issues is what sequence to address problems. Is it based off what recently grabbed your attention?
In both worlds the best course is to make an objective assessment of all aspects of your business and determine which areas can have the greatest return on your time and capital investment. Use your numbers to determine the priority order and use the potential pay back to guide your decisions and your business will improve and you can afford to play better golf courses more often.
,
They are more a like than you think. The process for improvement is not a straight line and it is not obvious which one should go first and you have to work on multiple things at once and things can often get worse before they get better.
There are a lot of people and products out there saying they have magic bullet, information, idea that will make improvement a synch.
There a lot of things to work on both sides.
Both processes start by measuring where you are at today to determine what areas need the most improvement.
ARE YOU EMBRACING OR DREADING THE DAY AFTER VACATION?
Coming off a vacation has its pros and cons. You may feel refreshed or dread catching up on 500 emails.
Vacation offers the opportunity to start with a clean slate and fresh perspective. One executive would delete every email he received during vacation so he could start fresh figuring if it was really important they would resend the email.
Floating back into work when the mind is quiet is a great time to use your numbers to determine where you want to focus your energy. Instead of just plowing through the emails one by one and building a monster todo list, take a look at the big picture.
Look at your key numbers and big trends. The twelve month trailing trend is a great way to see the direction of your business. Are revenues and net income climbing or sliding into the abyss? Looking at your annual budget and plan and compare performance when your mind is still.
Look at the big picture and ask big questions.How is the company doing? How are your teams performing? Do you have the information to answer these questions? You may hear signals that are difficult to capture when you are in the middle of the turbulent reality river.
Vacations are not free, use the golden moment when your mind is fresh to determine where you should focus your efforts.