5 key factors to consider when planning your budgeting process.

Jan 2, 2020 | Governance, Management

The new year will bring budget season. For most, it will be an addition to the  day job, but it is a critical activity that is often treated with less application of critical and creative thinking than it demands as a precursor to superior performance.

Following are 5 fundamental factors to consider as you plan for the budgeting process, and allocate the resources necessary to deliver strategically significant outcomes, as well as, ‘the numbers’.  

Parentage.

Ensure the budgeting process is a child of the strategic priorities, and measures of progress towards the stated strategic objectives. If these strategic priorities are not clear, budgeting in the absence of strategy is like having a shower with a raincoat on, you will have done the process, but it will not do much good.

Rolling budget.

Make the budget a rolling document, reporting against the expectations articulated in the budget, and updated quarterly. For many, month reporting is standard, but mostly it is financial only, make it strategic as well.  However, monthly is too small a time frame against which to reliably measure for strategic progress, quarterly is preferable. This rolling process should not be just for the budget year, they should be rolling quarters, and perhaps more than 4 of them. Strategies should not change dramatically in the absence of some significant and unexpected external catalyst. What changes, are the tactics used to achieve the strategic objectives, and both must be measured. I have used a 5 quarter rolling ‘budget’ in the past. This time frame is long enough to enable a continuous process of critical thinking that becomes part of the routine performance management processes. It has the added psychological benefit that it is  not 4 quarters, that are too easily seen as a proxy for an annual budget. 

Zero based budget

Make the process zero based, or at least partly so. Do the critical analysis of what is required to deliver the long term. Which markets and customers should you be servicing, what capabilities do you need, which improvement activities do you prioritise, which investments make most sense, what tactical activities should we be doing, and so on. Then then cost it, while making forecasts of the tactical outcomes and longer term benefits derived from the various activities. Taking last years numbers and adding 3% is again getting under the shower with that rain coat on.

Zero based budgeting demands that assumptions be examined and validated before they are included in the numbers and forecasts. It is a means of testing the boundaries of the status quo, and enabling some extrapolations to be done, and strategically sound experiments to be undertaken, so forecasting can be based on data and experience rather than what one person thinks may be a good idea. It also demands cross functional buy in, particularly when improvements are being sought. Functional siloes usually get in the way of improvements, by focussing on their own patch, and not recognising the cross functional nature of processes.

It also requires an analytical approach to decision making in the place of the often qualitative approach used when you just bung on 3%.

Deploy Data.

Data is essential, no sensible budgeting effort can get away from the need to have quality data and depth of thought created by critical examination of the data. Internal data is essential, and as important, but usually just glossed over, is external and competitive data. While I always advise clients to worry about themselves rather than their competition, that does not detract from the simple  fact that competitors do have an impact on performance, so being able  to quantify that impact is of great value.

Do not trust the Status Quo.

In every organisation, the status quo exerts a great deal of pressure. Doing what has been done before, even if it is sub-optima, will rarely get you into trouble, but it does ensure at best average performance outcomes. The status quo will override any effort that is not supported by both critical thinking, creative solutions to well articulated challenges, and data. The automatic continuation of the status quo is always a sign of sloppy or absent thinking.

Happy budgeting, and if you need some experienced guidance, give me a call, today.

 

Own your digital real estate, or slowly disappear in 2020.

Dec 22, 2019 | Change, Governance, Social Media, Strategy

It is getting harder and harder to be seen in the tsunami of stuff posted on various digital platforms.

The platform owners are wholesalers of eyeballs, their business is monetised by being the choke point between those who create material, and those who may benefit from seeing it.

Since the purchase of LinkedIn by Microsoft, the changes being made to generate a return on the $US26 billion paid have all been designed to build the case for monetising the access to the other side of the equation.

I have no problem with the principal, being paid for value delivered. However, for a small consultancy, wanting to inform, educate, demonstrate expertise, and add value, the costs can become significant.

There is an option.

Be really good, be different, and be of value to the few who really care.

Everything posted on the various ‘social’ platforms is first posted on my own digital home base, a point of distribution I own, so make the rules by which I operate, www.Strategyaudit.com.au . The alternative is to rely on platforms others own, where they make the rules by which you have to play.

For those who sometimes find value in what I write, subscribe to the posts on the site, rather than waiting to see them on LinkedIn or some other place, because you will miss most of  them.

Once subscribed, you have the option of reading them, or just skimming and moving on, the choice is yours, not that of an algorithm designed to extract rent for the privilege.

If the posts become less than valuable, unsubscribe. Easy.

For many years now the path has become increasingly clear: to be seen, you must own your own your digital real estate, not rent it from someone else. 

The recent changes in the LinkedIn algorithms have halved the number of people who see what I post, and moved them geographically. A set of eyeballs in Sydney is for me terrific, New York or Mumbai is of less value.

At some point soon I will simply stop posting outside my own digital real estate, relying on that oldest of marketing tools, word of mouth, to spread the word. At least then I know that those who see the stuff really care, perhaps learn, and might start a useful conversation, which is why I do it.

This is the last post for 2019. I hope it has been a good year for you.

As I sit here in Sydney, ringed by fire, and observe the impotence of the public governance  we have somehow inherited, the hubris and self interest that prevents sensible debate and change across our economy and social services, I can only believe we are at a tipping point. I remain an optimist, and hope against hope that 2020 sees the awakening of a feeling that we have to not only demand change for the better, but dig in and generate it, one by one, until it becomes unstoppable.

Merry Christmas, and I will see you next year

Oh come all ye turkeys

Dec 16, 2019 | Governance, Leadership

 

As we hurtle towards another Christmas, the turkeys are out, clamouring to be at the front of the line.

Australia’s latest quarterly GDP figures were released  on December 4, generating a flurry of commentary from all sides of the political and economic tables.

What are we mere every day Australians to make of this welter of ‘informed’ commentary, that takes the same set of figures and comes up with entirely different analysis, delivered as fact.

We have the treasurer spewing patronisingly about how well it is all going, the plan is working, as the number is 0.4% growth, an annualised 1.6%. This is down from forecasts, way down from the post GFC average growth of 2.6%, and a long term average of around 3.4%.

Not so sure I like the plan, particularly as all the anecdotal stuff I see indicates we are much deeper in the doo doo than those figures would indicate.

For example, household spending is steady at best by the numbers, awaiting the yet to happen Christmas shopping binge, which seems  unlikely to emerge. Household spending is a key component in the GDP figures, when it sags, the economy is heading for trouble. I expect a very poor outcome when the next quarters figures are released in March.

Unemployment was 5.3% in the latest numbers, and when you look at the graph, it is on a rising trend.  Perhaps it is time for a revision of the manner in which that number is calculated, in order to offer a more realistic picture than the one delivered by the current sanitised nonsense? Unemployment is the number of people looking for work in the period. It excludes those who could work, but are not actively looking. However, the catch is that ’employed’ is defined as anyone who is paid for more than 1 hour a week. By that measure, our unemployment rate may be 5.3%, but the real rate, the point at which the so called ’employed’ are able to live, pay the bills, and not look for more paid time, is way, way, way higher, and the rate amongst significant slices of the population, such as those under 20, is devastating.  Then you have the problem  my client base of SME manufacturing has, of actually finding tradesmen who are capable and willing,  to do the jobs necessary to keep our SME manufacturers competitive, thriving , and employing people.  Those trades do  not exist because we stopped training them and offering the dignity of work.

The unemployment number is an absolute nonsense, we all know it, yet it is a highlight of the political discourse.

The tax system is stuffed, as stuffed as that turkey that will be crammed into the oven as the kids rip the paper off the latest imported offering from K-mart. It is beyond the comprehension of the average person, all we see is the balance swinging against those who are in the PAYE system. Companies, particularly  multinationals, have the resources to manage down their taxes at a time when the governments are spending more, which needs to continue as our infrastructure ages, schools and trades education are in trouble, health costs are rising at a rate significantly greater than the anaemic inflation, and there are added costs like the NDIS.  There has to be a tipping point somewhere, and about now seems to me to be a fair bet. The Henry tax report is now a decade old, and none of the recommendations have been implemented. None. Ken Henry may have blotted his copybook at NAB, but that does not take away from the value of his contribution to public life generally, and specifically as the boss of Treasury, on whose advice Australia dodged the GFC bullet in 2008.

Trust in public institutions has never been lower. It is hard to pick the catalyst for this reality. Is it the realisation that institutions of all types, but  particularly those operating on a platform of faith, have been abusing our kids, that financial institutions have been stealing, politicians have a truly flexible relationship with the truth, or that social media has made us informed, lied to, mesmerised by trivia, and deeply cynical, all at the same time?

Enough, I am depressing myself, just as I have to think about going to the shops and spending on stuff I am not sure people want, for reasons I do not really understand, as should we not be generous with things way more important than money, with those we love and value all the time, not just around the summer solstice?   

The turkeys are all coming home to roost. 

The 3 terminal characteristics of 20th century accounting.

Dec 11, 2019 | Governance, Management

 

Accounting as generally taught at university, at least when I did it many years ago, and by observation since, does  not suit the 21st century.

It has served us well for centuries since the double entry system evolved from 15th century monk and mathematician Luca  Bartolomeo de Piccioli, and has not changed much since. Alfred Sloan who was CEO of General Motors for 23 years between 1923 and 1946, created what we would see as modern cost accounting, as he drove GM to be the biggest company in the world in his time. However, the context in which accounting is now used has again morphed into something completely different. Accounting practise has not followed quickly enough in 3 very fundamental ways.

It does not recognise a company’s most valuable assets.

The three fundamental parts of an accounting package are the Profit and Loss account, Balance Sheet and Cash flow statement. Together they offer what has been seen as the basis of analysis of the value of an enterprise, and forms the backbone of all management and reporting systems.

Why is it then that the value of many businesses as represented by their balance sheet, bears no resemblance at all to the valuations placed on them by the market?

Value in most enterprises now resides in ‘intangibles’, largely absent from the balance sheet because of the measurement difficulties. Intangible assets often walk out the door at 5.30, and have the confusing characteristic of being able to appreciate with use, unlike physical assets that depreciate.

A balance sheet, which records physical assets owned by an enterprise, is unable to adequately make this leap to intangible assets in preference to the easily measured physical assets, once the backbone of a valuation, but no longer. The occasional exception to this paradox is of course when a business is sold, or changed in some significant way, and an amount labelled ‘Goodwill’ can be added to the balance sheet. This amount rarely passes the ‘pub test’ and in any event, as the business has usually been sold, it is too late to be of any value to the now previous owners. 

Financial reports only the dollar outcome of asset deployment, not the value outcome.

I recall the zeal with which Michael Hammers book ‘Reengineering the corporation,’ published in 1993, was embraced by corporate management. They proceeded to outsource everything that was not  considered ‘strategic’ in the race to deliver ever increasing returns on net assets, a key measure for investors and analysts, driven by short term considerations. In the process of outsourcing, they failed to recognise the seemingly minor items that cumulatively delivered the value their customers were prepared to pay for.

The classic case is that of Dell Computer, who built a massive company quickly by redrawing the business model of PC sales, and then went public. This made Michael Dell a billionaire, but in the process of maintaining their impressive returns  upon which the IPO had been based, progressively outsourced their design, procurement, and manufacturing processes. Korean company ASUS became their primary supplier, then taking what they had learnt, turned around and became a competitor, leaving Dell without the operational capability to compete.

Listening to those working with the financial reports led them down this path, when they should have known better. After all, it was them that disrupted the previous manufacture/distributor model in order to maintain control of their own destiny, which they then gave away.

Accounting systems cannot tell the future

We are notoriously bad at telling the future, nor can it tell us what has not happened. About all we know is that it will be different to the past,  yet we accept an enterprise valuation that is a multiple of past cash flows. We also accept the numbers delivered as an unchangeable  fact, that gives us little scope to record the savings made by removing transaction costs and the hidden costs of waste in every system. Those deploying lean accounting systems are setting out to identify those cost savings, and recognise them, but the irony is that they need two sets of books. The traditional set, into which the lean accounting is back flushed to meet the accepted accounting standards, and the Lean books that identify the outcomes of actions taken to improve the processes that drive the costs of waste out.

The businesses that thrive in the 21st century will be assisted by the recognition of the paradox presented by the statutory accounts compared to ‘lean’ operational accounts, and effectively manage the inherent conflicts.

 

Cartoon Credit: Scott Adams and Dilbert, who bravely faces interrogation by accounting. Dilbert seems to be ever more common as the header to this blog, is it that I am getting older, or that Dilbert after 25 years is becoming even more relevant? 

 

 

 

How to think critically about your essential investments in marketing

Dec 9, 2019 | Governance, Marketing, Strategy

 

Marketing is almost always seen as an operating expense rather than an investment in the future.

This reality poses an absurd paradox.

We treat investments in capital equipment for our businesses, and various financial instruments for our own wealth generation,  as items on a balance sheet. By contrast, we treat marketing investments, and particularly those made in various forms of communication, as discretionary items recorded in the profit and loss account as an expense.

Why do we make this distinction?

Both forms of investment have as their motivator, the generation of future cash flow. Just because it is a bit harder to calculate the return on marketing investment than it is to calculate the return on an investment in capital equipment, or financial instruments, should not be a deterrent to the effort.

Nothing is more critical to the long term commercial health of an enterprise than the investment in marketing. What could be more important than identifying, communicating, creating transactions and building relationships with customers, that generate future revenue and cash flow?.

There are 3 basic strategies considered by financial investors

Index investment.

This is a passive, low cost, average but relatively safe return strategy, sticking to stocks that reflect the particular index against which the performance measures will be applied. The most usual are the S&P and ASX 200 indices.

Arbitrage investment.

Essentially this is a short term strategy that assumes the investor is smarter than the market, able to recognise mispricing before anyone else, and their IT programs. It involves a lot of buying and selling of stocks, and often commodity contracts, essentially bets on the short term movement of price. Over the long term, there is plenty of research around that indicates that the performance is around the major stock indices. This is also a high cost strategy, in that the constant trading incurs transaction fees, usually not included in the published performance metrics.

Value investment.

Investing for value is a strategy that involves taking a long term view of the businesses in which you invest. This means you engage deeply, not just with the numbers, but with the management and culture, as well as taking a view of the marketplace in which they compete. It is a ‘filtering’ strategy, one where a lot of research boils down the potential targets to a very few, in which you take a significant position. It is a focussing of resources at the specific points where you see there is long term returns available, and are prepared to accept the vagaries of the short term focussed market gyrations.

If you apply a similar frame to the manner in which businesses make investments in marketing, there is a remarkable similarity.

Index marketing.

Doing what everyone else is doing, being average, a follower, and risk minimiser. It also ensures you do not stand out from the crowd, which in a cut-throat marketing world means nobody notices or cares about you, so perhaps you should save your money.

Arbitrage marketing.

Those following this strategy are just applying tactical actions to situations they see, there is no underpinning strategy, just advertising and promotion, usually driven by a budget that has to be spent, and KPI’s that measure the activity, rather than the harder to measure  outcomes of the activity. The driving word is ‘campaign’. A string of tactical activities will be seen as a campaign, and usually there is little flow from one campaign to another. This tendency has been accelerated to stupid proportions by digital, where the cycle time of a campaign, limited as they have been, has reduced from months to days. No longer are we looking for the strategic ‘big idea’ that will engage and motivate customers over a long period, we are looking for 10 ideas for the Facebook and Instagram posts in the next 24 hours.

Value marketing.

Successful marketing requires a solid strategy, well executed with a long term perspective. Over time, you will fiddle with the details as you become more familiar with the minutiae involved, and you fine tune the application of funds as you learn, but it is a multi-year commitment, not a 6 month campaign, and certainly not a few ‘cat photos’ on Instagram. Such ‘cat photos’ may be a tiny part of the tactical execution, but are never a component of the strategy. This takes time, resources, and most importantly, a laser focus on what is important to  the selected group of primary customers. Over time, you communicate your value proposition that defines why they should do business with you, rather than someone else, and do so at a price that delivers you a premium return, while delivering them premium value.  Then you retain their business, increasing your share of wallet, innovating, reducing customer churn, all of which delivers sustainable cash flow.

If any of the above arguments holds true, then it must be that the measures we use to make decisions about our financial selves should be able to be adapted to the investments we make in marketing.

Step one is to see it as a long term investment in prosperity, and not a short term expense to be reported and forgotten, hidden in a monthly P&L.

Step two is to have a robust, well thought out strategy, that is able to optimise tactically in real time.

Step three is to implement and learn relentlessly, seeking the elusive cause and effect chains that must exist between marketing activity and cash flow.

 

Cartoon credit: Scott Adams and Dilbert reflecting on investment strategies.

 

 

 

Where to now for the bashed-up dairy industry?

Nov 12, 2019 | Governance, Strategy

 

There is an awful lot of hand-wringing going on amongst politicians, bureaucrats of various types, and industry pontificators about the state of the dairy industry. Sadly, it has been going on for as long as I have been an observer, which is a long time!

The current drought has been a disaster for the industry, but is not the cause of the long term decline. For 30 years, smaller family farms all over the place have been going to the wall, and those left are mostly just surviving as a result of the margin squeeze, caused by concurrent cost increases and downward price pressure, as well as short term thinking and often mismanagement throughout the supply chain.

This is not a recipe for long term industry health.

25 years ago I was booted out of a senior role in one of the largest businesses in the industry. I had consistently voiced disapproval of industry policy (this was before the inevitable de-regulation in NSW) and of some aspects of the management of my employer. They were as sick of me, as I was of them, so there I was, after a decade of delivering growth and profit, on the footpath with a young family.

After a frustrating search for another job, I emerged as a strategy consultant, never again to be required to act against my best instincts and experience.

Very recently I was asked to prepare a proposal for a body in the industry, and while I had little belief it would proceed, did some on the ground research to uncover the changes that had occurred in the 25 years since I had left active participation, upon which too base my recommendations.

Sadly, I could have almost written the list below 25 years ago.

The drivers of the industry have not changed much, nor has the lack of strategic response. Each factor has impacts on others, and the compounding impact has been significant, and probably terminal for most small operations in the absence of substantive and therefore unlikely change.  The reduction in numbers of family dairy  farm operations over the last 25 years leads to the conclusion that there will be very few, if any, left in another decade.

The list following is not weighted, or in any particular order.

Scale.

The big are getting bigger, sometimes vertically integrating through the chain, and the small are being squeezed out. This applies to all steps in the supply chain, farmers, processors, and retailers. In this environment, scale becomes the primary driver, delivering financial returns at the expense of other considerations. Product quality becomes ‘averaged’. The smaller operations cannot compete on price/cost, and do not attract a commercial reward for the higher quality they are able to deliver. A few have been able to find a niche that does value a superior product, but most have had no option other than to accept the price on offer, irrespective of costs incurred or quality delivered.

Capability.

Over a very long period we have hollowed out our scientific, management, and innovation capability in dairy, as well as allowing it to be taken into overseas ownership. The management focus of larger players is on international prices and commodity trading, rather than domestic demand responsiveness, market development and innovation. As a result, the whole industry has been commoditised. You can buy milk, a natural, nutritious product at your local supermarket for $1.10 a litre, while in the isle next door, water, virtually free from the taps sells for multiples of $1.10 a litre. A gross failure of industry and enterprise marketing, and not one that can be fixed with nonsensical regulation.

Financial depth.

Small farming operations do not have the financial capacity to expand beyond their dairy boundaries, and usually do not have the depth to even utilise existing technology to optimise current operations. This precludes both investing in potential productivity improvements on farm, and moving further into the supply chain to capture some of the value added margins that are potentially available.

Education.

The emerging generation of potential dairy farmers has nowhere to go to learn.  There is no longer any dairy education in Australia, which means that there will not only be a degradation of the management capability of existing industry participants, there will be no new blood coming in, and there will be no process or product innovation. This factor applies throughout the supply chain, but is particularly evident in dairying operations. There are a number of ‘cottage industry’ training courses around, such as cheese making courses. These only teach the ‘how,’ without any reference to the ‘why’ things happen. To a significant degree they also substitute for real education in the public mind, which makes it easier to close down the real education that has the potential to add long term industry value. Most of us would agree to the notion that education is a core foundation of long term success, and yet we have stood aside while it has been raped and thrown out into the street.

Scientific foundation.

The scientific base upon which all else is built has been discarded, not just degraded, discarded. Werribee, formerly the centre of dairy science is an uninhabited ghost-town, and as noted tertiary education in all its forms in dairy technology has been discontinued.  If I wanted my kids to do a degree in dairy technology, they would have to commute to New Zealand.

Food security.

Along with other parts of the food supply chain, Dairy has been sold off to international entities. We no longer control our own food supplies, the manufacturing capability is largely overseas, and local production increasingly in the hands of Multinationals who make decisions on their commercial needs, which are not necessarily aligned with the best interest of Australians.

Water security.

The current drought is a disaster but is not more than a nasty reminder that, in the driest continent on earth, we have allowed water security to diminish, and sub-optimal use to be made of the resource available. This impacts all aspects of primary production and has had a profound impact on the ecological and environmental management of the land.

‘Metro’ farming.

Dairy farming (and intensive farming generally) evolved close to population centres, often on the best land. That land is now more valuable as a short-term development opportunity than it is as a long-term producer of food, and so is largely sold off as ‘bedrooms’ to the population centres, pushing farming to more marginal and logistically costly areas.

Power.

Australia is a substantial net exporter of power, yet we have very high power prices by comparison to other developed economies. This is a failure of public policy over a long period. For dairy farmers, it has proved to be a real problem as they need a lot of power to drive refrigeration and their operational plant. Power costs alone are driving small operators out of the industry.

Survival mode.

Small farmers are in ‘survival mode’ working long hours for little financial return. This leaves little in the ‘kitty’, financial, time, or energy, to undertake the challenges of change on their own. They desperately need an infrastructure that supports and rewards their efforts. Rebuilding this infrastructure is not a short term ‘fix-it now’ press release response, it needs bipartisan political support across a number of  portfolios and geographies.

Demographics.

The average age of dairy farmers is now approaching retirement age (25 years ago it was 56 and it does not seem to have reversed). These people are retiring, selling the farms, and their children and grandchildren are not going to follow on. This loss of farming wisdom may seem minor in the scheme of things, but in the long term will diminish us all, as we try and address the increasing environmental challenges facing us.

 

The egg that is the dairy industry cannot be unscrambled, but there is some hope that a reasonable omelette can still be made. However the chefs seem to be out to lunch, and the apprentices do not know what to do, or how to do it. Only going right back to the basics, removing the politics of power and influence, of all types,  and rebuilding from the foundations up, has any hope of there being much more than a few corporate farms and the odd family with a couple of cows left in a few years.