6 essential questions from the devil

6 essential questions from the devil

May 4, 2018 | Governance, Leadership, Management

Having a ‘devils advocate’ around you is one of the most productive relationships you can have in a complicated enterprise. Such a relationship enables the stripping of any position held back to its core, removing the bias, preconceptions, and power of the status quo, but leaving room for intuition born of domain knowledge, experience, and most importantly, data.

You should seek out and nurture such relationships.

The most successful commercial relationship I have had was with a bloke to whom I reported for a long time, in two different businesses. Vigorous ‘conversations’ took place as a natural part of determining the best course of action to take, the best allocation of limited resources, with each testing the positions taken by the other.

The eventual outcome was more often than not, one that would not have emerged without such a process, although we both knew who held the power of veto, and from time to time, it was used.

I was reminded of this relationship recently in a conversation with a client who had reached a conclusion I thought was absolutely wrong. It was based on flimsy information, the opinion of someone whose opinion in this matter was in my view skewed by some unfortunate and irrelevant bias, and a reverence for the status quo which appears to me to be destructive.

I went through my standard list of  ‘Devils questions’ to no avail. Tell me what questions I should have asked on top of those below in an effort to help him consider the real merits of the decision he was about to make.

  • What is the source of the data you are quoting? Without a reliable, robust and repeatable data source that stands up to scrutiny, an ‘insight’ based on it is just another opinion.
  • How did you get from the ‘data’ quoted to the ‘insight’ you appear committed to? I like to see logic chains, definable cause and effect, when gathering insights from data, and am wary of leaps of faith that do not have the authority of logic and experience.
  • What biases have you have built in from your background and experience? Nobody is immune from some level of built in bias, a good devils advocate holds up a mirror to them.
  • What other options could there be based on the same data? In most situations, there is more than one way to interpret and leverage data, opinion, experience, and outside knowledge. Playing the ‘options game’ as a part of a conversation is a very useful tool.
  • How do we test the insight without betting the farm? These days the ability to test has been multiplied a thousand fold by the digitisation of everything, it is no longer wise (if it ever was) to bet the farm. The scientific method rules!
  • What will you do if you are wrong? Learning from mistakes, and applying the learning is the basis of improvement, and without an inclination to learn from mistakes, you will be destined to repeat  them, usually for  the same reason they were made in the first place.  In addition, answering this question almost inevitably opens up other options for consideration that may not have been adequately considered, or completely missed in the conversation.

Devils can be very helpful when used well, but they also have the power to be destructive, so be careful with whom you dance.

 

A marketers explanation of the difference between an ‘Intangible Asset’ and ‘Goodwill’

A marketers explanation of the difference between an ‘Intangible Asset’ and ‘Goodwill’

Apr 30, 2018 | Change, Governance, Strategy

When you look at a balance sheet, the intangible elements of it are either the outcome of ‘boilerplate’ accounting standards that bear little resemblance to reality, or are the function of a management narrative. Neither is of much use, and both can be destructive.

For example: under the accounting standards, intangible assets are listed on a company’s balance sheet only if they are acquired, and therefore have an identifiable cost, and usually lifespan that can be amortised. Assets developed internally have no place on a balance sheet.

Of course, neither goodwill or intangible assets as recorded have little ’cause and effect’ connection with the share market valuation, which is all about future cash flows.

The Coca Cola logo is generally ‘valued’ in the billions, but does not appear in the balance sheet because it was built internally, rather than acquired. Were a company to acquire Coca Cola, there would then be a value that could be pinned to the logo, which would then appear on their balance sheet. The caveat is that there are mechanisms to place a value on an intangible asset that can be recorded, usually involving independent valuations, but these valuations come with a grain of salt.

A further example. When developing a new product, the outcomes of that effort may be seen as an intangible asset, but it appears nowhere except the P&L, as development expenses. Assume the product is a pharmaceutical product, years in the development, and very expensive, this is a drain on cash flow in the hope that there will be a pay-off. Prior to commercial launch, it has been patented, the efficacy proven, then the patent becomes a tangible asset, as a dollar value can be attached, and the patent is tradeable. The brand name of the new product will become a new intangible asset, not reflected anywhere beyond an implied connection to the value of the patent. Over time if the product is a market success, the value of the patent will increase to reflect the future cash flows that will result from ownership, to a peak, after which the cash flows will be subjected to competition from generic products that will become available as the patent period runs out, so the value is reduced. The brand name has no value in the books, until it is sold, perhaps along with the patent,

The key distinction between goodwill and intangible assets is that the goodwill has been purchased, so has a market defined value. Google paid $12.5 Billion in 2011 for Motorola Mobility, entirely  for the patent library they owned. At the time, Motorola was close to broke, their products which had led the mobile phone market had suddenly become irrelevant when they missed the smart phone revolution. The patents were transferred to Google, who then sold the remaining  hardware business to Lenovo for $3 billion, without the key software patents. On paper, Google took a $8.5 billion loss, but retained the patent library and intellectual capital associated with the Motorola development labs. This gave them greater leverage with the users of Android mobile software, predominantly Samsung, and protection against the relentless patent wars with Apple. A great deal.

Lenovo would have an item on their balance sheet that values their purchases from Google, but there is nothing on Googles balance sheet beyond the  ‘loss’ they incurred in the transaction, which fails to reflect the future value they will derive from the ownership of the patent library.

However, there is a sea change going on. According to research company Ocean Tomo, the proportion of US Fortune 500 companies stock market valuations represented by intangible assets has gone from 17% in 1975 to 87% in 2015.

The lesson here is that the world has changed, so called ‘soft’ assets are now more valuable than the physical assets that accounting systems were designed to track.  Focussing effort on building those soft assets will pay long term dividends, which cannot be readily accounted for in the monthly financial reports.

For most of my client base, the notion of intangible assets is far-fetched, until they come to valuing their business, when a primary asset becomes the relationship they have with their major customers, and how ‘sticky’ they might be seen post a sales transaction. It is this ‘stickiness’ that is a primary driver for the acquiring company to keep the key personnel employed on a pay-out contract based on a period of time and key KPI’s, to better manage the smooth transfer of the relationships.

Header from http://www.oceantomo.com/2015/03/04/2015-intangible-asset-market-value-study/

Is marketing’s greatest failure in the boardroom?

Is marketing’s greatest failure in the boardroom?

Apr 23, 2018 | Change, Governance, Leadership

There have been libraries written about strategy, and particularly marketing strategy. There are now multitudes of tools and templates available to develop and implement, but the gap between the development and successful implementation of marketing strategy is huge, and hard to navigate.

Marketing is a functional silo on an organisation chart, as is Sales, Operations, Finance, HR, but unlike the others, marketing deals with unknowns, the future, whereas all the other functions deal with the past, or what is immediately in front of them.

Marketing is about the future, long term commercial sustainability, and its effectiveness is really hard to measure, other than in hindsight. There are lots of measures for things that have happened, which are the result of often many combinations of actions taken some time ago, so the measures are unable to change anything, just give insights to what worked and what did not.

As the senior marketing person in a very large business 30 years ago, I found myself often talking about advertising, segmentation, positioning, graphic design, and all the rest, around the board table, which either put others to sleep, or elicited opinions, usually uninformed, about the detail. However, when I talked revenue I had their attention.

Marketing is all about revenue, particularly future revenue. The other stuff is the paddling under the surface that enables the generation of the revenue, but the real measure of marketing effectiveness is revenue and margins over time.

In every business I have ever had anything to do with, marketing expenditure is treated as an item in the P&L. By definition, items in the P&L are expenses or past sales revenue. This is inconsistent with the notion of marketing being about building the foundations of future revenue.

The closest analogy is a piece of capital equipment, they are always purchased to fill one of two roles, sometimes both:

  • Increase the volumes available too be sold,
  • Increase the productivity of the processes.

Those purchases are recorded in the journals, posted to the appropriate ledger account and reported in the cash flow statements, and the balance sheet, not the P&L. The greater irony is that capital items are depreciating assets, whereas marketing  investments, when done well are appreciating assets, unrecorded anywhere except the P&L as an expense until the business is sold, when the accountants start talking about ‘Goodwill’ being the difference between the realisable value of the physical assets, and the liabilities on the books.

There is a structural paradox here. We treat a potentially appreciating asset differently to one that can only depreciate, just because it is hard to measure.

This challenge of measurement is the biggest one marketing people have to hurdle. The turnover of marketers in senior roles is the fastest amongst the functional heads in large corporations because we generally do not recognise the essential long term business building nature of marketing investments. We treat it as an expense to be cut at the slightest cloud on the profitability horizon, and the marketing people with it.

One of the challenges here is that to achieve these long term outcomes, marketing requires the co-operation and  collaboration of all the other functions, without the organisational authority to direct. The CMO has to be a leader across functions. He/she has to build the respect and co-operation of other functional leaders, often at odds with their short term function specific performance measures.

25 years ago, I and my marketing team, failed to convince the board of the then Dairy Farmers Co-Operative to invest the required capital in new equipment to launch a new brand of flavoured milk. It was to be packaged in plastic bottles, with a screw cap, to be sold at a very considerable premium to the products then only available in the gable top cartons, and we proposed to sell it to different consumers. Nobody had done this before, we were banking on tapping into a market completely under-serviced by existing packaging and branding. The Operations Manager at the time believed in the project, and put his neck on the line by committing  his R&M budget to refurbish some older gear in the absence of capital approval, and I ‘stole’ the required advertising funds from another brand.  We launched Dare Flavoured milk, and it delivered the fastest return on investment I have ever seen, and 25 years later, it is still going strong, delivering revenue and margins to the now overseas owners of the business.

If marketers started talking about revenue generation, rather than the more common ‘marketing-speak’ like positioning, segmentation, and all the insider jargon generated by digital, they will be taken much more seriously around the board table. Building support amongst other functions to acknowledge the long term impacts of intelligent marketing, is necessary for long term prosperity, and the only real measure of marketing effectiveness.

The management task is all about getting the most out of the assets and capabilities of your business, and it is marketing management that carries the usually unarticulated responsibility to drive the collaboration necessary to achieve the best outcomes.

This task has four dimensions:

Operational management, strategic management, Financial management, and performance ,management.

Strategic management is all about the manner in which you address your market opportunities and challenges, and has a long term focus on commercial sustainability.

Operational management is the manner in which you deploy and utilise the assets of the business on a day to day basis to add value that customers are prepared to pay for.

The financial management of a business provides the basis for the assessment of success, or failure. It is a scorecard that is capable of comparison, across activities, business functions and timeframes.

Lack of a good financial management framework is a bit like walking blindfolded into a minefield, you might be lucky for a while, but eventually you get blown up.

Financial management is far more than just running the numbers, and ensuring compliance with the tax and corporate rules, it is about being in a position to make the choices that need to be made across the business every day, that shape not just today, but build the resilience necessary for commercial longevity. Understanding the numbers is a core part of every management job, not just of the financial people.

Performance management. Performance management is all about getting the most out of the assets and capabilities your business has, and can purchase in, maximising the productivity of the assets of all types you have deployed.

Manufacturing is the backbone of the economy, and is not taken sufficiently seriously by current national leadership. While we migrate to an economy whose GDP is less dependent on ‘hard’ assets, to one that emphasises ‘services’ we fail to adequately factor in the foundations that manufacturing delivers. In our age of ‘digitisation’ the value coming from increasing productivity is ill defined by the measures employed in the past. We need a new suite of measures, based on the old, but adapted to reflect the reality of a changed world. This is particularly as it is now an international race, without the protection of geography, and less of the artificial protection of regulation, despite the regular hiccups that result from populist politics, and just keeping up requires a substantial effort and investment.

 

 

 

Have we reached a moral watershed with private data?

Have we reached a moral watershed with private data?

Apr 20, 2018 | Governance, Leadership

Privacy has been a question on the table for some time, pretty much since the dawn of the digital age. However, there has always been a deep paradox between what was generally said, indeed legislated for, and what we did.

The aspect rarely considered is the moral one.

For a moral stance to be effective, it must be proactive, rather than  reactive.

Legislation is reactive, protecting us against ourselves, usually because we are unable or too stupid to protect ourselves, and in this country  we have a library of laws just about discrimination, just a small sector of the regulation of how we live our lives.

This is the case with the digital privacy conundrum. Well meaning, clogging the system with legislative plaque, much of which is ineffective, and getting in the way of people having to make moral and usually sensible decisions,

Where is the moral line in the sand as regards our personal data and the social platforms we all use?

There is a difference between selling data, which none of the better known platforms like Facebook would do, and enabling that data to be used in a manner that you have at least tacitly agreed to by its provision. It may be a fine line to some, but the line is there, as the choice to give the data is yours, only you can make it.

Most do  not seem to realise, or choose to ignore the fact that the free platforms they use are not really free. The price is access to their personal data which the platform uses to target advertising, which they need to make it free.

While we struggle to share potentially life saving information in domains like healthcare, in case our friends found out we had a cold, we lavished personal and often highly sensitive information onto digital platforms, for use as a way to attract advertisers, so they can blast us with specific and personalised messages to buy their stuff. The first situation is as stupid as the second.

When faced with a problem of Gordian proportions, never trust the guy with a simple answer, especially when they have something to sell you. Unravelling the knot we have got ourselves into with privacy is such a Gordian knot.

The many data breaches and sheer commercialisation of our data, highlighted with the Facebook/Cambridge analytica fiasco recently have perhaps brought things to  a head, but it just keeps on coming. Grindr’s problems over the past week with data security and just plain lying, are just another in a long line, that will keep on coming as long as we post stuff.

Corporations, and their directors have to navigate a way through this maze of inconsistency, public good Vs individual rights, and the primal urge to legislate that seems to drive what passes for political discourse.

A  simple test for individuals: If you would not want to see it on the front page of the Sydney Morning Herald (showing my age there) do not post it!

 

Photo credit: Angelo DeSantis via Flikr

 

The two crucial leading indicators of business performance.

The two crucial leading indicators of business performance.

Apr 18, 2018 | Governance, Management, Small business

‘Simplicity is the ultimate sophistication’. So said Steve Jobs and he was not only right, but just one of a long line of people saying similar things.

Aristotle, Marcus Aurelius, Mark Twain, and my personal favourite, a marketing guru of great stature, although known for other things, who said ‘Everything should be as simple as possible, no simpler’. Albert Einstein.

It is also very useful to have a few simple but reliable forecast measures that give you a ‘heads-up’ about rough waters ahead.

Therefore when doing a StrategyAudit of a business, I try to distil everything down to its most simple form. That way not only can most (including me) understand it, but there is less room for error, misunderstanding, evasion, finger pointing, and all  the rest that goes on.

Two words capture the essence of a successful business, irrespective of size, structure, location and market. Having done many StrategyAudits, using a whole range of tools, some simple, some pretty sophisticated, there are just two words that underpin everything.

‘Cash’ and ‘Flow’.

Let me explain.

Cash.

Cash is the lifeblood of every business. Every activity, in one way or another is connected to the consumption or generation of cash. When you are doing something that is not contributing in a positive way to cash generation, even if it costs cash (such as advertising), stop. It does not matter how grand the vision, how well meaning the mission, how creative the advertising, how innovative the products, unless it generates cash in excess of its cost, stop.

So, I look at the cash. How it is managed, committed, deployed, forecast, leveraged, and disbursed.

The three fundamental parts of an accounting system are the cash flow statements, Profit and Loss statement, and Balance Sheet.  Both the P&L and Balance Sheet can be ‘managed,’ just look at Enron, Dick Smith, FAI insurance, State Bank of SA, One-Tel, and a host of others for proof. However, look closely at the Cash Flow, and without sophisticated fraud, it cannot be ‘managed’, and if there is fraud, a close look will reveal it fairly quickly to an experienced eye.

Probably the easiest way of judging the health of a business is to look at free cash flow. Cash coming in – cash going out, excluding capital expenditure. If positive, at least there is some hope, negative, start resuscitation immediately, or run for the lifeboats. This assumes a reasonable period of time. My recommendation to most clients is a rolling 13 weeks. Long enough to be somewhat immune from the day to day stuff, but short enough to give a fair indication of the overall health of the place quickly while giving enough time for any necessary corrective action.

Every business I work with is strongly encouraged to do a weekly rolling 13 week cash flow forecast. Those that resist strongly usually end up former clients for one reason or another. Once set up, the routine makes it easy, takes little time, and removes a whole lot of stress.

Flow.

This is probably a bit unexpected, but when you think about it, every business is made up of many processes, sub processes, and sub, sub processes. Draw a ‘map’ of your sale to cash process, and there are a number of steps, preparation and dispatch of the order, proof of delivery, invoicing, supporting book-keeping steps, and debt collection. Similarly, all the processes in your business have stages, points at which there are necessary interventions, potential changes, interruptions, delays, mistakes, rework, and a myriad of admin things and performance measures that need to be completed.

Keep drawing process maps and see how they become entangled, are dependent and interdependent, and can create uncertainty, opacity, and opportunity for error, as well as being necessary to get the work done.

I think about flow as you would a river. Water flows smoothly and predictably while there is no interference, but insert a rock, or bend, or shallow bits, and there is interruption to the flow. The greater the interruption, the more unpredictable the flow, and the more energy is required to move the water through. The velocity of the water through a part of the river is a measure of the productivity of that part, and again, the greater the interruption, the less the productivity.

I therefore look at the ‘flow’ of processes through the business, and seek to simplify, and accelerate all of them by removing the ‘rapids’. It is an incremental and never ending task, but one that delivers great financial and emotional rewards. In most cases, there has been little process mapping done, so that becomes a priority in any improvement project, but the current state of the ‘Flow’ is a very good indicator of the health of the business.

When you need a bit of help considering these two crucial performance indicators, give me a call.

Is your mentor asking you these 8 key questions?

Is your mentor asking you these 8 key questions?

Apr 9, 2018 | Governance, Leadership, Uncategorized

Successful people can always point to one, or a few people who over the years have contributed to their success. A great mentor does not tell you what to do, or how to do it, rather they examine motivations, objectives and options to help you determine which path you will follow, then provide feedback and suggested options for consideration.

The tool of an effective mentor is searching, challenging, and enlightening questions.

What does success look like?

This is a question that adapts itself from the little tactical things, to the big strategic challenges that need to be defined and faced. Creating a conversation where the goals are articulated by the mentee  creates ownership in their minds. ‘Owning’ a challenging  goal is the first essential step in achieving it.

What do you want to be different in 3 years?

This question is a follow up and supporting question to  the first one, and it gives a time frame, a powerful motivator to action, as it requires commitment. Together these two questions add up to what I call ‘hindsight planning‘.

What are the major obstacles being faced.

The obstacles we face are a mix of personal, and commercial, identifying the shape of them is the first step to developing strategies to overcome them. Like any problem, and obstacle undefined is never addressed in an optimum manner.

How do we measure progress?

Having defined what success looks like, and identified the major roadblocks, you have to at some point act, and measure progress towards the goal. Fine words without the actions to achieve them are just hot air.

What can you control, and what is outside your control?

Focused effort on leveraging the variables under your control that deliver the outcomes you want,  is essential. However, ignoring the things you cannot control, is a huge mistake. The best you can do is see, and have a deep understanding of how these uncontrollable factors may impact on the performance of your businesses and achievement of key objectives. Then you should  plan to enable the leveraging of potential opportunities that may emerge, while mitigating the potential negatives.

What are the options available?.

Encouraging wide and analytical thinking is necessary in the face of complex problems. This is a question to be asked every day, in relation to every action. Dealing with any uncertainty is always helped by understanding the options available, and only committing when they have been analysed, and then only when you need to progress. The danger of course is that there is an over-consideration, which becomes procrastination.

What would you do next time?

Explicitly learning from experience separates the successful from the rest.  Conducting a formal ‘After Action review’, a term that evolved from  the US army learning processes is common in large businesses after a capital expenditure project is completed. Critical review of actual outcomes compared to the plan is far less common in non-financial areas than it should be. The discipline is a crucial one, from the major strategic decisions to the tactical and team based projects on a shop floor. Those familiar with process improvement often use the term  ‘Plan Do Check Act’ which is a core discipline of process improvement.

Tell me more.

This is always a question to apply in any situation where you are trying to uncover the motivations, cause and effect, and implications inherent in any situation. The simple act of asking the question  ensures that the one being questioned has another look at their preconceptions, and barriers.

When you think you might benefit from this kind of collaborative performance management, give me a call. After 40 years of doing it, I have learned a bit that may be of value yo you.