Dec 5, 2022 | Leadership, Management, Strategy
The current ‘argy-bargy’ around wages policy makes the mistake of assuming it is a binary equation. Pay a dollar more/hour for labour and profit is reduced by the equivalent amount.
This assumes that people working for you are only doing so for the money, and money is directly proportional to output.
We all know this is crap.
While it is clear that many, mostly female dominated jobs, are underpaid compared to the costs of living, and simple value equivalence with other jobs. It is also true that people are not rational, they make decisions on many dimensions, of which price is only one.
Price. Key word.
Why don’t we consider the cost of labour as just the price of it, and consider our labour strategies in the same way we apply pricing strategy for our products to the marketplace?
When we do this properly, which too few do, price is only one factor in the equation. Depending on the context, it can often play only a minor part in the strategies we deploy.
Price is rarely a binary choice, just take it or leave it with no other options. It is also rarely considered how unfair it is to pay people whose performance is unequal, the same amount. We usually address this with piecework pay, which often has a detrimental impact on value delivery to customers. Just look at what is happening to Qantas currently in the handling of baggage for the evidence. It is a fine line between paying for customer value delivered, and piecework payment.
What would you rather have?
Better paid people who care about quality, DIFOT performance, productive time, and all the other things that lead to superior value delivery to a customer, leading to financial performance, or more lower paid people who do not care about any of those things?
Thinking in a binary manner will deliver the latter, never the former.
In these unusual times of inflation coupled with a flat economy, you need to find the most productive people you have, and model their behaviour to others, and compensate them appropriately. You may end up with less, but better paid and more productive people.
Trends in labour cost equations can be an extremely sensitive lead indicator of performance. Labour cost/dollar of revenue or gross margin can tell you a lot about future performance. By contrast, labour cost as an absolute can tell you nothing beyond how much you spend.
The question management needs to ask itself, is not how much labour costs, but how can we make labour a driver of performance.
Header cartoon credit: My thanks again to Hugh McLeod at gapingvoid.com for putting it so accurately
Sep 30, 2022 | Governance, Leadership, Strategy
At a time when the market value of a business bears no relationship to the financial balance sheet, when PE ratios of market darlings are counted in geometric multiples, something is wrong.
Currently the PE ratio of stock market darlings: Apple at 33, Microsoft at 39, Alphabet (Google) at 34, Facebook at 30, and Amazon an eyewatering 68, are completely disconnected to the tangible assets of the businesses. By contrast, the PE ratio of some of the industrial stocks which built the economies we currently enjoy, GM 9, Ford 9, GE zero, (25 years ago the biggest company in the world is trading at a loss) still reflect tangible asset values.
The governance and operational reporting of business is often left in the hands of the CFO. They produce all the numbers and do most of the analysis of those numbers, as well as determining the investment choices other functional heads make by way of budgets, and the accounting for the spending of those budgets.
Several things have changed recently, on top of the rapid change that was proceeding up to 2020. The drivers of our economies took a dose of steroids from Covid, which not only accelerated the rate of change, but drove it in unpredicted directions.
- The accounting function deals with patterns and reporting that relies on history. This is a very poor guide to what happening around us now. The landscape has changed fundamentally, and that rate of change is not slowing down.
- Legacy systems now includes much of the stuff that was installed last year. Digital transformation has happened, redundancy is now counted in months, not years and decades.
- Business models have changed dramatically. Online ordering, and ‘no touch’ delivery of various types, previously struggling to get a foothold in many categories have taken off, while those that were already strong, have had their pedal to the metal. Legacy business models are dead. For accountants, trying to make sense of all of this while knee deep in the financial and governance accounting required, have run out of the gas necessary to accommodate it.
- Suddenly there are new power bases within an enterprise. All sorts of ‘Chiefs’ have emerged from hiding, and a few new ones have popped up. CDO (chief digital officer) CMO, CIO, and others that now have as much grunt at board level as the CFO, changing the nature of boardroom debates. ‘Traditional’ accounting is struggling, and largely failing, to keep up with the reporting and forecasting of increasingly fast cycle times and changing market and regulatory demands.
- How should the CFO deal with the accounting for innovation and change? The key for them is to learn much more quickly than they are used to doing, so they can recognise the demands, risks and costs of innovation, and think their way around the legacy accounting systems to deliver some sort of innovation and qualitative scorecard that fills the need for quantification.
- Sorting out Capex priorities, used to be done by business plans and discounted cash flow models driven by the often optimistic forecasts of marketing people. They usually relied on history to deliver an extrapolation, with allowances for the vagaries of new stuff. The time frames are now much shorter, the 10-year depreciation schedules allowed in financial accounting have become irrelevant when you are dealing with radically shorter equipment life and competitive needs.
- The significant move has been from a balance sheet that had little influence exerted by qualitative stuff, to a balance sheet structure that absolutely fails to reflect the real value of an enterprise, i.e.: what is in people’s heads. Those assets walk out the door every night and make choices about what to do tomorrow. This was previously a challenge, now it is a huge problem. The stock market calculations of start-ups with small if any revenues, but a few employees with a great idea can run to billions in the extreme case. They are backed by no hard, resalable assets at all, making valuation a nightmare for accountants.
What is a Strategic balance sheet?
Just as businesses undergo a regular financial audit, to ensure the appropriate governance and consumption of the enterprises resources, and account for the gains and losses of owners’ equity, so should it undergo a process of a Strategy Audit.
The financial balance sheet has a key role in articulating the ‘balance’ of assets and liabilities built up by the business, the difference between those totals is the owners’ equity, or what is left over to repay owners for the risks they have undertaken in lending the enterprise their money.
A standard balance sheet is a document assembled with historical data. It is subject to considerable ‘management’ by the valuation and classification methods employed in determining how an item will be treated.That is no longer even a fraction of what is requred to reflect the real competitive and strategic health of an enterprise.
Strategy drives the way resources will be deployed today in an effort to harness and maximise the potential for future returns.
This process of identifying the drivers of performance, and forecasting the optimised outcomes, is considerably harder than simply extrapolating the past. The only thing we know for sure about the future is that it will not be the same as the past, and even present.
Therefore, the strategy audit process is more qualitative. This does not mean that data and critical thinking should be thrown out the window as often happens, it makes it even more critically important.
Building a Strategic Balance Sheet is an iterative process. As you cycle through the expected costs and outcomes of strategy implementation, you will learn more and more about the relative weight, timing, cause and effect chains, and the trade-offs that exist between them. Being difficult to do means very few are doing it.
What an opportunity for those few who can get their heads around the drivers of strategic success and start to quantify them.
What do you think?
Send me your suggestions.
Sep 29, 2022 | Collaboration, Leadership
A business is like a money machine.
Put a dollar in, and get 2, or 5, or 10 back, and you have a good business.
Put a dollar in and get 0.90 back, is a big red sign that the machine is broken.
The caveat is that it may be a start-up, in which case, a dip before returns start is both inevitable and foreseeable.
Put simply, it is the return on Investment. ROI.
However, when you get the money back is almost as important as how much you get back.
The value of a dollar returned in a years’ time is less than the value of a dollar today. In a decade, it will probably be almost worthless.
It is also important to note that you must put the money in the machine before there is any chance of getting anything back, which is the chicken, and which is the egg is very clear.
In a world increasingly dominated by intangibles, what is inside people’s heads, the equation becomes much more complex.
To what extent do you need to invest in stakeholders heads, as distinct from investing in the tangible assets of the business, or are they increasingly the same thing?
In which case, the challenge is to figure out how to maximise the content of your stakeholders heads, and how best to leverage that content to mutual benefit.
Sep 7, 2022 | Change, Leadership
‘Business coach’ seems to have suddenly become a go-to moniker for former corporate executives looking for a new gig. For someone who recognises that a coach might be a valuable performance enhancing addition, how do you pick the right person?
I had a conversation on this topic recently in the pub with some colleagues, a beer with a few people who run SME’s, that used ‘networking’ as an excuse for said beer.
(Aside, Christ beer in a popular pub is expensive!)
The conversation was initiated by a ‘techo’ who was just folding his 5 year side gig up, after very considerable investment of time, money, and emotional commitment.
He needed, he said, to learn how to be a ‘businessman’ rather than a ‘techo’, and needed a coach, or mentor, but did not know how to pick the right one.
The response I gave him was
- Been there, walked in your shoes
- Able to relate at a really human level to the coached
- Part psychologist, part headmaster, part collaborator, to drive accountability
- Able to bring together the confusing and fluid interaction of financial management, revenue generation, operations, and all the necessary support and regulatory stuff. They cannot be an expert in all these, nobody can, but they acknowledge their limitations, and have a group of trusted specialists available as needed.
- Ask good questions and happy to be proven wrong.
- Prepared to tell those being coached the ugly truth.
- Leaves you better off after every session, although from time to time, that is hard to see at the time. Bit like going to the gym, the impact is cumulative over time.
- Widely knowledgeable beyond the domain the ‘coached’ is operating in to bring in different perspectives
- Holds themselves and those they coach accountable.
- The coach ensures they dedicate the time to discover ideas and observations from other domains that may be useful, then package them up for those they coach.
- They will always be a great listener and have a keen understanding and appreciation of your point of view.
- They can personalise their own experiences in a way that the coached can relate to
- They make the agreed goals of those being coached their own for that relationship.
- They demonstrate patience and perseverance, while being assertive.
However, there are two problems in all of this. It is highly unlikely you will find all 14 in one person, and there is a further huge catch for you:
A real ‘kicker’
Even if the coach you choose has all these characteristics in spades, it will not be enough.
There is a further absolute requirement for a successful coaching relationship.
You, the one being coached, must be open to change.
Coaching is all about changing behaviour, modifying responses, being more open, and understanding. In short, able to be coached. In the absence of that ‘coachability’, nobody can help you get better, you have to do it yourself and suffer the consequences.
Header credit: Yoda from Star Wars series.
Aug 26, 2022 | Governance, Leadership
There is an additional and dangerous downside to former Prime Minister Morrison’s grab for power I have not seen aired anywhere.
Like everyone else, I have watched the emerging revelations with amazement.
The weight of commentary against the actions he took is total, even his supporters in the Liberal party are having trouble even talking about it, let alone justifying it. The solicitor general’s report confirmed what others had assumed. It concluded that there was no illegality in his actions, but that they were ‘inconsistent with the principle of responsible government‘
We live in a highly volatile and complex world, one where the cycle time required of decision makers is contracting, as the need for wise input born of diverse knowledge from different perspectives into decision making is increasing.
This is where I believe the other great threat to good decision making in the nations interest lies.
Our political system is good at weeding out any diversity of view, it demands adherence to the party line, and as a result, decision making suffers, badly. Good people with good ideas and wisdom inconsistent with that party line do not get a say. As a result, we have a parliament and supporting systems filled with careerists who understand the way to progress is to be yes men.
Anyone running any sort of enterprise facing complex problems understands the challenge. The best way to address those complex problems is to seek a variety of views from experts looking at the complexities from different perspectives. You then blend those views into a decision making process that enables clear accountability and continuous improvement of the outcomes as results emerge. This requires a culture that encourages diversity and transparency.
Morrisons power grab is that he removed any sense that there was a valid opinion on any topic other than his own.
Everyone comes to any situation with a perspective of their own, moulded by their life experiences, beliefs, and positions taken in the past. This is entirely normal. It reduces the cognitive load required to get through the day by allowing us to act almost on auto pilot for most of the time, leaving cognitive capacity to deal with the unusual.
Complexity by its nature has all sorts of second and third order impacts when you set about addressing that complexity. No one person can hope to see them all, or even a small proportion of them. It takes a wise group of diverse minds to focus on the problem from differing perspectives to anticipate those second and third order impacts.
So, just at the time when collaboration, diversity of opinion based on fact, and transparency is vital, the former PM goes the other way, looking at the problems faced by the nation only through his own particular version of the truth, an overload of confirmation bias.
He is the one who exhorted a church audience in Perth a few weeks ago not to trust governments, presumably in total ignorance of the reasons why public trust has been trashed, and the blatant hubris and hypocrisy of his words.
Wouldn’t you love to be a fly on the wall the next time he meets some of his former colleagues in private?
Aug 24, 2022 | Governance, Leadership, Management
There has been an awful lot of trees cut down to accommodate the blather about the new world of post covid work. In an effort to condense the ‘debate’ and save a few trees, the following is what I have gleaned.
Humanity.
We humans are social animals, we need other people around us for our own psychological health and creative productivity. Therefore, the idea of general remote work becomes a potential mental health time bomb. We will adjust to it by mostly going back to the office. it is very unlikely to be 9 to 5, there will probably be more satellite offices, short term but regular meeting schedules, but back we will go in some form.
Proximity.
Physical proximity enables deeper communication than any other form. Even the distance apart in the office makes a difference to the nature of the communication we have with each other. Not just about work, but the tiny things that we do not notice until they are not there, and even then, often with hindsight only.
Trust.
Trust enables teams to work together. The less face to face contact, the harder it is the generate that trust, making teams harder to assemble, generate productive outcomes, then disassemble and reform for another project or purpose.
Belonging.
We are sustained by a sense of ‘belonging’. We are drawn to ‘people like me’ but when we do not see them, or see them only occasionally or over Zoom, the sense of belonging frays, leading to eroding productivity and sense of community.
WFH.
Working from home for many has been great, not having that commute every day. It is convenient for many. However, convenient is not always good for us. Going to the gym every day may not be convenient, but it is good for our health.
Leadership.
Leadership and the nature of that leadership has never been more important. In the past we had a few leaders, and a lot of managers. In a world where remote work is a consistent part of the output, just being a manager will not cut the mustard. We need more leaders, and have not trained them, which indicates problems for many, and opportunity for the few in the coming few years.
Alignment.
The alignment of priorities and performance measurement and the place each individual has in the scheme of this is critical. When an individual cannot see how their efforts contributes, to both those in their immediate vicinity and to the overall objective, the effort will become diluted. Working remotely in the absence of that focus on priorities and outcomes will lead to real productivity challenges for the enterprises, and personal ones for the individuals.
Culture.
Culture is a function of the leadership, and how the leadership permeates the organisation. Building a culture in a remote workforce is more challenging than when face to face is the norm. Some have done it well, but mostly they are the enterprises that have started life as remote enterprises, so those who join, and remain, have the right ‘remote work DNA’ from day 1. The holding company of website builder WordPress, Automattic springs to mind. Founder Matt Mullenweg set out to make the company completely remote from day one, but even he has co-working spaces in places where employees are concentrated.
Technology.
Technology is what has made this remote working possible, but it is also planting the seeds of our own disassociation with those we need around us for our own well-being. Like most things, too much of anything good becomes a problem.
Clearly, we are not yet ‘Post covid’. However, the workplace has changed over the last 2 years, and while the jury is still out, when it comes back the status quo will not be the same as pre covid.
There has also been a lot written about the great resignation, and its relationship to covid. My suspicion is that it is not covid specifically that has driven the change, although covid was the catalyst. The model we have been using to get the work done was over a century old, and getting pretty creaky. Covid acted as the catalyst for many to simply reconsider their working lives in the light of the tools that have emerged in the last 10 years, and they chose to make a change. Enterprises must adapt to these new models of work. Those that can’t will become rapidly extinct.
What have I missed?
Header cartoon credit: Tom Gauld
