Nov 22, 2021 | Collaboration, Leadership
When the owner of a medium sized business is thinking of selling, the road in front to complete a transaction is a rocky one.
On top of the pressure and tension of financial and strategic due diligence, there are always questions about employee reaction.
- Will it impact on the value of the business?
- Will productivity drop?
- Will key employees leave?
- Will they disrupt the process?
- How will I replace any that leave when the business is for sale?
These questions, and more will be out in force.
Given that the large majority of private sales processes do not end in a transaction, the long term impact of a failed process can be significant.
Is it better to take employees into your confidence, and include them in the process, giving them the opportunity to contribute, or better to keep quiet and hope they do not find out?
Employees in a medium sized business are generally close to each other. Rumour and assumptions that might impact them, accurate or otherwise, get around very quickly. It is also the case that employees are rarely stupid, they can see when the owner is getting near retirement, has had an approach, or just getting tired of the grind, and draw their own conclusions.
The stress of uncertainty is far more corrosive the certain knowledge of difficult things to come.
On several occasions, once in defiance of instructions, I have taken employees into my confidence when a plant has been nominated for closure. In every case, all I did was confirm what they suspected, and knowing the truth proved to be much better than the uncertainty of not knowing. In every case, the plant closure, or sale process has been greatly assisted by the employees, who now had a clear picture of what lay in front of them, and of the measures put in place to assist.
Similarly, I have been in several situations where the closure of a plant or sale of a business was kept as confidential as was humanly possible. In every case, the corrosive impact of the suspicion that something was up amongst employees greatly impacted the outcome negatively.
My recommendation: Always assume employees are not stupid, and that they will react positively to being taken into your confidence, and even assist the process, not just for your benefit, but for theirs. There are many examples around the world of the impact employees can have on the success of a business. I have been in a small way involved in several. The current poster-boy for employee engagement is Chobani founder and CEO Hamdi Ulukaya, who turned an old, broken yogurt plant in upstate New York into a global success by engaging employees, then told the story in this TED talk.
Cartoon credit: www.gapingvoid.com
Questions in cartoons
Nov 19, 2021 | Leadership, Sales
Cash is the final arbiter of commercial success. You cannot live without it, too much of it and you get lazy, too little and you are wheezing, struggling to breathe, living moment to moment.
There is a lot of advice around about how to manage your cash, reduction of debtor days, management of inventory, project progress payments, pricing structures and the ret. All are valid and should be managed explicitly.
One item not often considered in the context of cash is the sales process, the pre-order or sales pipeline, time and resources consumed in that process.
The Cash Conversion Cycle is usually started at the point where there is a direct cost to filling an order, or buying materials for inventory.
It is a small leap to extend it to a point at the beginning of the sales process. That might be at the point where a lead becomes a sales qualified prospect, whatever nomenclature you use. The point at which the odds of closing the sale increase past an inflection point of some sort.
Many sales pipelines I have seen are long, torturous, ambiguous, and subject to gaming by sales people to make their ‘numbers’. The advent of CRM systems, and the logging of prospects and the expected conversion rates to generate revenue forecasts has made fools of many senior executives.
In the absence of a disciplined and regular review of the numbers, they always tend to be optimistic, until the crunch comes, then it is a nasty surprise.
Sales, like everything else in a business that is repeated, is a process that can be broken down to its component bits, systematised and optimised. While normally hidden in the fixed costs of a business, the expenses incurred in generating sales consumes working capital. Any reduction in the working capital required to run a business, increases the value and profitability of the business. Therefore, treating the sales pipeline as a process to be optimised makes both financial and strategic sense.
Ask yourself how any sporting team that is successful over a period of time does it. The personnel changes, the opposition changes, but the success stays. An exemplar is the Melbourne Storm rugby league team. Few believed they could continue their long-term success in the absence of their three superstars, Slater, Cronk, and Smith, but they defied the expectations. How? I bet coach Bellamy has a playbook that contains all their standard plays leveraging the skills of the individuals in every position, which are practised and practised over and over until they are second nature. There will also be a set of plays tailored to the weekly opposition, and the individuals they expect to meet on the field, which are run over and over in the week leading to the game, so they are also second nature. In the heat of the game, nobody has to wonder what to do next, they have practised it.
How many businesses practice their sales game? Mapping out each stage, looking for the friction points and practising how they will be addressed, workshopping the best responses to all possible objections, and ways to smoothly move to the next ‘mini-close’ in the process.
Very few.
If you were to practice and practise while optimising, do you think the sales cycle would shorten?
Clearly it would, and it would also confirm those who are likely to become a customer earlier, and probably increase the net price at which they were converted.
Together that would shorten the lead time and optimise the leverage from the resources committed, leveraging the relationship between sales and financial outcomes.
As the old saying goes, ‘More sweat in training means less blood in battle’
Nov 17, 2021 | Leadership, Strategy
Strategy is an essential ingredient for success. Without a clear, unambiguous, and well communicated strategy, there will be wasted effort, sub-optimal decision making, lack of alignment between functional responsibilities, and any number of other problems.
Therein lies the problem with strategy.
You spend time and money researching, developing, road testing and implementing strategy. You build a deep commitment to it, the CEO if he/she is doing their job well spends a significant percentage of their time building the engagement of all stakeholders in the strategy.
What if it is the wrong strategy?
What if one of the core fundamentals suddenly turns against you, or becomes irrelevant to the customer purchase decision?
Not only have you wasted the resources getting to that point, but the whole point is also to generate commitment. It is very hard then to turn around and say, Oh Crap, we got it wrong!
The inclination is to double down, work harder, not throw the sunk cost against the wall and change tack.
Blockbuster did not survive this challenge. Suddenly the core assumption that people would rent videos from a central location, then incur late fees when they finally brought them back, failed. When Netflix emerged as a subscription DVD by mail service, Blockbuster management saw it as an odd, fringe product that would never take on. Netflix management, virtually broke, offered to sell the business to Blockbuster for $50 million, an opportunity they declined. Technology caught up with Netflix, streaming became a viable option, and Blockbuster took only 3 years to go from king of the multi-billion dollar castle to broke.
Blockbusters strategy sucked. It assumed no change to the business model that had made them successful, could not pivot to a new model, and disappeared, because their strategy was wrong.
Kodak made the same mistake, and so did a local bottle shop that set out to compete with Dan Murphey’s on price and range.
Consider the strategic foundations of the current Australian Government’s commitment to the continuation of fossil fuel. Despite the spin of the last few weeks, their actions display that continuing commitment to the ‘Gas led recovery’ and options such as Carbon Capture and Storage, dismissed as fantasy by serious scientists. Business on the other hand recognises the inevitable failure of this strategy, and have been taking steps for the last few years to pivot their own operations. Now even the business lobby groups have publicly stated the government’s strategy sucks.
Tesla by contrast, founded in 2003, went public in 2010 for $17 a share. It took a few years before the strategy became an evidently powerful one. You could have bought a Tesla share in early 2020 for $70. That same share today is hovering around $1100. Tesla holds almost 80% of the US market for EV’s, 20% share worldwide. The market for EV’s is about 3% of total vehicle sales, but has doubled for the last three years: compounding is at work. All the major car manufacturers are fighting for a share, but I wonder if they missed the boat, In the US at least, you do not buy an EV, you buy a Tesla. A bit like Hoover, the brand becomes the verb describing the category.
The problem with strategy is that when it is well locked into the decision making and performance measurement of an organisation, it is very hard to change. Vested interests, personal, professional, and institutional all get in the way, and actively work against the change until too late.
To be effective, strategy also must be agile, subject to continuous evolution, as well as being the ‘North star’ of decision-making. The alternative is that you follow it into irrelevance at best, but often extinction.
Header cartoon credit: Scott Adams via the wisdom of Dilbert
Nov 15, 2021 | Leadership, Management, Small business
The term ‘Washing Machine Brain’ was used recently by a client as we sorted through all the competing tasks and priorities of his role running a small, rapidly expanding business. Everything was mixed up, tangled, swirling at a rate he found difficult to keep up with, let alone get on top of any of the seeming endless list of tasks.
Common problem, and a very expressive descriptor.
Over the 18 months I have been working with him, the number of tasks and the complexity of those tasks seems to have increased geometrically, while the revenue has increased arithmetically.
Again, a common problem in a rapidly growing business. Every advance delivers a new set of management challenges, until a tipping point is reached. After that point, the scaling of operations can be done off the established base, and the ratio is reversed.
Over the 18 months, we have achieved a number of milestones, and left some significant tasks underdone. The product is a bespoke manufactured product with a sizeable number of customer driven variables, many of which are challenging to explain to the customer base.
We have:
- A very clear strategy, well understood by the small number of employees. .
- Implemented an operational planning process from order to installation that works pretty well. This uses Trello as the formal communication tool, enabling transparency across the operational staff, as well as encouraging input and accountability.
- Developed an electronic customer record in Dropbox that is the storage and reference point of all design and operational data that relates to individual customers.
- Automated the quotation process, although there is manual intervention still required, and given the nature of the product, may always be required. However, there are still many ‘wrinkles’ to be sorted out.
- Partially implemented a powerful CRM system to manage the outbound sales effort and lead funnel. Like many of these products, every time we turn a corner, there is more to do, but the promise of further automation to assist scaling is seductive.
- Generated more sales leads than can be managed with the existing operational and sales resources.
- Moved from break even to making sufficient profit to reinforce the owners faith in the product, and ensures the business has the resources to fund growth internally.
We have not:
- Successfully implemented a systematic qualification process to optimise the time spent in the pre-sale stage. We need a process to identify tyre kickers and potentially difficult customers & jobs early enough to either walk away, or price them accordingly.
- We do not have an adequate handle on cash flow, or the accounts generally. As a reformed accountant, this disturbs me greatly. These ‘back-office’ tasks require robust processes and resources, and remain a work in progress,
- The supply chain on which we rely is disorganised and hugely wasteful, much of which we wear in lead time uncertainty. While we do not control a key part of the manufacturing, the incentive to find a way to exert control is compelling.
- Labour availability is a profound challenge. The product relies on physical installation which can be complex, depending on the site. It has a range of variables new to this country and finding experienced people has proven almost impossible, and finding suitable trainees at least as hard.
None of this is unusual in growing successful businesses, but knowing that does not make the challenge any easier.
The only antidote is focus. Relentless focus.
Pick the few things that can be done today, this week, this month, and focus on getting them done, before moving onto the next source of value to be addressed. In so doing, spend the time and effort to complete each activity as well as possible. It is inevitable that in a growing business, the requirements will change, so processes need to be able to evolve, but there is little more frustrating and wasteful than having to re-cover areas you had thought behind you. Over time the washing machine will become significantly less chaotic as we iron out the wrinkles and scale the business. (Sorry, could not resist the obvious pun)
Nov 11, 2021 | Change, Leadership
Too often dissent is seen as just negative. Sometimes it is, particularly when the dissent is from a course of action that demands change, but even that can be useful.
The nature of dissent, when removed from becoming personalised, is usually hugely positive, as it opens conversation, points up otherwise glossed over weaknesses in an argument or proposal, and provides ‘safety’ for others to voice their views, dissent or otherwise.
These positive outcomes from dissent to an idea, proposal, or course of action, usually become consumed when the dissent is seen as an attack on the ideas, status or qualifications of the individual who made the proposal. In this case, it becomes even more important that someone speaks up, be the first, and it is a measure of leadership that those ‘in charge’ accept, and even encourage the dissent as a positive contribution to the process of decision making and risk assessment.
Dissent is the only real antidote to confirmation bias.
We see the factors that reinforce the views we already hold, while not seeing those that conflict. We all ‘suffer’ from such biases, it is an evolutionary tool that serves to maximise the cognitive capacity we have, but in business it can be terminal. I am sure there were those inside Kodak who thought the digital camera might be a good idea after Steven Sasson invented it, but they were not heard. Gary Starkweather, the inventor of laser printing inside Xerox, was almost fired, until someone in PARC, on the other side of the country recognised a good idea, unencumbered by the weight of the status quo, and the rest is history. Netflix blundered mightily when they tried to separate their DVD and nascent streaming businesses into two companies. CEO Reed Hastings later recognised his mistake in (unintentionally) allowing his voice to be the only one heard, and later put in explicit processes to enable dissent.
Dissent should be encouraged and made ‘safe’ for the dissenters.
However, when you are the dissenter, there are a few ground rules to follow.
- Ensure the dissent is to the proposal, the facts or foundation assumptions, not the person making the proposal.
- Base the dissent on arguable grounds, quantifiable outcomes, reasonable extrapolations based on robust assumptions, informed opinion, and experience.
- Be very concise and clear
- Use both narrative and facts to make your case, not just one or the other.
All progress depends on doing something differently.
The absence of dissent leaves the status quo as an unquestioned fact, from which no progress can be made.
Encourage, nurture, engage, and value constructive dissenters.
Header cartoon credit: Scott Adams and Dilbert. Again.
Oct 20, 2021 | Governance, Leadership
Effective managers are sensitive to the differences between working capital and investment capital.
The former is the money it takes to keep the business running, to generate the transactions, fill the gap between the sales registered in the P&L, and the cash coming into the bank this month. The latter is the money that needs to be invested to keep the business competitive, renewed, and more likely to have a long and successful life delivering competitive returns to stakeholders.
Peter Drucker observed that: ‘The purpose of a business is to create and keep a customer’ which is often used as a quote.
The full quote was: “Because the purpose of business is to create a customer, the business enterprise has two, and only two basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”
He was right, as usual.
Without customers, you do not have a business.
Marketing activity of any sort is an investment in future sales.
The creation and long-term engagement with customers, is just as much an investment as one in a piece of capital equipment. Marketing consumes funds over time that are necessary to generate the cash coming into the bank consistently and predictably.
Marketing investments are in effect, the working capital of revenue generation. However, they are treated as expenses in the profit and Loss statement, which leads to them being regarded as a variable expense, rather than an investment.
You could mount an argument that a major proportion of the marketing budget should be capitalised, as an asset, not depreciated as you would with capital equipment, but offset by a deferred revenue liability.
In a past life, in charge of significant marketing budgets, I have been on the losing end of the argument that cutting marketing expenditure in tough times is absolutely the wrong thing to be doing. The net result has been to erode brand position, revenue, and margins over time, as well as not being able to take advantage of competitors similarly dumb decisions to reduce marketing investment.
The research evidence to avoid such cuts is overwhelming. However, while the marketing budget resides in the P&L, it will continue to be a balancing item for annual EBIT, rather than playing the long-term role of building commercial sustainability.
