The core problem of calculating a return on an investment in marketing.

Feb 24, 2020 | Management, Marketing

Return on Investment is a very simple financial equation.

What you earned, minus what you spent, divided by what you spent.

Earn $100 after spending $75, divided by the $75, and you have a  33% ROI. Put another way, for every dollar you spend, you get back $1.33.

Simple, right?

Then why do marketers seem to have so much trouble convincing the corner office that investing in marketing is a sound strategic and commercial choice.

Simple answer: Attribution.

Which part of revenue, or margin earned, depending on how you want to measure the success or otherwise of an investment, is attributable to the spending of the money?

Let’s take a simple and very common example: building a website.

Every business these days is told they need a website, not having one is like not having a phone, it simply makes doing business next to impossible.

 Let’s look at the formula to try and pick clean the bones of the calculation.

What you spent:

  • You need resources to determine the form and scope of the website.
  • You need someone to write the copy, and take or source the photos and illustrations.
  • You may need subscriptions to items supporting the website, such as CRM integrations, analytics services, pop-ups, autoresponders, and on, and on, and on.
  • You may need resources to manage and ‘clean’ the data bases that appear on the site, such as product specifications, promotional deals, customer and lead management, and on, and on, and on.
  • Finally, you need resources to build and maintain the website.

All of these resources can be sourced from external parties, in which case you can track invoices, or from internal resources, in which case all you have to do is determine what part of their employee costs you need to attribute to this website development. Simple to say, hard to do.

What you earned:

If anything, this is harder than attributing costs to a website development project.

  • What part of the revenue, or margin, whichever you choose as the benchmark, can you attribute to the cost of the website, and which part goes to the sales force, the quality of the product, the photography on the website, the manner in which you follow up enquiries, how  you capture returns, the cleanliness of the delivery truck belting around suburban streets, and on, and on, and on.
  • Over what time frame do you measure the return? A week, a month, a year, the duration of the associated advertising campaign, the lifetime of a customer?
  • How do you factor in other marketing activities, advertising on traditional media, digital ads, the weight of your distribution, the quality of the targeting of activity to real potential customers Vs the tyre-kickers. And on, and on, and on.
  • How do you include the value or otherwise of the word of mouth, or organic reach on social media? Which social media do you include in these considerations, is it just Facebook and twitter?  What about LinkedIn, or if you are a ‘techo’, GitHub, or Reddit, or the networks of gamers, and on and on, and on.

The core question is, ‘what do you include, and how do you allocate a weight to the contribution it made to the outcome?‘

Attribution.

Too add to  the confusion, people use a range of  terms interchangeably, usually because they do  not think about, or recognise the problems of attribution.

For example, they confuse return on marketing investment with return on advertising spend, and they  confuse leads generated with real financial results, and most particularly when confronted by someone flogging new and shiny digital toys, revenue with margin.

To go back to the metaphor at the beginning, a website is not anything like a telephone, so to make the comparison is  nonsense. A phone is a one dimensional tool. They all look the same, and do the same job, although the advent of smart phones has widened that scope considerably. A website by contrast is infinitely variable in what it does, looks like, and performs, and should be the product of a robust strategy and tactical implementation plans, not some simple template pulled out of a digital urgers kitbag.

To build that necessary credibility in the corner office, most probably occupied by an accountant or engineer, whose whole mind set is quantitative, you must be able to draw conclusions based on data. This data must demonstrate the cause and effect chains that exist, often  very well hidden, and avoid the marketing clichés and jargon, which just make you sound like that digital urger in the foyer.

Need help thinking about the implications of all that, call an expert.

 

Why most enterprises fail at cost effective marketing

Feb 17, 2020 | Management, Marketing

It is budget time again, that time of the year when planning comes to the fore, usually as an added job that is just a pain in the rear.

There is an easy way, and a hard way.

The easy way is to download a template and get the intern to spend a day filling in the gaps. About as useful as an umbrella in a cyclone.

Better than nothing, but only just.

Then there is the hard way, because it takes time, and requires you to use your brain, and the collective brains of others, and can be an emotional as much as analytical exercise, requiring time, energy, critical thinking, and collaboration, and making some really challenging choices.

Let’s define what we mean by marketing, useful if you are going to plan for it.

My definition of marketing is the ‘generation, development, leveraging and protection of competitive advantage’.

Not a definition you will find in any textbook, but mine evolved over 40 years of doing this stuff.

Competitive advantage evolves, and comes in many forms, but without it, you are in a commodity, price driven market, and you cannot win in that. The pace of evolution is these days frenetic, so writing a plan, and leaving it on the shelf for an occasional reference before the next budget session is useless. It has to be an evolving document.

If you can find a template that helps you do that, let me know.

Marketing is about the future, you are trying to shape it, so you are dealing with unknowns that can be qualified, but rarely quantified. With the use of various mental models, cause and effect, domain knowledge, customer intimacy, competitive understanding, tactical agility, and a whole range of other things, you can build a level of confidence that justifies the risks being taken.

It is a jigsaw puzzle, to which you do not have the picture, and many of the pieces you do have are wrong, and many are missing, so you have to experiment, make up your own, use someone else’s cast-offs, try making your own pieces to fit.

At the end, it is about making choices with imperfect information.

That is hard.

When faced with a choice that appears to be between two sub optimal outcomes, step back, and find another way. That is in itself a valid choice, and a very good one, and it makes you think.

The greatest two problems most corporates have in planning marketing are:

Extrapolation.

Confirmation bias.

Add 3% to last year, and, only seeing what they want to see.

That is what you get when you use a downloaded template in place of using your brain to critically assess options, information, domain knowledge, capabilities, resources, risk, and market and trend sensitive indicators.

How to make better decisions, more often.

Feb 13, 2020 | Governance, Management, Strategy

 

 

A decision is a choice, made in the face of a problem.

Problems, at their core, have only two sources:

Uncontrollable events.

Flawed processes and their application.

These two sources have entirely different paths to a solution.

Flawed processes need to be subjected  to some sort of continuous improvement program, resulting in a clearly articulated process that can be taught. This improvement process can become a normal part of activity, given the appropriate leadership and focus. A key part of the improvement process is the application of critical and creative thinking. Having a highly optimised process is not the same as having a truly effective one.

Uncontrollable events are entirely different, by their nature, are very difficult to unable to be forecast. They emerge with little if any warning, generally from the outside of an enterprise, so the solutions need to be arrived at in an entirely different manner.

Two factors contribute to the options facing us as we set out to address these random events:

  1. People put far more weight on the problem directly facing them, than even a much more serious problem that has little short term impact. It is also true that most people have a better idea of the dimensions of a problem that directly impacts on them, than others that may carry more corporate clout, but are do not directly affect them.
  2. We can only deal with a very few problems at once, we simply do not have the cognitive bandwidth to deal effectively with a number at the same time.

Therefore, considering these two factors, it makes sense to democratise the manner in which we deal with problems. In other words, enable those who face the problems to deal with them by giving them the resources and responsibility to do so, within clearly understood boundaries.

Two mental models to consider.

The first is a pyramid, full of problems. If the only person who has the power to address the problem, is the one or two at the top, only a few will be addressed at all. Democratising the power to address them enables others at lower levels to address those problems they directly face, so it follows that many more will be addressed. There may be some stuff ups on the way through, but overall the outcome will be beneficial. However, most corporate cultures make this very challenging, built as they are on a hierarchical structure.

The second is also a pyramid, but turned on its head. In this case, the base of the pyramid is facing outwards, towards the customer and various elements in the supply chain with whom the operating personnel have contact. This is where most of the operational problems occur, so give them the resources and power to fix them.

Do these seemingly simple things, and those usually seen as the bottom of the hierarchy have the opportunity to address the emerging problems as they are molehills, before they turn into mountains. It does however necessitate the devolution of power from the top of the organisations structure, and all the way down through and across the functional silos. This may be a scary prospect for most, but it enables the enterprise to be agile and efficient.

The impact of this sort of culture shift cannot be underestimated. It does however take a special and unusual strength of leadership to enable the change to evolve.

US general Stanley McCrystal achieved  stunning results in Iraq with one of the most rigidly hierarchical of organisations, the military, so you should be able to do it. General McCrystal’s experience is recorded in his book ‘Team of Teams’ which is a compelling account of a culture being turned on its head.

 

The single best financial measure on which to focus improvement initiatives: Cash Conversion Cycle.

Feb 3, 2020 | Governance, Management, Operations

 

 

How long does it take you to convert your products into cash?

This is one of the most important but overlooked measures in most businesses I see. It goes to the manner in which you manage all the processes  and resources it takes to turn ideas, products and services into cash, the lifeblood of every enterprise.

Your Cash Conversion Cycle, (sometimes called cash to cash cycle) is the time from the order of raw materials, in the case of a manufacturer, to the payment of the invoice related to a sale. In other words, days inventory (which includes raw materials, Work In progress, and finished goods), plus days debtors outstanding, minus days creditors outstanding.

Reducing your cash conversion cycle time can be a huge competitive advantage.

There are a number of well understood ways to reduce your CCC, the catch is, that it is a delicate balancing act between differing functional responsibilities.

In the pre-deregulation milk industry in NSW, my then employer, Dairy Farmers, paid the dairy corporation for its milk, as all production was vested in the corporation, in 30 days. We sold to milk vendors, the monopoly distributors, on 7 days terms. This gave us a -23 day cash conversion cycle. On the day of deregulation, from which retailers could buy from whoever they wished, that cycle changed radically. We paid the dairy farmers, our suppliers, in effect, C.O.D., and supermarket retailers paid us 90 days. Our cash cycle went from -23 days to +90 days for supermarket sales, a 113 day turnaround overnight, which cost in the region of 60 million dollars in working capital.

It was a big pill to swallow.

So, what are the strategies that can be employed to improve your cash cycle time?

Reduce inventory.

Physical inventory in a service provider is not a consideration, as there is none beyond consumables. However, in most cases of service businesses, there is some sort of project involved, which takes time to deliver. In this case, time can be considered as inventory, and the quicker the ‘inventory turnover rate’ the better.

A manufacturing business generally has inventory in three parts: raw material, Work in Progress (WIP) and finished goods. While it is tempting to manage each separately, the downside is the potential impact on customer service, so they must be managed together.

  • Purchase reduction. Too many times I have seen a Purchasing Manager instructed to reduce inventories, which is easily done by simply reducing purchases. However, done in isolation, this almost always leads to manufacturing shortages, and angry customers.
  • WIP reduction. Similarly, WIP is often seen as relatively easily reduced by doing longer manufacturing runs. The unfortunate consequence of which is usually increases of finished goods inventory of slower moving lines. When there is a multi-stage manufacturing process, longer runs also leads to WIP build-up in front of slower manufacturing sub-processes.
  • Finished goods reduction. Finished goods are the most expensive inventory items, as you have added time, labour and the input materials to produce them. Nevertheless, being out of stock when a customer orders is never good. Alternatively, depending on your business model, putting their order on a future delivery date can be managed, but the longer the delivery lead time, the more likely the customer is to go elsewhere.

The upshot is that inventory can be reduced, often by substantial amounts, but it takes leadership, functional collaboration, and appropriate performance measures to be successful while retaining customer service.

Decrease debtor days

Debtor days are a function of both your trading terms and diligence in collecting debt as it becomes due. A strategy that usually works, is a polite reminder that the invoice is due to be paid in a few days. It is too easy to leave debtors to pay their bills as and when they are able.  A bit of friendly, polite pressure applied might see your invoice  go to the top of the pile, at least over those who do not actively and politely follow up. Diligence, and being a very polite ‘squeaky wheel’  pays.

Another useful way to reduce debtor days is to split payment. When selling some items you can reasonably have as a part of your trading terms a deposit, and partial payments over the period between order and final delivery. This happens when you build or renovate a house, there are stepped payments in line with project milestones. Think creatively about how you might introduce similar stepped payments, your cash flow will love you.

Manage creditor days

Managing creditor days is not just a matter of delaying payment, although this is the most common reaction. Your suppliers are in the same situation you are, setting out to reduce their cash cycle time, and if you are a recalcitrant debtor to them, they will tend to reduce their levels of service, demand C.O.D., or even simply refuse to supply. Secondary to a shortened cash cycle is a reliable cash cycle. If your suppliers know from experience, and negotiation,  you will pay the invoices on a given day, they will tend to leave you alone, or even agree to an extension of terms. In effect they are exchanging a shortened cycle for a reliable one. Experience tells me paying exactly to the terms agreed is the best strategy, as it enables renegotiation of those terms.  

Management of cash is an essential discipline for success, and the time it takes to convert an order into cash is about the best measure there is to proactively manage your procurement, manufacturing and sales demand planning processes. Out of measuring the cash conversion cycle time will come a number of contributing measures that will together make the enterprise more competitive, resilient,  and agile.

This is all pretty simple to say, but like most things in life, much harder to do. When you need an experienced hand, give me a call.

 

 

What are the ‘tells’ of a failing culture?

Jan 30, 2020 | Leadership, Management

 

A ‘Tell’ is an unconscious, usually inconspicuous, sign that something is happening. It is a term commonly used in card games, someone scratches their nose when they pull an ace, or looks over at their drink when a potential flush, is well, flushed.

Cultural failure is all around us, in our workplaces, communities, and institutions. The news bulletins are full of it, so full we seem to becoming immune, no longer enraged, just sad and drained at the seeming inevitability.

However, when you see a problem early enough, you pick the ‘tells’, you can often address them as molehills before they emerge as mountains.

So what are the tells of a failing culture?

In my experience there are a number of very common ones, the presence of any is a sign of disturbance to be addressed, more than one is a problem.

Lack of accountability.

When accountability is clear, individuals tend to act in more predictable and generous ways. When that accountability is to a peer group, rather than just ‘a boss’, that tendency is amplified, as we are social animals, and our welfare is tied to the welfare of the group. Behaviour that leads to the erosion of the welfare of a peer group leads to expulsion, and that is a huge penalty, greater than any that can be imposed by a ‘manager’

Shortage of diversity.

This has little to do with gender, ethnicity, sexuality, or any other label that can be applied by pressure groups. It is all about the diversity of thinking, background, and understanding. That diversity of thinking does  flow from the diversity of the people, but it is not a direct correlation. Actively seeking those who are willing and able to shed a different light on issues and challenges, hearing those often challenging views and taking account of  them in decision making, is a sign of a healthy culture

Absence of investment in people.

The greatest asset of most businesses walks out the door at 5.00 every day. Without them, a business is just a shell, a building, unable to get anything done. Investing in people is an essential ingredient of not just success, but remaining in business. There is piles of evidence that an investment in people is a great investment, generating a very fat return, but it is long term, hard to measure, easy to cut when times get a bit tough. The best enterprises double down on their people, particularly over the last 25 years as we have moved towards business models that value intangibles over tangibles.

Relentless imposed pressure.

High pressure environments wear people out, generate mistakes, short cuts, and poor behaviour. Every enterprise has times when things are really busy, the pressure is really on for some reason, but when it is relentless, and unchanging, particularly when imposed by a management that is using its power to impose the pressure rather than the individuals taking it on willingly, it is corrosive.

Walk the talk.

Talking about the desired culture and the behaviours, standards and ethics that underpin it is one thing, easy for most, the hard bit is to walk the talk, every day. This applies most specifically to the leadership of the enterprise. The behaviours that support a great culture are embedded and reflected at all levels.  However, they have no chance at all if the person at the top is not diligent about their behaviour, every day, in even seemingly small and supposedly unseen ways. People listen to what their leadership says, and if it is not exactly as they behave, they ignore what is said, and mirror and multiply the behaviour.

If you have ever seen a slick, egotistical CEO deliver a persuasive narrative about the importance of people, and a month later oversee a ‘re-engineering’ because the quarterly numbers are down, you know what I mean.

As you think about the culture in your business at the beginning of the new decade, you need to look at yourself and your behaviour early on in the process.

 

My thanks to Scott Adams for the portion of a Dilbert cartoon acting as the header, that reflects the last sentence.

 

 

 

 

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.