The 3 terminal characteristics of 20th century accounting.

Dec 11, 2019 | Governance, Management

 

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

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

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

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

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

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

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

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

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

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

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

Accounting systems cannot tell the future

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

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

 

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

 

 

 

The curse of insider knowledge

Nov 22, 2019 | Communication, Leadership, Management

When we know something, the automatic expectation is that those with whom we are communicating understand it equally well.

This automatic, unrecognised assumption can be a barrier, and at its worst, a curse.

Participating in a conversation a while ago where I was the outsider amongst a group of Canberra bureaucrats, their verbal shorthand, particularly around the departmental names and programs was incomprehensible to me. The terminology  was perfectly well understood by all of them, and they were surprised at my ignorance, when I pulled them up and pointed it out.

Try a little experiment.

Tap out a song, like happy birthday, with a pencil on a desk, and have people tell you what it is. We expect most to be able to pick it, the tune is obvious to us, singing it in our minds as we do it, but only a few actually pick it.

Of course, this closed communication loop is used all the time as a badge of membership, and a means of exclusion.

It may be that the group I was talking to were expressing their status as insiders by excluding me, but assuming this is not the intent, it was nevertheless the effect.

Every group has its own set of verbal and behavioral tools. These can be used as an offensive weapon, a means of exclusion, or they can be a tool of inclusion, it just depends on how you use it.

 

Header cartoon credit: Scott Adams and his mate Dilbert.

9 process management questions from the World Cup finals

Nov 8, 2019 | Leadership, Management

The process drives the outcome, right?

Well, mostly.

So long as the process directs the actions to be taken, the order in which they are taken, and is able to withstand external pressure when it is brought to bear, then yes, it will drive an outcome.

We can look at an outcome and grumble, unexpected, unfair, and so on, but we cannot change it, although we can change the practises that drove it,

Competitively we can also disrupt the processes of others, and have our own disrupted, both internally and externally.

I watched the All blacks demolish the Welsh in the fight for third in the Rugby world cup. Demolition was one description, the All Blacks simply executed their processes with precision, focus and excellence, and the Welsh had no answer. How could anyone beat that?

Well, the previous week England did just that, they beat the All Blacks to go to the final. They beat them by disrupting their processes, not allowing them to execute in the manner in which their processes dictated they should, which would bring the outcome desired, a win.

As a result, England played the Springboks in the final, lucky to be there by beating the Welsh in the 78th minute. While England were the deserved favourites, they were beaten by a team that did to them what they had done to the All Blacks the previous week. The English processes were disrupted, and they were forced to play the game the Springboks preferred. For an hour it was a slug fest, anyone’s game, although the Springboks had the better of the set pieces, by a good margin, and then two pieces of individual brilliance sealed the fate of England.

I cannot let  this go by without reference to the Australian Wannabees. It seems they had no process, or at least not enough to make an impact when it really counted, against good opposition. How can you have a stable repeatable and yet agile process when those whose responsibility it is to execute are never the same people. The trial, mix, and match of team selection is hard to fathom, and makes building a robust, repeatable process next  to impossible, no matter how great the individual players may be.

In addition, processes must be designed with the end in mind.

No good designing a process that gives you an outcome then putting in place people to deliver the outcome who are not instantly aligned to the behaviours necessary to deliver that outcome.

Designing a process, then executing on it consistently while under pressure, are different. Both are challenging, but they are not the same thing.

  • How robust are your processes?
  • Will they be disrupted by competitive pressures?
  • Are they sufficiently agile to accommodate the unexpected?
  • Does each element of the process fit comfortably into those on either side?
  • Does each element of the process compound to build the impact of the whole?
  • Are you measuring the performance of each element?
  • How responsible are the people in ‘hands-on’ control of each element for the performance of their part?
  • Is there alignment between the processes and the desired outcome?
  • Has the overall objective been broken down progressively into its component parts?

Robust, repeatable processes are the foundation of performance, will yours withstand the pressure?

 

A critical antidote to confirmation bias.

Oct 28, 2019 | Governance, Leadership, Management

Confirmation bias is a seductive bitch.

We see what we expect to see, the things that confirm our existing views and expectations, to the exclusion of alternatives. When taken to extremes,  loonies like holocaust deniers, and the ‘no vac’ lot emerge and sprout their fact and logic free poison, and attract a small following, and the rest of us just fail to understand how.

We humans tend to see things as if we were looking out a window.  It consumes less cognitive energy when patterns of the past are just assumed by our brains to be repeated, so that is the brains default. The further back from the window, the narrower the view, but however close you get, there is still a restriction.

The challenge therefore is to find an alternative window through which to look at the problem facing you, or better still, assemble a few others with different windows through which they look at the same problem.

Do  not just  think outside the box, get another box!

One way to use this different box, or window, to continue the metaphor, when facing a challenge is to ask better questions, ones that force the challenge to be examined from different perspectives.

  • Why is it so?
  • Where is the leverage?
  • Have we described the problem correctly, or just the symptom?
  • What is the pain point?
  • What has to be true for this outcome to emerge?
  • For this expected result to become about, which assumptions have to be accurate?
  • What happens if we do not decide?
  • What does this challenge look like in other arenas?
  • Are we relying too much on data?
  • What does the behaviour of others when confronting this really look like?
  • Is the data we have reliable, or has it been ‘managed’?
  • How is this different?
  • Have we simplified the challenge sufficiently for a solution to emerge?
  • What would the devils advocate say?

I could go on, but you get the picture.

Driving change in a business means butting heads with confirmation bias.

This is why you need a distinct catalyst to kick it off, and keep it running, for the change process to be successful.

Ask better questions!

5 meanings of ‘Send me a proposal’

Oct 21, 2019 | Customers, Management

 

Send me a proposal is a phrase I hear from time to time, and most of my clients hear often.

The challenge is to interpret what it really means.

Possible meaning 1. You have their attention, your pitch has generated genuine interest, and it is likely that there will be a job here, assuming the demons of the procurement process, and that person in the background with the power of veto, is amenable. Great.

Possible meaning 2. There is a job here, but you are not going to get it. Our procurement process requires us to have three quotes, and yours is number three. We can now confirm our first choice has the job.

Possible meaning 3. Great meeting you, thanks for the time and information. Your offer is really interesting, and I would like to go ahead, but cannot. However, I really like you, and would not want you to feel as if you have wasted your time, so send me a proposal.

Possible meaning 4. We think we have a problem, but are not sure, and even if we have, are not sure if it is worth addressing. Therefore, have a think about it, do some preliminary research, and give us your views, we will be grateful, we will both know  a bit more.

Possible meaning 5. I am just making myself feel important by asking for a proposal, but do not have the authority or budget to commission such a crazy project.

Clearly there are many variations, but they seem to boil down to these five.

I recently made the mistake of preparing a proposal for an industry body, knowing at the back of my mind that it was a waste of time, but the exercise of gathering the information to prepare it was useful for other reasons, so I proceeded. As anticipated, there have been a number of requests to amend the proposal, which has been done, but I do  not anticipate a green light any time soon.

As consultants, and service providers, we can spend a lot of time preparing proposals that will never go anywhere, and the time we spend is not valued by those who are asking us to do the preparation. It is up to us to leverage the opportunities as we best we can.

There are several strategies you may want to think about, all require you to have some sort of

‘RFQ Qualification’ process in place.

  • Politely decline the opportunity. It seems that sometimes when you do this, it just confirms in the mind of the potential client that you are in fact the right person for the job. You can then go around again if you choose to.
  • Reframe the RFQ so that you are responding to the question through a different frame from the one your competitors will use. At least that way, a real choice has to be made, and perhaps some deeper thought put into the brief, and ultimate choice. Sometimes this works.
  • Subcontract the job to someone else, and should they get it, you can clip the ticket.
  • Run for the hills.

In most cases where a proposal that acts as a competitive tender is required, there will already be a preferred tenderer. If you do not know who it is, it is not you!

 

Header cartoon credit: Scott Adams, again nails it.

 

 

 

What is the most challenging goal you could set?

Oct 14, 2019 | Branding, Management, Strategy

 

 

Simplicity.

We live in an ever more complicated world, and our instinctive response to external complication leads to internal complication in order to be able to manage the external.

Having ‘Simplicity’ as a driving goal, something to be strived for, has the potential to offer rewards from internal savings made by the reduction in ‘friction. It also delivers benefits to customers, making it easier, and more exciting to do business with you than an alternative.

These benefits translate into cost savings and revenue increases for the business, and added value for customers, a virtuous cycle.

It does not matter if you run the corner sandwich shop, or a multinational corporation, the challenge is the same, just the size of it varies.

Apple under Steve Jobs made Simplicity more than just a goal, it was the glue that held the culture together. Simplicity became, as Jobs said, the ultimate sophistication.

Mark Twain in writing a letter to his wife wrote ‘I have written you a long letter, because I did not have the time to write a short one.‘ This captures the essence of simplicity: it is hard, even for experts to achieve.

The power, as well as the challenge, is in the simplicity

 

Header Photo: courtesy Flikr and Jeannie Tseng.