Oct 24, 2023 | Governance, Management, Small business
Most SME’s I meet have at one time or another contemplated, and often invested considerable resources in the quest to obtain public grant funds.
Rarely do they approach this exercise with any understanding of the disconnect between the way the commercial world, and the bureaucratic one work. They assume that what to them is normal and obvious is reflected in the bureaucratic processes.
Wrong.
For context, 25 years ago I ran a small grant-funding outfit called Agri Chain Solutions that had been outsourced from the then Department of Forestry, Fisheries and Agriculture at the express direction of the then newly elected Prime Minister Howard. ACS was a Company, limited by guarantee with a largely commercial, board with two members from the senior ranks of AFFA and Austrade. The chairman had been a very successful MD of a very large business in the food industry. I was recruited as a senior manager with extensive experience in FMCG and agriculture.
Following are some relevant observations from that time about how the bureaucracies operate, which from what I can see, remain accurate.
- Departmental budgets are set annually in line with the governments policies and priorities. While program budgets are often spread over a number of years, they are reviewed and changed as necessary, or for a hundred other reasons, annually.
- Departments put in their ‘bids’ in the pre-budget preparation, which includes the costs of running the department, as well as the cost of the programs for which they are arguing.
-
-
- Departmental overheads have been progressively cut over years by shedding heads, which are then contracted back as an ‘off the books’ expenditure, usually netted off against program costs, or just classified as an unavoidable cost overrun.
- The status of public servants is measured by the number of reports, direct and indirect (i.e., reporting to someone who reports to them) they have, and the size of the budgets they manage. This leads to an ongoing turf war between departments, and sections within departments for status, and public service grades that determine pay and advancement.
- Public servants are typically held loosely accountable for the expenditure of money compared to the budget allocated. This has absolutely no relationship to the outcome generated by the programs they manage. To my mind, this mismatch of expenditure and accountability is at the core of much of the waste that occurs. It is also the factor that leads to the mad rush to ensure that budgets are all spent before June 30. An underspend will be seen as a sign that a cut is possible, while an overspend is seen as bad luck, with no recriminations, or understanding of the drivers of the overspend.
- Program reviews done by an ‘outside’ neutral agency are built into the program costs, but neutrality is a joke, as the current PWC fiasco demonstrates. In ACS’s case, the review was done by KPMG, who had to do three revisions to get to a program report AFFA was happy with, in order to get paid. As you might guess, draft 1 was OK by me, draft 2 was nonsense, and draft 3 was total bullshit that bore no relationship to the success, or otherwise of ACS expenditure. I was bitterly and noisily opposed to the final report submitted, but was advised that my disagreement while noted informally, was not relevant. I could not change the world, so I should just get on with life.
- Grant program budgets allow a percentage of the total program to be held back for ‘Administration’. In the case of ACS, that amount was 20%, a laughable amount, as the total expenditure on all ACS overheads and project management was around 6% of the program budget. All AFFA did was use the withheld amount as a slush fund.
- Program budgets are broken up to make keeping track easy, bearing no relationship to the way money should be spent to optimise the outcomes. In ACS’s case, we had $9 million over 3 years, minus the withheld admin cost. The department broke the total into 12 equal quarterly amounts and insisted that was the budget. Pointing out that it took 18 months to get good projects up and running, during which time little grant money would be allocated had little effect. In the last 18 months more than the quarterly ‘budget’ amount was to be allocated, which caused great angst in the department. I also pointed out that at the original sunset of 3 years, there would be projects that had not been completed, that ACS and AFFA had a moral if not contractual obligation to see through. After much discussion, we negotiated a 12-month extension for nominated projects that were then shuffled into the follow up program, the National Food Industry Strategy, with a contractor to administer them.
- Senior public servants speak about accrual accounting as being the base of their accounting processes. ‘Nonsense. It is cash accounting, there are no accruals involved, anywhere.
- There is a myriad of ‘allowances’ that foster rorting and destroy accountability. I came into contact mostly with those relating to travel. The intent is sensible: make the management simple. However, the effect is to enable officials travelling to rort the system. E.g. A level X official is allowed an amount/day for meals and accommodation, without any paperwork showing expenses incurred. Predictably, they travel as much as possible to places where they have friends and families, claim the whole amount, and pocket the lot, or stay in a cheap hotel, eat as cheaply as possible, and pocket the difference.
- Finally, for all the babbling about innovation that goes on, it represents the antithesis of the cultural abhorrence bureaucracies have with risk. Innovation is impossible without risk, and risk seen in hindsight is always weaponised as a mistake by those who oppose. As was once said to me by a senior bureaucrat in a well lubricated social setting “my job is to ensure my minister is never seen as stupid, and you know who my minister is, so you know how hard my job is’.
None of this is to denigrate public servants, quite the contrary. As individuals, they are generally a well-educated and potentially powerful force for good, frustrated by the constraints of the culture within which they work. The challenge is changing the culture that has been encouraged to grow around them, a task belonging to those with the power to do so, the politicians.
Oct 20, 2023 | Innovation, Management
Investing in dead horses sounds like a pretty dumb idea, but it happens all the time.
Projects, ideas, products, people, that have little or no probability of returning revenue and margin from the continuing investment should be stopped. Not only do you save the money and management distraction, but you have the opportunity to leverage the freed-up capacity against the opportunities otherwise passed over.
Opportunity Cost flipped to be just Opportunity.
Over the years I have seen many projects that have persisted long past any reasonable time, never seeming to move forward, but never getting the chop.
When resources have been invested in a project, particularly when it has a favoured place in the psyche of some manager, killing it is often hard, resources just get budgeted, absorbed, and ultimately wasted.
Voltaire observed that: ‘Perfect is the enemy of good’ This leads to the idea of Minimum Viable Product (MVP), getting an idea out to the market in some form to test if it really has sufficient traction to deserve the allocation of resources over alternative uses. ‘Ship and Iterate’ should be the cry, assuming that each time you iterate, you learn from the outcomes, and better understand the commercial reality you confront.
Prudent investors and managers take a ‘portfolio approach’.
They know that not all initiatives are equal. Differences abound in the resources they consume, the opportunity offered, and the odds that the opportunity as visualised will become reality.
Daniel Kahneman established quantitatively that we value what we stand to lose much more than what we stand to gain. This is the magic power of continuing to invest to avoid accepting a sunk cost. Flogging a dead horse by another name.
Stop investing in dead horses, they will not come back to life no matter how hard you wish it were different.
Aug 21, 2023 | Analytics, Management
Volume, flow, and capacity utilisation are drivers of each other, a symbiotic relationship articulated by Wrights Law.
A product with significant volume that is easy to schedule through a factory, and because of those volumes, has ‘well-oiled’ and efficient operational processes, generally delivers profit.
Years ago, I did a product profitability exercise on a range of products that were marketed by the company for which I worked at the time, Dairy Farmers Ltd. The parameters I used were based on the gross contribution to fixed overhead after promotional costs. These I calculated from the standard costing model being used at the time. Also weighted into the calculations were the complexity of the operational scheduling imposed by the products, and the ratio of gross contribution to the calculated capacity of the individual production lines, including downtime measures like machine availability.
The most profitable product in the range in both dollars and percentage was 300gm sour cream in cartons. It was a product that had significant and easily forecast volumes, so raw material procurement was simplified, predictable, the operational processes were ‘well-oiled’, and we had some pricing power in the supermarkets. There was very little wasted capacity or product failure in the manufacturing processes. Wrights law at work, and after a bit of thought, it made absolute sense that it would be the most profitable.
The second most profitable product in the range in percentage terms was a surprise to everyone, including me. A relatively small volume product, ‘Buttermilk’ in 600ml cartons. At the time there was no competitive product, so we had considerable pricing power, the volumes were highly predictable albeit modest, the ingredients simple and always available, and we could run the product immediately after sour cream with just a change in carton size which we could do ‘on the run’, the first few cartons acting as the ‘clean-up’ after the sour cream. There was effectively no downtime, no ‘start-up waste’ product, no added labour, few inventory costs, and no promotional costs. The capacity utilisation of buttermilk was virtually 100% of the capacity allocated by the arithmetic that combined volumes required and theoretical throughput rate and delivered margin.
Sadly for Dairy Farmers profitability, the supermarkets realised there was a profit pool they were not accessing. They introduced house brand products manufactured by a competitor who had idle capacity and took a marginal cost approach to the price at which they were prepared to sell the product to use that capacity. The volumes of both sour cream and buttermilk products fell quite quickly, while the operational costs per unit increased markedly.
Wright’s Law works in reverse as well.
The header is of Theodore Paul Wright 1895 – 1970
Jun 13, 2023 | Management, Operations
There is a simple answer, but the money is just a bit harder to find.
It is tied up in your current operations, consumed by all manner of things that do not add value to a customer.
Machine down time, rework, waste, on line inventory, double handling, and a host of other things that get in the way of a steady, predictable and continuous flow through a factory.
Progress to completion through a production process can only go as fast as the slowest point in the process. Working around these choke points entails either building WIP inventory, or slowing the faster parts down to the speed of the slowest part of the process. There is no third internal option, but ‘outsourcing’ the slow bits is sometimes a productive choice.
Progressive removal of any impediment to a predictable even ‘flow’ and you will save money. However, even more importantly, you will free up capacity that will give you the opportunity to sell more from the same fixed cost base.
That is where the gold hides: Money for nothing.
Do you want it?
May 17, 2023 | Analytics, Management
The ‘Long tail’ is a graphic recognition of the Pareto principle, the 80/20 rule. It holds true in every situation I have ever seen. Rarely exactly 80/20, but always somewhere in the region.
We tend to accept it as a reflection of revenue and profit: ‘20% of our customers generate 80% of our revenue’.
Often, we manage our businesses, particularly the sales effort, as if this is the only place the principle works.
It applies equally to transaction costs, long term potential, management attention, geography, product class, customer type, and many other useful to know indicators.
Take for example, those customers that in 5 years’ time will be amongst your most profitable. Chances are, they are currently hiding somewhere in your long tail, denied the focus and assistance they might value that will assist them to grow in importance, simply because they are not seen. I call them ‘Strategically Important Customers.’ Unimportant now by most measures, but critically important in the long term.
Ignore these customers at your peril.
So, how do you find them?
- They meet the parameters of your ‘ideal customer.’
- They have a problem to which you have or are developing the ideal solution.
- Your share of their ‘wallet‘ is low when they meet other ‘ideal customer’ parameters.
Conversely, set your sales team to dig them out of your competitor’s long tail, deliver value to them, and convert.
An equally important task is to identify those customers who cost more to service than their current or potential profitability. The best thing you can do is send them to your competitor, so they can be saddled with the usually hidden transaction costs and low margins.
The profit and Loss statement is, or can be, a remarkably efficient way of capturing the information required to focus resources in the most optimised manner, dictated by your strategy. A P&L by customer, product, geography, market, and any other driver can be generated using readily available and relatively simple tools. The challenge is in overcoming the institutional definitions of how the data for the statements is collected, collated, and presented.
For example, what is an overhead, and how is it allocated?
In a factory, is the cost of supervisory staff allocated to individual product lines based on the actual costs, some rough ‘standard’ cost, or not allocated at all? Are those costs seen as overhead? Is the total overhead spread across total production by some magical formula devised by the accountants, or treated as a cost centre and managed proactively? What about those directly on the production line? Are their costs allocated in proportion to production volumes, customer offtake, or some mythical ‘absorption’ rate?
Take the time to ‘slice and dice’ your Profit and Loss statement. After having tackled the greater challenge of having the costs as they are actually incurred reflected in the customer P&L statement, you will be in a great position to take decisions that will have a significant impact on your overall profitability.
May 5, 2023 | Leadership, Management
Amongst all the blather about remote work, there is an aspect that has received little attention, but in a couple of my clients is beginning to make itself known.
The ‘remote work’ idea is not applicable to everyone.
Office workers of all types are able to some extent, work remotely. They are saving commute time and money, childcare is more flexible, ‘family friendly’ and potentially delivering savings to their employers and to themselves.
However, those in factories, on building sites, driving trucks, are not able to work remotely, and find these benefits.
This is starting to cause friction. Those still punching a time clock, and subjected to the disciplines of shifts are starting to resent the freedom accorded to white collar workers.
During the covid lockdowns, it was OK, they understood. However, now the lockdowns are over, and the whiteys are still workingfrom home, or are they really working at all, or just logging in from the local café or pub?.
Why are they the lucky lot?
The benefit they are getting, dropping the kids to school, lunch with friends, and all the rest being denied to the blue collars.
They are getting pissed, and management needs to start considering the impact and implications of a differing set of expectations across the breadth of their workforce.
