Apr 10, 2015 | Management, Small business
It is interesting to consider the notion of ‘knowledge’ and how experts are given that label.
Often it just means that someone who is seen as an ‘expert’ may have just a little bit more knowledge that those who are listening.
Consider the primary school teacher, teaching maths to 10 year olds. To them, the teacher is an expert, knows it all, but could that same teacher teach maths at high school, graduate, or post graduate level? Probably not.
In primary school they are a relative expert, but the depth of knowledge required to teach maths at a post graduate level is far higher than primary school. On the other hand, could the teacher of post graduate maths teach 10 year olds?
Often not, as they do not relate to the level of knowledge that exists, and the way these kids will think and learn. The Uni professor may have all the maths skills, but often no skill at relating to their 10 year old audience, often simply because of the assumed level of expertise .
“How could they not know that?”
This post evolved out of a series I am doing, teaching basic software skills to small businesses by relating them to the things they need to do in their business every day, cash flow, P&L, and the other basic stuff that are absolutely essential to a business, but ignored by many small businesses simply because they do not understand what is being said.
There are legions of free “how to” videos, manuals, and the rest, readily available, but still I see small businesses every day who do not understand the importance of actively managing cash flow, or if they do, how to go about it.
Accountants know this, but they have generally failed dismally to communicate it to their small business client base. Generally it is not because they do not want to, but rather because they fail to communicate at the really basic level many small businesses require. On the other hand, owners of small businesses are often loathe to engage their accountants in this sort of conversation at $200/hour when they know they will not understand a thing.
Clearly the assumed level of knowledge is too high they get confused, and do not relate, but that is not their problem, it is that those setting out to teach the stuff have failed to understand their audience.
Mar 27, 2015 | Management, Marketing
Digital evolution
It is fascinating to observe human behavior. Of great interest to me is the intersection with the practices evolving to deal with the digital world, manifested in all sorts of unexpected ways.
One is the huge range of digital tools now available using the so called ‘Freemium” model. Give away a subset of the software’s capability for free, thus getting trial and hopefully conversion to the paid versions. This has been very successful for many platforms, LinkedIn, Mailchimp, Surveymonkey, and is increasingly being applied by platforms to generate advertising revenue as they offer free user access to the platform.
On the other hand, over human evolution, there are lots of common characteristics evident, three in particular that are relevant to any discussion of the freemium model that most would recognise:
- People want what they cannot have.
- People chase things that are moving away from them
- People value what they have to pay for, irrespective of the payment being in effort or some other means of exchange.
At first glance the Freemium software model is breaking these evolutionary rules, but on closer examination they are actually using them to their advantage.
By making the paid capabilities of the software explicit as free users try to do more and more with the familiarity that comes with software use, they get frustrated with the limitations and upgrade to the paid version.
For small businesses, whatever the business they are in, from the local retailer to service provider, combining these forces can work for you.
For example, if you want your car serviced, do you want it serviced by the bloke who can fit it in today, or the bloke who is so busy you have to wait 2 weeks?
It might also cost a bit more.
Creating some tension, then enabling people to resolve the tension, generally delivers greater satisfaction with the outcome, as those converted find ways to justify to themselves the value of their decision.
It has certainly worked with me, and it allows small businesses particularly to experiment at low cost, with nothing at risk apart from a bit of time.
Mar 23, 2015 | Collaboration, Innovation, Leadership, Management, Strategy
Plan backwards
All sorts of planning activity is aimed at defining the point where we want to be, then assembling the resources and capabilities to get there.
That is how planning is done, almost always, because by and large, it seems to work, and it keeps the spectator crowd happy.
Libraries have been written that describe all sorts of methods and models that can be used. They can be very useful and thought provoking, providing a framework to help articulate the factors that will impact the business, and the options you have in responding, but they rarely offer an antidote to the malaise affecting the development of really distinctive capabilities, genuinely new products, processes and business models.
The real innovations, the things that change everything seem to come from a different place, “left field” being the most common description.
Most planning ends up being just an extrapolation of the past, despite the well meaning and significant effort to make it something else.
Perhaps a better way is to put yourself in the future place, then work backwards, identifying the steps that need to have been taken to reach the point where in your mind, you are now.
Be specific about the end, articulate it clearly, and then “Plan Backwards” by considering the factors that delivered value for you. I generally call this process ‘Hindsight Planning’.
- What did you do that worked, and conversely, what might you have done that did not work?
- What capabilities did you need to develop?
- What trends drove changes to the industry you were able to leverage?
- Where did the technical innovations you leveraged come from?
- Which markets and customers were successfully addressed?
- What big customer issues were addressed?
- What did the business model(s) you used look like?
- And finally, How were you able to extract value for all these things?
This sort of analysis, if it is to lead to a positive outcome, requires that you recognise and deal with two types of barriers:
Management barriers.
People like consistency and predictability, so when the forecast future looks very like the past, just a bit blurry, they are happy with it, endorse it, and resource it. By contrast, being the harbinger of change that will affect the status quo is no way to get ahead in most organisations. However, it remains a truth that the future never looks the same as the past, no matter how much we would like it to be so.
- Idea averaging. Management absorbs and usually just “averages” or applies committee thinking to a good idea, but at worst, just rejects them for a range of reasons that sound absurd and utterly naive with the benefit of hindsight. Existing businesses are rooted in the networks and frameworks required to make them successful today, and are usually intolerant of new things that involve risk. Usually successful incumbents are well evolved, so are resistant to change, their current way has enabled the current business to be successful, why change? There are many examples of this phenomena, Kodak being a standout, Polaroid another, Cobb & Co another. The current attempts by the taxi industry to resist the encroachment of Uber in my hometown, Sydney, is an example unfolding, and the music industry prosecuting their customers for using their products is an example of one that is just about folded.
- New business models. The successful commercial execution of a real innovation generally requires some new way of delivering the value to customers and extracting value for the suppliers. In short, a new business model. Industry incumbents rarely completely disrupt themselves, by definition, they have too much to lose. Therefore, there needs to be new strategies and supporting business models developed by those outside or on the fringes in some way of an industry. Uber and Apple came from way outside the industries they disrupted, and can you imagine Hilton, or Accor funding that mad idea AirBnB that was gong to crucify their budget tourist dollars?
- The Profit paradox. Profit is counted by looking backwards rather than forward, rewards came after the fact. Forecasting profit, or “fortune telling” is inherently risky, as the only think you know for sure is that you will be wrong, the real question is by how much, but the consequences of getting this brand of fortune telling wrong are significant. However, in the long term, you are only truly profitable if your returns are greater than the cost of capital. If they are equal, you may as well put your money in the bank, because it is safe, less than that and you are long term destroying capital. This simple fact is ignored in almost every profit forecast, statement or review I have ever seen. The conundrum is that to generate a return greater than the cost of capital you must take risks and do stuff differently, some of which will not work out, or only work out in the long term, therefore risking the current profit. It is pretty easy to ramp up the profit made today at the expense of tomorrow, but in this case, tomorrow does actually come.
Creative barriers.
Creative barriers evolve around points of the assembly of ideas, where information, insight, experience, are mixed up to create the otherwise unlikely connections that are the foundation of a creative solution to a problem, situation, or challenge. These are the barriers that most businesses try and get around by the off site strategic planning sessions that rarely seem to be able to deliver the promise of the day. The energy and drive in the workshop room gets absorbed by the day to day of being back in the business. Removal of the barriers is a high priority challenge for management.
The barriers to creativity are many and varied, often overlapping in many places. Following is a ‘brain-dump’ list of the ones I consistently find.
- No commitment from the ‘top’
- It is not OK to be wrong.
- Give up too easily. Edison’s famous quote “Now I know 999 ways that do not work” whilst experimenting to develop the lightbulb resonates still.
- Creativity is hard to quantify, and is therefore often not measured. The old adage what gets measured gets done is right, so creativity is extinguished.
- Lack of resources, time, equipment, money, are all used as excuses for being too willing just to accept the status quo.
- Enterprise culture eliminates risk as far as possible, and creativity is inherently risky and “out there”.
- Rules rule. Particularly in public enterprises, and creativity is not in the rules.
- Challenging orthodoxies, assumptions and the status quo is frowned upon.
- Lack of what I call ‘environmental intelligence’ or an understanding of the macro trends and individual movements in the commercial and strategic environment in which you compete. Seeing trends that impact an enterprise, and their intersections is a rich source of creativity.
- Lack of discipline. Perhaps counter intuitively, creativity includes a range of activities that if subject to some disciplined and focused thinking can deliver great results.
- Not having the right people. Creativity is perhaps the most collaborative of human activities, well, almost. Not having the right people is a commonly owned albatross.
- Everyone can say “no”. Formal layers of approval for ideas act on creativity like a wet blanket on a campfire.
- Creativity is not a required contribution from everyone, it is assumed to be the product only of the young, or the marketing department, of the boss’s wife. Creativity should be everyone’s job!
I could go on, the list is huge, it is a wonder that creativity survives at all given the barriers.
An idea is the outcome of all that has gone before, and the triggers around at any given time, rarely is it the ‘Eureka’ moment. Ray Kurzweil who has a stellar track record in seeing the future in technology believes we need to become comfortable with what he calls “Hybrid thinking” and I can only agree but see that the ideas he articulates have a far greater range than just creativity and innovation in technology.
Mar 19, 2015 | Customers, Governance, Lean, Management, Small business
Image courtesy of ddpavumba at FreeDigitalPhotos.net
Remove transaction costs. Easy to say, hard to do.
The concept of transactions costs is generally attributed to British Nobel prize winning economist Ronald Coase, and the publication of his 1937 paper “The nature of the firm”
Transaction costs will always be present, they are the enablers of an organisation. The challenge is squeezing the maximum productivity out of the transaction costs you will inevitably incur.
Like all costs, transaction costs fall into three categories:
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- Those that are necessary for the sale, and that add value to the customer, so they would be willing, if you asked them (and this is the big test) to pay for it. Things like delivery of physical products fall here, and we all know there is no such thing as “cost free delivery”. ,
- Those that are necessary, but do not add value to the customer. Costs associated with compliance, your training and innovation programs, taxes and charges all fall here .
- Those costs incurred that do not add value in any way, just consume time and money, such as rework, picking up wrong deliveries, or correcting wrong invoices. You generally do not need an activity costing initiative to know that this third category is usually uncomfortably large, and should be eliminated.
The bloating of transaction costs has three basic causes:
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- Not getting “it right first time” requiring rework to correct the mistake. For small businesses, the costs of mistakes are relatively much harder to absorb than they are for a large enterprise.
- The penalty of small scale, expressed in the variable operational costs incurred, and the productivity per dollar of overhead spent. The flip side is that small operations can be far more agile than large ones, as the distance between a decision being made and actually getting something done, is much shorter.
- Less than optimum processes, or the ways that businesses manage the things that need to be done to support and document a transaction.
If you chose to take a deeper look at these three causes, they are all rooted in the way people go about doing their jobs on a daily basis, and for small businesses, with less people, and far easier personal communication, this is where the leverage can be applied by continuous improvement.
It costs the same to raise and process an invoice of $1,000 as it does for an invoice of $100,000. Therefore the transaction cost % of the invoice value is far greater for the smaller invoice. This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. Technology offers the opportunity to reduce the absolute cost of processing to almost nothing, making the transaction cost irrelevant either way, but once people are added to manage the exceptions that cannot be handled automatically, the costs soar.
The source of Woolworths superior performance over the last decade compared to Coles has been the impact of their reductions in transaction costs that have dropped straight to the profit line. Wal-Mart became the biggest retailer in the world by focusing on the reduction of transaction costs of all types, and passing the savings on to consumers as lower prices to attract the volume creating a virtuous circle. Less obviously, they passed many costs back to suppliers, then continued to insist on and successfully extract cost reductions from those same suppliers in spite of increasing their costs, simply because of the scale of their sales potential for suppliers.
It seems to me there are two parameters to transaction costs:
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- The absolute amount of the costs in a whole process
- The productivity of the costs in the process.
Most systems just look at the quantum, and set out to cut corners, work the current system harder, but by looking at the detail of the things that generate the costs, you can eliminate those that do not add value. However, moving a transaction cost on to another link in the supply chain does little to eliminate the cost, it just moves it. Retailers generally have been expert at this moving of transaction costs, while often creating them as a source of revenue. Practices such as making minor claims on a supplier, and holding up payment of a complete invoice until the claim is dealt with, then making the dealing with the claim a minefield for small suppliers abound. A source of the success of Aldi in Australia has been their focus on the reduction of transaction costs, but in return they get their “pounds worth” at the invoiced price point.
In dealing with supermarket retailers over many years, a number of transaction cost types have become evident:
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- Cost of searching, storing, processing & managing information. Category management is a prime suspect here. Suppliers engage in a costly, data intensive exercise in the expectation (hope in most cases) that there will be returns from the collaboration that is hoped to occur, and from the opportunities good category management can unearth. While the costs of the data transactions themselves may have dropped precipitously over the last 20 years, the costs of the overheads to manage them have not.
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- Cost of negotiation. In almost any negotiation where one party has the power, and is happy to use it, the outcome is virtually pre-ordained, it is just the quantum of the cost that is in question. Knowing, and sticking to your “Walk away” point is an absolute must.
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- Cost of time. A vastly under measured cost in most businesses. We tend to have people on staff because there is a job to be done, and we pay them competitive rates to ensure we get the best people we can for the job, but we tend not to measure the value delivered by the doing of the job, its cost is just a part of the fixed overhead. Every minute spent costs a business, but apart from VC operators who use “burn rate” as a key measure, we tend to ignore it.
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- Cost of certification. The range of certifications that are supposedly “needed” from HACCP to OH&S, to quality verification of components in a product to various religious and quality standards are legion. Each costs time, money, effort, and carry heavy opportunity costs. A bit of effort to isolate those that are really needed, and to manage those that are with automated or at least consistent processes can save a significant amount of time and money
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- Cost of influence. People deal with people, not corporations, no matter how automated and impersonal our communications systems become. Getting to know people , building relationships and trust takes time and effort. It is time and effort well spent, to a point, and finding the point at which the costs outweigh the benefits is a management challenge most fail.
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- Costs of cock-ups and rework. This is probably the biggest, most pervasive source of transaction costs. From the wrong invoice to a truckload pf product turning up to be rejected, and turned around dumped or put into rework. It is not just the cost of the product, but the added time, lost sales, loss of reputation, and needless consumption of capacity that really hurts. “Lean” processes target waste, and this one is the biggest waste that occurs, and is often made up of a lot of low hanging fruit if you go looking for it, and know where and how to look.
Small businesses are in a great position to reduce their transaction costs, simply by being good at everything they do, and being “close to the action” can make the wrinkles that can be ironed out that more obvious.
The original post that started the series is here, followed by the more detailed posts, 1, 2, 3, 4, 5.
Mar 9, 2015 | Change, Governance, Management, Small business
Three core factors of success
Over 20 years of working with mostly small and medium businesses, I have found there are three common factors that are almost always are pre-requisites to a successful business, generally in this order:
- Cash. Cash is the lifeblood of business, and too often small businesses do not manage their cash well enough. Simple tools and techniques are not used that could make a huge difference in the success and often avert the demise of small businesses. Businesses have absolute control of the manner in which they manage their cash, it is entirely up to them.
- Leverage. Most small and medium sized businesses are run by people who are functionally extremely competent, really good at the thing that led them into businesses in the first place, rather than being an employee. However, the flip side is that they often do not let go of their functional control, and they let other things outside their competence slide. The net result is that they work ridiculously long hours to take home less than their employees, and have no life outside the businesses which grinds to a halt if they take a week off. They must find ways to leverage their time, to get more done in less time. Most business people have the opportunity to leverage their time far better than they do, the choice not to do so is usually in their hands, weather or not they know it.
- Simplicity. Simple is good, simple makes life easier, more productive, and more profitable, but ironically simple is really hard to achieve. Unlike cash and leverage, simplicity is to a significant extent out of the hands of the business owners. The really good ones have simplified their processes, ensured their activities are aligned with their strategies, and built a culture that engages employees to minimise rework and maximise the amount of autonomy and innovation that happens, but then they have to deal with the world outside their premises. Customers, suppliers, competitors all complicate life, as does the public sector, unable as it is to even begin to realise the benefit of simplicity and the costs their own complexity imposes on small businesses.
Nevertheless, setting out to do better on all three parameters will most certainly deliver dividends. The first step is to form a quantitative picture of the current situation, plan the improvements, then measure the improvements as the changes bite.
Then “Rinse and repeat”!
Feb 27, 2015 | Governance, Management, Operations, Personal Rant, Small business
Times are tough, success is hard to come by, even for businesses that have been around for a long time, well and truly beating the hoodoo that stalks new businesses, 9/10 failing in the first few years.
Somebody I have known for a long time, who has run a small businesses delivering a range of very good products to consumers via FMCG retailers is about to go to the wall. 25 years of effort and commitment about to slide down the dunney leaving him with nothing, not even his house, left to him by his parents.
Worse than sad. Tragic.
Many things factor in the eventual failure of this business, but one stands out starkly.
Poor management of his cash.
There are two sides to the challenge of managing cash.
The first is the cash itself.
In this case, from week to week even day to day, he knew how much was in the bank, but when the big bills came in, it has been a real struggle to pay them, because he was not adequately forecasting the flow of cash, giving him the opportunity to adjust activity as necessary. His bank has been unsympathetic, creditors demanding, and debtors increasingly reluctant to part with their cash, even in this current super low interest rate environment. Meanwhile costs have increased inexorably, way out of line with his ability to extract a corresponding increase in the prices he can charge in the marketplace.
Not pretty, and all too common.
The second is how the cash you have is used, the level of productivity you extract from it. Cash by itself is worthless, its value is in what you do with it. Purchase inventory, pay staff, provide a factory and all the other stuff we call the costs of being in business. After all that is done, most want some reward for the long hours and stress of being in a small business, and then to have some left over to go towards that world trip on retirement.
The productivity of the cash is not measured by the amount you spend, but by what you get for it, and small businesses rarely spend enough time considering ways to increase the productivity of their cash, concentrating on the absolute amounts coming in and going out. Challenge is that there is no explicit measure for cash productivity, and it is not a notion recognised in the accounting packages everyone uses, the accounting standards, or most peoples mindsets. Best we usually seem to do is have a few ratios like the “Quick” ratio which measures current assets over current liabilities, which are not regularly tracked performance measures, and have room for interpretation and thus manipulation.
Stock turn, debtors days Vs creditors days, Sales or Gross margin/employee, product value produced/realisable value of a piece of machinery, production value/production employee, time taken/task, and many others. There are thousands of ways to measure the productivity of the cash tied up in any business, and every business will be different. However, there will be a few measures for each that capture the essential nature of the business, where an improvement will deliver measurable financial results.
You should be seeking and using these key measures of cash productivity in your business.
Back to the case of my acquaintance.
He did not manage his cash flow well enough. Failure to adequately forecast and thus manage the ebbs and flows of cash into and out of his business, and as a result having to put in place very expensive short term funding in one way or another meant he was always chasing his cash-tail. He also did not measure, almost at all, the productivity of his cash, allowing the ” hidden” costs of poor cash productivity to kill him. Despite his Income statement, often called the Profit and Loss statement, telling him he was making a modest profit, he has hit the wall.
A sad but unfortunately common story, one I hope you are not seeing first hand.
