May 9, 2021 | Change, Governance, rant
As I look at the current state of the economy from my spot as a boomer who has largely lived my life in times of peace and easy excess, it is becoming clear to me that there are two tracks at work.
The first is the one along which is driving those who work for a wage, pay taxes in the absence of choice, and struggle to feed, house and educate the kids. In the decreasing incidence of the traditional nuclear family, both parents tend to work, often multiple jobs, and seemingly get nowhere.
The second is those who own stuff. Specifically, property and shares. They are doing OK in the enormous inflation of price that has occurred.
The problem for our society and the glue of community is that the latter group are living on what economists call ‘rent’.
Income from ‘rent’ comes from what you own, rather than what you produce. In the absence of producing greater income ‘producing’ than from ‘owning’ you get what we have now, a two-speed economy.
It further seems to me that the system is weighted towards those who own, so can charge rent. Our tax system and increasingly education system which is the gateway to ownership is increasingly weighted towards ‘rental’ at the expense of ‘production’ by those in control. The controlling group are themselves renters, and so set the rules favourable to them, rather than being equitable to all.
This is not a simple challenge for us to address. It has been a long time in the making, and will be a long time in the fixing, which makes it unlikely to be fixed in the absence of strong political leadership that is able and willing to look beyond the current electoral cycle.
The economic problem posed by renters is that they tend to double down on what is producing the income today. In other words, optimising the short term at the expense of the long term, which is messy, uncertain, and therefore subject to greater risk. Risk minimisation is core to a renters mindset. That is why small enterprises are more innovative and less risk averse, they have much less to lose, and are reaching for the point where they can become renters, a much easier life.
When looked at through such a lens, the source of the current malaise in this country is obvious. Too many renters, owning way more than their ‘fair share’ of the largess we have inherited.
I wonder what constitutes a ‘fair share’? This is not something you can legislate, and in any event, the legislature is controlled by renters, so no joy there. In a democracy, we the great unwashed are supposed to be able to bring about change via the ballot box, but that seems unlikely in the short term. Again, the game is rigged to exclude anything other than very gradual change from the edges, and that is too hard for the renters to think about and accept the minor risk it might entail. The outcome of the last federal election when the Labor party put a few anti renter ideas on the table, they were scuppered. To my mind this was the result of incredibly poor marketing rather than the ideas being lousy.
I am first and foremost a strategist, one who looks at the big picture and articulates the principals by which the resource allocation and tactical decisions are made. As such, I propose two principals by which the foundations of our economy, and therefore the society we should be aiming for are sourced.
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- Education. Make this more accessible to all, from preschool to advanced tertiary, and everything in between. We need not only the scientists, doctors, and managers, that make the industries and services we want work, but the plumbers and toolmakers who actually make things that produce income. It is that latter group that have been killed off by policy decisions based on something other than the long term good of the community.
- Funding. It is a simple matter that the aspiration above needs to be paid for, somehow. Increasingly the tax burden is supported by the ‘workers’ while the renters get a pass. This simply must change. Not a proposition easily accepted by those who will ‘lose’. It will be resisted with all the resources at the disposal of the renters, and their allies. First target should be the multinational corporations that infest our industries, who reduce their tax, legally, to close to zero by a mix of entirely legal strategies, usually involving transfer payments to head offices domiciled in places where the rates are lower. This is an international problem, not just ours, so the benefit is that others need our cooperation as much as we need theirs, and the economies of the Bahamas and Cook Islands can be assisted in other ways to play their role in a fairer world economy. Then there are multiple soft targets in our domestic tax system that need to be progressively addressed so the balance is reweighted towards those making, at the expense of those renting.
We need to share the largess of the golden goose more widely by re-weighting the distribution of the gold, rather than the ownership of the goose.
It is Sunday morning, and clearly, I am dreaming!
May 6, 2021 | Customers, Marketing
LCM: Lifetime Customer Margin.
There is lots of talk, mostly hype, about Lifetime Customer Value. When you look closely, it almost always means lifetime customer revenue.
Revenue is of little commercial value in the absence of margin, so the discussion is somewhat misleading.
Understanding the margin generated by customer segments, or in some cases, individual customers, is an immensely valuable metric. It enables you to focus activities where there is the most benefit to the enterprise. You can make both strategic and tactical decisions with a great level of confidence based on the margin delivered.
Customer margin is also an enormously useful metric elsewhere.
Salespeople are often rewarded on revenue, which can be gamed. Margin over time is much harder to game, and a far better measure of the effectiveness of a salesperson in delivering value to the enterprise. In any comprehensive key account management process, margin is one of the best measures of the impact of sales and marketing investments made.
Similarly, calculating the cost of acquisition of a customer gains traction when measured against margin rather than revenue.
One of my clients’ businesses relies on referrals as a major source of sales. Increasingly they are moving towards margin on converted referrals as the single metric that best measures the impact of their efforts.
It is proving to be a rewarding strategy.
Header credit: Dilbert and his mate Scott Adams.
May 3, 2021 | Operations
I was asked a challenging question from the back of a seminar room a while ago, before the lockdown, at the end of a conversation about the importance of flow.
The questioner asked, and I quote: ‘I get the theoretical stuff, but how do I go about measuring flow in real life”
It is a good question, with a simple answer that is challenging to implement. It is all about the approach taken to measurement.
The more granular the measurement the better, but the Pareto rule applies. It is also sensible to bother measuring only things that can be changed to improve performance in some way. Measuring for the sake of measuring without the intention to manage by the results only feeds vanity and ego.
The two core measures of flow are:
In my experience, these two parameters are core to every process, in every business. Manufacturing is where they are most obvious, but they apply equally to service businesses.
While these two items are intimately connected, measuring separately enables improvement.
Inventory comes in many forms. Finished goods, Work in progress, raw materials, and in the case of service providers, projects and tasks that are waiting, being done, or completed but not delivered. In some cases, it will be measured in dollars, others, in units of some sort. Granularity enables greater scope for optimisation. For example, a factory with 3 stations in a line that has 3,000 units of WIP, 500 at the first station, none at the second, and 2,500 at the third, clearly has an impediment of some sort at the third station that requires investigation, and improvement.
Cycle time is the time it takes to move inventory from one point in the process to the next. Again, this can be measured for a whole process, or individual parts of the process.
Comparing the cycle times and inventory numbers, will give you a measure of line, or part line throughput, and therefore the productivity, and will highlight the opportunity to remove waste, and generate improved ‘flow’
This sort of analysis of flow is as valid in a management process as it is in a factory.
For example: In a sense, your debtors ledger is inventory. The faster you can get paid, the lower the ‘debtors inventory’ the better the financial results. So, ask yourself how you get paid faster?
You ensure invoices are sent with goods.
You maintain constant and friendly relationships with customers.
You send a reminder a few days before the invoice is due to be paid with a thank you in advance for paying on time.
You ‘deselect’ customers who habitually do not pay on time.
Applying the discipline of ‘Inventory’ and ‘Flow’ to every part of an enterprise will radically improve results.
None of this is too complex for even a modest business. The challenge is to give it the priority it deserves, collect the data, and implement progressively. Incremental improvements compound over time to deliver significant improvement in financial and strategic outcomes.
The header photo is of the Alligator river in NT. It flows unencumbered.
Apr 30, 2021 | Customers, Small business
Cost plus pricing has always been the worst pricing strategy to employ, although the most common. It is because it is superficially easy, understandable, and requires little thought.
In my experience, the use of a cost-plus pricing model is an indication of a lazy, or uninformed and poorly advised management.
The chances are they have no idea of what the real costs are.
Such a pricing model indicates that there has been no effort to isolate the cost drivers and determine a strategy that reflects their competitive and economic context.
All that has been considered are internal factors that the customer has no interest in at all.
It is also often an indicator that the costing system is driven by accountants, who manage by variances from some mythical standard that rarely reflects the reality of a production process, but over which they can absorb overheads.
Rubbish system, and here’s why:
- Standard costs. Most operations have a standard COGS system in place that is revised up or down against a schedule, often annually. In the meantime, variances are theoretically tracked and explained, but they tend to get lost in the chaos of day-to-day operations, and a budgeted gross margin.
- Costs included in a standard system are wrong the day after they are put into the ERP system. It may be a year before they are updated, and even then, remain inaccurate.
- Cost variability. Real costs will go up and down, often daily, and even hourly, depending on a range of factors, Factory throughput, supplier price changes, overtime, WIP losses and a host of other factors all impact actual cost. At the very least, you need to know if you are winning or losing at Gross Margin because of these changes.
- Sales management is compromised in the absence of robust gross margin analysis. Depending on the degree of autonomy the sales force has, they can be ‘generous’ to customers for a range of excuses, normally associated with sales budgets expressed in volumes, rather than gross margin dollars and percentages. This enables all sorts of ‘gaming’ of sales to exist.
- Increasingly in a commoditised market, value is delivered by intangibles rather than the physical product. It is geometrically harder to put a price on this value to a customer, so the potential for sub-optimal pricing is magnified by poor product costing.
- Customers do not care about your costs at all. Not a whit!. What they care about is the value delivered to them. Price for that value, just make sure you can make a sustainable profit on the way through.
At the very least the P&L should be broken up into cost of goods sold, further broken into customer and product categories, trading variable costs, and fixed costs. At least then you have the chance of identifying where the cash is leaking out, as it is leaking.
When you need some outside expertise to maximise your profitability, call me.
Apr 26, 2021 | Customers, Sales
Our sales efforts are often focussed on what we perceive to be customer pain points. Solve a problem for them, remove the pain, and you have a sale. So, the logic goes, and as far as it goes, it is pretty good.
However, an analytical look at the pain points of customers rather than just making broad assumptions can pay dividends. Such an analysis is a part of every useful key account planning session I have ever constructed.
As with most examinations, a frame of reference adds to the value of the discussion. It usually evolves that pain falls into a few categories.
Financial pain points. The most obvious and common. You can save them money, either by offering cheaper alternatives, or by increasing the productivity of the option they are already using. The latter strategy is always better, as ‘cheaper’ can quickly become a slippery slope. I would never use the term ‘cheaper’, always ‘better value’
Process pain points. You can help them build their productivity by helping optimise their processes, to get more out of the same investment, Always a welcome outcome.
Sales pain points. When you can assist a customer of yours to increase their sales, they will be forever grateful, and reward you with their ongoing business.
Strategic pain points. The most severe pain is often not self-inflicted, it comes from outside, from things that cannot be controlled. The best that can be done is to anticipate and plan your response. Assisting a customer to survive and prosper by helping them identify and consider their response to emerging pain points, always works well as a sales strategy.
The key is to put yourself in a position so that you can identify their pain points. This can take a considerable amount of research into the company, and their competitive and strategic domain. By this means you can add value to their efforts by application of the solution to the problems that emerge. This applies equally to existing customers, as well as key potential new customers, although emphasis on ensuring existing customers remain in the tent is almost always more productive..
In my experience, this customer research pays great dividends, tactically and strategically.
