Aug 8, 2022 | Innovation, Marketing, Strategy
Black and white thinking is easy, there is right and wrong, you decide which side of the fence you are on, and stick to it.
Luckily, life is not like that. Life is a mass collision of colours, ambiguity built on ambiguity, built on uncertainty. That is what makes it interesting, and worth living.
Following the previous post that offered 9 strategies for more impactful decisions, it seemed appropriate to observe that the great advice in that post is useless in the absence of being able to see a problem from a number of perspectives.
In other words, see all the colours.
Most problems we face in strategy development are wicked ones, where there is no obvious right and wrong answer, where there are nuances on top of nuances, second order impacts, and where definitive data is hard, if not impossible to find.
Thinking in a binary manner means that you dismiss all these opportunities for creativity because it is somehow inconsistent with your existing views.
This also means you lose sight of most of the stuff from the alternative choices, which is where the richness usually hides.
Differences of opinion cause tension, discomfort, and room for conversation which become challenging for a binary thinker.
Thinking and then communicating in a nuanced way is an enormously valuable skill.
Relationships that last can accommodate the differences caused by the grey areas. It requires that you can hold seemingly inconsistent ideas in your mind at the same time.
Binary thinking means you cannot hold those conflicting ideas.
The question every time in a disagreement, is the extent to which the tension created by differences in opinion are healthy.
We are used to seeing things in a binary manner, it is the automatic response, but we need to find a way to manage the inconsistency and ambiguity. We need to be flexible, as well as being driven by the rules.
The biggest challenges we face have the need to be able to dance with the facts, what works today, may not work tomorrow.
Overdoing structure removes the flexibility, and the opportunity to see things that may become important.
We think most problems can be solved, that is the base assumption we always have, but the conventional wisdom does not always work.
As a kid I lived on the beach, surfed a lot. The water pushed into the beach by the waves needs to get back out somehow, so you have ‘rips’. The area that allows the water to return from the beach. When surfing, you go with the rip, it will take you out, try and swim against it, you will just get tired and make little or no progress. You need to be able to swim at an angle, use the rip to take you out, then move across towards where the waves are.
This skill works in problem solving, finding bits of a problem that are resolvable, like getting a single wave in a session in the surf, you get the thrill of that great wave, use the rip to take you back to catch the next one. It is a process
Tension between people who hold differing views is healthy when managed well. This is when there is a recognition that there is no right or wrong answer to a wicked problem, just the better choice at this point. Then the differences in opinion can better hold the outcomes of the decision to account, it will increase the opportunity to pick up the problem molehills before they become mountains.
Ambiguity and bias can be used constructively.
Embrace your opposites. It indicates you recognise there are differences, give permission to voice the unfamiliar perspective. This is the opposite to just having people with you that agree, then there is no tension, no opportunity to see the differing perspectives.
One side of any question is rarely completely right, and the other completely wrong, we must be curious to see the reasons that the others see it differently.
This is how we produce creative new options that reflect life.
Header cartoon credit: Tom Gauld in ‘New Scientist’ magazine.
Aug 3, 2022 | Governance, Leadership, Management
We are in a climate of uncertainty. The next twist in the Corona pandemic, war in Europe, confrontation with China, and the daily scrambling at all levels of government, stacked onto the usual challenges of making decisions in a business, all make the current situation especially difficult.
The instinct is to wait a bit and see how it evolves.
However, having a bias to action, being prepared to do the groundwork, consider options that take a calculated risk, being prepared to back away with the learning of being wrong and having another go, is a key leadership characteristic in uncertainty.
Essential to leadership is taking decisions with less than complete information. You must then be prepared to adjust on the run, or even retreat when the planning assumptions are proven to be off target. However, there is a danger in being too aggressive. Sometimes delaying a decision is the best strategy. It is a critical balance.
Following are some ways you can bring some order to the decision-making process.
- Gather as much data as you can, but in uncertainty, it is the ‘gut’ of deeply experienced people who have ‘been there done that’ which often makes a critical difference to the quality of the outcomes from the decision. By definition, in highly uncertain times, there may not be much relevant data available.
- Ensure those experienced people are heard in the decision-making process. Ensure ‘due process’ is observed
- As part of the consideration exercise, undertake a ‘reverse 5 why‘ exercise.
- Ensure you have what I call an ‘Andon‘ system in place. This term comes from Toyota, where there is an ‘Andon chord’ which anyone on the production line can pull to stop production in order to prevent a fault progressing to the next stage, and being hidden as a result. It works for Toyota, and has been adopted widely elsewhere as a means to deliver consistent quality
- Gather as many ‘metaphors’ and similar situations in other industries as you can, there will be lessons there. For example, disc brakes were developed first to stop trains in the 30’s, and aeroplanes during WW11, as drum brakes were woefully inadequate. Citroen introduced the first successful mass production of discs on their ground-breaking DS in 1955, and now they are on every car made.
- Leverage ‘reverse planning’ and ‘What if’ questions. Every decision is based on both data and some level of instinct. When considering the future, few questions are as powerful as ‘What if….’ Being prepared by asking a wide range of questions that subject the assumptions often made automatically, often without consideration, will prepare for the unexpected.
- Be very clear about the problem being solved. Any decision can have second and third order impacts, so consider them beforehand as far as possible.
- Never move away from being customer centric. When this becomes a slogan, or ‘core value’ whose only role is a place in the reception of head office, beware!
- Don’t be a wimp. Make the tough calls while being transparent that not all the information you may like is available, but that the very least it will be a learning experience.
As a final note, good decisions can sometimes deliver poor outcomes, and the reverse is also true, bad decisions can lead to good outcomes for all the wrong reasons. Do not confuse the two.
Header cartoon credit: Gapingvoid.com
Aug 1, 2022 | Change, Small business
Covid has led to quite a bit of M&A activity amongst the difficulties of trading. I know several ‘baby boomers’ who have just packed up and left. A number have sold businesses they previously intended to continue for a while, and leave ongoing entities to family, and other shareholders.
Several have sold with an earnout period and discovered too late that there were things in the fine print that tripped them up and reduced the payout to next to nothing.
Poor planning and advice, but most importantly, lack of attention to the implications of the financial detail in the agreements.
Following are a number of the common pitfalls you should be aware of.
However, first and foremost, you must recognise that a payout period is really just a transfer of risk from the buyer to the seller. The degree of this transfer is dependent on the conditions in the contract and actions taken by the buyer post transaction.
Earnout revenue targets.
These come in many forms, often broken into categories.
- Many purchases are made for the sole reason of gaining access to the seller’s customer list. In this case, the seller is kept on to assure those customers that it is business as usual despite the change in ownership. Many things out of the control of the seller can impact on the attitudes of the customers, and often a change of ownership is just the catalyst customers needed to look around, and do an assessment of the levels of value being delivered. This usually results in revenue being lost.
- A buyer may cut the sales and marketing expenditure impacting on sales, a decision out of the control of the seller, but potentially impacting on the earnout numbers.
- A buyer often justifies some of the benefit of a purchase in the ‘back office’ economies they appear to bring. These projected savings can be the result of over optimistic projections around available savings made to fit the guidelines of the purchaser. They can have the impact of reductions in the level and acceptability of the service provided to customers. These can impact revenue and payout numbers while being out of the control of the seller.
- Post transaction, sellers often lack the drive and commitment they had prior to the sale, despite the earnout terms.
EBIT targets
EBIT targets are even more ‘manageable’ than revenue targets by a buyer. Being at the bottom of the P&L offers opportunity to load up expense captions from Cost of Goods Sold through trading expenses and fixed costs in all sorts of ways. This will be detrimental to the seller’s payout at the end of the period. Human nature being what it is, there is little motivation for the buyer to maximise the payout to the seller, and conversely, many reasons to take a ‘hit’ in the first periods of ownership that also serve to reduce the payout. Just a few of the many examples I have seen:
- IT integration costs, often the basis of M&A justification blow out way beyond expectations.
- One off costs associated with staff redundancies can cost a lot of money. Often there are assurances in place about staff, but who needs two of everything post acquisition, so job losses are frequent and often deep, creating unplanned costs.
- Changes in accounting practices of the acquired business, for example the valuation of inventory that is applied to the COGS, and unanticipated write-offs of excess inventory, can impact substantially on the payout numbers.
- Loading up advertising leading up to the end of the buyout period can damage short term EBIT, but benefit the long-term position of the business, post the buyout date.
One way of at least mitigating the potential disagreements and decisions taken outside the parameters of the agreement by the buyer to reduce the payout, is to base the payout numbers on free cash flow. The ways this can be manipulated are easier to define and agree pre-acquisition such that the seller is protected. The buyer still has the ability to make the changes necessary to integrate or take over the business and reshape it. Free cash flow is less complicated than agreeing what a post-acquisition ‘normalised’ P&L would look like, as the variables are reduced, and thus it becomes easier to make transparent and enforceable arrangements.
For many owners of an SME, the value tied up in the business is their superannuation. It makes sense to be very careful, as it is probably the case that the buyer has way more experience with these types of transaction than you.
Header cartoon credit: Scott Adams and Dilbert
Jul 28, 2022 | Analytics, Leadership
Psychology drives our behaviour, and yet we struggle miserably to forecast the impact it will have. Therefore, we cannot predict behaviour with any real accuracy, except with the benefit of hindsight, or across the average, assuming we ask the right questions.
There are five important psychological factors that profoundly impact the sorts of decisions, big and small we make every day.
Status, Certainty, Autonomy, Relatedness, Fairness.
Psychologists put them together into the ‘SCARF’ model as they set about understanding the drivers of behaviour, which centres around ‘away’ movements to minimise threats, and ‘towards’ movements to maximise rewards.
Status. We all know it is important, that is how Mercedes manage to squeeze 4 or 5 times the money out of buyers than a perfectly adequate, reliable, and outfitted with bells and whistles Korean or Chinese alternative. It is why people pay tens of thousands for a watch, assume crushing debt to have a luxury car in the drive, and Louis Vuitton is the world’s most valuable luxury brand.
Certainty. Uber nailed this one. The time we wait for a taxi is different to the time we wait for an Uber, even when the Uber wait is longer. This is because we are waiting with certainty, we know when the Uber will arrive, we know where it is right now, and we can walk out of the building as it pulls up, which adds a feeling of status to the equation. By contrast, call a taxi and then wait, uncertain when it will turn up.
Autonomy. We all like to feel we are making our own decisions, even when we are not. We love that feeling of freedom, even when it is an illusion, or inside a tiny arena of personal space.
Relatedness. Human beings are social animals, we like to feel like others are aware of us, and concerned with our needs, views, and ideas. It is like being in a book club, there are psychological rewards to being in a group that values your presence. We also need the group for protection, as it is the outliers that become a lion’s breakfast.
Fairness. Instantly we rate things on a fairness scale, we like to be seen as fair, even when we are diddling the books. Is it fair that the bloke next door who does the same job gets paid 20k more?
None of these things appear in economic models.
It was Einstein (amongst others) who said, ‘not everything that matters can be measured, and not everything that can be measured matters’.
Jul 25, 2022 | Analytics, Marketing
Almost every marketing so called guru, yours truly included, will bang on about calculating an ROI from your investment in marketing.
Marketing like any other investment should seek a return, and there should be accountability for those numbers.
Almost nobody will disagree.
The challenge is how you do it.
How do you attribute an outcome to any specific activity or individually weighted group of activities?
The amount spent divided by the sales, or margin returned from that activity.
Pretty easy in the case of a piece of machinery, another matter entirely for anything beyond a specific tactical action, such as an ad in Facebook or Google where the response can be counted.
In the case of marketing investment, how do you allocate the sales outcome to that activity?
When a sale is generated, was it because of the activity we are calculating for, or was it the phone call from the sales rep, attractive copy on the website, clean delivery truck, or the referral from some other satisfied customer?
How can we tell?
When some analytics nerd cracks the code on attribution, he will become histories fastest billionaire.
So, when some fast talker promising world market domination will result from investing in their new ‘thing’, run as fast as you can, unless they can prove they are the one who cracked the attribution code, which I do not expect any time soon.
