Sep 14, 2022 | Change, Management, Strategy
Scaling is the objective of every SME I have ever dealt with; they all want to get bigger. In every case they have the same three challenges.
Which activities do they Eliminate?
Which ones do they Delegate?
Which ones do they Automate?
EDA: the challenge of every SME.
The common challenge in them all is that they require change, and human beings, particularly busy ones, avoid change. This is the case even when they recognise that in the longer term, the change is necessary. The problem is finding the time to invest in figuring out what that the change must be, as that is an investment of time that is at a premium, without an immediate return. Besides, change makes us all uncomfortable.
Elimination.
This should be easy, but is often hard. The test is to define the value of the action, and if it is less than the cost, eliminate it. Before desktops, managers relied on regular printouts from mainframes to give us the information needed. Those under fifty may not remember the big dot matrix printed files that emerged in continuous sheets, often for further analysis by hand. These reports tended to multiply like rabbits on heat. One report responding to a once off information request resulted in that report being produced every time the report cycle ran, weather it was needed or not. In an effort to reduce this tree killing activity, I once put a line through most of the list of reports produced weekly for my department, not telling anyone, waiting for the screams. They did not come, nobody noticed. Eliminated. A simple example of what often needs to be done.
Delegation.
If it cannot be eliminated, can it be delegated? Someone who costs 150/hour doing a task that can be done by someone costing $50 is simply a non-productive use of resources. Again, delegating is easy to say but often hard to do. Everyone has established routines and delegating requires trust and change.
Automation.
When a task is necessary, cannot be delegated, and is done more than once or twice, it should be automated. The opportunity for automating tasks is limited only by imagination, the determination to do it, the time to specify it, and usually a modest investment of time and money. Automation of what used to come to me in huge printed blocks from a mainframe has been done by the advent of personal devices and ‘apps’. Information can easily be consolidated and tailored for the specific needs for which it is required. While the goalposts are continually moving as to what can be done, there is no task in an SME I have seen that cannot be at least partially automated.
EDA should be a standard item on every management improvement agenda.
Sep 7, 2022 | Change, Leadership
‘Business coach’ seems to have suddenly become a go-to moniker for former corporate executives looking for a new gig. For someone who recognises that a coach might be a valuable performance enhancing addition, how do you pick the right person?
I had a conversation on this topic recently in the pub with some colleagues, a beer with a few people who run SME’s, that used ‘networking’ as an excuse for said beer.
(Aside, Christ beer in a popular pub is expensive!)
The conversation was initiated by a ‘techo’ who was just folding his 5 year side gig up, after very considerable investment of time, money, and emotional commitment.
He needed, he said, to learn how to be a ‘businessman’ rather than a ‘techo’, and needed a coach, or mentor, but did not know how to pick the right one.
The response I gave him was
- Been there, walked in your shoes
- Able to relate at a really human level to the coached
- Part psychologist, part headmaster, part collaborator, to drive accountability
- Able to bring together the confusing and fluid interaction of financial management, revenue generation, operations, and all the necessary support and regulatory stuff. They cannot be an expert in all these, nobody can, but they acknowledge their limitations, and have a group of trusted specialists available as needed.
- Ask good questions and happy to be proven wrong.
- Prepared to tell those being coached the ugly truth.
- Leaves you better off after every session, although from time to time, that is hard to see at the time. Bit like going to the gym, the impact is cumulative over time.
- Widely knowledgeable beyond the domain the ‘coached’ is operating in to bring in different perspectives
- Holds themselves and those they coach accountable.
- The coach ensures they dedicate the time to discover ideas and observations from other domains that may be useful, then package them up for those they coach.
- They will always be a great listener and have a keen understanding and appreciation of your point of view.
- They can personalise their own experiences in a way that the coached can relate to
- They make the agreed goals of those being coached their own for that relationship.
- They demonstrate patience and perseverance, while being assertive.
However, there are two problems in all of this. It is highly unlikely you will find all 14 in one person, and there is a further huge catch for you:
A real ‘kicker’
Even if the coach you choose has all these characteristics in spades, it will not be enough.
There is a further absolute requirement for a successful coaching relationship.
You, the one being coached, must be open to change.
Coaching is all about changing behaviour, modifying responses, being more open, and understanding. In short, able to be coached. In the absence of that ‘coachability’, nobody can help you get better, you have to do it yourself and suffer the consequences.
Header credit: Yoda from Star Wars series.
Aug 29, 2022 | Change, Innovation, Strategy
For some years academics have been mumbling to themselves about an observed phenomena they generally called ‘Flattening‘. The discussions have been centred around technology, but the impact can be seen in a much wider context.
The idea is that technology acts as the rising tide in the old saying that a rising tide lifts all boats. By rising the average level of the ‘water’ the differences between individual companies and industries are removed, that the offering becomes increasingly homogeneous until a new technology arrives, lifting the owner clear of the competitive debris.
There are numerous examples.
The emergence of the Internal combustion engine wiped out long established industries and companies in the horse drawn wagon, whip, and horse breeding and breaking industries of the time. As they disappeared the automobile industry and its supply chains emerged, now in the early stages of being ‘flattened’ in turn by electric vehicles.
Before the internet, information existed in small silos and did not move much, and then only slowly. Industries that relied on those characteristics were ‘flattened’ out of existence. Yellow pages, classified newspaper ads, and in their place emerged new industries. Google, Facebook, and the plethora of other communication and search platforms.
Let’s consider energy production.
For thousands of years people used wood or coal to heat their houses and water. In 1698 Thomas Savery patented a machine that drew water out of flooded mines by using steam pressure, then in 1784 James Watt patented the steam engine, which for the next 150 years powered most industrial development. In 1831 James Faraday created the first very simple electrical generator that converted mechanical energy to electrical energy.
So what you ask.
Look at the current environment with the concept of ‘Flattening’ in mind.
Internal combustion automobiles are in the early stages of being ‘flattened’. This has been initiated by Tesla, in parallel with the batteries required to run the cars, but which will have huge implications across the energy sector.
Coal, the dominant world source of energy has suddenly become a pariah. It is polluting the atmosphere with the attendant changes in climate, leading to rapid growth of renewables, both personal and commercial scale. New fossil fuel projects, especially coal, are now being locked out of capital markets as they see their investments being stranded. Only idiot governments with an eye to donors is keeping them alive via subsidy and barriers to entry of renewables.
The tide however is inexorable, and fossil fuel will be redundant soon. As Hemingway noted in the Sun also Rises, when one of his characters was asked how they went bankrupt: “Gradually, then suddenly’ was the response.
That is what is happening in power generation.
Renewables have been around for 25 years, slowly evolving as the technology improved. It seems to me we are at, or almost at, the ‘Suddenly’ point. In the absence of being in front of the wave of changes, we will be left behind in the technical race to build the new industries that will emerge, again.
Flattening is also happening in some way in your domain, it is the normal course of development. the challenge is to see the elephant and react to it in time.
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 19, 2022 | Change, Governance, Innovation
There must be some sort of magic in the water supplied to the Santa Clara valley, just outside San Francisco, originally famous for its orange groves. What started as a ‘nick-name’ for the area in the 70’s, stuck, and we now know it as ‘Silicon Valley’.
Somehow, that same water has infected other places and times, leading to an extravagance of brilliance. Athens in the time of Aristotle, Rome in the time of Marcus Aurelius and Seneca, the Florence of Leonardo and Michelangelo, Paris in the 1920’s that spawned Picasso, Monet, and Modigliani, Hemingway and Scott Fitzgerald. Even a little pub in Oxford with a writers club, calling themselves ‘The Inklings’ that delivered three of the most popular books of all time, Lord of the Rings, The Hobbit, and Chronicles of Narnia from the pens of C.S. Lewis, and J.R.R. Tolkien rates a mention.
Futurist Kevin Kelly in a 2008 blogpost, looked at some of these creative clusters over time and concluded that there were four common characteristics:
- Mutual appreciation. Appreciation implies polite clapping, but real appreciation requires the injection and debate of contrary views, critical peer review, and competition driven improvement.
- Rapid exchange of tools and techniques, facilitated by the common language and competitive instinct moderated by the mutuality of a ‘safe haven’
- Network effects, and the geometric nature of influence and information when something interesting happens.
- High tolerance for the novel, and different, with barriers to prevent the status quo responding. The renegades are protected by the herd, rather than expelled
Kelly concluded that these groupings of genius were spontaneous, and self-supporting over time, and the best you could do was ensure you do not kill it. They also occurred after a time of considerable social and economic disruption caused by war, rebellion, and plague. Catastrophe it seems leads to innovation, as many if not most of the usual institutional barriers to change are removed, and there is a hunger for the new to replace the old.
Lurking amongst these four common characteristics are several other common elements. There may have been mutual appreciation and exchange of tools and techniques, but there was also fierce competition. Michelangelo and Leonardo were ferocious competitors, Monet and Picasso never agreed on anything. The characters involved in the morphing of a slice of semi desert into Silicon Valley, William Shockley, Sherman Fairchild, Gordon Moore, and the companies they worked for and founded were intensely competitive, while building on the successes of their peers.
Also present is a communal meeting place and ritual, usually in a coffee house or pub, as in the ‘Inklings’ meetings in the Eagle and Child pub in Oxford. These places were the key node in the generation of the network effects that characterises all these innovative ecosystems. They are the neutral, informal point from which the magic water of innovation is first dispensed.
These informal places attract intellect and experience from diverse fields, enabling a range of perspectives to be brought to the discussion table that can then be applied to complexities and problems in entirely new ways.
As we observe the world we are now in, on its own, the Corona pandemic might qualify as a catastrophic incident, sufficient to create another explosion of innovation. It could be easily argued that it has already created such an explosion. The rapid development of mRNA vaccines involved networks of researchers, companies, and public funds from around the world to commercialise with unprecedented speed, technology that has been slowly evolving for 30 years. On top of that, we now have another war in Europe, which has kickstarted the restructuring of the global economic and political status quo, shattering the ‘globalisation’ of trade and giving huge impetus to the development of renewable energy. Together with the rise of China, and the relative decline of the US, this surely rates as a global geopolitical pivot point.
How can Australia leverage this seismic restructuring of the global order?
If Kelly’s observations have any validity, and to me they reflect what I have seen over a long career, we should consider our strategies in the light of the constraints imposed by the current status quo, and rebuild those guiderails in a more appropriate manner. Constraints are useful for innovation, only so long as they direct the process productively.
- Divert academic attention from the necessity to spend significant time chasing grants and dealing with bureaucracies to keep working, to creating safe spaces for intellectual exchange and competition. The pub and coffee houses of the past have been partly replaced by Slack and Zoom, although the value of face to face cannot be understated. The tools are there, the guiderails are just in the wrong places.
- There must be a shared mission that motivates and engages the best minds. This will be the catalyst to assembling the resources enabling the pressure to innovate to be felt. Public funding is essential, but the governance of that funding needs to be driven by those funded, and in a position to leverage the outcomes, rather than by non-scientific bureaucrats and political appointees.
- The ‘field’ in which the ideas will be planted needs to be fertilised and watered consistently, again over a long term if the seeds are to germinate and grow. There also needs to be the recognition that many seeds will not germinate, and they must be seen as a learning experience, not a failure.
Sadly, our mindset works against this.
It is a mindset built by the 20th century, one characterised by a combination of catastrophe in the first half, and unprecedented advances and comfort in the second. However, it is now the 21st century, and the institutions that evolved in the 20th are inadequate to accommodate the 21st.
Unless we can change, we will remain hobbled.
The header photo is of the Eagle and Child pub in Oxford where ‘The inklings’ met from the early 1930’s to 1949.
Jul 11, 2022 | Change, Innovation, Strategy
When you look over commercial history, there is a cycle in scale.
A new industry emerges, then scales using the capital captured to build production and productivity, which in turn leads to scaled volumes, fed by sales and marketing dominance. At some point, a ‘tipping point’ of some sort emerges and industry fragmentation and change occurs.
Out of the fragmentation emerges a new set of products/services that renew the cycle of scale.
Perhaps the first modern industry that emerged from cottages, leveraging scale and branding, was Charles Darwin’s uncle, Josiah Wedgewood. The industry he created established a global dominance that lasted to 1940. After the war, Wedgewood was replaced by a host of cheaper, more utilitarian products emerging from a reconstructed Japan, and other low cost suppliers.
Early in the 20th century, there were hundreds of companies building their versions of horseless carriages. Henry Ford launched the first Model T in 1908, and built a further 15 million by 1927, almost squeezing out everyone else. Those that remained in the US merged to survive and became General Motors, evolving to be for a while, the biggest company in the world. They dominated until the mid 1970’s when the Japanese, followed more recently by Korean suppliers, almost destroyed them.
By the end of the 20th century there were few legacy car companies left. They are now in the throes of being disrupted by a new generation of electric cars. The incumbent manufacturers completely missed the emergence of battery stored electricity as a replacement for the internal combustion engine, leaving an open playing field to Tesla.
Today, Tesla is the biggest auto company in the world by market capitalisation, bigger than the value of the next 10 manufacturers combined. In terms of unit sales, Tesla is a relative minnow, demonstrating the capital markets view of the power of the trend towards EV’s. Few remember that cars and trams were run on batteries in the earliest days of ‘motorised’ transport.
You can track similar trends in all major industries. Media, communications, heavy engineering, retailing, technology, the only things that vary much are the speed and amplitude of the cycles, which are now accelerating at an unprecedented rate.
Picking where your industry sits in the cycle is an important strategic consideration, as it offers some insights about the types of investments required to stay competitive over the long term.
