Feb 5, 2024 | Change, Leadership, Strategy
‘Going digital’ sounds easy.
Sadly, it is not.
Almost every company I visit or work with needs, to one degree or another to be aggressively moving down the path towards ‘digitisation’.
Just what does ‘digitisation’ mean?
For most of my clients it means automating some or all of the existing processes driven by bits of unconnected software and spreadsheets, liberally connected by people handing things over.
It is a mess, and there is not one, or even a suite of digital measures that will address the whole challenge, despite what the software vendors sprout.
The world is digitising at an accelerating rate, so keeping up is not only a competitive imperative, it is a strategic necessity. Never more than now as ChatGPT burst onto the scene, compressing everything, and making the ‘digitisation’ drive one of life and death.
On of my former clients is a printing business, an SME with deep capabilities in all things ‘printing’ that enabled the company to be very successful, in the past. Their capabilities are terrific, cutting edge, if we were still in 1999.
If I use them as a metaphor for most I work with, there is a consistent pattern.
- They did not see Digitisation as an investment in the future, rather it is seen as an expense.
- There was no consideration of the application of digital to their product offerings, beyond the digital printing machines, and services beyond those that made them successful 20 years ago.
- Their business model, beyond what is demanded by the two biggest customers, who between them deliver 34% of revenue, has not changed.
- They have not considered digitisation of operational processes, beyond a 25-year-old ERP system. The system has not been adequately updated, and they only use a portion of the existing capability.
- They have not modified their organisational and operational culture to meet the changed expectations of their customers, and the market.
No digitisation effort can succeed without the support of an operating culture that encourages ongoing change. Organisational processes can be modified by decree, but they will not stick. It takes everyone in the boat to be pulling in the same direction, in unison to make progress. This takes leadership, and a willingness to be both vulnerable internally, and a strong ability to absorb the stuff from outside. The leadership group must ‘get out of the building’. Not to smell the roses, but to see the lie of the land, and understand where the opportunities and challenges are hiding.
Coming to this point, where there is a recognition that change is no longer a choice, is where you are given one point out of a possible 10. Now you need to do something about it all to have a shot at the following 9 points. A daunting prospect for most.
The process has 5 easy in principle steps:
- Map the existing operational processes so you know what to change, and where the gaps/opportunities are hiding..
- Map and change the mindset of the people, so you understand the extent of the challenge.
- Take small and incremental steps along a path that all understand leads to a digital future, which means that a lot of collaborative planning has been done.
- Ensure that there are the necessary opportunities for all stakeholders, but particularly employees to grow and change with you. Those that choose not to, also choose to work elsewhere. There are no free rides.
- Ensure the resources of time and money are allocated uncompromisingly to the long-term outcomes. It is just too easy to put aside something that is important but not urgent, for something that may seem to be urgent, but is not important to the transformational effort.
As noted, since the public release of ChatGPT in November 2022, the time before the liquidator comes around for those who choose not to change has compressed radically.
Most, if not all SME’s beyond the digital start-ups now cropping up like mushrooms after rain, will need outside expertise.
Consider that help to be an investment in survival, not a cost.
Header cartoon credit: Tom Fishburne at Marketoonist.com
Jan 26, 2024 | Change, Governance, Leadership
January 26 again, and out come the strident calls for it to be changed, in one of many ways, as well as the equally strident voices calling for no change.
To me it seems to be just nonsensical chatter.
In any event, January 26 is a confection. Prior to 1935 it was generally known as ‘first landing day’, which it was not, or Foundation Day, which rates as a ‘maybe’. It was only in 1935 that all jurisdictions used the label ‘Australia Day’. If we must change it to satisfy the noisy few who get hot under the collar, the sensible option would be May 9, which is the day the first federal parliament met in Melbourne in 1901.
We should be discussing more important things.
Climate change leading to floods, fire, with pestilence to follow. Another mouse plague perhaps? The impacts of climate change are there for all to see. They are more pronounced than the most pessimistic scientific opinion of a decade ago, and yet at the government level, little is being done beyond lip service and press releases. Private capital is making all of the relatively modest investment occurring, I suspect contrary to our long term best interests.
Covid has not gone away. What about the next pandemic, are we prepared better than we were when Covid announced itself to the world? I see few if any steps that act as ‘insurance’ against the impact of the next pandemic. Press releases will not stop it, when it arrives.
Generative AI has changed our world. I confess to being excited and confused at the same time by the explosion of AI. It is such a game-changer, it feels a bit like watching the industrial revolution happening at warp speed. Depending on who you listen to, true AI, meeting Alan Turing’s test will emerge anywhere between a decade hence, and ‘probably never.’
We are now in a knowledge economy. This is a term thrown around for years, but for the first time for me at least, it really sticks. It begs the question: what is the basic unit of production in the knowledge economy? How do we measure it, organise for it, pay for it in an equitable and sustainable manner, and critically, how do we optimise the utility of the time we allocate to any task.
The impact of the last digital revolution was articulated by Moore’s law, the compounding time frame of which was 18 months. If we apply the same logic to AI, the compounding time frame seems to be about a week. This will result, if it continues, in a logarithmic acceleration of AI tools surging way ahead of the hardware that delivers the physical outcomes. Therefore, the processes that currently consume the time of people will be in the gun, with the hardware lagging. Instinct, experience, in a phrase, knowing where to look to join the dots will be the critical leverageable capability for the good jobs and career paths.
The pressures the explosion of AI brings to the foundations of our country are profound. In our public discourse, these challenges are not being touched on in any way. We prefer to argue about the current but completely unimportant populist nonsense that is irrelevant to the country we leave to our grandchildren.
As an aside to any discussion of AI, there should be conversation about the coming deluge of litigation surrounding copyright. As Newton observed of his breakthrough ideas, he ‘Stood on the shoulders of giants’. Did that standing involve plagiarism under our current laws? Did Da Vinci’s most famous illustration, ‘Vitruvian man’ involve breach of ‘copyright’ of the work of Roman engineer Marcos Vitruvius Pollio? (I ignore for the sake of the debate that the sunset in copyright would have well and truly expired on Vitruvius’s original work). Creativity is a collaborative and experimental process always using the shoulders of others. How we align that reality to the current copyright laws designed for a non-AI world will be a lawyers feast, and a nightmare for the rest of us in the coming year.
The Geriatric election in the US will be impacted by AI. Putin is a capitalist, reputed to be the richest man in the world, but nobody knows where all the money (or bodies) hide. However, he does understand ROI. He can spend $10 billion getting his red headed, narcissistic, sociopathic mate re-elected, and cut off the supplies to the Ukraine that way, or spend $100 billion crushing the armies of the Ukraine, and wearing all the current contributors, distracted as they are by the conflagration in Gaza, down to the point where they back away. While the US election is half a world away, and totally out of our control, the outcome will have an impact on our economy, foreign relationships, and perhaps our way of life.
Our foreign policy is conflicted as never before. We have the China hawks yelling at the doves, while China is our major trading partner, upon whose goodwill our current standard of living rests. In parallel, we are committed to a program of procurement of nuclear powered submarines to protect us from that same vital trading partner. When/if they arrive, they will operate in shallow seas to our north, entirely inappropriate for nuclear powered boats that require very deep water in which to ‘hide.’ That ignores the probability that by the time they arrive, there will be sub detector drones available in Bunnings, and the barrier of building from nothing a nuclear industry to support them was not, after all, insurmountable.
Meanwhile, there is armed conflict in Europe and the Middle East, both of which have the potential to suck us deeper into a morass that makes Afghanistan look like a Sunday school picnic.
The taxation system is a dogs breakfast needing urgent and complete reconstruction. Such a sensible step is way beyond the reach of either of the major political parties, driven as they are by institutions that demand maintenance of the status quo for their own selfish reasons. The lack of voter appetite for change, despite the obvious gaping holes in the system ensures that no real change will happen until there is a genuine crisis.
Last week the PM reaffirmed the legislated tax cuts would come into force as legislated. This was a surprise to me, as I believed there would be changes, aimed more at the bottom end of the income scale. On Monday he flipped, and let everyone know there will be some changes, which will consume much of the political capital he has left. Despite being very modest cosmetic changes, nobody will be satisfied. The various aid and welfare agencies will be wondering aloud, where this government lost its social conscience, as the changes will not go far enough, and the opposition will run around yelling, again, that the sky is falling. Michele Bullock will have pencil poised, ready to point out that inflation will not be helped by the injection of money into the economy.
The housing crisis, one of our own making, will not go away irrespective of how many press releases and Band-Aids are sent around. It is a systemic challenge driven over the last 25 years, and treating it as anything but is a nonsense. Commentator Alan Kohler, who has a way of deconstructing the babble of economists, bureaucrats and politicians into common sense wrote a quarterly essay that contains plenty of sensible comment. If you have an hour, this webinar is useful. Alternatively, this precis on the Michael West media site gives a very good summary in a relatively short read.
Meanwhile the alternative Prime Minister is urging retailers to stock piles of Australia Day ‘merch’ that does not sell. This trivial matter, which is none of his business anyway, is not a contribution to the acknowledgement that we live in a great place, currently celebrated on January 26. It is just a shallow, meaningless, populist, and cynical appeal to grab a fleeting headline, and enrage some who live at the shallow end of the gene pool.
A decade on from this 2013 Australia day post, the observation that in the future, the core challenges to our society I saw then, education, research capability, diminishing manufacturing capability, and the flogging off of our national estate remain. Absolutely unchanged.
Have we not learnt anything?
Jan 5, 2024 | Change, Strategy
The Christmas break is a good time to have that delayed conversation with mad Uncle Charlie. Good old Charlie is a Luddite that the originals would have been proud of, we all have one somewhere. The conversation was about AI, a topic in which I claim little expertise beyond the bits I have read, and superficial fiddling I have done.
However, Charlie was adamantly opposed to any notion that AI was anything more than a gimmick used by computer companies to sell their devices.
In trying to make the case for the continued growth of AI, and stuff emerging, I used an old chestnut.
Compounding.
As Einstein observed, compounding is the most powerful force in the universe. The story of the peasant who did a favour for the emperor and was rewarded with anything he wanted and asked for a chess board to be covered with grains of rice, doubling at each square explains it. At casual observation, easy, but the maths is different. There are 64 squares on a chess board. Doubling the gains at each square ends up in billions of grains of rice. The first few are easy, 1,2,4,8,16, but after a modest number of iterations, the numbers really take off.
Digital transformation is similar.
One step compounds on top of the next, and next, and so on, until you recognise it is not a destination, it is a journey.
Fascinating to think we are at the very beginning of the journey.
An idea that has been attributed to many is that we overestimate what can be achieved in the short term, and underestimate what can be achieved over a longer period.
This is compounding at work.
If you think the developments of the last decade have been huge, unpreceded in history, I suspect the next one will make the last one look like it was snail’s pace.
Charlie has his good points, but he really is a devoted Luddite.
Header graphic is via DALL-E. A Luddite trying unsuccessfully to stuff AI back into its box.
Dec 11, 2023 | Change, Communication
Following on from a previous post about the value of information, it seems relevant to ask how long any value created lasts.
We are all familiar with the notion of the ‘1/2 life’. The time it takes for radioactivity of an element to decay by 1/2. Uranium 238 has a 1/2 life of several billion years.
What about the 1/2 life of information?
The 1/2 life of a daily newspaper is arguably 1 day, today’s news is ‘tomorrows fish wrapper’. For 99.9% of blog posts, and most other so called ‘content’, it is about 2 seconds. This seems odd in what is supposedly the ‘Information age’, why is the life so short in most cases, and what make the difference for the 0.1%?
The answer seems to be: It depends on the utility of the information, which is partly a function of the ‘friction’ or resistance which is applied to its transmission.
Businesses, and most institutions are structured to be top down in functional silos, a system that evolved before digitisation of information arrived at our inboxes. This enabled the scaling of effort and the most efficient allocation of resources. A 20th century solution to the challenge of information transfer and leverage.
In the 21st century, with digitisation, the structures of the 20th century are redundant. They are simply too slow to be competitive in an environment where the action happens at digital speed on the ‘front lines’ of customer interaction. It takes too long for the siloed decision making processes to work. Customers will now move quickly to someone who is able to satisfy their need on the spot.
We have to turn our power structures upside down, and give the front lines the authority to make on the spot decisions within a much broader remit than was previously the case.
This creates huge complications for organisations, as the status quo is upset. The power people at the top have worked to achieve all their lives is diluted, and for those at the bottom, suddenly they are being tasked to take decisions that last week were being referred up the chain.
There is a driver of activity, always present, but to date well in the background for most. This is the ‘operating rhythm’ of the market in which they compete. When their decision cycles are slower than the operating rhythm of the market, the market will go elsewhere, or at the very least, opportunities will be lost.
Getting ‘inside’ the operating rhythm of your market, being able to respond quicker than the market reacts, is an emerging key to strategic success.
The 1/2 life of information is now in the hands of others, those who really count, by being customers.
That is why the OODA loop, conceived by US fighter pilot John ’40 second’ Boyd in the 60’s is so relevant to 21st century competition.
Dec 8, 2023 | Change, Innovation
We make many types of investments in the future, brand building, capability development, process optimisation, building the foundations to scale, and significantly, R&D.
Each is aimed at generating future cash flow.
The management and strategic challenge is how we justify investments today in something that may or may not occur tomorrow.
In relation to R&D, we have a specific dilemma, in both private and public sectors.
Capitalising R&D is a problem, as it makes us very sensitive to the sunk cost syndrome. We have real trouble walking away from it when the outcomes are not as expected, and the experiment is clearly a failure.
R&D is experimental, most things you try will not work. When you have capitalised them, and they do not work, you have a balance sheet write-off to explain. In this situation, the propensity of humans to resist an admission of being seen as having been wrong is heightened.
Much better to expense it, then there is no sunk cost to write off, fewer egos and personal agendas to be managed, although the sunk cost syndrome is alive, powerful, and often hidden in jargon.
On the flip side, research is long term, and needs the certainty of long-term funding. It should be immune to the vagaries of the short-term profitability fix, that typically stalks expenses.
Take the marketing investment in brand building as the prime example.
Building a brand takes a long time, is incremental, and sensitive to short term fluctuations and changes in direction that can be influenced by the profitability this quarter, the demand for a discount from a significant customer, or a change in personnel. Being an expense makes investments in marketing the target for a short-term fix for a short-term problem, at the expense of the long term.
There is no right answer to the question, it always ‘depends’ on something.
For example, private enterprise typically has a much shorter time frame than government, and therefore, does less of the long-term exploratory science. By preference they take the output of publicly funded labs and apply it to problems they see in the marketplace.
Somewhat cynically, we see the time frame of government as being the election cycle. However, almost all the key discoveries in the last 75 years that I can think of have evolved in one way or another, from publicly funded science. The irony is that such funding is subject to annual budget pressure. In this country that has resulted in public science being gutted over the last few decades, which erodes the foundation of innovation.
I did not answer my own question, and it remains a key one to be considered. However, despite the recent announcements by the Albanese government, I suspect we are circling the drain.
Header photo: Monticello dam drain glory hole. USA
Dec 5, 2023 | Change, Leadership
One of Charlie Mungers better known quips was: ‘All I want is to know where I am going to die, so I’ll never go there’. He avoided that place assiduously, but last week, after 99 years, Charlie went there.
Perhaps by mistake, perhaps because even he recognised it was time, a very long innings behind him. However, he leaves a mountain of wisdom accumulated over that extended period, most of it as ‘wingman’ to Warren Buffett. While it was a partnership with Buffett as Chairman and Charlie as Vice chairman, Buffett credited Charlie as being the brains behind the strategic insights and wisdom that made Berkshire Hathaway such a profit powerhouse.
So, what can a local SME, struggling for visibility, relevance, and cash in an increasingly homogeneous and competitive market where size really does matter, learn from him?
Simplicity. We humans tend to complicate things. It is not usually deliberate, rather it is a function of our limited perspectives, reliance on others, uncertainty, risk management, and a host of other drivers we all feel. Charlie advocated simplicity. Break a problem or situation down into its component parts, and deal with them one at a time. Others might call it managing by first principles. Einstein noted that things should be ‘made as simple as possible, no simpler.’
Over the weekend I was reading through the updated Australian building codes trying to understand the complexities of the recent changes. One of my clients must ensure the products he sells into the building trade not only comply, but he needs to explain to his builder customers the application of the codes to his products. The codes are so complex, differing across state jurisdictions, that builders who are bound by them often knowingly ignore them, relying on their suppliers. The codes are simply too complex for a small builder to ensure currency is maintained, amongst the other tasks necessary to keep their businesses nose above water.
Simplifying decision making processes by ensuring that the boundaries of authority, responsibility and accountability are clearly delineated through the business, is a goal to which we should all aspire.
Focus. Competing priorities means nothing gets optimised, and often many tasks do not get completed. Focussing attention on the things that really matter and giving them undivided attention for as long as the problem or opportunity warrants is a key lesson from Charlie.
Focussing also frees up our most valuable resource: time. By deliberately ignoring distractions, and leaving the lesser issues to others, or ignoring them completely, frees time to concentrate on the most important things, those that in the long term will deliver the greatest return.
No SME client I have ever worked with has been able to clear their desk sufficiently to devote the time and energy they should to the long term strategic foundations and health of their business. They simply wear too many hats, and often have difficulty delegating, assuming there is someone to whom they can delegate. The smaller the business, the harder it is, as those to whom delegation can be made, and the cash to pay for it, are in short supply.
The discipline required, both personal and in the business culture nurtured is enormously challenging.
Think and act for the long term. When you think and act short term you inevitably find yourself whipping around like the end of a bullwhip. Logistics managers understand the ‘Bullwhip effect’ better than most, as they see it every day in their supply chains. However, it is just as potent in the management of every other facet of a business. Seeing and responding primarily to the short-term fluctuations usually just compromises your ability to adjust strategically to the long term drivers of success.
Circle of competence. Many consultants have made a business out of advising clients to ‘stick to their knitting.’ It has been so prevalent it has become a management cliché. A circle of competence as Charlie saw it is a wider concept. While you are sticking to what you know, you are also seeing opportunities to leverage what you know in other domains.
This idea also applies to those stakeholders with whom you engage. By ensuring there is overlap in the circle of competence each brings to the table, you widen your own. This is at its core a strategy for successful collaboration.
Incentives. Understanding the power and application of incentives to shape behaviour enables individuals and groups to optimise the outcomes for which they are responsible.
For years we have seen research report after research report articulating the reality that after the basic needs of life, food, shelter, and companionship are satisfied, individuals start to respond to a range of other incentives. Some will sacrifice money for free time, others seek public acknowledgement of effort, security of what they have becomes more important than risking it for some possible future benefit. The list of drivers of individual behaviour goes on, and it is never just about money.
A friend who runs a successful bookkeeping business has recently gone to a four day working week. Several of her staff were against it, and subsequently left. The significant majority were happy to do their hours in four days, with Friday off. Productivity has jumped, as there is several hours each day when the phones are not ringing, causing distractions, so tasks are completed quicker, and with less processing errors. Contrary to the expectations of some, clients have also embraced the change, and remaining staff love having Fridays free to get on with their lives.
Understand probabilities. Success requires that we have a picture of what we believe the future will dish up, and we are able to respond today to put ourselves in a position to leverage those future events in our favour better than competitors. Given the only thing we know for sure about the future is that we will not be completely right about it, we need to understand probabilities. The better you can articulate the odds of some future state, the better able you will be to respond positively to it. Charlie was a great believer in what he called ‘Mental Models’. Being a voracious reader, he was able to see situations through a range of perspectives, and equate them to previous known outcomes, thereby giving him the opportunity to shorten the odds of an outcome he felt sufficiently confident to predict, and invest in to leverage.
Understanding your odds offers the opportunity to give yourself an appropriate margin for error for the investment you are contemplating. This applies equally to how you will spend your time today, to a major strategic choice.
Continuous learning. Charlie never stopped learning, until last week. Much of the time freed up by his focus and personal discipline was spent reading and interacting with those he considered smarter than him in some domain, and satisfying his voracious curiosity. Every situation he saw was considered as a learning opportunity, particularly those that did not go as predicted. They enabled him to add to his wardrobe of mental models with another model through which he could see a situation to understand better the odds, and shape them in his favour.
Every owner of an SME I have ever dealt with understands the implications of the phrase: ‘work on your business not in it.’ Few achieve what they would see as the optimum mix, and it is always the ‘on their business’ that suffers. They are depriving themselves of the opportunity to learn by looking around, compiling mental models, seeing opportunities in other domains, and leading their employees and stakeholders.
Rationality over emotion. Successfully doing all of the above allowed Charlie to make rational decisions, avoiding the attraction of the emotions. He has been the living embodiment of what Daniel Kahneman would call ‘System 2’ thinking. He takes his time, removes the pull of emotion, seeks out the facts, and makes rational choices for the long term.
None of the foregoing practises are stand alone triggers for success. Each influences the others in a range of ways, offering compounding benefits. In taking the long term view of his investment choices, Charlie allowed that most powerful force in the universe, (according to Einstein), compounding, to deliver for him. An investment of $100 and subsequent reinvestment of dividends in Berkshire Hathaway in 1978 when Charlie teamed up with Warren Buffet would be worth almost $400,000 today. This is an almost 20% annual compounding of value of the investment. It is 25 times the value today had that same $100 been invested in a S&P index fund. This is the effect of patience, long term thinking, and powerful mental models that increase the odds of success relative to other investment choices. Every owner and manager of an SME I have ever seen could benefit from the wit and wisdom of Charlie Munger.
Vale Charlie. If I was having one of those imaginary dinner parties where the most interesting people from history were around the table, you would be there.
Header photo: Charlie 5 days before his passing, holding forth in an interview with CNBC
