Oct 4, 2022 | Analytics, Management, Operations
Too often KPI’s are all about the result, rather than the drivers that will deliver the result. When you are measuring just the outcomes, you have missed the opportunity to improve and optimise the actions that will lead to change the outcome being delivered.
Take for example the Cash Conversion Cycle (CCC) time. This measure is a fundamental tool in the improvement toolkit.
By improving the rate at which the cash outlaid to generate a customer service or product is turned back into cash by the payment of invoices, you reduce the amount of working capital required to keep the doors open.
The real benefit is to be found in the active management of the drivers of the CCC. The days taken to complete the cycle is just tracking the result of a set of actions that take place elsewhere, Manage the inputs, and the days will reduce.
For example, detailed examination of the debtors ledger will tell you which customers are slow to pay, thereby decreasing the speed of the cycle. It then becomes an item of potential improvement. Perhaps the salesperson responsible is not diligent enough, perhaps your collection processes are not explicit, you lack follow up, or clarity on your terms. In the end, perhaps you can decide that that a specific customer should be handed over to one of your competitors, weakening their cash position.
The same analysis becomes second nature around the inventory numbers: raw materials, WIP and finished goods. Improving those numbers without hurting the levels of customer service can dramatically improve the productivity of the investments made in the enterprise. As an added benefit, customers will thank you and give you more business.
As with anything, the absence of the information that details the drivers of an outcome, makes it hard to make improvements.
Another example. Sales personnel are often compensated by commissions on their total sales. If you want your salespeople to be out hunting for the next customer, rather than glad-handing existing ones, paying a commission on all sales is a poor strategy. It discourages the more time consuming and riskier task of finding and converting new customers. Existing customers in most cases can be professionally managed by an internal customer service function. The better use of commissions might be to encourage business development.
When you spend time identifying and managing the drivers of outcomes, the dollars will follow.
Sep 23, 2022 | Branding, Communication, Management, Marketing, Small business
In 1960, E. Jerome McCarthy published his idea of the four foundations of marketing. Price, Promotion, Product, and Place. The world has changed in the intervening 62 years, so you must wonder if this idea is still relevant, let alone a foundation.
To my mind, they are not only relevant, but retain their place as a seminal part of the marketing process, it is just that the context in which we think about marketing has changed radically, so the role the 4 P’s plays has also evolved.
This used to be simple, there was a product, and there was a price. Whether it was a consumer product, or one sold to another business, it was simple, and uncongested with notions of service.
Life, and the environment in which we compete has completely changed. Let’s see.
Product.
The idea of ‘product’ has changed along with everything else. We used to buy a car, increasingly, we are now buying the means to get from point A to point B, and discovering new ways to pay for it beyond the options of cash, or some sort of loan from a bank.
Product rather than being a singular physical product or service delivered has become a system that delivers value. The scope of ‘produc’t has also changed from the immediate geography to global, and the channels by which this is achieved look nothing like those available 62 years ago.
Price.
The exchange of money is how the economy goes round; money is the fuel. However, the articulation of the ‘Price’ of a product/service bundle has changed as much as everything else. Along with the product and delivery options now available are the pricing options. There are now many ways to be paid, only a few of which were available 62 years ago.
In all developed economies to differing degrees, the taxi industry has been regulated over time. Nothing changed from 1962 when the ‘Four P’s were articulated until along came Uber and disrupted the cosy taxi environment. Uber eliminated the uncertainty of how long you had to wait for a ride, creating great psychological value, and introduced surge pricing that would entice more supply into the system at times of high demand.
Surge and subscription pricing have changed the face of commerce globally. Amazon uses both in their operations, adding the willingness of a buyer to pay higher prices based on their browsing and purchase history.
Place.
We used to buy products at a defined place, in a defined manner. No longer. The notion of ‘Place’ has been replaced by one of ‘How’ you buy rather than ‘where you buy’.
The old model of a set of mechanically driven distribution channels has been replaced by a melange of ‘omni channels’ that deliver value in a wide variety of ways.
Control of the channels, formerly in the hands of the sellers has moved into the hands of the buyers, who demand and are given in increasing amounts of transparency backwards into the supply chain. All this is enabled by the explosive growth of digital technology.
Promotion.
If the other factors have changed radically, there are no words to describe the magnitude of the change to the ways promotional activity has evolved.
It used to mean the way we gained attention of potential customers via a limited number of options, engaged them, then sold product through whichever stable distribution channel was available. While the core process is unchanged, how we promote out products has exploded.
This brings us back to the question posed: are the for ‘P’s’ of marketing still relevant.
My answer is ‘Yes’, but the clothes they wear have changed radically and therefore the way we think about then must change.
My response to the change necessary is to look at the marketing process more from the perspective of the customer. This brings me to the view that both customer and supplier can look at the process from within the framework of Objectives, Value proposition, Ideal customer, and the Current state. Each party to a transaction sees these four parameters differently, but they are all relevant to the way the transection and relationship proceeds.
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.
Aug 24, 2022 | Governance, Leadership, Management
There has been an awful lot of trees cut down to accommodate the blather about the new world of post covid work. In an effort to condense the ‘debate’ and save a few trees, the following is what I have gleaned.
Humanity.
We humans are social animals, we need other people around us for our own psychological health and creative productivity. Therefore, the idea of general remote work becomes a potential mental health time bomb. We will adjust to it by mostly going back to the office. it is very unlikely to be 9 to 5, there will probably be more satellite offices, short term but regular meeting schedules, but back we will go in some form.
Proximity.
Physical proximity enables deeper communication than any other form. Even the distance apart in the office makes a difference to the nature of the communication we have with each other. Not just about work, but the tiny things that we do not notice until they are not there, and even then, often with hindsight only.
Trust.
Trust enables teams to work together. The less face to face contact, the harder it is the generate that trust, making teams harder to assemble, generate productive outcomes, then disassemble and reform for another project or purpose.
Belonging.
We are sustained by a sense of ‘belonging’. We are drawn to ‘people like me’ but when we do not see them, or see them only occasionally or over Zoom, the sense of belonging frays, leading to eroding productivity and sense of community.
WFH.
Working from home for many has been great, not having that commute every day. It is convenient for many. However, convenient is not always good for us. Going to the gym every day may not be convenient, but it is good for our health.
Leadership.
Leadership and the nature of that leadership has never been more important. In the past we had a few leaders, and a lot of managers. In a world where remote work is a consistent part of the output, just being a manager will not cut the mustard. We need more leaders, and have not trained them, which indicates problems for many, and opportunity for the few in the coming few years.
Alignment.
The alignment of priorities and performance measurement and the place each individual has in the scheme of this is critical. When an individual cannot see how their efforts contributes, to both those in their immediate vicinity and to the overall objective, the effort will become diluted. Working remotely in the absence of that focus on priorities and outcomes will lead to real productivity challenges for the enterprises, and personal ones for the individuals.
Culture.
Culture is a function of the leadership, and how the leadership permeates the organisation. Building a culture in a remote workforce is more challenging than when face to face is the norm. Some have done it well, but mostly they are the enterprises that have started life as remote enterprises, so those who join, and remain, have the right ‘remote work DNA’ from day 1. The holding company of website builder WordPress, Automattic springs to mind. Founder Matt Mullenweg set out to make the company completely remote from day one, but even he has co-working spaces in places where employees are concentrated.
Technology.
Technology is what has made this remote working possible, but it is also planting the seeds of our own disassociation with those we need around us for our own well-being. Like most things, too much of anything good becomes a problem.
Clearly, we are not yet ‘Post covid’. However, the workplace has changed over the last 2 years, and while the jury is still out, when it comes back the status quo will not be the same as pre covid.
There has also been a lot written about the great resignation, and its relationship to covid. My suspicion is that it is not covid specifically that has driven the change, although covid was the catalyst. The model we have been using to get the work done was over a century old, and getting pretty creaky. Covid acted as the catalyst for many to simply reconsider their working lives in the light of the tools that have emerged in the last 10 years, and they chose to make a change. Enterprises must adapt to these new models of work. Those that can’t will become rapidly extinct.
What have I missed?
Header cartoon credit: Tom Gauld
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
Jul 22, 2022 | Governance, Management
EBITDA is one of those acronyms that often appears in the accounts and narrative supposed to explain the financial outcomes of an enterprise. The meaning is often unclear to those unfamiliar with accounting jargon.
It stands for: Earnings Before Interest, Taxes, Depreciation, and Amortisation.
It is always a number near the bottom of the profit and loss statement, often confusingly also called the Income Statement.
Earnings. This appears at the bottom of the income statement, often called net profit. It reflects the outcome of all trading activity of the business. Sales revenue, minus the costs of doing business.
Before: Before, is before…. Who would have guessed? The items that follow are non-trading items that nevertheless impact on the cash of the business. They are all items that are further deductions from what the owners of the business will see in their pockets, but not directly attributable to trading activity.
Interest: We all know what interest is, we borrow money, and the cost of that borrowing is the interest we pay to the lender. A business is no different, it borrows money, it pays interest. However, the source of the funds used to operate the business has no impact on the trading activities, and is therefore excluded from the trading results.
Tax. When you make a profit, you pay tax. Simple, unless you are a multinational with a head office somewhere tropical. However, the payment of tax on profit has no impact on the operations of the business, so has also been excluded.
Depreciation. Assets wear out with use and need to be replaced from time to time. Including a number reflecting the depreciation of assets is again a non-cash item that has no impact on the trading activity, but can have a very big impact on the cash flow when assets are replaced.
Amortisation. This is similar to depreciation but applies to intangible assets. Assume the business purchased a competitor, paying an amount above the net asset value of the purchased business, but whose trading results are included in the numbers. You may want to write down that nominal overpayment over time to bring the value of the business, as reflected in the balance sheet back to closer to the net realisable asset value of the combined businesses.
The benefit of an EBITDA number is that it enables comparisons over time, and between businesses, even across industries. The downside is that there is no regulated formula for calculating it, there is discretion allowed, so beware of the weight you put on the final EBITDA number.
Header credit: Scott Adams and Dilbert, never confused by a good acronym.
