Managing in Difficult Times, Crisis or Turnaround

moved my blog to www.growroe.wordpress.com

2009-02-24T09:32:00.002-05:00

I've moved my blog, to achieve better results in search engines, to www.growroe.wordpress.com.. I sincerely hope you continue to read me.

Regards,
Rich Eichen

Failure is a failure if that's all it is - it's only a life event if you learn from it

2009-02-18T08:56:00.003-05:00

“There were always good short-term reasons for not doing something”
Quote from A. Andrew Shapiro regarding General Motors current state, NYT, 2-18-09

Craig Ferguson, the TV personality and late night talk show host, was being interviewed by Michael Eisner the other day and mentioned that one of the reasons he truly loves this country is because America is the place where if you fail, you pick yourself up, without shame, and “get on with it”. I would add, "just don't repeat it".

This is neither the time to sit there and wallow in pity, nor is it the time to act rashly. Leaders are all going to fail at least a little bit during this depression, no matter how hard we try. OK, I agree, there’s a wide range on the Fail Continuum and not all of us are going to hit the iceberg. But a good percent of us will either scrape the iceberg or come pretty darn close.

Many of today’s business leaders, of all stripes and sizes of company, came of age in the Era of Plenty. We had economic downturns, but they were not implosions on the order of what we have now and will have for 3-5 years to come. Yes, 3-5 years to come. I met yesterday with an Investment Banker whose institution didn’t need a bailout, and he told me his trading desk was preparing for Dow 6,000 later this year. Nice. Most of today’s leaders have never seen mass hyperinflation, mass unemployment, deflation, gas lines, general strikes or experienced the pessimism of the 1970’s. As leaders they’re only good as long as things are good and so their minds are aligned to repeat success and not early detect failures.

How to become great even during these times and emerge stronger than before? The answer is to stop giving good reasons for inaction and take hard decisions when necessary going forward. Which decisions? That’s where institutional introspection and learning from past failures and near misses has to take place. What red flags did we miss? How early did they appear? Were they rampant or was it a quick blip we missed? Did we not act on them because we missed them or was it denial? Did we miss them because we didn’t have the right information to spot them? Did our business processes and controls act as we expected? Again, do this analysis objectively, fast, thoroughly, ahead of time, even have it vetted by an outsider if you wish, but do not use it as an excuse for short-term inaction.

I’ve blogged previously of how managers will repeat mistakes and make the same bad decisions, with slight variations, again and again. I’ve seen this first hand when I step into a situation and nearly 100% of the time, they’ve done this mistake before in some recognizable form, but they didn’t actively think and learn.

The American Cancer Society once had a TV campaign, now more applicable than ever, where they said the 5 most dangerous words in the English language was 'maybe it will go away'. GET ON WITH IT.

Selling your company or getting investors - Is your company worth what you think its worth or what someone will pay for it?

2009-02-17T17:00:00.004-05:00

Had a very pleasant conversation today with a senior Investment Banker from Jeffries and Co. who told me today’s multiples for selling a company. To put it politely, they’re startling.

In sum, in the very best case of same revenues as last year (or even a slight increase), and same profitability, the current SMB multiple is around 3-4X EBITDA. If this year’s revenues are running less than equal to last year’s, you’re seen as damaged and virtually unsaleable except at ridiculously low prices, or not at all. Both of us have seen recent instances where potential purchasers walked away in the belief that an already damaged company will only get worse - and cheaper.

If you’re unprofitable, don’t even think of selling as a company, think of your company as a selection of fungible assets. When I asked him today’s multiple on the Top Line (usually it’s been in the range of 7-12 times for the past few years, depending on industry), he mentioned that in today’s market, Top Line without profitability isn’t even thought of.

The lesson is clear – what your company is worth (even if you’re not selling it's good to have an objective figure as a measure of how you’re doing) is what someone will pay for it and if there’s any issues affecting the Financials, all bets are off. Uncover hidden issues, fix those plus the one’s you already know of NOW.

How did we ever get here? Planning and executing a layoff

2009-02-11T08:58:00.002-05:00

A NASDAQ listed software vendor reduced their staff by 20% in 1 day. Some of the reasons made sense because the company was terribly overstaffed with Managers reporting to Managers, Directors to Directors to Senior Directors to Executive Directors. Within a week Management had lost credibility when word got out that a number of the now laid-off employees had been hired, granted a performance bonus along with the rest of the company, and were then terminated, all within 30 days of their hire date. There has to be a better way.

Much of the current MBA level and academic management literature talks about what makes up a leader, how do you hire and inspire staff, etc. Thought provoking concepts like leading by values, leading by example. Really good material, assuming the economy was still in 2004. Well, pardon my being a bit hands-on here but these days the thoughts which should be in the literature should revolve around who do I layoff and how do I minimize the impact it will have on my remaining employees and competitors. We won’t even go into what the heck our MBA programs (and I have an MBA) teach which produces the bunch of business leaders we now have.

While you’re planning the details of the layoff, you should ask yourselves “how did I get here?”. No, not the economic downturn, but the fact that you’re overstaffed. Do you pay market and get employees who are competent but not superstars (and therefore may require more of them to get the job done)? Should I have outsourced certain functions to begin with? Should I be proud or concerned that my employees usually stay for 10+ years, often doing the same job or a job 1 promotion grade higher (ex:. , am I getting new blood with new ideas)? Is my facility located in a comfortable community but not geographically desirable for the top performers in your industry and so they don’t even think of applying? A time like this gives you the license to ask yourself and your Leadership Team some hard introspective questions about what kind of employees you want going forward, i.e. is this a time to not just layoff excess personnel but a time to reshuffle the deck and your tenure assumptions as well?

So who do we structure a layoff? There are a few schools of thought. The Horizontal school goes for an X% company wide reduction, spanning all departments. Often, this leaves every business function understaffed and trying to reorganize itself to get the job done. Resentment is generated by employees feeling overworked and sad they are doing the work formerly done by co-workers and friends. Much time will be spent during breaks and lunches speculating on why individual employees were singled out for the layoff. Was someone not the boss’ friend? Were they malcontents? Were they inflexible? Were they the last hired, regardless of competency? If there does not seem to be a consistent thoughtful plan it could appear to be, at worst, vengeful or arbitrary.

The Vertical approach is summarized by the reason “we are no longer in (fill in business or location)”. If you’re going to cut back in a market, think if you should even be there or if your cutback will tarnish your name and give a leverageable advantage to your competitor in terms of customer support, presence, etc. Why spend money only to look poor? If you’re leaving a business segment, perhaps it can be sold off, but bottom line, everyone in that unit is laid-off, top to bottom. Resist the tendency to keep the to-be closed unit’s Senior Management in the company, unless the reason the business was cut had nothing at all to do with their performance in even the slightest way. Never mind this “you learned your lessons on my nickel” thought process – trust me, they’ll make similar mistakes again. For the surviving employees, this approach makes the most sense since presumably the now shed business unit was either unprofitable or not strategic going forward and the applicable Senior Management was not improperly rewarded with continued employment at the expense of their employees.

This is also a great time to mix the two approaches (calling it Diagonal is a bit odd) by leaving a business or location entirely and combining this with a very small general force reduction. The number of laid-off employees should be overwhelmingly guided by the Vertical approach, on the order of 70/30 Vertical to Horizontal. If you reverse the emphasis, it can be seen, internally and in the market, as panicky or ‘crashing and burning’.

When do we know we have to lay-off? Some will wait until a bad Quarter gives them either a reason or political cover to do so, but my recommendation is to be proactive and

• Model what your Financials will look like at the most likely % revenue reduction, and then reduce it by another 5%. Restate your projections to the worst case (and hopefully you’ll come in ahead of this restated plan, looking the hero)
• Since this is rarely linear across the entire company, look at what businesses/locations will fall the fastest and most – these are your prime targets for deep review
• Decide if those businesses/locations are mission critical now and 24 months from now
• Use your ROI per Employee bogey to determine the proper Financial Employee Level.
• Determine if you wish to recast your employee profile towards fewer, higher value employees both now and for the future, or if you wish to keep your regular employee profile and just have them do more until you can hire at a later date. The latter approach may involve increased errors and decreased customer satisfaction, so be prepared.
• Reorg on paper to support the Financial Employee Model in daily operations and be ready to restore a normal daily operating environment as quickly as possible
• Work with your Labor, Business and, if applicable, Bankruptcy attorneys to ensure all notifications are filed, protected groups accounted for properly, etc.
• Include your PR people as well if you think this could be a news event.
• It is not uncommon for Presidents and Interims to call their peers at strategic partners and key customers to give advance notice and perspective.

One last comment: make sure, on the day the layoff will be executed, you publicly announce the event and after all involved have been notified, publicly declare the layoff is over. Absent your closure announcement, everyone will go comatose, awaiting their turn. Eventually your remaining employees will figure out that the layoffs are over, but your being taken as credible at face value will be shot.

Legal was so 20th century, the 21st is all about Lawful

2009-02-03T16:57:00.006-05:00

Bonuses, spas, resorts…living the 20th Century model in the 21st Century – no wonder it seems odd

We’re all amazed at the cupidity surrounding those executives granting huge bonuses and one can say they’re unethical and from a PR point of view, a bit stupid. But, are they legal or are they unlawful?

Something being ‘legal’ has a base understanding that it is in technical compliance with the Law. An act being termed "lawful" implies it has a strong ethical correctness. So, you can perform an act which is technically legal but publicly perceived as unlawful.

For many years and before we all knew about Green activities and fuel efficiency, I drove a Chevy Suburban. Great truck, ideal for hauling kids, towing pretty much anything you can imagine, skiing gear stays inside and clean, etc. I used to joke with my friends who drove smaller cars that in an accident, just based on size and momentum, I would win immediately in the Court of Physics, even if I lost later in a Court of Law. Luckily, I never had to prove this, but the parallel here is that in this business climate you can easily win in the Court of Law but big time loose in the Court of Lawfulness. And the public, the purchasing public, the voters, the majority of people in this country, are collectively members of the Court of Lawfulness and so ticking them off is not a bright survival strategy.

Let’s not forget that for most of the 20th Century, information and public perception could be controlled. In the fuller age of the Internet, ie the 21st Century, information comes out as it comes out. Even employees are more likely to use blogs, email, social sites, etc to let their feelings be known. The public controls perception now. Most senior executives came to power in the 20th Century, are products of that Century’s culture and just don’t get how life has changed and so are genuinely amazed by the uproar.

Those businesses surviving this quasi-depression will be those who do everything lawfully, ie never have to risk bad perceptions, public backlashes, angry Congressman and the costs involved in remediation.

It’s actually easier to be both legal and lawful than just legal. And more profitable as well.

Technorati Profile

Can you figure out when you're business-blind and business-deaf before it's too late?

2009-02-02T14:56:00.003-05:00

"Blindness cuts one off from things yet deafness cuts one off from people." Helen Keller

Put into today’s business perspective,
"Blindness cuts one off from assessing reality, yet deafness cuts one off from executing survival." Rich Eichen

Business litigators with whom I regularly meet have been noticing a disturbing trend – increasingly, business owners come to them when it’s too late. By the time someone comes in looking for Business Bankruptcy protection under Chapter 11, all that can usually be accomplished is to pay the senior executives a few more paychecks before it’s time to close. One very senior attorney actually said, with great understated wisdom based on reality, “I talked to them a year before. Now they come in a year later and my job is to give them a decent burial”. Putting it another way, the senior executives went from being business-blind and business-deaf for about a year to now out of business.

EMT’s focus on the ‘Golden Hour’, the 60 minute window for advanced emergency treatment where severely injured or ill patients have a good chance of survival. After the Golden Hour, it’s you vs. the actuarial tables. In today’s quasi-Depression, I’d reduce the timeframe a business has to begin repairing itself from the 1 year mentioned above to a ‘Golden 6-Months’. After that Golden time, more likely than not your business (or customer for that matter) will join the 90% of companies (in N. NJ) who never make it out of Chapter 11. Given how crucial accurate understanding of your business’ health is during these perilous times, what delays recognizing you’re in the Golden 6-Months window?

Financial statements can cause business-blindness. They can easily show the business having solid receivables, plenty of inventory and assorted assets such as buildings, equipment and trucks. But in reality, if your business is just servicing debt and paying salaries, in effect it’s out of business. In previous Blog postings we’ve covered many of these various signs and considerations, so no need to rehash them.

Hearing but not listening to objective outsiders causes business-deafness. Many times, 6 months to a year before the end, you’re starting to hear from your CPAs, Trusted Advisors, attorneys and secured and unsecured creditors. The ultimate test of business-deafness is when people stop talking to you. Either it’s too late or they figure you’re beyond taking constructive input.

In my experience, the best way to avoid having a company fall into such an unhealthy state is to convene, for 1 hour monthly, a group of Tursted Advisors consisting of your leadership team, a Turnaround/Crisis manager, your business attorney and perhaps your CPA/Audit Partner. A phone or a web based video conference works well to make this as efficient as possible. The goal is to ensure your team doesn’t go blind/deaf to reality and should it come to it, further ensure the Golden 6-Months window is recognized as early as possible. And of course, worst case, should a Crisis Manager be needed, you’ll have someone already up to speed, preserving as much of the Golden 6-Months window as possible for working things back to health.

This was not a fun article to write, but please understand how dangerous business-blindness and business-deafness can be.

Draconian times result in ‘Draconian Threats’

2009-01-23T16:07:00.001-05:00

In normal times, we all perform the standard 4 box SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), but I’ll bet you the ‘T’s are really only mildly disturbing issues in retrospect. The usual list of Threats I see in SWOTs are just not sufficiently draconian and therefore the mitigation planning is not designed to handle today’s bizarre economy. We’ve come to a fork in the discussion here. For those companies deeply recession affected and nearly out of Cash, it’s too late to redo the T’s – core survival is at stake and you have to deal in the now (see our other postings for insights to consider). This posting is for those companies who are not yet affected and wish not to be.

Today and in the near future, we need to reverse order the boxes and our focus to identify and plan for ‘Draconian Threats’. If they are taken care of, the Strengths and Opportunities will happen.

What are some ‘Draconian Threats’ to be planned for now that we’re in the midst of a quasi-Depression? Here’s what I’m seeing:

Some companies have had their best customers stop making bulk buys and go instead into month by month mode. This is much different than a downturn – it’s a complete change in how you forecast, stock and operate. Will it become the new norm? If it does, will your demand generation and business models have to adapt long term?

Other companies have seen their market basically dry up. At least one Ocean Freight shipping line has taken delivery of multiple new container ships, just to sail them into drydock, even though the loans are still in effect. Again, this is more than a downturn – it’s acknowledgement that they cannot get a correct fix on future container shipping needs.

Crazily, some healthy companies could be in jeopardy because one of more of their commercials landlords are in bad financial shape and the bank can foreclose on their buildings.

The underlying strength which permitted many companies to issue their own Performance Guarantees and Letters of Credit in lieu of escrowed cash have evaporated and now various regulators and key customers are demanding thick cash escrows or large and tight Performance Guarantees backed by a 3rd party. Who has this spare liquidity these days? So, your business is fine, but you’re running out of cash.

CPG companies have marquee brands and value brands in each category. In bad times, many brand-loyal shoppers move to value brands for the savings. Do you make value brands less effective and risk harming your company’s reputation? If the value brand has sufficient quality not to ding your company’s image, you run the risk of customers not moving back to your more profitable marquee brand, negating some of the millions of dollars spent each year in marquee brand equity and of course, reducing margins.

If you relied on financing customer’s purchases either through your existing lines or through friendly Banks…enough said.

Without belaboring the point by showing too many ‘Draconian-Threats’, the key identifier of a Draconian Threat is, unfortunately, usually an after the fact utterance of “wow, we never thought that could actually happen”. Those companies who will survive this terrible economic time will be those companies who revisit their SWOT analysis now and quickly come up with the extreme worst scenarios and plan accordingly.

In this economy, that 1% probable ‘Draconian Threat’ may very well have a 100% chance of occurring. Plan accordingly.

When you feel powerless – take back your power

2009-01-07T13:48:00.003-05:00

As the leader of a company under financial pressure, either just starting or already distressed or even under Bankruptcy protection, you can easily feel completely under the microscope, being scrutinized and reviewed by any number of outsiders. We’re talking way beyond self doubt here – many of your peers feel they are being questioned on anything they do with the result of feeling powerless and afraid to act. And to make it worse, this doubting comes from some of the same people who looked up to you as a success.

Yes, you really could be traumatized (the feeling of being in danger and unable to control the event which can cloud your judgment and cause inaction) but let me assure you that you still have the power to act and be successful. Just chose your actions wisely and avoid the temptation to ‘do something, just do something’. Below are just a few key areas where you can invest your time and energy, returning your power to control events:

Revenue
Try not thinking in terms of sales forecasts alone and start thinking cash to cash cycles per fiscal year. How long and expensive is it for Prospect A to decide and place an order, for you to procure same and then deliver, recognize revenue and finally collect? If the imbalance is beyond a reasonable threshold, do you need Prospect A? Weight your sales pipeline and forecast in terms of the cash to cash cycle and not just the close date. Manage accordingly.

Try shortening your sales cycle. Many times a sales cycle is a certain length and cost because that’s the way it is in a particular industry. Work with your CFO – brainstorm how you can restructure what and how you sell to bring forward revenue recognition and billable events.

Can you use cost + X% pricing and open your books to your best customers? In these times, transparency is a real plus and showing you make a reasonable profit over cost is overwhelmingly endorsed by most purchasing agents I know. It also helps put a floor under negotiations. If one of your competitors is willing to charge below your cost+ X% figure, you can now show the customer that your competitor is not likely to stay in business or service them well and nothing ticks off a purchasing agent like uneven performance or company survival risk.

New revenue streams leveraging what you already have
If you have the time and bandwidth (see the last paragraph in this positing), look into leveraging your existing assets and capabilities into new revenue streams. One Internet Portal I know is tied to the Logistics and Shipping industries, which as I write this, is seeing it’s first decline in revenues in its 10 year existence. They do have serious capability in data centers and web application building and support. They’re actively soliciting new business from various companies (some mof them existing customers) looking to chop their internal IT costs.

Consistency with your customers and suppliers
Chances are, your suppliers and customers experienced varying degrees of inconsistency while things were getting rough and have pretty much had enough. Restoring consistency is totally under your control.

Going forward, every pre-sales promise must be kept, from delivery to installation, to returns and warrantees- no exceptions, and kept to a ‘T’. Work backwards to detail the best terms and timing you can get from your vendors and bake this info into your sales promises and contracts.

In best of times, your customer’s Purchasing Dept. tracks vendor performance, and in these times, they perform Vendor Rationalization (as you should), meaning they cut back on inconsistent or less than perfect vendors so they get the best terms from the best vendors. That seemingly minor 1 week delay can now become disastrous.

Problem employees, partners and investors
External issues like the economy are stressful enough, you don’t need internal issues. Employees who play politics, even if they are ‘on your side’ must go. Partners who publicly undermine you must go. Investors who are not trying to help you get thorough this tough time must be paid off and go. Employees, no matter what their tenure, who resist change, must go. Sometimes valuable employees, even formerly key people, no longer fit the future direction. They have to go. I know of a highly successful owner of a significant industrial distributor who had a mini-stroke at work because he didn’t say “go” when he needed to.

What do you do when these people won’t “go” without a fight? If you are the person in whom the Creditors and customers have faith, then you have tremendous power. If you have to buy out a partner, you can force the issue if you have the backing and time the payout to future events. The alternative is they have no-payout from the no-company. Caveat - any Interim Manager worth their pay will tell you to pre-plan both the new organization and any legal steps required before you pull the trigger on employees or partners. Avoid the feeling that firings means you still have control and power. The power is in thinking and planning and getting your ducks in order, not just execution.

One last thought – learn to rely on those advisors who you pay because they are on your side. You must always remember who pays each advisor or overseer/Trustee. If they are on the Creditors Committee you can rest assured they are sitting there wondering how much bone marrow you have and what’s the daily price per gram. The Trustee is there to protect creditors. Your attorneys are on your side and you both have the same mission to accomplish, i.e. get you the best personal outcome. Same for your Accountants.

There is another type of help which is invaluable (insert shameless product placement here). You need a trusted advisor or Interim Operating Officer who can think clearly, is on your side (paid by you), objective, apolitical, has not been through your personal trauma and based on their experience can make well reasoned decisions and take this burden off your shoulders. If they are also an execution & Operations leader, that’s the home run here – let them do it so you can focus on those alternate revenue streams we mentioned earlier. Having to take difficult decisions and then execute, this outsider can become a rallying point – the person everyone can ‘agree’ to hate but accept for the short term. The best part of this relationship – once you’re healthy, they walk out the door.

I’m not going to tell you to ‘snap out of it’, or some other greeting card saying. What I will say is that you cannot do things as you once did, but you have the personal power to do things differently and get through this traumatic event.

Cutting expenses but not your own throat

2008-12-15T16:25:00.001-05:00

The best way to preserve cash is to stop spending. But, obviously, you have to be strategic and cut in such a way that it also builds the company for the future.

Based on my experiences at various clients over the years, by taking a reasonable and strategic approach, you should be able to cut 9% - 22% off your Expense lines while most likely making your company a better competitor. It might also help a company beat the odds and emerge from Bankruptcy. By the way – this is high stakes poker – if you go too aggressive and cut muscle, the returns will be a short term ‘false positive’.

Who should do the cutting? Generally, we recommend an outsider, mainly because as I often say “we’re the people everyone can agree to hate” or as a client once put it “you’re a first class SOB but you’re our SOB”. Insiders often do not have the broader cross-industry exposure, are used to doing things "our way-it just is" or are afraid of the ramifications to themselves. Your employees and executives/senior leaders should be represented on the Approval /Steering Committee.

Assuming you are using an outsider, how do you contract? There’s a bunch of people out there right now who will go for a straight percent of the save identified, but this often leads less to savings and more to amputation without regard for life- after. The better way is to put a bit of skin in the game as a 1-month billable project to bake this initiative into the staff, structure the Governance model, etc, followed by 20% of the amount mutually agreed to as identified potential saves (this means a business model, identified vendors, terms, etc.). If you wish the outsiders to perform the saves, then expect to pay an additional 15-20% (for a total of 35-40% to the outsiders, 60-65% of the saves stay with you) once the saves are completed. Make sure they teach your employees how to re-run a cost savings initiative on their own.

Where are the savings? As an example, the items listed below are a sub-set of what we, and presumably others, would examine in the IT arena which is usually a large % of spend:

Applications Development, Maintenance, Licenses
• Review all quotation software to ensure the edits/rules are current and tight enough to prevent overly aggressive quotes, i.e. ‘revenue leaks’
• Ensure licenses are used and return all shelf licenses which will not be used for 24-36 months. Why pay now? They’ll be glad to give discounts anytime.
• Are we getting value for maintenance dollars and can we lower the cost based on value received? Can we use 3rd party certified providers for routine maintenance?
• Are we overusing any online applications and can we cut back to a controlled level? Many people see online as ‘free’
• Can we not renew non-strategic licenses coming due in 2009?
• Are there avenues where implementing technology will provide MEASURABLE saving in 2009? Examples would be implementing workflow to replace field FTEs
• By implementing Shared Services, can we reduce the number of licenses, hardware footprints, business unit staffs, etc?

Projects, new and In-flight
• Review all projects to see if they are properly scoped, structured and have a measurable payback within 12-24 months. If not, is the project sufficiently strategic to remain active?
• If implementing any Enterprise software such as ERP, most vendors will supply significant resources gratis to ensure the project is successful. If early on and the vendor is uncooperative, introduce competition if possible and revisit.

Network Infrastructure
• Review contracts to ensure best deal.
• Review bills – often leads to 10-30% savings
• Deploy VoIP to save 50-90 %
• Review which sites need 99.99% uptime vs. 99.9%. This often saves in excess of 20% of WAN expenses

Hardware Infrastructure
• Defer Windows upgrades unless cost free
• Defer PC replacements; do not go to Vista or Windows 7 in 2009
• Virtualize and consolidate servers, use Linux for servers
• Review and standardize business intelligence and reporting software vendors
• Postpone all architecture pilots, evaluations and upgrades
• Review data management requirements to avoid adding online capacity, also reduce duplicate data storage by various systems in favor of Master Files callable by all. For example, save Customer info once, use many.

Purchasing
• Set and enforce strict rules on purchasing new services, equipment, etc.
• Immediately consolidate ALL procurement to the Procurement Dept. No credit cards purchases by units or people
• Start Vendor Management process, including tracking and adherence to SLAs and Master agreements
• Buy used first, new only if absolutely required
• Review if remote offices need full infrastructures or it they can use online versions of a central application – reduce hardware, infrastructure and licenses accordingly

People
• Review required staffing levels, reduce as required
• Review which non-essential services can be moved to a 3rd party vendor
• Stop all conferences and courses

In a recession, cash is king

2008-12-10T13:33:00.001-05:00

“Follow the Money”
“Because that’s where the money is”

In a recession, cash is king

A South American country was continually and publically threatening its neighbors with immediate invasion as a means of diverting its population from the little fact of 1200% hyperinflation. They reset the currency every day at Noon by some factor, usually small, but sometimes by double digit percents. They also instituted personal, manufacturing, export and repatriation exchange rates. I was running the local subsidiary of a US company and early on naively accepted payment from a government agency at 11:45AM in local currency. 15 minutes later and on the way to the bank, the currency was devalued by double digits and I had to eat over $250,000. That’s hyperinflation

The only way to survive was to use Accrual Accounting for my HQ reporting (and local statutory filings) but operate on a daily basis as if this was a corner deli, that is, on a cash basis. We developed a ‘30-Day Sources and Uses of Cash’ report and at the close of business each day, did the “we took in X, spent Y, still have money in the bank so we’ll open again tomorrow” discussion. In doing so, we had an accurate understanding of our immediate business health and the amount and timing of our cash needs/sources and sufficient time to address any expected cash shortages. Before we developed our 30-Day cash report we would occasionally get our cash timing wrong and scrambled to survive. From this I learned the only way to survive a difficult economy is to live by your timed cash flow. Not to say that accruals were or are a bad thing, quite the opposite, but on a daily basis we needed to know if we were distressed or healthy. Accrual Accounting just did not fit our daily lives.

We have to treat today’s severe recession as if it is as dangerous as hyperinflation and manage by cash over a rolling 30 day window. No, they are not the same thing, but both represent extreme economic dysfunction and living for the present is the best way to survive. I know of several businesses that are, on a cash basis, highly distressed while on an accruals basis, healthy. Just recently I dealt with a company that was healthy per Accrual Accounting, but the owners had to arrange an emergency cash line and inject some of their own monies as well because on an available cash basis, the company was technically borderline distressed and the bankers didn’t care about their accruals.

When managing on a rolling 30-Day Cash basis, you have to monitor only a few key things:
• Cash on hand
• Cash to be collected within 14 days
• 30-Day Burn rate, especially if any belt tightening remains to be done
• Revenue Leakage

The first 3 are self explanatory, but the 4th isn’t. Revenue Leakage occurs when sales reps sell your product or services for less than your approved pricing guidelines and discounting policies. This often occurs because your reps are trying to keep their jobs and your order entry systems permit out of bounds pricing. The problem with Revenue Leakage is the immediate impact it has on that king of all recession needs, cash, because it overcomes any smart negotiating you did to lower your Cost of Goods Sold and upsets any in/out cash flows. In other words, you worked hard to get the best deal from your suppliers and your reps are giving it away and this pretty much guarantees a cash shortage in the very near future.

The takeaway: During severe economic recessions, manage by the real-world metric called 30-Day Cash. Thinking in terms of cash buys you the time you need to survive long enough to build for the post-recession future. The ‘30-Day Sources and Uses of Cash’ report is your single most useful daily operations management tool.

Richard Eichen is a senior turnaround and crisis manager and is a Managing Principal at Return on Efficiency, LLC (www.growroe.com) and can be reached at richard.eichen@growroe.com.

Do what the FDNY does – Part 2

2007-10-04T16:39:00.000-04:00

For much of its lifetime, the majority of the FDNY’s firefighters had been in the military and so understood the chain of command. They even understood the unwritten rules of when to salute the uniform and not the person wearing it. You could easily see it in the way they marched in the St. Patrick’s Day Parade – they had obviously been trained by the best drill instructors around. Times change, and for a number of years now, the number of vets has seriously declined but the respect for the chain of command has firmly remained. And yes, they still march during the parade, only a bit more, shall we say, freestyle.

So how does a sort of military discipline organization get 360 degree feedback, especially when they work in public and their daily job is life threatening? I call it the Firehouse Kitchen Table concept, and I’ve seen it, used it and it works even in our world.

Upon returning from a fire, trucks are backed in, hoses set to dry, gear removed and stowed. OK, that’s 10 minutes. Then, acting on an unspoken cue, everyone adjoins to the kitchen. Now a Firehouse is both a home and a workplace. Furniture in the kitchen is at best, highly used, but very comfortable. Duck tape is a major source of furniture repair and decorating element. Some sit at the kitchen table, some slouch in this collection of repaired couches and recliners. Then all freak*&% hell breaks loose.

For a short period of time, all ranks are gone and only fellow firefighters remain. “How could you $%^& put us in there? How come I went in and you didn’t have my back? Can Man – thanks for pushing me out of the way on 4. Tommy, good job on irons!” No one is exempt and it’s straight, from the heart and dead-on accurate. If you don’t give and take, as it truly is and was, you’re no longer fully trusted. After a fast and intensive few minutes, everyone has their feedback and “Bill” returns to Chief, “Angel” to Firefighter. Of course, the underlying common denominator is respect for the person, their skills and commitment to being in it together.

Here’s an interesting story of how not telling it like it was can kill trust.

During a post 9/11 lung treatment session where I was the sole non-firefighter, Big Mike and several others were furious. This was during the early hearings on why the FDNY lost 343 brave souls and a Chief was on record and videotape as saying that he had not allowed anyone into the obviously fatally damaged buildings. Only problem was, he had held the door open while Big Mike and other firefighters ran into the buildings in full gear. So he saved his butt that day, but lost the respect and trust of firefighters, Department wide. A bit later he was reported to have ‘decided’ to retire, but the truth was, “no one would follow him into a fire”.

In the business world, here’s a great example:

A CPG company was having forecasting issues. Big issues. Process goods factories shut down, in entirety, at least once per year, and in the case of some refineries twice per year, for maintenance and seasonal adjustments. Raw materials, packaging, additives and flavoring all have long lead times. Get the 6-month forecast wrong and you either can’t produce all you can sell, or you’re looking for broom closets to store pallets of unsold product.

A serious ‘we mean business’ sales meeting was the only solution. Everyone flies to HQ. Only the cafeteria had enough chairs and tables. Not nice talk. Warehouses full of lawnmower oil, not saleable in the off-season. True, no spoilage problem, but they had a lot of cash tied up for at least 5 months and they missed their Revenue guidance so the Board and Wall Street were, let’s call it, “curious”. Nodding heads, background hums of total agreement and general acknowledgement of Management’s wisdom. Seems everything was awesome; time for a nice group dinner.

Until Angie stood up. The admin from a mid-west sales office started with “I can’t take this anymore” and let it rip. Professionally, passionately and from the heart talking of getting orders entered into the systems without the sales reps review, of being pressured into meeting Monthly and Quarterly forecasts no matter what at the expense of accurately planning with the customer, of shipping merchandise and then processing credits into unrelated systems so “no one really knows how much product actually sticks”. That last part was not accurate – the warehouse knew because they had to make room for it in both directions, but they weren’t in the loop on this issue.

Suddenly, it was the Firehouse Kitchen Table. Specific incidents, both venting and seeking underlying reasons, flew across the room. Not just one or two rabble rousers. All ranks were lost and they got down to identifying and solving the real problems. Hours later they parted a better team than they ever had been, ready to do this again, albeit under happier circumstances. PS – going forward, forecasts were dead-on, everyone made more money and the cafeteria remained dedicated to haute cuisine.

The takeaway - Each company, from a few employees sitting around a table to a cafeteria full, has to build a Firehouse Kitchen Table culture where during regular meetings we bypass ranks and get honest feedback – both to win as individuals and as a team. Like any other form of relationship, unless there is open and honest communications, it can never work in the long term. And that means no reprisals or lasting hard feeling or grudges. Just don’t wait until there’s a fire.

Do what the FDNY Does - Part 1

2007-09-26T08:28:00.000-04:00

Do what the FDNY does
Part 1

As a 9/11 survivor, I felt compelled to pay it forward and so became a Board member of a charity helping injured firefighters receive the care they and their families needed. As a result, I got to meet some very brave people, and learned how the FDNY teaches new firefighters this very complex subject. Their training methods are applicable to our worlds as well.

Trainee firefighters go to the FDNY training center at ‘The Rock’ where they are thoroughly drilled in technique and science. World class training in a top facility, with highly experienced instructors. Upon graduation, these newbie’s are sent to various fire houses, where the old-timers (with apologies to my friends) take them under their wings and teach them, hands-on, how to read a fire, how to put it out, protect themselves and their fellow firefighters, etc. Experience is passed down from ‘generation’ to ‘generation’. A Probie (Probationary firefighter) is seen as a training exercise and not a full firefighter.

In our business world, the applicable lesson is to always formally attach a new customer-facing employee to a proven old-hand. From my experience, it takes a minimum of 6 months hands-on experience for a new employee to be credible in front of a customer. Adjust your revenue and profitability projections accordingly, as well as your recruiting cycle.

Let me provide two examples from the business world:

A Consumer Packaged Goods company, selling mainly to the Big Box stores, had a large national field sales force with high turnover. Due to custom, lack of systems , and inexperience, their standard response to a customer question was frequently "I'll get back to you". Not much value-add here. When they teamed new reps with highly experienced reps, customer satisfaction indicators nearly doubled.

A technology company won the rights to implement a sophisticated software package. They trained their staff and sold first engagements. Customers soon complained that they were paying market rates for inexperienced personnel. Rookie mistakes were made, causing delays and embarrassment. They should have figured out how to provide a 50/50 mix between deeply experienced personnel and their own newly trained employees.

Rule of thumb – make sure each account has at least 50% highly-trained and deeply experienced staff in front of the customer or your competitor will. Avoid the temptation to sell like crazy and have more simultaneous situations than you can 50% staff with high-experienced employees. If you maintain the 50% ratio, you can bring in sufficient ‘Probies’ to grow your business while maintaining customer satisfaction.

Richard Eichen is the Managing Principal of Return on Efficiency, LLC, specializing in Operational Improvement, Turnarounds and Interim CxO services. Their website is www.returnonefficiency.com and his email is richard.eichen@returnonefficiency.com. Please feel free to offer comments and suggest ideas for new postings.

The Truth about Trust - the cheap and direct key to team building

2007-09-17T11:09:00.001-04:00

Truth
definition (www. websters.com)
A verified or indisputable fact, proposition, principal, reality

Trust
definition ( www. websters.com)
Rely or depend on; to believe

Why are team building exercises minimally effective and sometime downright annoying? They all assume the people you work with understand and then state reality and that inter-personnel issues are creating friction. No, I’m not calling people liars, because you’ll deal with that in real-time. But, let me give you two examples:

A sophisticated IT group was under-delivering based on the estimates of the Applications Development Director. Strains emerged because the other IT Directors, CIO and CEO did not trust these overly optimistic estimates based on true history. A team building consultant was brought in who created communications-contracts between these seemingly warring Directors. The truth about trust was that the Development Director was weak on estimating and fixing communications did not address that.

A new Sales team repeatedly blew their forecasts, which the President, Board and Financial Analysts did not appreciate. They held a last-chance group forecasting meeting using a new sales methodology. Since they did not understand the reality of why and how someone buys their product, the new consensus was just as good as any other guess even if it was in a new format. They were not mis-representing; they just had no concept of the reality in their sales cycle and this loss of truth killed off trust.

The key takeaway of this blog entry is:

You cannot build a team solely by communicating or cooperating better – every interaction has to reinforce trust by being based on truth. In virtually all cases, the lack of truth is based on a need for knowledge or skills. Treat the causes and you’ll get better results, cheaper and faster. Team building exercises are great – once everyone has truth and trust.

PS – you may need an objective outsider to identify the causes, but you can almost certainly implement the fixes by yourselves. Save the money; get better results.

There is one Operational Improvement factor that you can control - and it's FREE

2007-09-12T08:48:00.000-04:00

There is one Operational Improvement factor that you can control and that will either make or break your company.

Groups, from families to companies large and small, all develop a series of behaviors and permissions that allows for trust and predictability, called a Social Contract. Every Management decision, no matter how small, is viewed by your employees through this lens. How will you know when you’ve breached this agreement? You’ll know virtually immediately and all the team building sessions in the world will not overcome it – only consistent tangible actions can – hopefully. Or, look at it this way –if your employees are so gullible or stupid that you can pull the wool over their eyes, would you want them involved with your customers?

Those departments most affected will simply vote with their feet. Cut the sales plan and watch your best producers ‘check-out’ and then leave (and take their best producing buddies). Say you can’t pay a bonus one year and then drive up in a new company car and you can see the snickers. Treat staff like they are beasts of burden while proclaiming they are your best assets and feel the smirks. Have a strategy du jour and watch people nod in seeming agreement.

Costs to you? Think of it this way – if you have 25 employees in an affected department or division and it takes 60 days for a new employee to settle in, then in a 33% employee turnover scenario, you’ll waste over 2 years worth of productive time (and dollars) PER YEAR.

Lost business? I was shadowing a sales call for a client where their customer (a senior manager in a Global Investment Bank) said to my client’s sales rep, “if you stay for 6 months, then I’ll learn your name”. Ouch.

What are the earliest leading indicators that your workforce feels the Social Contract was broken? There are 3:

Excessive discounts.
A company was acquired by a larger competitor and the employees all expected to be fired or at least have to share their accounts with the new parent’s reps. The company sale had been performed in total secrecy and the Social Contract was obviously broken the moment the announcement hit the Wall Street Journal (which is how the employees found out they were being sold). The result – the acquiring company inherited a series of last-minute large orders averaging 92% discounts off list.

Growing Days Sales Outstanding
Happy customers pay their bills. Are your support and A/R personnel being rude or curt with your customers? Are your sales reps getting ready to bolt and stuffing the channel with merchandise to pump up sales and their commissions while offering bizarre credit terms? Do you have a quality problem and the customer feels they have to manage your repairing it at their site?

Employee Turnover
Every company has some turnover. Actually, you can say that a company without some turnover is stagnant and subject to groupthink. If you have turnover approaching 33% in any job area, it should be easy to see if new employees go through the following 6 steps if the Social Contract is broken:
Initial Laughing (they think it’s just some jerky fellow employees)
Denial (there must be more to it I don’t get)
Anger (how did that headhunter do this to me?)
Internal Negotiating (how can I make this work?)
Checking Out (‘whatever’)
Flight

When you have to see the world for the way it really is

2007-09-07T11:39:00.000-04:00

Denying the Outside Truth at your own risk

Just about every company I have ever run or advised had one thing in common –it took an Outside Truth which could not be denied to force them to action.

Their cultures have a groupthink orientation and everyone who wishes to remain in good graces will adhere to the accepted ‘internal religion’ until an undeniable outside event takes place, such as a new competitor. An example:

A Sunbelt bank thought its local contacts, comfortable feel and long standing in the community was all they needed to keep their private banking customers. Service was fine, and the Bank was doing well, unless you looked at the leading indicator of Trust Prospects Lost to Competitors, which is hard to calculate.

After years of good local growth through their home state and surrounding states, a migration of retiring babyboomers started to move in. These people went into the retail branches, opened accounts with some pretty big initial deposits and that was that –the Trust Bank was never notified that a new high net worth individual had moved in and was a new customer entitled to the very best service. The internal groupthink was that the new customer would call the Trust Bank because they just knew it was the only thing to do.

Then the OUTSIDE TRUTH occurred:
A national competitor, much more aggressive, entered the market to mine this new customer base.

The end result was a scramble to link the Retail and Trust Banks (2 separate legal and operating entities) into a common push for new Trust customers. Unfortunately, they had let a major predator into their barnyard and within 24 months, the Bank was sold. If they had not waited for the Outside Truth of the new competitor, this could have been avoided.