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May 20, 2008

Already tried that ... back in 1952

For those of you who offer advice as part of your business model, you no doubt have heard those mercurial words, "Yeah, we have already tried that, didn't work!"

I have always stated adamantly that the value in my consulting smarts is about the questions I ask rather than the answers I give. And, here is another typical example. The response by your clients to your advice needs to be diagnosed. Yes, diagnosed. They may genuinely have tried your recommendation, but exactly when, exactly how, and what was the outcome they hoped for?

Do not assume that the client knows what you are intending, or that they understand precisely how it should be implemented. When they give you this typical response, it may be for any of three reasons:

  1. They are resisting change
  2. They are annoyed that you are smarter than them in offering your suggestion
  3. They're just an aberrant wise-guy (and I don't mean this in the Mafioso sense, either)

How do you handle this, however, when it happens?
Ask intelligent questions:

  1. When, specifically, was it that you attempted this in the past?
  2. How are the conditions (environment) different today?
  3. What was the exact outcome when you tried this?
  4. How did you measure and evaluate the results?
  5. Who did the measurement and evaluation?
  6. Why, specifically, do you think it didn't work?

By asking these questions you can establish if perhaps what was attempted, was not exactly as you are now recommending today. You will also have the client clearly articulating how the business environment has changed since then (which may effect the resultant dynamics in today's conditions); or that the analysis of the results and outcomes back when it was previously attempted were flawed or at least ineffectual; or that YOUR assumptions may not be appropriate now that you have this additional background information!

Never assume the client is damaged - establish the facts to verify your assumptions. The upside is that the client may become more willing to consider your suggestions after answering your questions (and gaining that BFO - blinding flash of the obvious), or the questions in themselves may actually lead you to providing an even better recommendation after receiving the answers.

© Ric Willmot 2008 All rights reserved.

May 17, 2008

Strategic Planning isn't Planning for Contingencies

We live in uncertain times, and people talk about all sorts of planning. But, as someone once said, "if you want to give the gods a real belly laugh, just make a plan!" How valuable is it, then, to make plans? Are there different types of plans?

Strategic planning often seems to mean that a company or business owner examines the future based on today's variables. Depending on worst, best, and likely case analyses, the planner then develops a cause and response plan. This type of planning differs from tactical planning in that it usually goes out farther into the future. Tactical planning tends to be more about "how" will we do something. Strategic planning is more toward "what if" something happens.

That being said, we also see plenty of examples of long-range plans failing to take into account some unexamined event. In fact, one example is where the company has contingencies in place for twenty different problems, never expecting that all twenty events will take place simultaneously. Problems and crises have a way of coming in bunches, making planning more of an art than a science.

So what's a person to do? Should we never bother to consider possible problems and disasters? What about considering success beyond all expectations, as with an exponentially larger number of orders or clients? Do we make plans, cross our fingers, and simply hope for the best?

Consider the entire concept of planning: At its foundation, a plan is a way to adapt to future circumstances. We can say that the better someone is at adaptation, the more successful their plans. To develop a comprehensive set of plans, one would need to be omniscient and clairvoyant. But to be skilled at adaptation requires only ordinary human capabilities, and requires much less specific planning.

An important part of adaptation is flexibility in processes. Yet many business owners don't have a solid grasp on all the processes taking place in their business. In fact, many business owners and executives don't actually know the key processes and critical dependencies of their core business. If that's the case, then strategic planning ends up being more like a shotgun blast of plans, with no particular organization.

Knowing how to adapt, and making the business highly responsive to changing circumstances is a better way to prepare for the future. Explorers throughout history didn't know what they would encounter in new places, but they did know how to survive, how to adapt, and how to quickly assess entirely new events. Along with strategic planning, why not have a rapid-response team in place?

To better prepare for the future, it makes sense to first lay out the many processes involved in the current business. Then determine the most critical processes and what they depend on outside the company's control. But instead of devoting full attention to setting up contingencies for failures in the dependency chain, examine how quickly each process and its function can be entirely changed.

Think about the process of setting up an order from China. The process begins with inventory management, which in turn causes an order to be generated. The critical dependencies include transportation systems, remote politics, and raw materials. Rather than developing a contingency for transportation failure (e.g., a ship sinking), a local war, or a factory burning down (taking with it all the raw materials in stock), how can this process be dramatically changed?

Suppose all three events take place at the same time---war delays the ship leaving port; an explosion destroys the factory; then, even partially loaded, the ship sinks in the Pacific. If contingency plans are in place, what happens if the necessities for those contingencies also fail?

How quickly can the source for orders be fundamentally shifted from China to another country? It isn't important which country; it's important to know how quickly the process can be changed. Is it possible to redirect the entire order process, perhaps setting up an immediate delay notification to all waiting customers?

Substitution is an adaptation process, and it's been around for a long time. Rain checks are a form of substitution. Regardless of what part of a process fails, or if it goes down completely, the adaptive response is to offer a substitution. That's not the same thing as having a specific backup product or service stockpiled as a contingency. We don't yet know what we'll substitute, but we know that we can come up with a substitution quickly.

Contingency planning assigns a specific response to a particular event or circumstance. Strategic planning examines possible events or circumstances that might require contingencies. But process analysis with adaptation capabilities in mind is a third option. People don't succeed because they know how to do everything; they succeed because they know how to change and adapt to circumstances, taking advantage of evolving opportunities.

May 16, 2008

Eschew the Evil of Enron

The movie Wall Street was a hit in 1987. The main character played by Michael Douglas was Gordon Gekko:

"The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. The point is, ladies and gentlemen, that greed - for lack of  better word - is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed in all of its forms - greed for life, for money, for love, knowledge - has marked the upward surge of mankind. And greed - you mark my words - will not only save Teldar Paper but that other malfunctioning corporation called the USA."

Humans are tribal beings, xenophobic if you will, and therefore in all of us is an ability to be evil if we allow it. The good news is that our natural evolution as a species means we are also pro-social and cooperative. My opinion is that Enron and 'Gordon Gekko' are the exceptions to the rule.

President George W. Bush publicly claimed that Enron's failings was due to "a few bad apples," which happened to also be his reason for prisoner abuses at Abu Ghraib. This would be a nice if it were that easy, however, it doesn't explain what actually happened at Enron.

1986 - 1996 Enron had a highly effective managerial system including transparency of corporate governance. Richard Kinder was then the president.
1996 - 2001 under the presidency of Jeffrey Skilling, Enron changed and became secretive and almost covert regarding corporate governance.

Kinder was involved at every level of Enron's business dealings under under his stewardship revenues surged from $5.3 billion to $13.4 billion. Richard Kinder was renowned for his photographic memory and his "Bullshit Barometer." As an Enron unit leader said: "Kinder was impossible to bullshit. If managers lied to him about their numbers, Rich would eat them for lunch."

Evil often occurs in hidden places, devoid from social accountability, such as in the deep recesses of Abu Ghraib. The first line of defense against corporate evil, then, is transparency, open communication and continual management of the business systems.

As leader, managers and entrepreneurs we must accentuate trust and accountability; embrace challenges made of our opinions and assumptions; promote healthy debate around decisions; and demand transparency so as to be less susceptible to corruption, fraud and mismanagement. As leaders, managers and entrepreneurs we must foster camaraderie, cooperation and pro-social behavior. As leaders, managers and entrepreneurs we must seek respect and loyalty.

It's nothing personal, just business. But the business will prosper if the people in charge are personable.

© Ric Willmot 2008 All rights reserved.

May 12, 2008

Generational Generalizations

Below is an e-mail received from a good friend in the education department. Ross sent this to me in response to my many "Rants" over human behavior and "labeling in the workforce" and psychometric testing at work.

*****

Gen Y
Teacher: the National Education Magazine <http://www.acer.edu.au/teacher/> 
May 2008; Pages 60–61
Andrew Williamson
People born between 1976 and 1991, known as Generation Y, number around four and a half million across Australia. They are the second-largest generation currently in the workforce, and account at present for around a third of the staff in Australia’s schools. Generation Y staff tend to function differently to preceding generations, and being aware of how they differ can be a great asset for current school leaders. Typically, Generation Y workers dislike the traditional management style that elevates managers above other employees. They tend to be confident, optimistic, sociable and to have a strong social conscience. Opportunities for learning and skill building are important to them, as are clear goals and a supportive environment that encourages innovation and values new ideas. Preferred avenues of communication are usually informal, such as email, text or casual conversation. Generation Y members are technologically adept and eager to integrate new technology into their work. To attract and engage workers in this group, aim to provide a flexible workplace that allows for healthy work–life balance. Be sure to offer variety and opportunities for project leadership. Strive for transparency of processes and show respect for all staff, and openly appreciate and value the contributions these workers make. Give staff freedom to manage their own workload while also aiming to provide frequent constructive feedback. The confidence shown by this generation of workers is often surprising to those in older generations, but school leaders should not automatically assume they are antagonistic. Generation Y staff appreciate a working environment that respects skills and creativity, values workers as equals, and infuses work with purpose and a sense of fun.

*****

Points for discussion:

  1. "Generation Y workers dislike traditional management style that elevates managers above other employees." ... so do many 'baby-boomers' and Gen X that I work with.
  2. "They tend to be confident, optimistic, sociable and to have a strong social conscience." ... as do many other generations.
  3. "Preferred avenues of communication are usually informal, such as email, text or casual conversation." ... This is where I do agree there is a distinct difference; and is at the root of many of the dysfunctions between people at work and in society.
  4. "Generation Y members are technologically adept and eager to integrate new technology into their work." ... No doubting this comment, as new technologies are developed, those people who grow up as children using it, will always be more enamored to it. No shock there!

I will stop now ... as you get the idea.
Are Gen Y different to 'Baby-Boomers'?
Perhaps.
Are Gen X different to Gen Y?
Maybe.
Are women different to men?
Sometimes.
Can two women from the same city, with similar economic backgrounds and education, be different?
Definitely!

People being people, will be different as much as they are the same. My point is, we need to treat each other with respect, to be considerate and care for other's self-esteem and dignity, to engage and develop them in our workplace whether they are male or female, Caucasian or not, rich or poor, educated or not.

Forget the labels of Gen Y and baby-boomers, eschew the dopey fads and treat each other with respect. Value each other for our own unique traits and differences. It is in our differences that we gain value.

© Ric Willmot 2008 All rights reserved.

May 09, 2008

What Immelt taught Jack about GE

The June 2006 Harvard Business Review, had an interview with Jeff Immelt, Chairman and CEO of General Electric by the magazine's Editor and Managing Director Thomas Stewart. Stewart noted that Jack Welch tended to focus on efficiency, with initiatives such as Six-Sigma. Immelt’s focus however, is for GE to grow organically, two to three times faster than world GDP (Gross Domestic Product).

Immelt intends to achieve this goal by recognizing the realities of the knowledge economy and the importance of pricing:

“If we can create a sales and marketing function that’s as good as finance at GE, I’ll change this company. In a deflationary world, you could get margin by working productively; now, you need marketing to get a price. A good example is what we’re doing to create discipline around pricing. Not long ago, a guy here named Dave McCalpin did an analysis of our pricing in appliances and found out that about $5 billion of it is discretionary. Given all the decisions that sales reps can make on their own, that’s how much is in play. It was the most astounding number I’ve ever heard - and that’s just in appliances. Extrapolating across our businesses, there may be $50 billion that few people are tracking or accountable for. We would never allow something like that on the cost side. When it comes to the prices we pay, we study them, we map them, and we work them. But with the prices we charge, we’re too sloppy.”

$50 billion is “discretionary”!

This is a polite term for how much GE is leaving on the table because of poor pricing strategy. Let's put this in perspective. For the year ended December 31, 2006, GE had total revenues of $163 billion; hence they are leaving approximately 30% of total revenues on the table with poor pricing strategy. And, GE is an intelligent company.

Does anyone think GE can increase productivity or cut costs by this amount? Or increase revenues by this amount through growth?

The number one argument I hear from accountants and lawyers about the philosophy of value-based pricing is: “How would you know if you’re making money without time sheets?”

This is the wrong question. Of course you’re making money, especially in a Professional Services Firm (PSF) where margins are not slim. Yet no matter how accurate your time sheets and cost accounting, you will never be able to answer this far more important question: “How much money are you leaving on the table because of mediocre pricing?”

It matters not to know your costs right to the cent without understanding the value of your services to the client? This is why enlightened PSFs let value drive price and price drive costs. In effect, cost accounting is performed before the work is started, not after. This is especially important since no one really knows what a cost should be; something cost accountants don’t understand, since they only see the costs after the fact.

This is exactly how Toyota prices without ever having a standard cost accounting system. That should send a shudder down the spine of everyone who believes that you need cost accounting to be a profitable, dynamic company. Just killed that theory dead in it's tracks.

If GE is leaving $50 billion on the table, how much is your firm leaving on the table due to poor pricing? Proper pricing blows away what you could ever hope to achieve by cutting costs or increasing efficiency. Work on creating and capturing value through excellence in pricing. It’s the number one driver of profitability in GE, and your firm ... if you so choose.

© Ric Willmot 2008 All rights reserved.

Addendum May 12, 2008.

After receiving a few e-mails: Yes, pricing for professional service firms is a speciality service that we offer and is part of our expertise here at Executive Wisdom. E-mail me directly if you would like to discuss how we can assist you and your business with Profitable Pricing Strategy.

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