Losing Perspective

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The story is that if you drop a frog into a pot of boiling water, it will jump out immediately. If you put it into a pot of cool water, however, then turn on the heat, the frog won’t notice the temperature change, and will eventually die when it gets too hot. Who knows if it’s true, but it’s a great metaphor, and we see it happening everywhere.

It’s easy to lose perspective.

We Are the Best

I worked on the conversion of a newly-acquired retailer’s systems to those of the acquiring parent company. Although the new system was much more sophisticated and comprehensive, fundamental accounting controls were missing, and it was so difficult to acquire, verify or reconcile certain information that we had lingering doubts over its overall integrity.

The parent company had a unique corporate culture based on the belief that they were the best – had the best stores, the best products, the best people, the best systems, etc. – and there was no room for discussion of improvements. The corporate controller explained to me that the systems were terrible before he joined the company, but they were great now. He listed examples of how bad they used to be, and every one of the deficiencies still existed… but they were the best.

Years later, there was an accounting scandal that hinged, among many other things, on the system’s inability to properly account for cost of goods sold.

They refused to look at their systems with a critical eye, and they lost perspective.

Director’s Cut

A well-known filmmaker invited me to see his new film while it was still a work in progress. He had been editing it for weeks, and was ready to show a rough version of the finished product. It was a demanding film, with dense dialog requiring concentration, and a limited budget for production values, and I was drained by the end of the screening. I looked at my watch several times during the film, so I was very aware of the fact that it was well over 2 hours long.

Called on for comments, I sincerely praised the film for its merits – a respected film critic eventually included it in his annual “Top Ten” list – but I felt the length of the film undermined its overall success. Surprised, the filmmaker responded: “You should have seen it when it was 4 hours long.” I attended the screening of the final film, and still found it much too long.

Art is subjective, of course, but I believe he lost perspective.

Competing Systems

A homebuilder developed an elaborate and advanced construction management system, and its reporting mechanism was tied to an accounting package. For reasons lost in history, they also continued to customize the primary general ledger system that had been in use since the 1970s. The result was that there were two very complex systems, but the reported results were often materially different.

Each member of the management team had his own favorite reports from both systems, and every meeting started with an argument over whose report was correct. One member of senior management knew how to reconcile the results, and he spent more than half his time doing so. By the time the reports were reconciled, the meetings were often over. Important business issues were never addressed, and the managers made their decisions based on different information.

This was one of the first issues I raised when asked for my observations on the company and its operations. The CEO, early in his career, personally directed the customization of the ledger system, and he wouldn’t listen to any criticism. He and his managers had developed the construction system, and were so proud of it that they invited homebuilders from around the country to show it off. There wasn’t going to be any discussion of problems there, either. When I tried to address the gap between the systems, the response was: “It’s great now – up until 6 months ago, all the computer terminals had green screens.” I hadn’t seen a monochrome screen in over 20 years.

The company went bankrupt. They had lost perspective.

Hey, What’re You Gonna Do?

Another retailer was very dependent on its highly complex systems. The nature of the business is that there is a high rate of turnover among line managers, and the corporate training systems placed more emphasis on sales and marketing than on administration. Unfortunately, the systems, while comprehensive, were not user-friendly, and there were constant problems requiring many long telephone calls to explain and resolve issues.

There was constant finger-pointing and redirection. A manager would direct associates to call the technical support hotline, only to be directed to the regional office, who might then send it back to the original manager. Certain employees became known for their ability to resolve certain types of problems, and everyone had a favorite go-to fixer.

Frustration abounded, but there was no feeling at the field level that there was anything fundamentally wrong with the systems. The company had been in existence for a long time. There was no problem with customer service, but the amount of employee time wasted by awkward systems was huge. When I asked why nobody complained up the corporate ladder, they just shrugged and said it wouldn’t do any good.

They had lost perspective.

That’s How it Should Be

In a construction company, it was highly unusual for accounting reports to tie out to the general ledger. It was a constant problem, and drove me crazy, because I could never trust that I was working with reliable information. We were involved in huge projects and equally huge financings, and acting on wrong information could have major consequences.

The CFO and IT director had been with the company for many years, and together had implemented most of the systems in use at the time. They knew them so well that they could tell me how to do elaborate reconciliations of the reports, which would often involve writing special programs. Their default question would typically be: “What do you need that for?” This exercise turned up problems with the original reports often enough that we had the battle many times.

When I pressed the CFO to set up a task force to streamline and clean up the accounting systems, he would argue that the systems were good, and that the reports actually shouldn’t tie out. “That’s how we designed them.”

They had lost perspective.

Does your CFO encourage taking a fresh look at long-established systems and methods?

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Hmmm… Didn’t Think of That

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There are executives who rely on their ability to move quickly. They are often the ones who loudly declare that if we sit around analyzing things to death, we’ll never get anything done. Sometimes, they’re also the ones who are willing to bet the farm before the analysis has been thoroughly completed.

I love working with these high-velocity types, but they often need someone like me watching their back. Someone with a strong business sense and analytical capability who doesn’t slow down the process.

Here are some examples of how things can go wrong:

Catalogue Stores

A well-known retailer operated discount department stores nation-wide. To reach a wider customer base, they also operated a successful chain of catalogue stores in communities too small to support a full-service store. A customer would place his order at a catalogue store, and the item would be delivered within a week.

Meanwhile, changes in technology and inventory management techniques had resulted in a substantial reduction of inventory carried in the full-service stores. These were large stores, so quite a lot of physical space was freed up.

A senior executive came up with the idea to put catalogue stores in the available space in the full-service stores. His analysis showed that not only would the new catalogue stores add substantial revenue and profit to the existing outlets, but they could easily be placed in the least desirable selling areas, often in store basements.

There was much fanfare as the project was launched. The executive in charge even ran afoul of his boss and colleagues when newspaper articles praised his brilliance beyond their comfort level. Then the catalogue stores were abruptly shut down as a disastrous failure. Why would a customer walk through the store, passing by the merchandise he wants to buy, only to order it in a dark basement for delivery a week later? Hmmm… didn’t think of that.

Paper Shortage

A young warehouse worker at a large office supplies distributor showed such ability and intelligence that he was rapidly promoted to be the company’s purchasing agent. This was a long time ago, in the mid-1970s, when the oil crisis resulted in chronic shortages of a surprising range of products.

One day, the purchasing agent called to place a routine order of reams of 8 ½ x 11 inch printer paper. “6 months’ delivery” he was told, and he realized he would be unable to fulfill his customer orders for much of that time.

He was a smart kid, so it didn’t take long to figure out that when the shipment did arrive, he could be looking at another 6 months for the next delivery. Of course he didn’t ask for advice. He started placing orders every couple of weeks, based on historical usage, fully expecting to be back on his regular schedule at the end of the 6 months. Yes, he was a smart kid.

The only problem is that it was a big company, and after a while, the orders accumulated into a quantity large enough to justify an entire separate mill-run by the manufacturer. There were delivery trucks at the door for days on end, and you had to walk sideways through the warehouse to get past the stacks of paper. Hmmm… didn’t think of that.

Demographics

A retailer launched a new business based largely on demographics. It was the early 1980s, and the Baby Boomers were just starting to have children of their own. It was the beginning of a huge increase in births that the industry was calling the Echo Boom. What better time to start a chain of stores specializing in children’s apparel?

After establishing a solid base in California, the plan was to follow the demographic projections that showed high percentage population growth in the southern states. The company made an aggressive move into Texas, and suffered from an economic downturn and some bad real estate decisions, resulting in the prompt closure of about half of the new stores. Still, the roll-out through the south remained the CEO’s plan.

This is the only example in this article in which I was able to play a part, so of course, I’m the hero of this story. I pointed out that the southern states were in fact projected to grow at high percentage rates, but the population density was insufficient to achieve the economies resulting from tight clustering of stores. After all, 10% of nothing is still nothing. Hmmm… didn’t think of that.

The management team listened to my presentation, and we headed instead to the northeast, where large populations were already in place. Our strategy shifted to taking business away from the department stores.

Does your CFO sit in on strategy meetings and tactical problem-solving sessions? He might just bring an important new perspective.

What (Not!) To Do In Troubled Times – Part 2

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Regrettably, I’ve seen my share of companies in troubled times. Some CEOs step up and take effective action, but others are less effective. Here are some unfortunately common behaviors that have led to failure. This group of behaviors falls under the category:

General Confusion

Change plans constantly, and don’t inform all of your mangers of the changes – There is always the fear that plans aren’t working, or aren’t working fast enough. Plans need to be carefully thought through and executed at all levels of the organization if they are going to succeed. A rapid succession of poorly conceived plans is worse than no plan at all.

Make radical decisions, then reverse them without explanation – Wild decisions such as cutting the price of your flagship product by 50% (it’s a fictitious example, but just barely) are not the only way to increase business. Everyone, including you, knows it’s not going to work, and abruptly changing your mind a few weeks later will only make you look more foolish.

Find reasons why managers who don’t always agree with you should be absent from meetings – It’s nice to hear from people who agree with you, but you need to hear every point of view, especially in troubled times.

Constantly reshuffle management responsibilities – Sure, you sometimes wish your managers had stronger or different capabilities. But you hired and promoted them for their expertise, experience and judgment in certain areas of the business, and they are the ones who are going to help you through the rough patches. Juggling responsibilities just causes confusion and resentment, and after a while, you’ll be the only one who knows what is going on… maybe.

Appoint capable managers to lead new initiatives, but don’t let them actually do anything – Is this really the time for bold new initiatives? Or are your senior managers more effectively used to improve the core business? Don’t waste your most valuable resources on projects that you will probably never green-light.

Think about it. Does any of this feel familiar? … Really think about it.

What (Not!) To Do In Troubled Times – Part 1

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Regrettably, I’ve seen my share of companies in troubled times. Some CEOs step up and take effective action, but others are less effective. Here are some unfortunately common behaviors that have led to failure. This group of behaviors falls under the category:

Personal Interaction

Cut off communication – When things start to go wrong, your best friends can be a source of support and morale. But they should not be your only points of contact. Resist the urge to see only friendly faces and hear only from people who agree with you. Don’t close your door and hire a bulldog assistant to keep people away. The more people you hear from, the more you’ll understand changing conditions, and the better equipped you’ll be to deal with them.

Stop making field visits – In stressful times, don’t look at your office as a sanctuary. You are unlikely to learn anything useful there. The people who make and sell your product are the ones who can really tell you what is happening, and often how to make things better. And your attention is reassuring and inspiring to them.

Take long trips away from the office – Yes, bad times are stressful, but you can’t hide from them. Taking more personal trips and long weekends will just put you out of touch, and will send a very wrong message to your management team.

Make it clear that you only want to hear good news – We all like good news, but if you won’t hear the bad news, or require that all bad news have a positive spin, you’re going to lose your grip on the business. And you’ll look foolish to your management team.

Hold more long meetings – Meetings are necessary for communication. More meetings, longer meetings and meetings with more attendees can be detrimental. You may feel comfort in surrounding yourself with subordinates, but the more time you spend talking to them, the less time they can spend identifying and solving problems.

Think about it. Does any of this feel familiar? … Really think about it.