It is a Crisis. What to do now.

Have you ever fallen off your bicycle?  One minute you are zooming along, next picking gravel out of your skin.  Happens too fast. Crises are like that, firms click along and too suddenly they are kissing the pavement. 

Biffed knee

There is a great book written about planning by Stan Davis called Future Perfect (my copy is from 1994). The book dealt with how we can create a different future by pulling apart how we view products and delivery. By now the idea of home delivery and separating the physical product from the information content is the very nature of many internet businesses.

In it he notes that we must manage the beforemath:

In the industrial economy, our models helped us to manage aftermath, the consequences of events that had already happened. In this new economy, however, we must learn to manage the beforemath; this is, the consequence of events that have not yet occurred.”

Stan Davis

In every crisis there is time and opportunity. What you do at the beginning of a crisis will help you control that consequence of events that leads to the aftermath.

As I’ve noted before, CFOs help CEOs run the company. 

Step one for both is to manage cash. Every crisis includes the problem of cash flow.  Get a firm handle on the cash in the business, what is coming in and what is flowing out.  The cashflow model you review most often is done on a set time frame: annually, monthly or weekly.  Whatever time frame you are using, go one step closer.  Runway behind you and altitude above you are no help when you are flying a plane.  Figure out your cashflow runway first.  Make enough runway so that you can safely last well, well past the crisis.  You may not have to sell that prize piece of real estate but if your cash flow plan says you need the money in month seven, and it will take 60 days to list and close, then you know when you have to take action. 

Step two is to develop a plan to protect the main profit-making portion of the business.  Don’t cannibalize what works to shore up what isn’t working.  This is a hard one for senior management.  The years of planning and capital investment are sunk in a new division and now we are in crisis. I’ve watched great company’s go bankrupt trying to continue growth initiatives in a crisis.  That recently launched product or new store?   Be prepared to retrench. I worked at a company with limited cash resources which renewed leases on money losing operations because they were statement locations where we’d spent considerable capital obtaining and putting into operations.  Unfortunately, they weren’t making money and they tied up considerable capital.  Sunk costs must be ignored. Keep what makes you money, making you money.  If you don’t know which products, operations, segments are most profitable, find out fast.  Some 10% of your customers generate below average profit rates and some 10% of your products deliver below average return on investment.  Cut those first. 

Step three is to be bold. Generally, changes suggested by an entrenched management team are too shallow.  We love what has worked. Sometimes the only way to make a business profitable is to pare it back to the profitable core and start growth over.  Get smart about what business we are in and what business we aren’t in. This role is uniquely the CFOs.  The saying goes “CEOs love their children” but the CFO knows that businesses aren’t children.  Generate a range of options for whatever contingencies are reasonably possible.  Start identifying likeliness, severity and possible options to reduce both of those.  The time isn’t wasted.  Options identified on how to keep one customer happy can be used to keep vendors in line also.  But whatever you do, keep in mind what drives profit in the business.   I’ve suggested several bold ideas in meetings, which were rejected initially but were embraced later.   It isn’t disloyalty to admit that a division isn’t working or that the environment has changed and strategy has to change. 

Step four is to move quicker. Napoleon said “There is one kind of robber whom the law does not strike at, and who steals what is most precious to men: time.”  Time, space and action can define most problems.  Space and action can be changed, time can’t.  Whatever management process you have it must work better in crisis.  Meetings that lack relevance must be canceled and new agendas developed that better fit the problems the firm is facing.  Many firms go from monthly to weekly meetings, and some from weekly to daily. More time helps but equally as important is who is invited to the meetings, what is discussed and whether actionable tasks are generated.  I’ve seen management teams dither for months while opportunity and cash leak away.  Take a fresh look at how the team works and make the needed changes. Now.

Step five is to manage the staff.  In a crisis, everyone is a little on edge.  Your staff is worried about their jobs and even when they say they are not worried – they are lying.  In a crisis, you must spend more time communicating.  Emotion is more important than information.  Most of your communications are going to be read for emotion first and then content. Be as clear as possible and repeat yourself.  Sounds stupid but when people are in crisis they don’t listen too well.  They are like the Far Side cartoon called “blah, blah, blah Ginger” where the dog only hears its name.   When people are nervous, they forget who to trust.  Don’t let your staff find out what the business is doing on the internet, tell them first what is going on and what you are going to do.  And then tell them again. 

There is no guarantee these (or any) actions will result in the business thriving or even surviving. However, doing these five things will improve your odds of success.

How do you avoid a crisis?

I have been tracking the Coronavirus for about a month and a half, my first email on the subject was back on February 14th.  At that time, it looked like it was going to fizzle. It hasn’t.

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” – Ernest Hemingway

Firms fail all the time.  They survive when the sun is out and the environment is consistent, but when change comes, even if expected, they can’t adapt and failure results. During a bankruptcy meeting at the court I overheard the case before ours.  The owner had lost a significant portion of his business but failed to downsize staff, equipment and space and in a couple of years was in bankruptcy court.  I commented to our attorney that if the owner had just recognized and taken some action he wouldn’t be in this mess.  The attorney commented that was true for everyone in bankruptcy.  The challenge is recognizing the need for change and the development and execution of actions to solve the problem.

Start-ups are generally dealing with crisis every day and they good at solving the problem. What used to work, doesn’t. Procedures and processes are revamped shortly after development.  The management team is having strategic planning sessions every month laying out a new course.  As a firm grows, it becomes less flexible and processes are written, reviewed and put into a book.  The firm achieves a level of effectiveness, so efficiency becomes more important and redundant staff which provided flexibility is removed from the company.  This process works great in a static market. Unfortunately we are not in a static environment. Here are my four steps to keeping the start-up mindset going as you grow.

Keep your head up. Too many management teams are inward focused.  They care about what goes on in the next office more than the next building and even less about what is happening across the world.  When I started out we had a news service curated by the company librarian.  We would receive via a buck slip (names of the relevant executives to be checked off as read) a package of the most relevant articles that affected our firm, our competitors and market. Today that may be your RSS feeds.  Management meetings would include time to discuss what we learned.  Understanding and wisdom was shared through the team.  Black swan events happen all the time, especially if you are not paying attention.  Cut down on surprises, make sure your team is looking outside the firm.

Build multiple redundant plans. A plan is a decision on what you are going to do to achieve some goal.  If you have only one plan, any change will mean you have no plan.  All plans are about an uncertain and possibly unfriendly future.  Good plans think through contingencies and outline potential options. Bad plans reflect the present circumstances.  Charlie Munger talks a lot about decision trees and thinking about options and choices.  Most schools don’t do a good job of teaching this skill. Learn it.  Thinking through what could happen along with what actions could be taken will make your plan more robust. 

Build a diverse team. “None of us is as smart as all of us” – Ken Blanchard.  Recent research talks about the decision-making advantage of a diverse team.  History proves this true.  Good teams work together but also bring experience and perspective.  We’ve all worked with the executive who has 10 years’ experience which is really 1 years’ experience 10 times. Different perspectives help make everyone smarter. Seven people you went to grad school will be a great party, but your shared viewpoints hide rather than illuminate options. I’ve worked with a lot of executives: both great ones and a few not-so-great.  Great ones don’t always fit, but they always add value.   Organizations are quick to exit the “poor fit” team members who don’t share similar viewpoints.  Fit works great when the environment is static.  When the environment changes “fit” drops in relevance and competence rises. 

Only the Paranoid Survive is more than a book by Andy Grove. I don’t wish you to be truly paranoid.  Paranoia is a symptom of illness.  But I’ve now worked with too many businesses which when successful consider themselves brilliant and special, and when difficult times come they shatter. In the stock market we used to say, don’t confuse brains with a bull market.  It is easy to make money when everything is up and to the right.  Don’t drink the lemonade, keep humble.  This section is likely wasted at this time.  By now you‘ve figured out that the tide has gone out as Warren Buffet says, and who is naked.  This crisis will pass but don’t forget – there will always be crises.