john – Bates Creek Consulting

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.

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 14^th. 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.

A quick relaunch update

Bates Creek is focused on helping government contracting firms grow using state of the art accounting software and services. If you are thinking of moving off of quickbooks or GCS, give us a call.

Why we spend our time on what we spend our time on

I attended Armanino’s annual conference last week. Matt Armanino went through their CFO Evolution Survey which talked a lot about CFO’s and business transformation. The survey has been going on for 8 years and it benchmarks what CFO’s do and what they should be focused on. The survey refers to three main focuses of the CFO, accountant, protector and business leader. According to the survey, accountant and protector roles chew up 75% of the time, while the ratio they suggest, should be more 50/50 with business leader being a much more important role. The actual conference material was focused on the accountant and protector, which is where most of the attendee’s currently spend their time.

CFO’s spend their time where the needs are, not where they’d like to work. Allocating time has to be done in the field based on the challenge the company faces.

When I work with CEO’s I often use the metaphor of operating a car.

Getting the Car Running

The first level is the accounting figures, the controls, audit and compliance are about getting the car working, and telling you where you have been. To do this well you need a great understanding of GAAP, compliance and tax. In big firms this is often a senior level job that doesn’t necessarily lead to a CFO role. At a medium or small firm this level is “table stakes” for CFO’s and Controllers. If you can’t do this, you have to find a different career choice.

Having correct accounting figures is like driving by looking out the rear view mirror, because this is reporting on what has already happened. CFO’s that fail

here do so because they have a weakness in a core skill (planning, reporting, managing). In a bigger firm, that weakness can be covered by strength in the staff. Getting compliance, process and controls right can be a big job. Although Armanino suggests that the CFO spend less time in this area and focus on automation of routine functions, successful CFO’s in a new situation can spend years getting this right. If this isn’t right, being the best business leader in the world won’t help, you have to get the numbers right.

Drive the Car

The second level is the use of metrics and tools to identify how the business is operating. It is like driving the car. The use of key performance indicators (kpi’s), development of dashboards to manage the business and reduce risk is like looking out the front window of the car. More real time data allows you to make changes as circumstances change. Forecasting and planning become relevant. Executives who are uncomfortable with building metrics on the management of the business become compliance “bean counters”. A great deal of firms in the small, middle market haven’t developed a good set of KPI’s which help drive the business. They are often happy just having accurate financials.

The main time focus of the second level is the next 3-6 months. CFO’s that excel here use technology and reporting to drive change. The challenge is to maintain balance in reporting – too much focus on financial numbers will pull attention away from customer and staff oriented metrics.

Many, many businesses survive with minimal KPI’s and really no long-term planning. Reactive management styles can be successful. In a fast moving market, sometimes all you can do is drive fast and aim in the general direction of success.

Plan the Route

The final level is the transformative level, where the CFO plans the trip and picks the stops. At this level the CFO becomes a business partner to the CEO and helps create the circumstances and changes needed to keep the business successful. The business model becomes relevant, exit strategies, market changes and management development are important. This is the level that Armanino suggests CFO’s should be working at.

I don’t think every financial executive should work their way to the final level. There are lots of companies without a good level one reporting system or without good KPI’s or metrics. When hiring, CEO’s and Boards should think more conceptually about the current challenge of the business and stop worrying about industry knowledge. Wal-Mart and Dolce & Gabbana are both retailers, but they aren’t the same.

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Dr. John Zott is the Principal consultant at Bates Creek Consulting. John is the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect consumer businesses. If you are looking for a CFO for your e-commerce/retail/consumer company, or are a former student, colleague or would just like to connect – reach out.

The Elusive Nature of Sustainable Growth

Sprinkler test for fire supression system installed two months before massive 39,000 acre Lake Chelan fire.

The upward trajectory of growth is exciting, challenging and at times mystifying and elusive. Growth happens due to a group of factors, some of which are dependent on timing and luck. You can put all the pieces in place for a growth strategy and execute well and still not achieve the planned growth. At other times, the simplest adjustment in color, price or promotion generates significant new sales. If you are embarking on a growth strategy the odds of success are in favor of assembling the pieces, hiring well, executing well and a bit of luck. However in a pinch, just luck can work.

Growing fast is like catching lightening in a bottle, it is not easy and is risky. But once growth has begun it is imperative that you don’t screw it up. Like Bull Durham’s Nuke LaLoosh, a superstitious baseball pitcher, you must respect the streak. You must respect the thing that is bringing the customers to your business. Too often managers will want to implement changes without regard to how that effects the very thing that drives customer acceptance. I get that the lead engineer wants to tweak the product for more performance and the head of operations wants to reorganize (again) and the stores team wants to update the prototype. All of these things will eventually get done, but don’t let them come before sales.

I once worked with a company posting solid 6% comps in an industry that was lucky to get 2%. Overall sales growth was high teens. The management team kept trying to change the formula, seeking to compete against bigger companies. What they didn’t see is that the strength of the business was the very product and service lines they were de-emphasizing. At another company the culture was very gung ho and entrepreneurial, which had been a big part of the strategy. The new CEO saw his role as professionalizing the team, which mostly consisted of adding bureaucracy and purging the company of all managers who weren’t loyal to the new CEO. Disaster ensued.

Although it is seems hard to believe, management teams often do not understand what drives incremental growth or short term sales slumps. They speculate, hypothesize and test, but often don’t know if the change in trend is short term or long term. Management teams are paid to take action, and often they take action prior to diagnosis. Tom Peters used the term “ready-fire-aim” to coach big businesses to move faster. For small business this is a bad strategy. You already pull the trigger plenty fast, you just don’t hit many targets.

John Tukey put it “Far better an approximate answer to the right question, which is often vague, than an exact answer to the wrong question, which can always be made precise.” A great strategy based on the wrong question is far worse than an ok strategy to the right question. Doing nothing is a better result than doing something wrong. Doctors take an oath to “first do no harm” as the cure can be worse than the disease. Managers should take the same oath. Before messing with a product line that is working or with a company that is killing it, make sure that your changes don’t impact the reason that customers are choosing you over your competitors. And when in doubt, test and test again.

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Uber and Reality.

A friend recently interviewed with a startup where the senior management group was upset that the CFO was requiring receipts and documentation for the use of company credit cards. They had decided to replace the CFO because they didn’t want to be troubled by providing receipts.

Sooner or later this company – like so many others – will face reality. When and how they will face reality is unknown. They may run out of cash, suffer a major defalcation or the company is sold, goes public or matures and profits become tougher to obtain. Providing receipts will be the least of their problems.

Facing reality is what Uber is doing now. The Board finds itself without much of a senior management team, no back-up plan and a rapidly sinking investment valuation. Changing CEO’s isn’t easy – I’ve been through the drill a couple of times. Planning is essential and thinking probabilistically is critical.

Thinking probabilistically isn’t hard. Using a decision tree is a good way to start. The tree in this case might have had three branches depending on the outcome of the investigation. Branch 1 would be no or only a minor finding, branch 2 would be a significant finding and branch 3 a major finding. The odds of branch 1, no or a minor finding would be low, they’ve had steady turnover in the ranks and there have been a lot of negative disclosures, I’d estimate 15%. The odds of branch 2 “significant” would be high, I guess 60% . A significant finding would require some senior turnover and changes in the culture.

Hiring a big deal law firm and a consulting firm to probe 3 million documents and survey employees anonymously isn’t cheap. A significant finding is most likely. Finally the third leg would be a major finding where the top management team needs to be fired or a significant restructuring undertaken. That accounts for the remaining 25%.

When the CEO decided to have an investigation of sexual harassment claims in February, there was a distinct possibility that the result would be significant or worse. Facing a 25% potential turnover in the top management group should have focused the Board on a backup plan. When Mr. Kalanick’s mom passed in a boating accident at the end of last month the odds of turnover increased.

Review Covington & Burling’s report recommendations (see here) and then guess at what facts justified these recommendations. The first set of recommendations states that the CEO’s responsibilities need to be reassigned. The second set aims at Board governance; which should have figured out the problem in the first place. The recommendations suggest that they found significant problems with leadership. Uber is facing reality now.

We used to joke about managers who’d used the “force”. The “force” was an unreality field that surrounded the manager, and within that field they could manipulate facts and time to justify whatever they wanted to do. Eventually since there are not Jedi’s in business, reality catches up. I worked for a CEO who ran the business by anecdote even when we had facts. We spent months on the wrong strategies based on incomplete understandings. He’d repeat the same anecdotes in every meeting, certain of his rightness, even as the business crumbled. Reality didn’t penetrate until he was fired in a crisis. The company never recovered.

I am unhappy when capital is wasted, but I really dislike the toll the failure to face reality takes on the people who work for these businesses.

I worked for a company that opened up a Texas operations center, reproducing it’s California central office. The strategy was to be more local in sourcing. After a year or two, the CEO realized this was a bad strategy, and ended up shutting down the office. The sad part was one of the junior people who’d moved their life to Texas was so upset by the closing and the layoff, committed suicide. Obviously there were other issues in this person’s life, but as senior executives, we shouldn’t forget that decisions have consequences beyond return on capital.

VC’s and PE firms are focused on return of capital. Board members are usually required to do what is right for the company. VC and PE firms have come up with investment vehicles which absolve themselves of any fiduciary responsibility to the company. They are held accountable only to investors in their funds, not to other investors or stakeholders. Uber’s board had full confidence in Mr. Kalanick (see here) in March even while turnover of senior executives and the search for the COO continued. The company never hired a COO or a CFO and turnover still continues. All that being said, the “money” Board seats appear to be more rational than the founder’s board seats.

Uber’s board is dominated by the founders with super-voting shares (see here). This structure supports founders regardless of competence. Facebook and Google have this structure but they are primarily technology businesses. Uber is challenged because it is a people business, like Target or McDonald’s and the founders are not competent executives. Uber has 5-10x more employee/drivers than Facebook has employee/contractors, yet Uber is run like it is some sort of “two guys in a garage” startup. The non-founder portion of the Board has as little control as the drivers or employees do. The Board’s failure to take action makes sense, they are powerless. The board can either support Mr. Kalanick or be ignored.

Founderitis is a destructive disease to businesses. When a business outgrows it’s entrenched founder (through special voting shares) there will be a lot of pain, both for capital and for people. The VC’s and PE firms are well compensated for the pain and they don’t want or need my sympathy. My concern is saved for the thousands of drivers, workers, vendors and customers who will deal with the fallout.

Uber has been great for thousands of people. I like the service and it’s made the world a better place. But, I can make an argument that it has been poorly run from the perspective of: capital, management, stakeholders and ethics. Screwing up a company doesn’t just mean you’ve screwed the investors, it also means you’ve screwed customers, employees and vendors.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

He is also the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.