Management – 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.

Ramp or Steps?

I once implemented SAP over the top of Quickbooks. We were on a fast growth trajectory and the venture funds wanted a solid system that we could use while we grew. The SAP ERP system was selected before I joined. The system wasn’t as mature as it is today and for our $1,000,000 check we received a lot of “Achtung” error screens. The one positive was that we used their system exactly as designed. Our processes didn’t exist, so there was no need for customization.

Managing growth is about managing the many changes that occur when you turn a small business into a big business. Start-ups lose money before they achieve scale. This is because costs aren’t perfectly variable. If you open a frozen yogurt shop, you’ve got to rent space, buy fixtures, yogurt machines and train a staff. All of this cost occurs before you bring in any revenue. These investments are a part of your fixed costs. Costs that vary with sales are called variable costs. A perfect variable business would not have any costs until revenue is achieved. Unfortunately, there are no perfectly variable businesses.

Costs grow in “steps” because the cost increases are not smooth, they increase in a bunch. For instance, you could start out renting a small space with a fixed rent, which is a step up from working on the kitchen table. A year later you pay the same rent but the staff has grown and people have to crawl under their desks to get to their chairs. A new space is located and rent increases, another step. Shared space operations like WeWork, Regus and Carr and hope to minimize the steps by allowing you to add space as needed.

A big change in business in the last 25 years has been the decline in the size of the steps and the ability to ramp a small business. We used to call the growth infrastructure problem “the tunnel”. Before you entered the tunnel you could make money – the business is small, not much investment in space or people, there was little structure and no overhead. You entered the tunnel when a step up in investment was required. Maybe you needed a larger office, or a new system or a warehouse. But whatever it was, until you grew sales sufficiently to cover the cost of investment, you had high costs and lower profits.

Years ago there were many, many large steps. Renting an office space used to mean a 5 or 10 year lease with guarantees by the founder. Not so anymore. You will pay a more per square foot for shared space, but you aren’t committed in the long term. Systems used to run six figures, while today I’ve worked with businesses with sales more than $40m a year running on a $400 copy of Quickbooks.

Financing can sometimes help make those steps smaller, too. You may only need to put down 10% on that frozen yogurt machine, so you pay the loan with money you’ve made selling frozen yogurt. The risk remains (after all you have to pay the loan), but you better match income with outflow.

These steps happen with staff, space, equipment and systems. Managing the growth is a lot about making the steps as small as possible while keeping your attention on the target. My SAP install turned out to be a bust. After losing $50m the company pivoted and we returned to Quickbooks.

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Dr. John Zott is the Principal consultant at Bates Creek Consulting and works as a CFO. John is a senior adjunct professor at Golden Gate University and comments regularly on issues that affect growth companies. If you are a former student, colleague or would just like to connect – reach out.

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.

Planning the When

My uncle moved his pharmacy about 50 years ago. He could only choose one location, and he mapped out where he thought the growth of the city would be. The first few years were hard, but as the city grew, his shopping center became the center of town and the store site turned out to be a very successful location. He balanced today’s customer against tomorrow’s. Too early, and you build in a corn field and are bankrupt by the time the community arrives, too late and you pay higher rent, or are completely shut out of the market.

CFO’s (and CEO’s) work in a particular time frame. Some think about next month, some about next year, some about 10 years from now. This is typically called the strategic time frame. My Uncle’s time frame was 20 years, the length the time he’d be committed to a lease. To make a positive difference in earnings you typically need at least 6-12 months. Strategies take time to develop, initiatives need to be planned, advertising ordered, product sourced or manufactured, distribution organized, and sales teams trained. Of course, you can make a negative impact on a quarter a lot quicker, simply run out of inventory. My friends in the Hispanic grocery business called that “throwing a party without having any beer”. Not a recipe for a good party.

A good strategic plan is about figuring out what to do. You generate positive initiatives, put them in a rational order, fund and staff them, and sequence them so performance targets are achieved. But when should these initiatives be focused? If too short term the projects will be small, too long term and the market may change and the opportunity disappear. Balancing the “when” becomes as important as picking the “what”.

Elliot Jacques was an organizational development consultant who felt most OD problems were organizational and not people problems (see here for his requisite organization page). He felt that people had a natural time frame and controversially believed it couldn’t be changed. I don’t know whether that is true, but I do know that there is too much short-termism in plans.

Short-term projects tend to push out long-term projects. Silicon Valley CFO’s stay about 3 years in a job. There really isn’t time to think long-term when you spend six months learning the company, two years working and six months planning your next gig.

I’ve worked with management teams that spend 100% of their time focused on hitting the weekly numbers. These management teams react fast when things go astray. They also tend to be inward, operationally focused. So intent on what is in front of them, they miss opportunities to grow the business.

This applies in your personal life. There are probably 2 or 3 things that will make a difference in your life in 10 years. Are those things being addressed now on your to-do list? I talk with people every month about retirement, and too many lack a plan. Be kind to your future self, think about the future and make those constructive changes you know you need to do. The earlier you start, the smaller the changes need to be.

A good project plan has steps to help you reach your goals. A good strategic plan has interim steps that support your long-term goals. Look at your strategic plan (or project plan or to-do list) and see if you have a good mix of short, medium and long-term items, and be kind to your future self.

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Simple, Better Decisions

Although I prefer to help businesses grow, sometimes growth goes bad and the company becomes a turnaround. I worked with a firm that went through a very rapid growth phase, was hit with an unexpected event, and ended up declaring bankruptcy. I joined shortly before the bankruptcy and saw them through the money raise and bankruptcy exit. It is a valuable experience that is way under appreciated by hiring managers.

One day early on in the process, the outside corporate counsel (a close friend) and I were sitting in the back of the court room waiting for our turn. Several smaller cases were being heard by the judge. After listening to a few of the facts, I noted to my friend that if these firms made a few relatively small decisions six months earlier they could have avoided the whole bankruptcy proceeding. The lawyer turned to me and said “every case in bankruptcy court could have been avoided by making a few better decisions earlier.” Although this doesn’t sound that profound now, it did to me then.

Decisions have consequences, and bad decisions lead to bad outcomes. Although it can be personally satisfying to blame one person or one decision for a bad outcome, there are often multiple decision points and multiple people involved and plenty of opportunities to take another path. The downward spiral of performance is often accompanied by a closed mind. You can’t fix a problem you won’t see.

Management teams repeat their core message to the staff, which communicates strategies and values. This repetition helps solidify the culture and keep the company on track. Unfortunately, as circumstances change, sometimes the strategies must change. Repeating the company line when it is no longer relevant is like dancing for rain. The only winner is the guy getting paid to dance.

Worse yet management teams that don’t recognize change become further out of touch with the front-line staff that faces the market and the changes. Respect declines when your boss is telling you to focus on “a” when you can clearly see the problem is “b”.

The first rule of holes is “when you find yourself in one, stop digging.” Management teams need a method of tracking performance that tells you when you are in a hole, an open mind to recognize that circumstances have changed and the fortitude to go and fix the problem.

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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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We love our Guru’s but they aren’t helping

I have been saying for many years that we are using the word ‘guru’ only because ‘charlatan’ is too long to fit into a headline. Peter F. Drucker.

There is comfort knowing that someone knows what is going on and can help us by giving us their opinions about politics, stocks, how to live better and what to wear. All we have to do is to find the right guru – the right advice. We think we are reducing risk by following a guru, but we aren’t. But, at least we won’t look foolish alone.

There are not many physics guru’s because one important part of guru-ness is that the subject matter should be indeterminate, that is that it cannot have a single right answer. The stock market is prone to guru’s. There are no simple answers and what works one day, won’t work another. Investment shows on TV are about entertainment, not education.

By now hopefully you know that there are no stock market guru’s. It is simply not possible to forecast where the stock market is going in the short term. Most of what passes as forecasts are 20/20 hindsight or deal with relative valuation of the market. I think relative valuation is useful, you can buy the market at a discount. I know you will pay less for Christmas/Holiday cards in January (11 months early) than November. However, buying something at a discount doesn’t stop the chance that there will be a bigger discount later.

“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge. ” Lao Tzu

Politics is similar to the stock market. The guru’s in politics are no more accurate, and offer no more clarity than the stock market guru’s. Political forecast accuracy has been the subject of quite a few good books. Tetlock’s book “Expert Political Judgement” outlines his thoughts on why so many political forecasts go poorly. Philip Tetlock’s suggests that foxes are better than hedgehogs at forecasting. The fox knows many different things, hedgehogs know a few things well. His more recent book with Dan Gardner “SuperForecasting” offers examples of good and bad forecasts and includes some suggestions on how to do it better.

Forecasts are effected by circumstances and human behavior that in the short term can be identified, but in the long term (more than a year or so) have too many interactions to be of any use in forecasting. Like the weather forecasts which fall apart the further out you forecast, the longer the time frame the more human behavior and chance result in different outcomes.

“No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.” – J. Scott Armstrong

There are a lot of guru’s in the business world. Harvard seems to grow them like tomatoes. The history of management includes a lot of ideas that turned out to be stinkers. Scientific management wasn’t a very good idea even when it came out. Re-engineering turned out to be another way of saying lay-off. I’ve spent hours debating core competencies which in the end, couldn’t be defined or implemented. Theories that can’t be tested are especially prone to guru-ness.

Trying to implement guru’s advice can be frustrating. I loved “In Search of Excellence” but the advice was general like “stay close to the customer”, which is almost perfect guru advice since you can always say you weren’t close enough. I call it Zott’s Law of Business Books. The more general, the easier to read, the less useful the advice. Kahneman’s “Thinking Fast and Slow” was a top business book of 2015 and is interesting and a good read. Again, not much useful advice.

J. Scott Armstrong also said, “If you can’t convince them, confuse them.” A lot of business guru’s wrap pretty simple ideas in complicated language.

The Principal Agent problem states that there are differences between principals and agents (owners and managers) and that making agents more like owners will solve the problem. I like Agency Theory, it explains a lot of behavior. We sought to fix this problem by giving executives stock options. Since then we’ve spent millions on stock options and it doesn’t appear that management is any more aligned now than before. The cure I think is worse than the disease.

We listen to these guru’s because we want an answer. The answers given aren’t necessarily right nor particular useful, but they are confident and we value that certainty. Guru’s use our need for certainty to sell us their opinions (and via advertisements, dish soap). In today’s world of fake facts, alternative news, spin and TV personalities who are selected and paid for their ability to speak confidently (without knowledge), our main defense is a healthy skepticism . Skepticism and an understanding that we live in an uncertain world.

Quidquid latine dictum sit altum videtur – Anything said in Latin sounds profound.

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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.

Millenials and Baby Boomers Can Get Along…

Millennial in natural habitat – a craft beer garden

When I started my career we were debating theory “X” vs theory “Y”, baby boomers and the nature of people. Today we debate about what millennial’s want. Millennials are the people who became adults in the early 21st century, so basically they are 18 to 35 right now. The debate about how to manage them reminds me of the debates we used to have about working with the baby boomer generation.

A great bunch of the stuff written about how to manage millennials is so general it is useless. It is slightly more scientific than astrology. For instance, millennials want meaningful work and work life balance. They want to be listened to, they want to dress casually. I am not sure what workers don’t want those things. Fortune has noted that millennials are not all the same in their November 1st 2016 “Millennials are not Monolithic” edition (see here). Fortune says we are more alike than different but spends a whole magazine repeating the same generalizations.

Being treated as a part of the baby boomer generation never described me and I bet at least some of the millennials out there that are being managed via the latest and greatest theory dislike it too.

I never saw big advantages of being a baby boomer. The era of cheap college ended with advent of tuition inflation in the 1970s (1970-1985 12.4% annually). The era of large protests pretty much ended while I was still a boy scout. There were some small advantages to following the bulk of the baby boomers. By the time I came to high school, we could wear our hair past our collars and the assistant principal couldn’t hit us with a paddle.

One thing they used to say about baby boomers was that they lacked loyalty as employees. I graduated from college in Detroit with a shiny degree in accounting and an MBA (accounting graduate fellow) the same year GM laid off 70,000 workers with an estimated 15,000 people in finance. My main clients at KPMG were the city government and a series of weak and getting weaker manufacturers. I left for better climes after I put my time in for my CPA license. A couple of years after I’d moved to California, my father got laid off from a job he’d been at for 20 years. Lesson learned, loyalty was not a two way street.

Millennials are supposedly quick to quit a job. I think this is due to the confidence that they will find another, and realistically, most will find another. They don’t expect a lot of loyalty from an employer, and they show little.

Managing people via a theory has had a long history of failure. I have never been a huge fan of scientific management and Frederick Taylor. My dislike is how Taylor perceived workers. Treating the worker like a machine, transferring control from worker to management and a general sense of contempt of the work force were his key viewpoints . Yes, work flow improvement is important, and the quality initiatives such as six sigma can be traced back to his research, but for the most part, it is the idea of applying science to work, rather than his specific ideas that he is known for. He was virulently anti-union, while the way scientific management was implemented almost assuredly pushed more workers into joining a union.

Henri Fayol was a contemporary of Mr. Taylor. Unfortunately he wrote his book in 1916, in French in the midst of World War One. His book didn’t get translated until 1949, but if you read about his ideas today, they’d make a good primer on how to be a manager. Fayol had the advantage of actually working with people successfully. Something Frederick Taylor struggled with.

Millennials aren’t a different species of worker. They want what we all want, meaningful work, a laugh now and again, decent pay and a convivial office. We get that taken care of and we can stop worrying about what year our staff was born.

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

I am the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and I comment 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.