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Performance Goals – Great If You Use Them Wisely

2011-01-07T12:34:00.003Z

Goals are as Valuable as the Care You Put Into Them

Goals can be powerful things. When used well, they can produce startling increases in performance; used badly, they can damage and destroy; used half-heartedly, they typically have hardly any effect at all.

The evidence of the benefits of well-set goals is hard to ignore. Studies comparing goal-users against those with no goals or “do your best” instructions show consistently better performance by the goal users. This is true for individuals, teams, and enterprises. Studies of athletes regularly show improvements of 50-100% in the best responders. Locke’s original landmark review of goal-setting studies in enterprises showed that 90% enjoyed material performance improvement from using goals. The same review identified an average 40% performance improvement when goals were combined with monetary incentives.

The disastrous effects of badly-set goals are also hard to ignore. Ordonez et al’s “Goals Gone Wild” gives an attention-grabbing selection of negative case examples of gaming, conflict, irresponsibility, and issue blindness from poor goal-setting. These include Sears’ auto repair sales goals, which resulted in company-wide behaviour of overcharging and making unnecessary repairs. The paper also includes the inevitable Enron example of sales targets that ignored profitability measures, with results that we all know.

Goals applied half-heartedly are just a waste of time. Long-term goals have no performance enhancing effect if not combined with more immediate goals. Goals, of any time frame, have no material performance-enhancing effect if not combined with feedback on results.

In a nutshell, the effort and thought you put into goals is rewarded in proportion.

How Goals Work

A major effect of goals on the mind is to focus the attention, something I’ve talked about before (here) as being critical to performance improvement. Done well, goals help you direct your attention to what’s important, at the expense of what’s unimportant.

Studies that record multiple aspects of performance consistently show improvement in the aspects with goals, and little or none for areas where no goals are set. This is as true in day-to-day life as in corporates: one study of collegiate rugby players showed between 26% and 118% improvement in pre-selected goal tasks over a season with negligible improvement in non-selected tasks.

Done badly, goals direct your attention, possibly inadvertently, onto damaging or unproductive work, which Goals Gone Wild illustrates at length.

Without goals, you don’t just flounder; but you are more likely to get drawn into a range of nice-to-haves and ought-to-dos, with no prompt to choose how to prioritise your limited time, money and energy.

A second effect of goals on the mind is mobilising increased effort and persistence. In observed field experiments, when people are allowed to control time, they prolong effort to hit goals. When faced with tight deadlines, they increase work pace.

Hard goals produce higher effort even than people’s self-directed attempts to work as hard as they possibly can. In a study of cyclists, participants given hard goals actually performed at higher levels than those asked to cycle until they literally couldn’t pedal any more.

A third observed effect of well-set goals is to stimulate use of new or more productive strategies: prompting the mind to work smarter as well as harder. This is a characteristic of planning, which I’ll cover in a separate set of future posts.

My favourite characterisation of the extremes to which focused attention and persistence exhibit themselves in pursuing a critical goal, and how ingenious strategies become, is from the documentary March of Penguins. Natural world examples aren’t for everyone, so I’ve summarised this separately here.

Good Goal Habits

Given the enormous potential benefits involved, it’s worth investing some time to set and use goals well, taking on board the lessons that enterprises, sportspeople, scientists and others have learned and captured over the years. The commonly-espoused SMART (Specific, Measurable, Attainable/Agreed, Relevant/Realistic, Time-based) goal-setting protocol is a good start; but it misses some critical steps, without which you’re wasting your time.

I’ll therefore use the next series of posts to lay out some Good Goal Habits, which summarise much of the accumulated knowledge of what works and what doesn’t.

Areas I’ll cover include: whether and how to use longer-term and shorter-term goals; how difficult should goals be; whether to use outcome goals or process goals; where to use multiple goals, and how to manage them; how explicit goals should be; the role of feedback and evaluation; the importance of goal commitment, and how to increase it; who to include in goal-setting; special characteristics of group and visionary goals; and characteristics of a top goal-setting and goal-hitting environment.

Next post, starting with the big picture: using long- and short-term goals together for an excellent goal structure.

Sources

Locke & Latham, 2002. Building a Practically Useful Theory of Goal-Setting & Task Motivation

Ordonez et al., 2009. Goals Gone Wild

Locke & Latham, 2009. Has Goal Setting Gone Wild, or Have Its Attackers Abandoned Good Scholarship?

Mellalieu et al., 2006. The Effects of Goal Setting on Rugby Performance

Dimitrova, 1970. Dependence of Voluntary Effort Upon the Magnitude of the Goal and the Way it is Set in Sportsmen

Botterill, 1977. Goal-setting and Performance on an Endurance Task

Copyright Latitude 2011. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Penguins & Performance

2011-01-07T12:31:00.000Z

How Goals Work (Briefly)

This post is an add-on to my introductory post [here], which was about the consistently major benefits of well-managed goals, and about how goals work. Well-set difficult goals work because they (1) focus attention onto what’s important and away from everything else, (2) motivate greater effort and persistence than simply doing your best, and (3) stimulate use of better strategies to reach them.

These characteristics are personified in the extreme by the stars of the documentary “March of the Penguins”.

A Difficult, Important Goal – Keep the Chick Alive

Emperor Penguins choose a breeding ground on ice that is solid year round. At the beginning of the Antarctic summer, the breeding ground is only a few hundred meters away from the open water where the penguins can feed. By the end of summer, the breeding ground is over 60 miles away from the nearest open water, and gets further away every month.

The female lays a single egg each breeding season, and the goal is to keep the chick alive for eight months in one of the most hostile environments on earth, miles from food sources, until it can fend for itself.

Focused Attention – Chick First; Food and Everything Else Second

The males and females are together on the breeding ground for two months after mating until the eggs are laid. If the egg is to survive, it needs to stay warm. So after the female lays the egg, she transfers it to the feet of the waiting male, minimising exposure to the intense cold that would kill the developing embryo. The male tends to the egg while the female returns to the sea, now even farther away, both in order to feed herself and to obtain extra food for feeding her chick. For an additional two months, while the female make the return trip to the sea, the males huddle together to stay warm enough to incubate their eggs.

(Just Unbelievable) Persistence

The females have not eaten in two months by the time they leave the hatching area, and have lost a third of their body weight. They then need to travel 50 miles to reach the open ocean. The males meanwhile endure temperatures approaching −62 °C (−80 °F), with falling snow their only source of water. By the time the females return, the males have lost half their weight and have not eaten for four months.

When mother penguins come back and feed their young, the male penguins take their turn to go to the sea, now 70 miles away, to feed themselves.

The parents continue this shuttling back and forth to the sea for an additional four months, until finally the parents can leave the chicks to fend for themselves.

Ingenious Strategies to Survive and Keep the Chick Alive

The Emperor penguins have devised a multitude of ingenious strategies to keep the chick alive in this crazily hostile situation. In addition to the female-male-female tag game and the keep-warm huddle, memorable strategies include the males taking turns on the cold outside of the huddle and, in desperate near-starvation circumstances, feeding eleventh-hour nourishment direct from the father-penguins' throat sacs.

Here’s my point in this example. If an important goal can stimulate this phenomenal focused attention, persistence and ingenuity in a penguin, I would hope that goals can be helpful for us too.

Copyright Latitude 2011. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Want To Be Excellent? Then Stop Doing So Much

2010-12-21T09:33:00.000Z

Miss Melbury's view of the doctor as a merciless, unwavering, irresistible scientist was not quite in accordance with fact. The real Dr. Fitzpiers was a man of too many hobbies to show likelihood of rising to any great eminence in the profession he had chosen, or even to acquire any wide practice in the rural district he had marked out for the present.

The Woodlanders, Thomas Hardy

One critical characteristic of individuals and companies who excel in their fields is their ability to focus every bit of their attention on what they yearn to do extremely well. Part of this deal is that they do less of everything else. This is the decisive step for many of us: not doing more of this or that, but removing the innocent-looking things that rob our attention.

In my investigations into this, I’ve noticed two reasons for our inability to shut out the non-essential. First, we find it hard to say no to additional things that seem valuable or interesting. Second, we don't understand the massive hidden damage that the distractions and dissipation ultimately cause to our potential.

Damage Caused by Distraction

Evidence abounds of this damage caused by distraction.

At a high “where should I focus my business/career/talent” level, spreading talent across a wide range of activities is shown time and again to result in lower performance. Examples range from the excellent Billy Beane’s disdain of under-performing baseball all-rounders, through to regular academic reviews showing the negative effects of business diversification.

Distraction is damaging at a day-to-day level too. Studies of multi-tasking individuals reveal consistent reductions in performance, versus control groups who are forced to focus. This is true even where the multi-tasking is intended to help performance. One study of students showed that those allowed to look up recommended online information during lectures fared considerably worse than those only allowed to listen to the lecturer.

The distraction doesn’t even need to be present in the room to hurt performance. Damage to performance by life stress is well-reported, with evidence even extending to performance deterioration in teenage ice-skaters caused by issues at home.

But the most worrying result I have found from research into distraction is this - people don’t realise how much it damages them. In one study of medical students, participants were distracted with questions during simulated surgery, and had a consistently higher miss rate than a control group that worked in silence. The frightening insight from this study is that only 9.5% of these under-performing students thought the distraction had affected them!

An Everyman Path of Focusing

There is a well-trodden path for achieving this ability to focus, and free ourselves from distraction. This is to transport the person or team to an environment where everything is already set up for single-minded focus. These environments can be permanent, for example elite academies and institutions, or temporary, like training camps and business war rooms.

Most of us can’t practically transport ourselves from our families to these tailor made centres of excellence, other than the odd trip to La Santa or business off-site. A more realistic option is to do the hard work of transforming our own environment, company or working day.

“How-to”s aren’t to everyone’s taste, but if you’re interested in a basic exercise as a starter-for-ten in deliberating what to cut out, here are some simple questions:

What is the minimum I need to do, to be as good as I want to be at (...)?

This minimum includes not just today’s work and output, but the development needed for tomorrow’s capability.

If you don’t know what this minimum amount is, then it’s a critical and sobering step to understand just how much this is. Even if you think you know how much attention you need to commit as a minimum, it’s worth reviewing anyway, because you’ve probably under-estimated it. One way to do this assessment is to identify a person, company or team whose performance sets the benchmark for you. Then investigate how much accumulated time, effort and resource they have put in over days, months and years to get down the experience curve to where they are.

If you’re ambitious about how good you want to be, and investigate thoroughly what it takes, the minimum you need to do will be a very great deal indeed. It will possibly be more than your entire available time or budget. You’ll likely realise that your initial target was too broad or too soon; and you will need to focus further, to cut your minimum down to something feasible.

What are the distractions to my time and attention, which stop me getting down to this and doing it consistently? How much of this could I take away if I really needed to?

I’m asking this question at both a high level and a day-to-day one. High level distractions include non-core lines of business, passing interests, peripheral talents to practise, and major obligations. Day-to-day distractions include everything that takes away your attention, time or hunger to perform, from the task at hand – elite performance academies are spartan places with clear tables and no pop-up email alerts!

What do I need to add, so that I can focus my attention properly?

The critical things to add in here, from which high performers really benefit, are relaxation and support systems. I’m not aware of any real-life high performers who aren’t also great at making time to relax and reflect. I’m not aware of any high-performing individuals or management teams that don’t also have great support systems. As with many important and non-urgent things, we need to set aside time to invest in these, so they don’t get lost in the melee. If we ignore them as peripheral, we can count on their consequences to come back to bite us very hard later.

Have I got plenty of slack left for the inevitable changes, delays, surprises, crises and over-runs?

If not, return to “1”. If you think you’ve got too much slack, see how things go for a week.

If you try the exercise and have a look at what you’re giving up as a result, my guess is that it will consist of a lot of things that previously seemed useful, or at least harmless, but ate away silently at your potential by stealing your attention:

· Interesting projects that have genuine potential, but are peripheral to where you’ve chosen to focus

· Profitable projects or sidelines that aren’t critical to your core business

· “Ought-to-dos” and “nice-to-dos”, which if you’re honest are more about being polite or following form than providing or receiving something of value

· Other people’s priorities that you have just reacted to, without working through whether or how they fit in your plans

· Tasks that any number of people could do just as well as you could, or services that any number of companies could provide

· A plethora of regular day-to-day background distractions

Now look at what you’re adding to replace it, which will be more of this:

· Much more time and resource to devote to the small number of things you want to be extremely good at

· Activities that build your future capability

· Time to reflect and even relax

· Investment in your support systems

· Slack time, so that inevitable sidewinders can be accommodated without chaotic triage

In summary, we now have a lot more time and attention spent in and around what’s really important, and a lot less to distract us from it.

Here’s a couple of tests I use with clients and observe in others, to see if this chosen focus is sustainable. First, the prospect of focusing so much of attention on one or two things needs to be exciting, so exciting that it can fuel countless hours of relentless commitment. Second, other people – customers, sponsors, backers and supporters – need to value it sufficiently to pay more than enough for the performance we’re providing in return.

How other people have got to this sort of exciting focus, one that is also productive and sustainable, is part of a whole new subject. But I’ll cover that another time. I want to stop this article from doing too much.

Copyright Latitude 2010. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Florence Nightingale - A Case Study in Excellence

2010-10-02T22:55:00.000+01:00

If I were to choose a list of great people who embody what it takes to be excellent, Florence Nightingale would rank above every single living person I can think of.

The commonly-held view of her is romantic, the archetypal nurturing carer; someone "called upon by God" in her own words to spend her life in nursing despite expectations of feminine nobility. But beneath this velvet glove, there was a tough and practical nature; which supplemented her passionate side to make her a case study in excellence.

I'll describe her less recognised side in terms of the attributes of high performance I’ve introduced previously.

Constant feedback and measurement of progress

Nightingale was absolutely systematic and rigorous in using measurement to track improvement. In addition to being a nurse, she was an accomplished statistician, and in her time pioneered graphical representation of information. She is credited with developing the polar area diagram, which she used to analyse progression of Crimean War conditions. Examples of these elegant and insightful charts are shown here:

She later used a statistical study of sanitation in India to recommend improvements in public health, and was invited to become the first female member of the Royal Statistical Society.

Honest diagnosis of what is and isn't working, what works best and what to change

When Nightingale first arrived in the Crimea, she was convinced that high hospital death rates - ten times greater than death rates from combat - were caused by poor nutrition and supplies, and by over-working. In the first year of her presence, despite her efforts, mortality went up to the highest level of any hospital in the region. Only after analysing evidence that indicated the benefits of sanitation did she turn her focus to this, subsequently pioneering sanitary living conditions in the army and then other hospitals. Compared to the improved survival rates from Nightingale-inspired changes, the benefits of modern drug developments are a rounding error.

Pursuit of challenging boundaries, constantly reviewing them to be just right versus capabilities

Nightingale started as a nurse with the challenge of cleaning hospitals in the Crimea, but stretched her boundaries consistently over time. After Crimea, she founded the first school of nursing; she then wrote the first textbook on nursing, then introduced trained nurses into the workhouse system, and then launched trained nursing to the US through her mentorship of Linda Richards, ultimately founding the nursing profession in both the UK and US.

In clarifying her thoughts on the profession, she wrote what would be a seminal work in the progression of feminism. In applying them, she undertook to statistical studies and lobbied for sanitary reform that supported a quartering of the British Army death rate in India.

Focus only on relevant actions and outcomes that are within your control

She couldn't do much about the Crimean war that caused men to be hospitalised, or the medicines available, but could she sort out the sewers. Following the Sanitary Commission’s work, death rates fell from 42% to 2%.

She couldn’t do much about the insanitary living conditions of the British poor, but she could send nurses to the workhouses, a precursor to the National Health Service.

De-cluttering of everything else that distracts, and creating support systems to allow such dedication

Nightingale was as single-mindedly dedicated to nursing as Hannibal was to toppling Rome, or as Wylie Coyote still is to catching Road Runner.

She rejected her first high profile marriage suitor, with an explanation that marriage would interfere with her calling to nursing, and rebuffed other approaches regularly through her life. She had the education, privileges, opportunity and backing to take up legion other causes, particularly the growing feminism movement of which she was in a position to be a leading light; but she chose to focus her time and attention on nursing and the improvement of the conditions of the sick.

She was also fortunate to have support systems that allowed this commitment. She was from a wealthy background, and her allowance from her family was large enough that she was not distracted by worry about making ends meet.

Relentless continual mindful application for hours and hours and hours

Nightingale was “called by God” to nursing at 17. She used her time before she could become a nurse to study hospitals, producing her first work on treatment of the sick at 21. She announced her decision to enter nursing when she could, at 24, which was then the focus of her attention for the rest of her life.

It is hard to think of a more intensive, unremitting, immersion in any profession than the Scutari military hospital of the Crimea where Nightingale made her name in 1854, as far from society as could be conceived, and where 4,077 soldiers died in her first winter. Her obsession with hospital conditions was relentless throughout her life; even when bedridden with severe brucellosis, she did pioneering work on hospital design that was implemented around the world.

I wouldn’t invite her to my ideal party, because she wouldn’t turn up to anything that wasn’t about improving the conditions of the sick. But that doesn’t make her less of an inspiration.

To many people, she’s the magical, caring lady-with-the-lamp. To me, she’s the intrepid, forensic, challenging, realistic, relentless, hard-as-nails, make-it-so Flo. Today’s performance gurus couldn’t hold a candle to her.

Copyright Latitude 2010. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Loving that Performance

2010-09-28T13:59:00.002+01:00

"But, tell me, why should your leader—why should you all—spend your money and risk your lives—for it is your lives you risk, Messieurs, when you set foot in France—and all for us French men and women, who are nothing to you?"

"Sport, Madame la Comtesse, sport,"

The Scarlet Pimpernel, by Baroness Orczy

The performance improvement world now possesses some myth-busting evidence and fascinating case studies about what it takes for anyone to do something really superbly well. I've been spending time researching this subject, and reviewing its application, and will cover it in a series of forthcoming posts. As a pre-view, a simplified how-to-be-excellent list from this research is as follows:

Challenging standards, which are constantly reviewed to be achievable but not too easy or difficult
Focus only on relevant actions and outcomes that are within your control
Constant feedback and measurement of performance and progress
Honest diagnosis of what is and isn't working: what works best, and what to change
Removal of everything else that distracts, and support systems that allow you to do this
Relentless continual mindful practice or application, intensively, for hours and hours and hours

As you can imagine, in order to pursue this relentless, repetitive process, you really do need to love what you're doing. This apparently ethereal issue is what I want to cover here – let’s talk about love.

Here’s what I don’t mean by love of what you’re doing. I don’t mean the pursuit of a lofty goal. I don't deny there's a part of each of us that feels the need to do something worthwhile; and I’ve no doubt that rousing ideals provide genuine motivation. But, by themselves, they don’t make us good at whatever we’re doing. We’ve all heard the jaded inspirational anecdote about a sweeper at NASA saying he’s putting someone on the moon. Was he a satisfied sweeper? Was he actually any good at sweeping? The anecdote runs out of steam on those points. Anyway, for many of us it's pretty hard to find the ultimate external benefit in much of the work we all do, to understand how everything comes together in the multifaceted interactions of society.

When I talk about loving what you’re doing, I mean the love of doing the thing for its own sake; the total absorption in process that you see in a great cook, scientist, bike mechanic, musician, orator, or athlete. Racking my brains, it’s hard to think of any examples of human excellence that don’t display this absorption. Neither does it seem to be confined to celebrated, world class performers; in my world, that same absorption is a hallmark of the top performing individuals and teams with which I have the pleasure to work.

So how do you or I access this love of doing something for its own sake, which underpins all this excellence? There's a received wisdom that stage one in becoming excellent and satisfied is to "follow your passion"; simple as that. Taken in isolation from the reality of what your friends, customers, team mates, and family all value, I think this advice is downright dangerous and destined to end in tears most of the time; but that’s a subject for another day. My point for today is that the world is not so linear: passion doesn’t just lead excellence, it also follows.

Even casual everyday evidence seems to show that our enjoyment and passion in doing something emerges and grows from excellence and application – the better we get at it, as long as we’re improving, the more we enjoy it. Did Tiger love golf the first time he swung and missed with the giant plastic golf club his dad bought him before he could walk? Did Becks immediately love curling in free kicks at the local park; or was that swerving, match-saver against Greece a bit more satisfying than the early ones? Did Tolstoy get passionate about prose in his first one-pager about his family cat; or did his passion become a little stronger with the development of an art that produced Anna Karenina? At a lower level, watch any celebrities-have-a-go-at-new-skill type show, and see how much they’re enjoying themselves in their first class or test, compared to the end of the series when they’ve developed a degree of mastery.

So my view is more emergent than the "start with your passion, something that stirs your loins, and watch good things follow" view of excellence. Fair enough, it’s smart to start with something that we enjoy, which works for both us and the others we care about commercially and socially. The key step for me is the next one: do all the things that it takes to do the thing really superbly well, and immerse ourselves in the process. With that, we’ll see the passion grow with our growing excellence, and we’ll enjoy the sport.

Some relevant links:

A simple experiment showing that performance increases with relevant challenge, and that enjoyment increases with performance, even in the most apparently meaningless task.

http://cres.usc.edu/pubdb_html/files_upload/685.pdf

Alain de Botton talks with Russ Roberts about people’s absorption in the process of their jobs.

http://www.econtalk.org/archives/2010/09/de_botton_on_th.html

The Scarlet Pimpernel

http://www.gutenberg.org/files/60/60-h/60-h.htm

Copyright Latitude 2010. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

So How Do I Improve Service Then?

2009-11-06T18:06:00.002Z

In my last post (here), I showed that, all else being equal, better service equals higher growth and bigger profits. One implicit, but counter-intuitive, element of this is that improving service regularly results in lower costs.

The obvious question that comes to mind for the practical person is, “So how do I improve service then?”

The temptation is to dive straight into benchmarking, systems and process improvement, and incentives. However, there are three steps I’d advise taking first, which will save an awful lot of work and waste down the line.

Customer Service Performance - I’ll cover it one word at a time.

1.    Customers

Your customers will not be one homogeneous group. You’ll have different types, which have different levels of value to you, different performance requirements, and will rate your service accordingly. One simple way to improve your service and profit performance is just to focus on your profitable, amenable customers.

To start, you need make your definition of customer groups as relevant as possible. Sometimes the obvious splits (small/medium/large, sector, etc) are valuable. But additional thought about how you group your customers can make the exercise much more insightful. For example, you could segment by who the decision-maker is: purchasing professionals usually care much more about total cost at specified service levels, whereas people with operating roles care most about service support at a competitive price.

If you look at the value of the different groups (the value of their contribution over their lifetime less the cost of acquiring them – a very different and more relevant number than monthly profitability which ignores acquisition cost and loyalty), you’ll see who values you most. Chances are that you’ll have different groups that have very different value, and in each group you’ll have a range of service performance and profitability. You’ll have a series of undemanding high value groups. You’ll also have some groups of very unprofitable or hard to please customers.

Your first decision comes now. Which groups do you want to focus on? Can you turn around the profit and service performance of the nightmare group? Should you – is it worth it? If you drop a group, does the cost of serving the rest go up or down? Many of our clients have turned around their entire service and profit performance by making some hard-headed decisions at this stage, ditching certain customer groups that were just too hard to acquire and serve profitably, and whose demands caused service problems across the entire edifice.

2.    Services

If you have multiple service or product lines, this is the same exercise as the one for customers above. Again, the key insight here is to look at the value of a product or service over its lifetime including development costs, and not the regular monthly margin analysis that already appears in Board reports.

Again, you need to make some decisions on unprofitable service lines, and products that diminish your service reputation. However, service line decisions are generally less clear cut than customer decisions. Early stage products commonly have poor service performance and poor profitability, some apparently profitable products give you such a bad reputation that your word-of-mouth marketing is negative, so you need to think through the full strategic impact before getting out the hatchet.

3.    Performance

Now we’ve got a handle on how service level and profit differs by customer and product, and have decided who we want to serve with which services, we can now ask the more operational question of “what do we mean by performance?”, and identify customers’ most important concerns. The key customer service concern in each of our last five engagements for clients has been completely different: active account management, short waiting times, access to technical expertise, personalised offers, and up-time reliability.

Finding this concern is generally a matter of talking to customers and listening to what’s important to them – you ask a broad question about “service”, they will respond by talking specifically about what’s important to them. One of our favourite ways of cross-checking this is to ask a series of customers about our client’s strengths and weaknesses, and counting up the mentions for both – the important issues for customers generally find their way to the top of both lists.

Unless you are highly-diversified, there will generally be one big thing to get right that addresses all the major concerns, and if you do this to a level of excellence, then everything else follows. The big thing for a famous airline service turnaround was making sure the planes took off on time; the big thing for one of our tech clients was 100% server availability.

This approach of focusing on the one big thing has an additional benefit of automatically deprioritising wasteful or unvalued activity, which is the flip-side of the same service improvement coin.

If you can find time to take these three steps before diving into operational improvements, then you save yourself a mountain of unnecessary work down the line. To give you an idea of how valuable it can be, I’ll relate the experience of a client of ours. After the customer assessment, they decided to drop a previous focus on very large customers whose size, complexity and purchasing structure made those customers expensive to acquire, expensive to serve, and very disloyal. They dropped a product line whose gross profit looked very attractive, but whose customer acquisition cost made it value-destroying, and whose performance was damaging the company’s reputation. They then focused their service performance turnaround on the key issue of account management, which enabled them to more effectively address other customer concerns about accessing technical expertise and designing bespoke solutions. In one year, they have doubled total profit and are currently the industry’s service and profit leader.

With these high-level decisions made, the other steps of process improvement, systems support, incentives and devolved decision-making responsibility are much simpler and well-targeted. I’ll save those for a future post.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Does better service really lead to bigger profits?

2009-11-05T11:09:00.000Z

There's some strong received wisdom that better service is somehow financially a good thing. But the piecemeal data around that supports this view is unconvincing, it is often put together by vested interests, such as consultancies that charge fees to help improve customer service, or by idealists who just want it to be true. It's easy to point to high service companies that generate outstanding results. But this is a biased and self-selecting exercise, because the opposite is also true - there are lots of inconvenient examples that show low service companies making outstanding returns. Would you say that Ryanair has better service than BA? No? So how come it makes more money then? Service clearly isn't the be-all-and-end-all. Companies have different business models, different customer bases, different competitors, regulatory environments, sources of economic rent, etc, etc, all of which also affect their financial performance.

To get anywhere on this, we've got to start by comparing like with like. Here (below) is the most unpolluted evidence I've seen. This company rents out white vans, and does this through a series of local rental companies. They're of similar sizes, they all do the same thing, for very similar customers, with the same fleet, and the same rate cards. But if you look at the performance of the different rental companies, you see two striking things. First, the ones with better service have better growth rates. Makes sense.

Here's the more interesting chart. The ones with better service also have better profitability.

So the ones providing better service, providing more value to their customers, at the same price as the poor service providers, are the ones that also make more money. And in case you’re wondering about causality – when the worst performer addressed its service problems to climb up the chart, its costs went down as growth went up.

We can speculate all day about the reasons. Here are a few common explanations:

Word-of-mouth marketing: happy customers recommend you for free, and reduce your sales or marketing costs.
Better customer retention: there's good evidence that better service leads to higher loyalty (repurchase) - Lexus is commonly perceived to be the highest service car provider in the US and has repurchase rates of 63% versus 30-40% for most other brands.
It could be that it's easier to serve these same regular repeat customers at lower cost: think about how efficient it is at your local coffee shop when you get to the front of the queue, you have the exact money ready, and they have your regular drink ready.
Higher service companies may be the ones that sell to better customers: who'd disagree that more agreeable, cooperative, organised customers make better service a lot easier.

I could carry on speculating about underlying reasons, but that’s an intellectual exercise. What matters here is that, all else being equal, with better service you make more money.

Instead of speculating about why service increases profits, it’s more useful to accept the link and ask: how do we improve service?

It's tempting to look for a process answer here, following visions of efficient, flawless, repeatable mechanisms. I’m not saying process improvement doesn’t help, but the highest service companies in our charts were also the most informal, with rule-bending and exceptions happening all the time, and none of these had ever been through a process improvement exercise.

For an answer I can relate to, I'll bow to the wisdom of the most credible person I've heard talk about this subject, an impressive man called David Neeleman. He was the founder of JetBlue Airways, which at the time I heard him speak was the lowest cost and the highest-rated service airline in the US for the second year running. Even in the year of its infamous ice storm crisis where passengers were stuck on planes for up to 8 hours, it still came top in national service surveys.

Mr Neeleman's explanation of JetBlue's excellence was all about service attitude at the top and the bottom. At the top, his own practice as CEO was to take one trip per week on a JetBlue flight, in which he served as cabin crew during the flight, helped with the bags at the airport, and was an obvious and visible role model of the importance of service. At the bottom, JetBlue's recruiting practice was focused on hiring courteous people who also cared about service. Candidate's attitudes to other people were observed closely: did they hold the door open for other people; were they pleasant to the receptionist? JetBlue also uses measures in the middle, using Bain's highly-regarded Net Promoter Score system; and Bain has shown excellent evidence of NPS benefits, though Mr Neeleman didn't talk about this at all.

So, recruit a team that cares about service, supported by a leader who continually reiterates its importance and acts as a role model for service excellence, then let that group of people work out how to take it from there. This is clearly only the tip of the iceberg on service improvement, and I'll expand on it with evidence from some our clients’ successes on another day.

But I want to get back to my main point. Using the best evidence I know about service, it warms my heart that everyone wins - value begets value – and that better service does lead to better rewards.

Relevant links:

About David Neeleman
http://en.wikipedia.org/wiki/David_Neeleman

About Net Promoter Score
http://www.netpromoter.com/netpromoter_community/index.jspa

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Six Common Mistakes People Make When Analysing Markets

2009-10-28T08:25:00.003Z

Market analysis is a difficult science. So it's not surprising that most attempts that we review contain mistakes and gaps that put the whole analysis, and its consequences for the business, into question. Even worse, it's our view that the strategy gurus who propose and push high level market analysis models inadvertently cause many more problems than they solve, and are probably the single biggest group of culprits causing shoddy market assessment.

Here are six common mistakes.

1. The analyst looks only at a macro level

It's important to look at markets at a high level, at growth, trends, competitive environment, etc, and the macro view is what the text books prescribe. But looking only at this level misses what for us is the most frequent area of critical insight: what customers and potential customers value and pay for now; and what they are going to value and pay for in the future. There is one place that the revenue and profit pool of a market is going to come from, and that is customers' spend, budgeted or unbudgeted. There is one source of revenue and profit for each individual supplier to that market, and that is winning some or all of that spend.

Unless you're a cartel, monopoly or lobby group, then you're in the business of providing value for value. You need to know what results customers need to achieve, how they propose to achieve them, how they decide who will support them in doing so, and the value they place on that support.

The clue to where the customer places most value? Where they intend to spend money. This is either unidentified and consists of a price they are willing to pay to solve a problem; or is identified in the form of next year's budget.

This micro analysis has got enormously more business value than the macro-level equivalent of quantifying emergent (unbudgeted) and established (budgeted) markets. What would you rather know, the macro overview that the market has grown by 4% with a trend to cloud computing, or that your target customers are under pressure to reduce infrastructure support costs by an average $15m and will pay 70% of the savings to reliable outsourced suppliers with reputations for service responsiveness?

2. Where micro analysis is done, it is done cursorily, uncommercially, or just plain badly

Talking to customers about their plans, desired results, budgeted spend and supplier requirements is a golden opportunity to understand some critical facts: where customers place future value, the corresponding source and size of a pool of profit for you, and how to win that business.

Unfortunately, most analysts miss this golden opportunity by delegating the exercise to market researchers or untrained, poorly-briefed graduates. These people are briefed to ask mindless, well-trodden questions about likes and dislikes, strengths and weaknesses; or they get interviewees to rank elements of the value proposition in terms of importance and performance. If you ever listen in to one of these interviews, you'd be shocked by its tedium and superficiality. The consequent information is sometimes useful. But it's only useful if it supplements some much more important and tangible information: which elements of the budget are growing or shrinking and by how much; who the budget holder is and how they make buying decisions; what causes people to stay with or switch from incumbent suppliers; what characteristics suppliers need to have in the future to win business; how the supplier can help them make or save more money.

Asking questions like these takes skill and commercial acumen, but their answers are worth more to you than every market research report you could ever commission.

3. The analyst doesn't take enough care to define his market

"What market am I analysing?" is a much more important and difficult question than it looks at first sight. Let's take an imaginary organic pet food manufacturer, based in Wales. Does my market include every potential customer of pet food, even though my product costs three times as much as the non-organic market leader? Or is it organic pet food, which is defined by the product and some kind of customer sentiment? Or is it premium pet food, defined by some kind of price and quality level? Do we include or ignore the supermarket customers that we will never access because we're too small to be stocked by the big chains? How much of the UK do we count as our market? Do we include continental Europe? If so, how much of it? Do we include dry food, even though we only do wet? Etc, etc.

The reason I've banged on with this definition example is that every definition I suggested gives you a completely different market, with different size, growth, trends, competitive set, etc. And the definition you use for one circumstance, say understanding how your core customer group is growing, will likely be different for another equally valuable circumstance, such as how big could demand be if you cut prices by 30%.

The damaging temptation is always to ignore these factors and define the market according to what data is available, which gives you a substantiated quantification of a (probably) irrelevant market. In our experience, you are almost always better off taking care to define your market to be as relevant as possible to your situation, and accepting that will need to use bottom-up assumptions to estimate the market size, structure and growth.

4. The analysis obsesses about the competitive environment, to the exclusion of all else

Michael Porter's five forces are a very useful checklist, core competence/strategic intent is a useful mindset, the disciplines of market leaders and the 7S framework can help create insight. I'll keep my thoughts about The Art of War to myself. These common strategic tools can have value - competitive intensity is usually the most dominant driver of margins - but they're not the whole toolbox. They usually only cover the competitive side of the picture and miss such fundamental issues as whether demand is shrinking or growing, what customers actually value and plan to pay for, and what your company actually, distinctively offers.

This obsession with macro competitive postioning distracts the analyst or manager from both the demand side, and from the micro analysis that solves the germane issue: what you actually need to do to make more money.

5. The analysis places far too much confidence in forecasts

Most analyses that we see use a single forecast for the future; no scenarios, no what-ifs, no ranges. Even worse, that forecast is usually a projection of the recent past with little thought to what might drive any changes, or what the leading indicators are, or anything that might tell us what confidence we have in our estimates.

There is one thing that we can be sure about with all of our forecasts, and that is that they will be wrong. If we took a moment to analyse the success of our historical attempts at forecasting individual markets, we would all be humbled by our enormous margin of error. As humans, we regularly and grossly overestimate our ability to predict the future. If our business relies on such forecasting performance, with no margin for the likely large error, then there is a high probability that it will be seriously compromised.

It's therefore wise to be realistic about our ability to forecast and act accordingly. We have to accept that we cannot predict the future, we can only prepare for it. So there is much more value in acknowledging our lack of prescience, and developing a series of scenarios. Of course we need budgets and targets, but the discpline of working through how we can survive the disaster scenario, or how we can generate sufficient capacity in the optimistic case is of more tangible value than complacently forecasting and hoping that we're right.

6. There is a disconnect between market analysis and sales forecasts

I've lost track of the number of plans I've seen where the market grows at one rate, and the business grows at a completely different rate, almost always faster than the market. There's rarely any justification for this implied share gain. It's possible if the company has just entered a market, or if its product is suddenly better, or if it has a new channel, or if it has something else new and advantageous, or if its competitors have decided to lie down and let it win some of their pitches. Our default position is to assume no share gain unless there's a very good reason to assume otherwise. Anything else generates cognitive dissonance in our rational analytical minds.

So there you have it. Six common mistakes, any one of which can cause a market analysis to be unhelpful, devalued or just plain misleading. We see many, many more mistakes, but the list is too long to cover in this forum.

I hope by raising them that we have averted some problems and implied some solutions. I don't have a catch-all unbreakable golden rule for analysing markets effectively. But my best one is this: business transactions are about providing value and being rewarded for doing so, so to understand the market you need to look for where that value is, and follow the money.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Why Let Facts Spoil the Narrative?

2009-10-19T16:24:00.003+01:00

I've just finished reading a very shakey due diligence report, in which one of the key questions to review was the impact of the recession on the company under investigation. The report author covered the beneficial effects of recession on services (comparable to those of the target company) that people mainly use in their own homes. The report talked about increases in satellite and cable TV subscriptions, growth in Dominos deliveries, and the trend to "staycations", and implied that, as a result, everything would be OK.

A question kept coming to my mind as I ploughed through this nonsense. This question was: "But the recession has been happening for about a year - why don't they just look at what's been happening to the company?". The analyst could have looked at sales, customer churn, average customer value, new sign-ups. And they could have looked at them before, during, and after recession (now we're coming out of it for a short while). They could have compared the company's performance to changes in disposable income, or employment, or interest rates, or consumer confidence. They could have just looked at whether they rose or fell. The data was available and staring them in the face; but they didn't look at any of the vast array of facts at their disposal, and instead indulged in this staycation narrative. I'll let you guess whether the facts confirmed, contradicted, or made irrelevant, the report's conclusions .

I kept asking myself why any sane analyst would display such disregard for information. After some reflection on examples of similar behaviour, here's my conclusion: given the choice between some compelling facts and a compelling narrative, people will often prefer the narrative. From everyday observation, there are legion examples of people ignoring or skimming over facts that might get in the way of a good story.

This preference can be, literally, fatal; and if you'll indulge a longer-than-usual post, I'll illustrate it with a historical example.

A nineteenth century physician called Ignaz Semmelweis analysed the high incidence of childbirth mortality of Puerperal fever at one of the wards of Vienna General Hospital. He noticed that Puerperal fever was high in wards where the same doctors also conducted post-mortems, and showed that if doctors washed their hands with chlorine solution after working with cadavers, then Puerperal fever incidence declined dramatically.

His data is hard to challenge:

Unfortunately, Semmelweis's facts didn't fit the narrative of the day. Prevailing theories of health related to the balance of the four humours of the body, and the role of "bad air" in the spread of disease. In fact, his implication, that lack of cleanliness in the surgeon was a cause of the disease spreading, was considered insulting to the gentlemen who administered medicine and surgery.

Semmelwies was roundly criticised, and his observation and recommendations were dismissed by the mainstream, despite their obvious life-saving results. It was only after Pasteur's work into germ theory became accepted 20 years later that the establishment embraced the findings of, the by then dead, Semmelweis.

So coming back to my point. There will always be an accepted or acceptable narrative to explain anything, be that the four humours of nineteenth century medicine, or the various dubious adspeak marketing theories we hear today. We can pretty much guarantee that by blindly following the narrative, we will be proven as gullible, closed-minded and wrong as those olden-day physicians. Alternatively, we can ignore the narrative for a moment, and just have a quick look at the facts...

Copyright Latitude 2009. All rights reserved.

Related links.

On Ignaz Semmelweis
http://en.wikipedia.org/wiki/Ignaz_Semmelweis#Ideas_ran_contrary_to_established_medical_opinion

On truth, bias and disagreement
http://www.econtalk.org/archives/2009/03/klein_on_truth.html

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

So-What (SWOT) Analysis

2009-10-14T15:22:00.001+01:00

One thing that makes my palms sweat when reviewing a business plan or strategy document is a SWOT analysis. Reading one of those two-by-two tables makes me think that my generally very smart, commercial, rational clients, have decided to illustrate what they learned at primary school, or have accidentally inserted a no-idea-is-stupid whiteboard printout from the start of a brainstorming session.

I'm not saying that SWOT doesn't have its place at the beginning of the strategy development process; it does, especially if you start with the "O".

O, for opportunity, forces you to take a moment to look around and speculate where the future pools of profit might be, which is especially useful for bringing out those areas that you're currently not doing anything about.

S(trengths) helps you realise where your sources of competitive advantage might lie.

W(eaknesses) forces you to be realistic about what may need improving, and traits that might put you at a disadvantage.

T(hreats) forces you to look at those things coming over the horizon that might sink you below the water line.

This forced lookaround for factors that may be important is, in my experience, the entire benefit of SWOT. But it's only of value if you go on to test properly which ones are true and material. Unfortunately, most plans that I see stop with the SWOT output, and bung the list unqualified into the document. This is worse than useless; it's foolhardy, because it can set in train a series of actions that are based on barely-substantiated speculation.

From the long list of strengths, weaknesses, opportunities and threats that emerge in the SWOT analysis, how do you know which are actually true as opposed to speculation? Which are material and will affect the entire future of your business, and which are pretty much irrelevant? Which ones should you deliberately not do something about, for example the weakness in high-end products that would kill your cost advantage if you addressed it? How do you know which opportunities are the ones to put time and money into, and which are the ones to deprioritise?

If you recognise SWOT's limitations, and treat it as a start point, from which you do some testing with facts, then you can create something valuable from this motley list of brainstormed hypotheses.

Start with the opportunities and ask some standard commercial questions. How big are they? How well positioned are we to exploit them versus everyone else? How much does it cost to start exploiting each of them? How sustainable is the profit stream that comes from each? Which of them is the most valuable use of a dollar of investment or an hour of management time? If the business case of any one of them stacks up, what do we do next to get there?

Do the same kind of reality check and so-what test with the strengths, weaknesses and threats. And you will end up with a short list of credible opportunities and actions, which I promise will pay back the additional time a hundred-fold.

You'll also have fewer business plan readers with sweaty palms asking "so what?".

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

You Can't Take Vision to the Bank

2009-10-11T22:27:00.000+01:00

She sat, watching him in the manner of a scientist: assuming nothing, discarding emotion, seeking only to observe and to understand.

A description of Dagny Taggart, “Atlas Shrugged”, by Ayn Rand

Earlier this year I worked with two companies that couldn’t be more different.

Company one is one of the most respected names in the FTSE, and operates in a classic recession-proof sector. Company two is an unknown business in an unfashionable declining sub-segment of the telecoms sector.

Company one’s management team is smart and sharp, and would be intimidating if they weren’t such pleasant people. The Directors have a cadre of direct reports who, to my initial and ongoing bemusement, make sure that everything that reaches the Directors is high level, conceptual and visual. When working with us, one tried to insist that our presentations contained less data and more pictures – pictures for God’s sake! But, the thing is, these people weren’t acting dysfunctionally – in every meeting with us, the company Directors dwelt and debated on the concepts and vision, and seemed to skip very quickly over all of our data and analysis.

Company two’s management team is one of the most uninspirational I’ve ever met. The top two Directors could pass as the two main characters in Peep Show. But these guys love their numbers. Every question we asked them in our work with them was answered with numbers, supported by a flood of analysis. The business is managed using a set of KPIs that would have a quantitative analyst in paroxysms of delight. Everything is tested, everything is monitored.

Company one has had flat sales in a growing market, and so seen its share decline pretty much continually for the last ten years. But it now has a striking vision of industry leadership for the future, which might work. You never know.

Company two has grown revenue and profit more than 20% annually in the time since the management team came on board. This isn’t from harvesting – new services launched in the last three years now make up about 25% of profit. Company two’s vision – I’m quoting exactly here – “we’ll try a bunch of things and see what the numbers tell us”.

I think I’ve made my point. Vision can be appealing, numbers count.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Burden of Proof

2009-10-09T14:57:00.000+01:00

A long-established business I know is being mauled by its competitors. To get out of an apparently terminal decline, this year it threw millions into consulting fees. Following the consultants’ advice, it plans to throw hundreds of millions into systems and other investments. Management admits that the business case following the advice was built on hard-to-test, unresearched assumptions that could turn out to be very inaccurate. However, the Board made a decision to go ahead and agreed on an implementation plan.

Shortly after, my company was asked to look at the business case for expanding a currently small existing scheme that captures customer information for use in more effective marketing, range development and profitability analysis. The business case for this is a slam dunk: the existing smaller scheme is already highly profitable, investment is miniscule, roll out can be tested with a low cost pilot, payback is less than a year, the scheme adds hundreds of millions to shareholder value, and all the high growth competitors run similar schemes. Without the scheme, the company has no idea about customer profitability or marketing effectiveness, and is at a material disadvantage to competitors who already use the same kind of information from their own schemes to steal its loyal customers.

Management is going to reject the project. Why? Because they may be able to get "almost-as-good" additional customer information as a result of the plan they’ve already decided on (the one that costs hundreds of millions and is based on self-confessed shakey data). And, if that plan turns out well, they may be able to capture many of the same benefits from the scheme we tested. If the company captures these benefits, then the remaining incremental benefits of our scheme are just too small.

So management is going to make a terrible decision. This isn’t because of bad economics – I don’t disagree with the marginal benefit argument. They’re going to make a bad decision because of where they place the burden of proof. They’ve taken as read the shakey assumptions from the decision they’ve already made, and put the burden of proof on how another scheme can improve on that.

The lesson for us in all of this? We tend to place the burden of proof on the uncomfortable choice: the new, the unfamiliar, the thing that may cause us to change our ways. We won’t make good decisions unless we put the same burden of proof on all of our options, including what might happen if we don’t change our ways.

If we’re the frogs floating in the slowly-heating pan of water, when are we going to look at the risk of staying in the pan as hard as we look at the risk of jumping out?

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

There’s an 80% Chance That Your Analysis is Wrong, and You Know It

2009-09-14T16:46:00.003+01:00

In an interview on the excellent Econtalk podcast, Nassim Taleb, the epistemologist and author of the best-selling books The Black Swan and Fooled by Randomness, gave a statistic that blew me away.

The results of 80% of epidemiological studies cannot be replicated.

In other words, when a research scientist studies the reasons for the spread or inhibition of a disease, using all the research tools at his disposal, and is peer-reviewed sufficiently for his results to be published academically, then there is a four-out-of-five chance that predictions using that theory will be wrong, or useless because of changed circumstances.

Taleb gave some innocent, and some less than innocent, reasons for this poor performance.

On the innocent side of things, he raised a couple of human thinking biases that I’ve talked about before: narrative fallacy and hindsight bias. In normal language this combination says that we’re suckers for stories, and when we look at a set of facts in retrospect we force-fit a story to it and we assume that the story will hold in the future. Worryingly, as the amount of data and the processing power increase, then there is an increasing chance of finding accidental and random associations that we think are genuine explanations of what is going on. In a classic example of this, there’s a data-backed study that shows that smoking lowers the risk of breast cancer.

On the less-than-innocent side of things, we can of course use data to fool others and ourselves that our desired theory is true. Taleb is less kind, calling it the “deceptive use of data to give a theory an air of scientism that is not scientific”.

Even more worryingly, if peer-reviewed epidemiological studies are only 20% replicable, then I dread to think about the quality of the 99.99% of other, significantly inferior, analyses we use to make commercial, personal and other life decisions.

So what is Taleb’s solution if we aren’t to be doomed to be 80% likely to be wrong about anything we choose to analyse? He advocates “skeptical empiricism”; i.e. not just accepting the story, which can give false confidence about conclusions and their predictability, but understanding how much uncertainty comes with the conclusion and the reality of the breadth of possible outcomes.

At the risk of sounding pompous by disagreeing and building on Taleb’s thoughts, I’d say there are three things we can do about this if we stop kidding ourselves and admit the truth of our own biases and inadequacies. First, I think we know it when we’re actively seeking a pattern in a set of facts that suits our desired conclusion; or when any pattern we spot seems too fragile, over-complicated or hard to test. We just need to be honest about how biased we are. Second, we also need to be honest about how little we know, and how far wrong we can be, so that we can be ready for scenarios that are much higher or lower than our confidently predicted ranges. Third, we can design a test or pilot or experiment to find out how wrong or over-confident we were.

Would you rather persuade yourself and other people that you’re right, or would you rather know the truth?

Some related links:
Background on Taleb:
http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb
Script and MP3 of Econtalk’s interview with Taleb:
http://www.econtalk.org/archives/_featuring/nassim_taleb/

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Put Some Emotion into Your Decision-Making and Analysis

2009-09-01T15:59:00.004+01:00

I’m a firm believer that emotion plays a cornerstone role in any decision-making. What’s more, I also believe that strong emotion should be used to stimulate much better analysis about how to improve performance or solve a problem.

While my wife picks herself up from the chair she’s fallen off, making unflattering comparisons between problem solvers, analysts, consultants, coaches, philosophers, scientists and Mr Spock, I’ll give you some context and take some time to explain what I mean by the heresy above.

I was listening last week to a podcast featuring a German philosopher called Sabine Doring. Her area of interest is the philosophy of emotion, and its role in decision-making. In her interview, she provided three insights that got me thinking:

1. Emotions are by definition directed at something, which makes them different from moods. For example: feeling sad is a mood; feeling aggressive towards your cheating former lover is an emotion. So I can’t be an emotional or unemotional person, but I can be emotional or unemotional about a particular concept, person or decision.

2. It is ultimately your emotions that determine what matters to you when making a decision. In the most mechanical and number-driven decision-making, we still choose and give weight to different factors based on such aspects as risk-aversion (worry), time-horizon (impatience) and reward (greed). And the vast bulk of decisions, being much less mechanical, require some major value judgments. In fact, if you don’t care about your decision-making criterion, then the whole thing doesn’t matter, is irrelevant and doesn’t require a decision.

3. Recent studies by her colleagues showed that people are generally more creative when happy (counter to the art-house dogma), and more rational and analytic when depressed.

So, contrary to the truism that emotions cloud reason and need to be shoved to the backs of our minds when trying to be rational, Ms Doring’s musings lead me to a list of insights that I hope can help us become better decision-makers:

1. The better we understand ourselves, the better decisions we can make. I’m not advocating self-indulgent soul-searching here, but I am proposing being alert to and honest about the emotion that motivates each decision (and, yes, greed counts if maximising reward is number one).

2. The more we care about something, the harder we will look to find a solution or make it work. There’s a downside to this of course, that we’re tempted to overlook things that run counter to our desired result. This why one of my few personal rules is to be as emotional about finding the truth as I am about anything else.

3. Playing good cop/ bad cop, or happy cop/ depressed cop, about a decision will help you get first into the creative to search for possibility in making something work, and then into the rational in testing it. Some of the best management teams I know have permanent happy and depressed cops to create this productive balance.

So there you are: a rationale for more emotion. Hopefully, my photo above shows how emotion fits into my performance.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

The Flip-side of Focus

2009-08-30T21:55:00.004+01:00

I’m going to talk about focus.

Here’s a typical concluding paragraph from a business article or interview about improvement in any area of performance:

“It takes commitment from the top. Every member of the top team, from the CEO downwards, needs to be a champion and role model of [fill in the gap – customer service, efficiency, health and safety, etc.]. It needs to be recognised as a top priority, measured, monitored and rewarded. Every organisation/individual that has taken this approach has improved its [customer service, efficiency, health and safety, etc.] performance by a factor of …”

You can read and hear similar advice and claims from gurus and advisors of personal development, public policy, sports and fitness, hobbies, interests and a host of other areas where people seek performance improvement. In a nutshell, if you focus on something, you get better at it.

This is a fine approach with great merits, but brings up in my mind an awkward compromising question: “What about everything else; everything you’re not focusing on?” Is there a risk that by focusing so much attention on X, then Y will get worse, or at least not improve as much as it would if it got more attention?

One UK insurance company I know spent one year putting customer service above absolutely everything else, and grew that year to market leadership. But it saw its profits turn negative and created chaotic complexity as every front line person did what was necessary to delight every individual customer. The following year saw a focus on process simplification; the next, a heavy focus on waste reduction. Each year saw improvement in that year’s particular area of focus, but standstill or decline elsewhere. After three years, the company was several places down in the market league table, and was subsequently acquired by the new market leader.

Ben Franklin established a set of thirteen personal virtues in his 20s, which he famously, and successfully, practised for the rest of his life. He would focus on one at a time, making each habitual before moving onto the next. The first and foremost of these virtues was, of all things, temperance. The reason he chose such an uninspiring virtue to lead all the others was that he needed to practise temperance in order to have the presence of mind to put the right effort into his twelve other important virtues.

The lesson from all this? Of course we need to focus our attentions. Of course we need to choose where we improve or excel: we can only do one thing at a time and we can’t be all things to all men. But we need to have the thoughtfulness and wherewithal to take things in the round, think through where we choose to focus, and we need to pay attention to the full consequences. This includes an acknowledgement that we are likely to go backwards in areas where we aren’t paying attention.

With this in mind it’s unlikely that one area of focus for performance improvement will capture everything we need. There are good precedents for multiple areas of focus. Franklin had thirteen in a carefully selected order; Jesus had a Golden Rule of two parts, the Lord’s Prayer, and a gospel full of other rules and stories; everyone I speak to from Tesco gives a different combination of reasons for its success.

People from management science backgrounds might call this approach a balanced scorecard. Life-hackers might call this priority management. To me it’s just about looking past the claims and clichés, and paying proper attention to the complete picture.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Types of Blindness

2009-08-20T22:43:00.004+01:00

There are various degrees and kinds of blindness, widow. There is the connubial blindness, ma'am, which perhaps you may have observed in the course of your own experience, and which is a kind of wilful and self-bandaging blindness. There is the blindness of party, ma'am, and public men, which is the blindness of a mad bull in the midst of a regiment of soldiers clothed in red. There is the blind confidence of youth, which is the blindness of young kittens, whose eyes have not yet opened on the world; and there is that physical blindness, ma'am, of which I am, contrairy to my own desire, a most illustrious example.

Stagg, the blind man in Barnaby Rudge, by Charles Dickens

I’ve no doubt you’ve followed the recent bickering among the political classes about the NHS in the UK, and the proud blindness being used by all parties in their selective and romantic championing of that institution’s cause. I’ve got no idea whether this kind of deliberate or programmed blindness works in power politics; but in the areas I do know: in science, in sport, and in the subject of this blog, business and enterprise, it is a road to ruin. I’ll look at Stagg’s three types of blindness.

Let’s start with Stagg’s first example, the connubial blindness that men and women have about their lovers. People making business cases have often already fallen in love with their ideas or products. There’s nothing wrong with that; it’s a passion that fires the imagination for options and possibilities. The flip side is that, too often, these same people exhibit this connubial blindness, and they want to see the best of every side of the situation. They make over-optimistic assumptions, under-estimate threats and assume the market will love the idea as much as they do. Too often the consequences are the same that Dickens’ Nancy suffered at the hands of her beloved, murdering Bill Sykes.

A second kind of blindness, the blindness of party, comes when people start to believe the rhetoric espoused by their colleagues, like dyed-in-the-wool Tories, or socialists, or Republicans, or whatever. They are selective in their choice of facts, of sources of information, and of assumed consequences. People can be tribal, and there can be comfort in shared views, but this tribalism only increases the likelihood that those same people won’t challenge their own received wisdom, and will ignore some real opportunities and threats that don’t fit their group paradigm. A political example of this is communism; a business example is any bank you want to choose.

Stagg’s third example, the blind confidence of youth, is horribly apparent in new businesses and in businesses that have confused their own ability with a bull market. There’s nothing wrong with this confidence if it’s supported by some resilience in a company’s management and business model; if it can cope with a downside scenario. But this resilience is all too often absent. I’ve rarely seen such an over-confident company hit its too-lofty targets, and I’ve seen many felled by the first major blow or downturn that comes its way. Example: choose any one of 99% of companies from any boom – dotcoms in the early 2000s, property investors from financial bubble, or almost every social networking business from the last four years.

The lesson in all this? We all need to open our eyes and prop them open: to where we might not want to see something bad about our service; to where we’re not challenging the party line; or where one bad month or lost customer would sink us. Better to see the truth than suffer Nancy’s fate.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

The Sign of a Good Answer

2009-08-06T22:02:00.003+01:00

In stage 16 of the 2006 Tour de France, the favourite, Floyd Landis fell badly off the pace in the last 8 minutes and crawled to the finish with his chances in tatters. The next day, stage 17, he produced the most inspiring comeback many cycling fans have seen. He attacked early, broke away from the favourites and alone sustained a pace to which the peloton, with all its wind-saving advantages, couldn’t respond. He made up enough time to eventually be crowned Tour champion.

Explanations came flooding in for this stirring physical achievement. To many fans it was a story of the triumph of human spirit and athletic supremacy. But the accepted explanation in knowledgeable circles was that Landis, by being out by himself, could to keep his body temperature under control, giving him a major physiological advantage. You see, it was an incredibly hot July day, and the riders in the peloton were suffering from sky high temperatures; meanwhile Landis spent the day pouring cold water over his head, supplied by the team car.

Seems reasonable?

A few days after Landis’ victory, his urine sample, taken after stage 17 tested positive for a banned performance-enhancing substance - synthetic testosterone.

OK, which explanation for the inspirational performance do you believe now?

You see, as we all know, it’s very easy to come up with a reason or theory for any phenomenon: why our competitor is doing twice as well as we are; why we’re not as profitable as we once were; why we’re struggling to get a foothold with a customer group; why growth has fallen off, or whatever is puzzling us.

When you review businesses and markets, as you unearth the facts and analyse the data, you come across a whole raft of potential explanations and solutions for the business’s condition and theories on what it should do next. The first set you come across is usually complex, nuanced and subtle, often received wisdom from proclaimed experts, and very tempting to believe. But if you have the gumption to ignore these temptations; if you carry on researching, challenging and turning over stones, I guarantee that you will eventually come up with a better answer that’s as plain as the nose on your face.

Scientists have a principle called Occam’s Razor, the common understanding of which is as follows, “Of several acceptable explanations for a phenomenon, the simplest is preferable, provided that it takes all circumstances into account.”

At my company, we describe it differently. We just carry on investigating, testing and searching for explanations until we uncover the one that fits our golden rule: when looked at in retrospect, it must be absolutely obvious.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Straightforward and Spartan: What Big Businesses Can Learn from their Smaller Brethren

2009-08-01T19:33:00.002+01:00

King Leonidas: [turns back shouting] Spartans! What is your profession?
Spartans: HA-OOH! HA-OOH! HA-OOH!
King Leonidas: [turning to Daxos] You see, old friend? I brought more soldiers than you did.

There is an unchallenged and lazy myth that small companies generate more wealth in the economy every year than large ones. They don’t, though the real facts are much more interesting. Research shows that three per cent of all firms account for almost all private sector employment and revenue growth; and these “high impact” firms are proportionately evenly spread across all company sizes. But here’s the killer fact: 98.3% of firms in this wealth-creating sector have 20 employees or fewer, because there are simply many more smaller firms in the world.

But how can it be that smaller firms make up so much of this GDP engine, and generate just much wealth as blue chips, who have established brands, sophisticated systems, massive buying power and the pick of the brightest talent? I’ve been fortunate to observe companies from across the size spectrum, and even more fortunate to work with some that were once in the small camp and are now large. Here are four distinctions that I see in the successful smaller ones.

First is brutality. My smaller clients have a mindset in which they will habitually challenge their propositions and expect to need to reinvent their services, even in the many instances where they are the dominant player in their particular niche. They are justifiably proud of their products, but they appreciate that today’s iPod is tomorrow’s Walkman. Cannibalisation is a fact of life, and better that they do it to themselves than their competitor does it for them.

Second is straightforwardness. Here’s an example. A client I started working with eight years ago was shortly to become one of the 3 percent club of high impact firms; it quickly became the global market leader in its niche. Then, I could ask a question to one of the Directors and they would just answer it, warts-and-all, no justifications, no qualifications. Now it has joined the 97 percent of slow-growers. I re-engaged with the firm again recently. Now, the most common first response to my questions is: “can you tell me what you will do with that information?” the second most common is: “can you tell me why you need to know that?” Following this pointless dance, we get to the same questions I was going to ask anyway, only we have time now for 25% fewer of them. And the answers are now gilded with such self-justification that finding the problems necessary to improve my client’s condition takes on a whole new level of complexity.

Third is decisiveness. My smaller clients engage only my company for advice and act on about 50% of it. They are far less exhaustive in their analysis before decisions, being happy to act on 80% confidence. In contrast, larger companies often use multiple advisers and internal teams in an often futile search for perfection, and act on 10% or less of the advice they seek.

Fourth is parsimony. If you’re used to corporate life, a smaller company’s office feels like a cell. If you’re a consultant used to the corporate jet-set, a smaller company’s fees feel like a budget airline. It’s probably not in everyone’s interest for me to highlight parsimony. But those who read these posts regularly know I'm keen on saying the truth as I see it, rather than selecting the facts that suit. Besides, Ben Franklin thought parsimony was the route to wealth, and who am I to argue with him.

So: brutality, straightforwardness, decisiveness, parsimony. Leonidas would be proud.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

What to Look for in a Consultant

2009-07-26T19:49:00.003+01:00

Here are some things to look for if you genuinely want value from a consultant, all of which you can test in a meeting or single reference.

First is personal credibility. I don’t necessarily mean brand here, which in a way is lent credibility. I mean the credibility of the person or people actually doing the work. To appreciate the importance of this distinction, you just need to look forward in time and ask: “What credibility will that person have in front of the Board or the bank or the MD or my colleagues when they start asking difficult questions?” Of course there are times when a brand does add credence, but I’d argue that what really counts is the quality of the individual making those recommendations, and consequently the recommendations themselves.

Second is subject matter expertise. By this I mean genuine expertise in the particular issue you are facing, be that business case development, due diligence, market entry, benchmarking, whatever. I specifically don’t mean industry expertise, which in my experience contributes either marginally or even negatively in a consultant’s value to a company.

At the risk of unpopularity, using industry expertise as a way of choosing a consultant is, in my view, misconceived. It is an easy way of screening for a buyer, and an easy way of selling for a consultant. Consultancies understand this dynamic and have industry experts at senior level only, in order to help the sales situation. They talk the language, have the examples, etc. But the people that do the work and generate the insights come from a pool of generalists and subject matter experts.

We hear all the time that clients are amazed how quickly we get to understand their industries. But they're giving us way too much credit and over-estimating the difficulty of understanding a sector sufficiently well to apply our subject matter expertise. In contrast, subject matter expertise is the thing that takes years to develop. To illustrate, we have performed dozens of due diligences of technology companies, and we use exactly the same skills to due diligence leisure companies. Each one, in whatever sector, takes only three weeks, and we have never had any problems in sectors we have never worked in before. But we would have no idea where to start re-engineering a business process, a subject in which we have no expertise, one of the exact same tech companies we just diligenced. And we couldn’t even dream of knowing how to sell a client’s products.

A third thing to look for in a consultant is his willingness and ability to challenge you, your views and your assumptions. It is easy for an adviser to back down, particularly someone who's junior, impressionable, easily intimidated or otherwise anxious to please. I’m embarrassed for my profession that 90% of consultants I've met fit into one of those categories, people responsible for the tedious cliché of the consultant taking your watch to tell you the time.

The Greeks had a concept of a noble friend, who would tell you the truth, even if it wasn't what you wanted to hear. A good consultant is a noble friend for hire.
A fourth thing to look for is absolute attention to your particular concern. The consultant will be so focused on your particular issue that you won't be able to see any approach or methodology he employs. Every conversation will all be about your situation and helping you improve your own condition.

There are some good precedents for these characteristics in an adviser. William Wilberforce, in my opinion one of the greatest men who ever lived, had for an adviser the great John Newton (pictured above), composer of Amazing Grace. Alexander the Great had Aristotle. Washington had Lafayette. I guess they didn’t do too badly.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Don't Swallow Your Own Snake Oil

2009-07-18T20:45:00.003+01:00

Business people need to be scientific in how look at their companies, their markets and how they make decisions. If they don't, they may be lucky and thrive for a while, but they will ultimately and inevitably end up in ruin.

I want to be clear what I mean by the term “science” here. I don’t mean biology, chemistry, physics or any other examples from the school curriculum that restrict our thinking and, if I'm honest, put us off the subject. What I mean by science (in as unpretentious a way as possible) is a method and mindset of trying to find the truth of a situation or issue or problem; and caring first and foremost about finding the truth, irrespective of what that truth turns out to be.

It’s not about making an argument or proving a point. As soon as you start looking to defend a position or prove a point, then you're not a scientist, no matter what your qualifications or credentials. Mr Dawkins, looking to prove that God doesn't exist, isn’t a scientist. His antagonists, creationists trying to find evidence that He does exist, aren’t scientists either. Neither is anyone who selects information to justify themselves, rather than seeking information and testing the quality of their thinking to challenge themselves.

Therefore, you see true science exhibited more often in arenas where people need to get results, regardless of rationale or excuses, such as sport or gardening or medicine or the judge in the court room; and you see it less often where people need to be right, such as politics, interest groups, sales or the barrister in the courtroom.

Science, and the scientific method, is partly a thinking skill. It involves breaking down a problem into clear discrete component parts with an analytical knife; using crystal clear thinking to hang those parts together; making your assumptions and gaps in your knowledge explicit; using facts to test those assumptions and your draft conclusion; changing the conclusion according to what the facts say; and then challenging that new one in turn. You repeat this in a relentless process until you've got an answer with which you're satisfied. But the method isn’t something I want to go into any more here, because for most people the method isn’t the main issue.

The main issue is mindset. This mindset is about deliberately challenging your knowledge in the search for the truth of a situation and, crucially, being happy to change your view as the balance of facts dictates. It is not about collecting facts to make an argument or prove a point. This latter path is an aspect of rhetoric, which is a noble art, but it isn’t science. And unfortunately this point-proving seems to be a stronger instinct in the way our minds work than the discomfort of challenging our thinking and conclusions.

I'll give you an example of how easy it is to slip into the rhetor's mindset. I run training sessions for management consultants in the principles and practice of the consulting method, which is basically the scientific method. Everyone typically learns the scientific techniques to get to the heart of problems and crack difficult issues in a rigorous, objective and credible way. That is until I split the learners into teams and ask them, as an exercise, to give me the case for retaining or abolishing the royalty. I give the teams names: "Royalists" and "Republicans". As soon as they're given those positions my students turn from objective scientists into aggressive rhetors, searching for evidence that backs up their position. One team searches for the massive cost to the taxpayer of the royal family, while the other searches equally hard for the vital tourism income they bring to the country. They can't help themselves in this one-sided self-justifying behaviour. And I see this same behavior in myself and others every day.

Now let me come around to what all this means for business. First of all, of course there's a time for rhetoric and making an argument: whenever you're persuading someone in a sale, raising finance, or recruiting a super-star graduate. But if you want to know the truth about an issue, and make the best decision for yourself and your own business, you need the scientist’s mindset. You need to be humble about your pre-conceived notions, be open to challenge, and be prepared for the discomfort of receiving and doing the challenging. As soon as you stop doing that, and start building a fortress of facts to support your rhetoric, you're on the road to ruin, with self-justification, post-rationalisation and excuses all the way down.

So I'll leave you with a couple of questions to ask yourself about whatever issue you're facing. Are you being a scientist and trying to find the truth about whatever issue that concerns you, or are you selecting facts to make yourself feel better and prove a point? Are you trying to make the patient healthier, or are you trying to sell yourself some snake oil?

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Can You Absolutely Know That It's True? An Unlikely Insight for Businesses from the Self-help Section

2009-07-11T15:34:00.003+01:00

My wife is a wonderful but crazy woman who takes great interest in the modern spiritual gurus that appear on Oprah and whose books top the iTunes non-fiction list. Her attention has moved over the years from what I consider to be flimsy self-help one-size-fits-all nonsense to some thoughtful, insightful, challenging people.

One of these is an American woman called Byron Katie. This woman regularly counsels people who describe situations that are causing them some degree of personal pain. She responds to pretty much every person’s description with two opening questions: “Is that true?” and “Can you absolutely know that it's true?” - the second question being a polite equivalent of “Come on, be honest with yourself.”

The results of this simple line of questioning are frightening and fascinating. Almost immediately, when pushed to be honest with the second question, Ms Katie’s interlocutors realise they’ve been working with some very dodgy assumptions. These assumptions have been convenient, but have given them a misguided take on the situation and have resulted in some pretty damaging actions.

The consequent realisations of where they've been treating someone unfairly, punishing themselves, etc. often cause an outpouring of emotion that I find a bit much to bear, but my wife seems to like.

Now, let me get to my point, because it's not about relationship self-help.
As managers and professionals, we constantly work with a series of assumptions that a simple challenge such as "is this true" causes doubt, and a follow up such as "can you really know it's true?", causes the whole false edifice to come crashing to the ground and reveal something very different. I've seen whole sales forces pitching "we're not the cheapest, but we're valued advisors" in price-sensitive markets where they were, in fact, the cheapest. I've seen shifts away from highly profitable services to loss-making ones based on superficial untested assumptions and use of the wrong measures. I know a CEO who absolutely insists that his holiday company services the over-45s, and spends his marketing money accordingly, when his average customer age is 71.

Now I'm not saying that Byron Katie's formula is original. I think Socrates beat her to it by a couple of millennia. And I'm not saying you should apply it to your personal life unless you want to be known as the annoying guy. Ms Katie is currently on her third husband; and Socrates was so annoying that he was accused of corrupting the minds of the youth of Athens and forced to drink hemlock.

But I do say try the challenge on your own business or service or product. Challenge your own assumptions - work out what it is that really makes customers prefer you, or what really makes your product superior, or how much return you really make on that sponsorship or other favourite area of marketing spend. I'll bet you find something important that you didn't know, and I'll bet it affects your wallet.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

The Next Level of Analysis - It Makes All the Difference

2009-07-09T21:02:00.003+01:00

Malcolm Gladwell’s “Outliers” is a treat. It gives fascinating insights into what really lies behind world class performers, destroying the superficial romantic myths about poor kids defeating the odds with a combination of god-given talent, inspiration and succeeding against the odds. I’d sum up the Gladwell’s conclusion of what makes world class performance with the phrase “practice makes perfect”, though I’m sure my performance coaching colleagues would justifiably emphasise the importance of creating environments and cultures that stack the odds in favour of practising the right things.

Gladwell’s conclusions were fascinating, but what caught my attention was his method – how he got to the insightful conclusions that gave the myth to some romantic, but ultimately incorrect and misleading, received wisdom. In a nutshell, all he did was this: he took the analysis to the next level. That’s it. Here’s an example from the book.

A US study analysed the improvement in reading performance of school children from different social classes. Though the social groups had similar aptitude for the youngest children studied, the gap between wealthier and poorer classes grew as the children got older. Policy makers had concluded that the education system was failing the poorer children.

However, analysis of reading performance before and after summer recess revealed an interesting insight – that the entire difference in improvement could be explained by what happened when children weren’t in school. During the main school holiday, children from the wealthier classes improved their reading ability, whereas the poorer children regressed. In fact, during the school year, the poorer classes actually improved marginally more than the richer children. So by trying to raise the relative level of the poorer children through the traditional school system with traditional school hours and a traditional school year missed the crucial point - that they regressed outside class. A simple answer was a very popular, successful school that kept children at school for longer and kept them focused on their work.

The useful insight for me here wasn’t about schools or policy or social justice. It was that by getting under the skin of things, you get the insight that allows you to take the most effective actions.

Critics of Gladwell's book say he's superficial. But all these critics are saying is that he'd have got even more insight if he'd gone to the next level, so the importance of analysing to the next level still stands.

So what is the relevance of this to business strategy? It is the immense value of analysing to the next level, beyond the superficial received wisdom, and the risk of not doing so and missing the obvious actions. I’ve been analysing businesses and their markets for more than 15 years, with more than 200 companies, including my own. From that 200+ sample, I cannot think of a single example of a company that hasn’t understood its markets or the value of its services differently after making that next level of analysis. Some of these companies even acted on that insight and turned around their performance as a result.

So does this mean for the provider and buyer of strategic advice? I was speaking at a Chairmen’s dinner recently about the benefits of performing an external review, and the host asked me a very similar question: do I, as a reviewer of businesses and markets, provide information or do I provide advice? I bungled an answer, but I should have said this:

"If you keep asking the right questions; if you get under the skin of the issue, not being satisfied or fobbed-off by superficial hearsay, then the answer and the advice comes out all by itself."

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

Strategic Reviews — Typical Content and the Most Common Mistake Management Makes

2009-03-28T20:57:00.006Z

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.”
Donald Rumsfeld, Former US Secretary of Defense

“Just one more question.”
Lt Columbo, San Francisco Police Department

In our last post we covered how critical it is to learn the lesson of the great detective, and treat a strategic review as an investigation. In this post, we look at the basic areas to cover in a review, and where companies classically miss valuable insights by not adopting this inquisitive mindset.

If it’s going to be useful, a strategic review should cover a minimum of five areas:

1. Positioning at a macro level—this classically consists of some measure of market attractiveness and some measure of competitive positioning

2. Positioning at a micro level—this review covers the buying process, routes to market, purchase criteria, company performance against those criteria, performance versus competitors, customer purchase intentions, and switching

3. A review of financial performance by business unit or product or geography

4. An assessment of the risks and opportunities the company faces

5. Strategic decisions about where and how to compete as a result of the investigation

In addition, management might then want to look at some specifics or angles or hypotheses it wants to test, such as market appetite for a new product. Management may also want to put together projections and a business case to support the decision making and subsequent planning process.

This list above is over-simplified, but you get the gist.

The fatal mistake to make with strategic reviews is to stay at too high a level, be too assumptive and too generic. Without asking that next question, leaving all the difficult stones unturned, you’re left with a strategy built on limited and superficial knowledge, Mr Rumsfeld’s known knowns. You never get to the unknown unknowns where the insights lie.

When management adopts this high-level mindset, our five review areas above tend to play out as follows:

1. Management defines its markets too broadly and so is in no position to understand properly the size, growth or any other measure of attractiveness of its different businesses’ markets. Also, without a tightly-defined view of which markets it is competing in, management doesn’t understand who it is really competing against for its most important business

2. With a high-level mindset, positioning at micro level is barely covered - it appears to low level for strategic work. As a result, management misses critical information about customer budgets and spend intentions, revenue security, requirements for service improvements, and other tangible, useful facts

3. Financial performance by business unit/product/geography, etc ends up being confined to Board KPIs and familiar numbers, with the consequence that some very common and vitally important drivers of economic value and returns are missed completely in analysis

4. With excessively superficial and generic information from areas 1-3, the range of risks and opportunities becomes much too broad and irrelevant. Management is then faced to many poorly-defined risks to know how to mitigate them, and has an excessively long list of nonspecific opportunities that it can only guess how to prioritise

5. With no new insights raised to challenge assumptions, the strategy ends up being very close to that inside the CEO’s mind prior to the review. Unless the CEO has incredible prescience, there is only a slim chance of this being the best strategy for the business

In the rest of this series, we cover how the investigative mindset gives us more insight and clues in areas 1-3. With this deeper and more accurate level of knowledge, management can make more valuable decisions and take more relevant actions.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

Strategic Reviews — Overview: “A Little More Columbo and a Little Less Sun Tzu”

2009-03-24T16:02:00.005Z

Every so often the management of a business has a prompt to ask itself some big fundamental questions: What business are we in? Where and how should we compete? What are the prospects for our business and how can we change them? Which parts of our portfolio should we keep, sell, close, grow, harvest, restructure? Where do we focus our limited capital and time?

One common exercise provides the basis to answer these essential questions—the strategic review.

It requires an analysis of the attractiveness of the company’s markets, its competitive positioning, drivers of profit and economic value, a review of new opportunities and an assessment of risks. Done well, this strategic review provides management with the information and the confidence to make decisions from the most high-level (such as which businesses should we be in) to the most everyday (such as how do we improve our customer service).

But here’s the thing. A strategic review is an investigation. And in this investigation, God is in the detail. The Columbo fans out there know this already — you don’t solve the case if you act like the local cops and just take a cursory look, missing the key fact that the murdered “burglar” who came in from the lawn has no grass on his shoes. It’s the same with strategic reviews: you don’t generate insight by going through the motions and staying high level; you get it by behaving like the great detective — asking the questions nobody else thought of and noticing the things nobody else noticed.

There is a time for strategy and vision and bold moves and inspiration and big picture; but that time is later, once you know exactly where you stand.

In this forthcoming series of posts, we will cover the basics of performing strategic reviews, highlighting along the way some of the disciplines we use to generate the insights that successful reviews should produce.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

Business turnarounds - troubleshooting performance problems (3/3)

2009-03-12T15:30:00.009Z

In our last post we looked at our two most fruitful areas of analysis when an under-performing company has issues with sales (or gross profit) growth. In this post, we look at the two areas of investigation that we find most useful for companies with profitability problems.

Again, the most useful analyses are the ones that are rarely done. Board packs, management KPIs and performance measures often track return on sales and total profit by line and by customer group. These analyses ordinarily have value, but don't add to what the Board already knows, and so do not provide insights to a performance problem that the Board has to date been unable to address.

The analyses we find most useful are related to lifetime profits:

1. Analysis of profit contribution of assets over their lifetime
2. Analysis of profit contribution of customers over their lifetime.

Profitability analysis of asset usage

Capital constraint is a critical issue in turnarounds. However, profitability numbers in Board KPIs often either ignore asset usage or treat amortisation uniformly for each product line, not distinguishing asset-intensive versus asset-light customers.

Accounting for each customer group’s asset usage often highlights major cash sinks. It can overturn previously held understanding of customer profitability and often reveals where companies have historically focused time and resource on what turn out to be loss-making or value-destroying customers.

Example – gaming machine operator turnaround

Profitability had declined for five consecutive years in a highly capital intensive sector, resulting in low return on investment and ultimately covenant breach.

The business had focused on maintaining high machine rents, by targeting sales on high end managed pubs and by rapid and continuous new product introductions. The business deprioritised lower end free trade customers that required lower rates of introduction and paid correspondingly lower rents.

Using a simplistic assumption for machine depreciation, managed houses appeared profitable, free houses unprofitable.

Correct accounting for machine asset depreciation showed the historic focus on managed pubs to be value-destroying.

The business consequently renegotiated its managed pub contracts to reflect the accurate understanding of cost structure, grew profitability and has successfully refinanced.

Customer acquisition cost and lifetime value

Management accounts and monthly KPIs can hide the true cost of acquiring customers, and the payback over the customers’ lifetimes. This can be particularly true for larger deals or new services where the customer contributions appear large, but the time and cost taken to acquire these customers can make them loss-making over their lifetime. This is further exacerbated when accounting for a high time value of money in distressed situations: a large initial sales cost outlay and delayed incoming cash flows can generate large negative net present values and heavy cash requirements for some major prospective customers or ambitious new services.

Example – telecoms reseller turnaround

A corporate telecoms reseller had operated at low scale and with heavy losses for several years, and faced closure by its financing parent.

The business perceived greatest potential from large corporate customers and focused sales efforts on these accounts.

Analysis of customer lifetime and acquisition cost arising from low hit rate, resulted in the conclusion that the business was incorrectly focused on loss-making large corporates and under-investing in sales to highly-profitable SMEs

The business refocused onto SMEs and subsequently achieved trade exit in excess of £150m.

So, there we have it, four rarely-used but commonly insightful analyses to perform on struggling businesses, when the usual KPIs and Board packs have not given any productive clues to the causes of decline.

Given the recent trend for debt holders to delay taking control of breached or distressed companies, we believe that management and equity now has greater breathing space to diagnose financial issues. And we believe that a rigorous understanding of such issues is value-adding for everyone involved.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

Business turnarounds - troubleshooting performance problems (2/3)

2009-03-12T12:30:00.019Z

In our last post we pointed out that the most fruitful areas to investigate for unaddressed causes of performance problems are, by definition, those that aren't covered in standard KPIs or Board packs.

We find four analyses particularly insightful, depending on the area of underperformance. The first two are suitable for understanding issues of sales (and gross profit) growth/decline, and we cover them in this post. The third and fourth are more suitable for issues with profitability; we will cover these in our next post.

To diagnose issues with sales or gross profit growth/decline, the two most commonly insightful analyses are:

1. Reviewing market and competitive benchmarks, in order to understand whether the company's product mix matches market growth areas and if gross margins are in line with peers, or if, more likely, the company is working hard to hold back the tide by growing share in a low margin segment

2. Analysing the year-on-year sources of business, to understand the reliable base line of secure business, and whether the company's underperformance is a result of issues with customer acquisition, customer retention, or both.

Review of market and competitive benchmarks

A market and competitive review generates rapid and useful benchmarks of reasonable growth expectations for a company’s services and expectations for gross margin. Problems with revenue and gross margin can often be simply the result of a poor business mix, skewed towards the low growth, low margin market segments.

Plans to exceed market benchmark growth or margin are too unconservative for a sound turnaround plan. Changing business mix to higher growth, higher margin segments, achieved by reprioritising marketing and sales investment, is almost always a more pragmatic path to follow.

Given the generally strong positive relationship between gross margin and market growth, such a reprioritisation kills two birds with one stone.

Example – technology services turnaround

Sales had slowed below historic rate in the previous 18 months, and gross margin shrinkage caused impending covenant breach.

Rapid analysis of market growth and competitor margins showed that business had focused excessively on a low growth, low margin segment. This growth in excess of market had depressed margins even further. A return to sales and margin growth was possible from rebalancing business mix to higher growth segments.

The refocus took 8 weeks to implement and resulted in business returning to full-year budget performance within 4 months. The business refinanced successful with all solvent banks retaining participation and is now the most profitable player in its sector.

Analysis of new versus retained business

Understanding a company’s reliable base of recurring business is clearly important in the context of turnaround financing and planning. In addition, a review of new versus retained business over months or years illustrates whether the revenue problem is one of acquisition or retention, each of which has very different restorative actions.

Example – tour operator turnaround

Sales had declined for three consecutive years in a steadily growing niche, resulting in declining total profit, with trend rate threatening covenant breach.

The business had cut unprofitable discounted lines but maintained traditional efficient distribution in an unsuccessful attempt to reverse profit decline.

Analysis of sources of yearly bookings showed a strong stable base of regular customers but a continual annual decline of new customers, resulting in steady decline of volumes.

Cumulative bookings from previous customers show consistent annual spend

Cumulative bookings from new customers show ongoing annual decline

Evidence of reliable loyal booking provided a solid baseline for a successful refinancing.

The business refocused on new customer acquisition through a successful new online channel, regional departures to reflect changing travel patterns and the launch of lower-cost introductory products to capture new customers.

Of course, there are limitless other analyses that can be used to address the underlying causes of sales underperformance, but the two in this post are the ones we find most useful and under-used.

In our next post, we will cover our two most fruitful approaches to understanding profitability issues.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

Business turnarounds - troubleshooting performance problems (1/3)

2009-03-10T21:04:00.008Z

Turning around an under-performing company has one major characteristic in common with fixing your central heating - unless you work out what went wrong, you'll never fix it, at best you'll patch it up, keep your fingers crossed and sit there shivering next time the weather turns cold.

We have worked with hundreds of companies with performance problems. Only a handful of these had a clear and accurate picture of what went wrong to get them into trouble. With the exception of one (extremely fortunate) company, we have not seen any recover from distress without knowing the problem that got them into it.

There are occasional examples when the problems are obvious to everyone. In these cases, the decline is often rapid and can be associated with something specific, such as loss of a key contract, a change in legislation or a change in the market or competitive environment. Handling a potential turnaround in such a situation is usually straightforward, requiring brutal but obvious decisions. However, these sudden-dive situations are uncommon.

The majority of financially-troubled businesses that bring us in have experienced an extended decline, one that current or previous management has worked unsuccessfully to reverse. In these situations, management can often identify some areas of underperformance through various KPIs. However, without a clear and correct diagnosis of the underlying causes, management is shooting in the dark. It cannot possibly address business underperformance and more usually makes decisions that worsen the situation. As a result of such flawed or incomplete understanding of customer or service profitability, we have witnessed heavy targeting of loss-making customer groups, withdrawals from profitable, cash-generative business lines, proliferation of product into areas of marginal or negative return, together with a long list of progressively desperate gambles as performance deteriorates.

In a turnaround situation, the two major constraints are time and capital, and management needs to know where to direct them. To achieve this, we believe that a business needs to undertake a complete diagnosis of where it is making and losing money, and the underlying causes of performance problems. Only once it does this can it identify which areas of the business to protect, which to cut, and where to address scarce time and resources in performance improvement.

The most fruitful areas to investigate are, of course, the ones most commonly over-looked - ones that by definition do not appear in the Board pack or management accounts. In the next four posts of this series, we outline the four most common problems we see, and the ways to identify them.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (7/7)

2009-03-08T18:46:00.005Z

In the last three posts in this series, we covered the common and unique characteristics of market leading companies in our research that enabled them to make breakthroughs in performance and cope with rapid growth without losing momentum or focus. In this final post of the series, we describe the characteristic shared by only the market leaders that stayed ahead – the ability to stay uncomfortable.

Participants highlighted two big areas of concern once they were ahead of the field.

The first concern was being exposed to changes in customer demand: with a large share of the market, you inevitably rise and fall with it.

The second concern was complacency: once ahead, companies faced temptations to concentrate on reaping the financial benefits of their strong position, and to stick with winning ways. But the dangers of this “defend and reap” attitude were considered by leaders to be enormous: from outside due to targeting and copying by competitors, and from inside due to the departure of ambitious people lacking new challenges. Indeed one PLC leader attributed its slow demise to the spawning of competitors from within the company.

The most consistent solution that successful leaders gave to both big concerns was to stay uncomfortable and deliberately take the business to the next challenge.

Staying uncomfortable

This wasn’t about asking for more of the same, which is demanding without being challenging at all. It was about challenging where and how the company did business. To achieve this was difficult and needed discipline, and as with previous themes, different organisations achieved it in different ways. For example:

Raising the stakes by increasing the size of the arena the company played in, for example one payroll services company designed its next generation of further services to address the broader challenge of improving the workplace and the productivity of clients’ employees

Moving a local business into dominant positions in new geographical areas

Incorporating a challenge of “Is it brave? Is it original?” in relation to all market-facing and planning activity

Sustaining the challenge by splitting the business into smaller, more focused components every time it became too unwieldy

Establishing restless, constant change as a deliberate policy driven from the top

There was no common individual solution, other than the underlying requirement to stay on the edge of management’s comfort zone.

The common theme however was deliberately to raise the bar rather than to look back and focus on defending an established position, even though this often meant losing key members of the original senior team, who weren’t willing to get back on the tightrope.

So, in summary, we have now covered the common characteristics of market leading companies from Latitude research that were missing in their more mediocre counterparts.

First, relentless focus on a cause based on a combination of passion for that cause and a firm grip of market and commercial reality.

Second, tough action to get the right team in place, based on the right attitude, even at the expense of talented or experienced team members who aren’t up for the challenge.

Third, creation of breathing space so that management can concentrate on important actions for the business and are not continually distracted by urgent firefighting.

Fourth, clear, tangible behaviour boundaries, inside which there is room to perform, but the crossing of which is simply not tolerated.

Fifth, and finally, the continuing challenge from the senior team to keep the business on the edge of its comfort zone in terms of where and how it does business.

These aren’t rationalised steps to success. Rather they are a series of characteristics that should look obvious to experienced managers of high-performing businesses. By presenting them here, our hope is that they provide a nudge to make a decision that the manager already knows he should be making anyway.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (6/7)

2009-03-06T20:59:00.005Z

In our last two posts we covered the most critical actions that market leaders from our research took in order to achieve a performance breakthrough. In this and the next post, we will describe the two characteristics that determined whether these same companies continued to thrive, or if they saw their leadership positions fall away.

CEOs of companies that made performance breakthroughs described an interesting challenge that will be familiar to anyone from a fast-growth company. With a breakthrough in performance, came rapid growth and an influx of talented people. The challenge facing a CEO in this situation was how to maintain direction and momentum, and avoid dilution or chaos, whilst giving new people space to act with minimal needless constraint. In our research, we expected strategic planning to be the answer to this problem. But every company we talked to, good and bad, used strategic planning, and this didn’t distinguish the higher performers

The answer to this challenge from the CEOs of successful, sustained market leaders was to employ very clear behavioural boundaries. If people stayed within these boundaries they were given responsibility and room to perform. Stepping outside them, i.e. behaving in a way that was not acceptable to the company’s culture was never tolerated.

A clear “our way” of behaving with uncompromising boundaries

Leaders were very clear that the setting of behavioural boundaries was the key that enabled them to get the most out of people, to generate growth in their team and their business, but at the same time maintaining clear focus and discipline. This delegation of responsibility with clear conditions meant that senior people had space to look forward and focus on important decisions, rather than becoming caught in an operational bottleneck; it also meant that capable junior people took responsibility for solving their own problems and as a result developed and stayed with the business.

There was no universally applicable code of behaviour that distinguished the successful from the unsuccessful companies – there were no magic behaviours. Indeed, behaviour codes were very different in equally successful companies: the absolute requirement to “mix it” in the locker room style of one leading computer games company was essential for people in that business; but this would have been totally unacceptable in the conservative environment of a market leading recruitment consultancy that emphasised respect and professionalism as an essential part of its behaviour code. What was common to the successful companies was that the behaviour code was very clear, very simple, was right for them and was something that the CEO could describe with countless real examples of good and bad. To give a common example, whereas a follower might state “integrity” as a defining value (as did about three-quarters of our sample), a leader would say “we keep our promises”. Simple.

There was also no common pattern to how successful companies in our study came up with these behaviour codes in the first place. There was no magic exercise. Some went through very inclusive approaches, some pushed things down from a strong and inspirational leadership team, for others it was just obvious and there was no discovery exercise at all. What was universally consistent in the leaders was the strength of dissemination of the behaviour code – in particular how the “way of behaving” wove its way into the day-to-day expressions and language of the business.

Of course, there is another side to the behaviour boundary coin – for our leading companies not behaving appropriately was fatal. CEOs described this in very dispassionate terms – “if they don’t behave our way then they’re out” – as simple as that.

In our next and final post of this series, we cover the final characteristic of market leading companies, and probably the most important factor in staying on top – the ability to stay uncomfortable.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (5/7)

2009-03-01T19:13:00.004Z

In our last post, we covered the first action market leaders from our research took to make a performance improvement - tough decisions to get the right team in place. In this post, we cover the second activity required to make a breakthrough: creation of breathing space.

Every company that made a breakthrough found a way to create breathing space so that management could get away from piles of day-to-day matters and take time to reflect properly on the business. The leaders emphasised how criticalit was for their senior people to be able to spend time thinking about important, but non-urgent issues without distractions and the need to engage in permanent fire-fighting.

Dominant external factors that stole managers’ attention and intruded upon proper breathing space were cash flow pressures and customer servicing demands.

Deliberate and successful means of dealing with the distraction of cash flow issues were varied. The two most prevalent that didn’t rely on rich parents were, firstly, tough internal decisions to take the costs of the business below ongoing revenues; and secondly focusing deliberately on generating continual rather than one-off revenue streams, which could mean taking a lower margin to buy revenue continuity.

Customer servicing demands were also an unhealthily large day-to-day management distraction for companies struggling to break through. When entering into relationships with clients, leaders consciously took care not to overstretch themselves. For example one leader limited the number of new clients it engaged with every year because the additional servicing needs of new clients could affect performance with existing clients. Another leader used a series of financial and non-financial pre-contract tests upon which it needed to be satisfied before accepting new business.

Though finance and customer service were the biggest external assailants of breathing space, most problems were essentially self-inflicted. As one MD said: "we were the arsonists as well as the firefighters".

MDs of successful companies talked of ways of achieving breathing space that were simply means of ring-fencing time for managers to take their attention beyond the day-to-day. These included simplifying management structures so that responsibilities were clear; giving managers enough time and ownership to work out how to achieve their objectives before interfering; hiring personal assistants; and taking regular team away days. It was always simple stuff that gave managers room and a separate time to work on the important as opposed to the urgent.

Creation of breathing space was the second critical step that our breakthrough performers took. After breakthrough to leadership positions, our market leaders faced some new challenges that required new disciplines to address them. We'll cover these two disciplines in our next two posts.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (4/7)

2009-02-28T12:24:00.003Z

In this fourth post of the series we cover the most critical and painful step taken by all the market leaders in our research - getting the right team in place.

Every company that made a breakthrough in performance ascribed it to making significant changes to the team, at the top level and at the level below it. This did not necessarily mean wholesale changes, and all companies emphasised the importance of retaining experience, but it did mean changes in important management positions.

A typical story involved losing one or two senior people who were strong, talented individuals who nevertheless caused problems in the team. For smaller companies this was often the original entrepreneurs, for bigger organisations it was senior directors and managers.

In many circumstances CEOs perceived a high level of risk in losing an individual, such as the fact that they were high performers or that losing them might mean losing other people that respected them or worked for them.

However, although the decision was always a tough one, it was invariably seen as an obvious one. In fact the biggest regret that successful companies had was not making changes to the team more quickly.

And this is not wisdom in retrospect. Everyone we spoke to who made changes to the team said that at the time they knew what they should do but delayed taking the painful step.

In contrast to some established theories we did not see a clear pattern of “first who, then what”. The new team did make changes but never to the cause. All of the companies who made a breakthrough had the same basic and underlying cause before and after the team was in place. The changes that came with the new team were primarily in the culture and capability of the business. Changes to the product or service on offer were about focusing and refinement rather than fundamental redirection.

Finally, the right team did not always mean a completely balanced team. We saw a clear pattern among the leaders of skewing attitudes and skills of senior people towards what was distinctive about each company. For example, one successful software business deliberately skewed its team towards developers and away from marketers. And in many cases it was deliberately left to the support people to supply the capabilities to balance their leaders’ skill gaps and deficiencies. The common and essential precondition for the team was its alignment to the cause.

In our next post, the other major action market leaders took to make a performance breakthrough - creation of breathing space.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (3/7)

2009-02-26T10:49:00.006Z

In this series we cover the characteristics of market leading companies, actions and practices that distinguish them from their more mediocre counterparts. This is determined from direct research with CEOs of more than 100 companies.

In this post we look in more detail at the first of these characteristics: relentless focus on the cause.

The most striking common characteristic that distinguished the leaders in our research was their almost religious focus on the purpose of the company, or the "cause". The cause was something the leaders were passionate about, what they knew they were good at and it was always simple, specific and easily described.

This wasn’t a blind following of faith. These leaders were very sensitive to and aware of customer needs, and many researched and responded to customer needs very actively, but only within the confines of the cause. The commitment didn’t waver but was informed by rational testing and ego-free listening. We like to make a comparison here with the (now maligned theory of the) two sides of the brain. A person (read business) is only able to fulfill her potential if she uses the full capability of her brain (read senior team): she needs to engage both the right (passionate, creative) side and the left (analytic, rational) side. Right-only may deliver short term buzz but is unsustainable and leads to disaster; left only leads to sustainable mediocrity, which is probably worse.

One popular management theory is that success comes from listening closely to the needs of one tightly-defined customer group and designing an offer that serves those needs. Our findings were very different on two counts. First, the successful companies started by establishing what they stood for, then found who valued it, and what they valued about it. Secondly, though some leaders had one tightly defined customer group, many others had a variety of customers that differed greatly from one another.

In explaining their propositions, leaders described what was distinctive and beneficial, rather than what was better. Indeed, comparison with and paranoia about competitors was more the preoccupation of the followers. Leaders were conscious of competitors but only as a prompt to keep their thinking “edgy” and to look for the next challenge. No leader described itself unprompted as “best” or “world class”.

Every market leader surveyed had made mistakes and strayed from their cause at some stage. Reasons were always understandable (providing add-on services for a special customer, pet projects of vital people), but straying was always regretted no matter what the reason; leaders learned the lesson quickly and got back on track.

There was no common pattern of how leaders came to define their cause and focus upon it in the first place. This varied from building on personal hobbies and previous experience, through packaging for general use a successful one-off service that the company came across by chance, to more formal market analyses. However, even the leaders that had performed a sophisticated analysis used the emotional (what turns us on) when deciding where to look, before the scientific testing (what is the opportunity and does the business case stack up).

A final word on what focus really means - leaders could tell they were genuinely focused when they were turning away attractive, profitable opportunities – discarding the unattractive is easy; the challenge is turning away attractive business that is outside the focus.

In our next post, we cover the big step people took to make a breakthrough in performance: tough action to get the right team in place.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (2/7)

2009-02-25T09:50:00.010Z

In this seven-post series, based on direct research with more than 100 companies, we review five distinctive characteristics of market leading companies and the common steps they took to get to leadership positions. In this post, we summarise these five characteristics and share some unexpected findings.

All the market leading companies shared an enduring theme that existed at the time they made breakthroughs to leadership and remained thereafter - "Relentless focus on the cause"

Relentless focus on the cause

“Focus” is a cliché that is often taken to mean the dedication of services to one tightly-defined customer group; but for our survey leaders, focus was about what we call “the cause” – the essential function of the company, what it is good at and excited about; literally what the company is for. For Metro, it is digestible news for urbanites; for Innocent, it is tasty, healthy drinks. It needs to be something for which the company has a passion but at the same time can challenge and justify rationally and commercially in the cold light of day.

We think of the cause like the (now maligned) description of the two sides of the brain. It needs a passionate, creative (right) side and a rational, analytic (left) side. Without the rational, the company is destined for disaster, even if it enjoys a flurry of success; without the passion, it is destined for mediocrity.

Leaders have relentless focus on this cause, in that they will sacrifice anything which is irrelevant to it. Every one of them could point to profitable business that they turned away because it wasn't part of the cause.

When asked about the time they made a breakthrough to leadership, our market-leading CEOs described two strong themes: "tough action to get the right team in place" and "creation of breathing space.

Tough action to get the right team in place

When asked for the most memorable action they took just before a major performance breakthrough, one answer came through consistently: "we changed the team". No company in our sample made a sustained breakthrough in performance without changing at least one member of its senior team. In fact, the change was generally two or three people from the senior team, often the CEO himself, and an equivalent proportion from the level below. The team changes had two further common characteristics. First, changes were based on attitude (are we in it together) and not aptitude (are you experienced); second, every CEO regretted not making the change earlier.

Creation of breathing space

The second action successful companies took to make a performance breakthrough, was to find a way to remove the day-to-day financial and time pressure so that management was not continually fire fighting. This was one area where there was a distinctive difference between smaller companies, where lack of breathing space was commonly about cash and customer servicing, and larger ones, where it was commonly about complexity of systems and reporting. In the vast majority of cases, however, lack of breathing space had been self-imposed.

Once companies had made a performance breakthrough, two characteristics were shared by those who sustained it: "clear, uncompromising behaviour boundaries" and "staying uncomfortable".

Clear, uncompromising behaviour boundaries

With a breakthrough in performance, comes growth and an influx of talented new people. To retain control of the business, but still give a larger group of people room to perform, our market leaders employed very clear behaviour boundaries – inside the behavioural boundary people were given room to develop, perform and make decisions, but stepping outside the boundary was, literally, not tolerated.

Staying uncomfortable

Our successful, sustained market leaders perceived their greatest single threat to be complacency. They were conscious of the competitive danger of standing still, but also of the need to provide interest and challenges to their talented middle management. CEOs took it as a personal mission to put their team back on the tightrope and keep challenging the business.

So there we have it, five common characteristics of market leading companies, that we will expand on in turn in the remaining five posts of this series.

Before we finish this post however, it is worth looking at at some findings of the study that we didn't expect, and which are inconsistent with some received wisdom.

1. Listening to customers was vital but it followed, not led, the cause - none of our market leaders worked up their cause by starting with a big customer research exercise. They all took great pains to test market demand for their services, but they only tested the things they were already passionate about
2. Rationality went hand-in-hand with faith. In fact, rationality seemed to be much more dominant in the companies that had always been followers or had seen leadership slip away
3. Leaders were easily understood, sometimes so simple that we thought we'd missed something; followers were more hazy and complex
4. All the leaders made big mistakes along the way and readily acknowledged that they would likely continue making mistakes
5. Everyone performed strategic planning, but leaders went about it in a consistently different way, by being challenging about the future rather than the classic share growth approach adopted by followers
6. MDs of successful companies came across as much less egotistic than their less successful counterparts. We actually counted the mentions of "I" in early interviews, until the pattern became obvious of humility of the leading company CEOs versus almost defensive egotism in the followers.

In our next post, more on the common thread of all of our market leading companies - "relentless focus on the cause".

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (1/7)

2009-02-24T09:42:00.004Z

Market leaders make a lot more money than followers. The average return on investment for a company with five per cent market share is 10%, with twenty per cent share this grows to 27%, at forty per cent share RoI is almost 40% (source: PIMS survey of 3,000 US businesses). The personal and career benefits of creating or running a market leading company are equally clear, and go without saying.

Given the attractiveness of market leadership, a number of questions come to mind:

Are there any consistent characteristics that distinguish market leaders from followers?

What do leaders typically do to break through and become the obvious provider in their market?

What big problems do leaders need to overcome along the way?

Once they become leaders, what new problems do they face and what do they do about them?

In this 7-post series, we will answer these questions, based on a two-year piece of direct insider-research with MDs and CEOs of more than 100 companies. Companies include impressive but rarely-covered household names such as Innocent, Expedia and Metro, and cover the full range of sizes, performance and stage of development.

Most of the market leaders we researched had moved from being followers to being leaders or had started from scratch to become the leader in their sector. We therefore captured the changes needed to make the transition. We also covered the other side of the coin: companies that had not managed to make the leap and companies that had seen their previous leadership position start to fall away. The characteristics which distinguished these various groups one from another gave us confidence that the leaders had not simply been lucky.

The output of this research challenges established views about what it takes to succeed, and lays out what is central to success, and what is peripheral. In this series we outline the findings, which dispel some management myths and uncover some surprising new themes.

In our next post: the five common characteristics present in all market leaders that were missing in followers.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (4/4)

2009-02-23T09:49:00.006Z

In the first three posts of this four post series we described ten "cognitive traps": ways in which we think that can cause us to make damaging decisions without realising it.

The good news is that there are some decent tools to challenge these traps. We explain our two favourite approaches below, as lessons from science and sport.

1. A lesson from science – treat your beliefs as a hypothesis to be challenged

True science is not about test-tubes, double-blind tests and professors with moon-shaped glasses and speech impediments. It is about starting with a premise that you believe may be true – a hypothesis – and challenging it to see if you are right, or more likely, where you are wrong. Under this definition, you are more likely to see science from a good plumber trying to work out why your central heating makes a knocking noise than you are from a PhD nutritionist with research sponsored by High5, trying to persuade you that High5 is better than Powerade. The plumber is the scientist, challenging his hypothesis in search of the truth; the nutritionist is no more than a fundamentalist seeking and selecting evidence to support his initial position. Unfortunately, when we get attached to our ideas, the cognitive traps make us act more like the nutritionist than the plumber.

This is why the true scientist needs to adopt a mindset of challenging the hypothesis with data, and to have no belief that the hypothesis is true until the challenges show it to be so. Some practitioners even go as far as setting up a formal challenge in the form of an antithesis, an alternative hypothesis that is posited as a more accurate or insightful version of reality. This approach isn’t confined to the material and commercial – the Catholic Church appoints a devil’s advocate to provide the rigour of challenging its most important decision, the legal system applies the rigours of having separate representatives of both sides of the case.

So, how to apply this? Treat your belief as a hypothesis and challenge it, if necessary with your own devil’s advocate, to whom you give the seniority and power to challenge your decisions. And honestly expect your hypothesis to change as the evidence emerges.

Applying this lesson from science stops us being blind to the evidence at hand, but it doesn’t help us predict a future that is much more random that we think it is, or stop us being over-confident in our ability to predict it. To prepare for this, we take a lesson from sport.

2. A lesson from sport – prepare for a range of scenarios

A lesson learned by those of us who have been on the wrong end of a drubbing on the sports field or, more seriously, have experienced military action, is that no plan survives contact with the enemy. Whether you are a batsman facing a spin bowler about to treat you to one of his box of tricks, or a tennis player trying to decide if your opponent is stretched enough for you to approach the net without being passed or lobbed, you have to be able to cope with a range of scenarios. It doesn’t mean that your core game plan needs to be dictated by the opponent and environment, but it does mean that you need to be prepared for the range of scenarios that might play out. If you can’t deal with the high ball, you can guarantee that a good opponent will be sending up bombs for you to panic under all afternoon.

In business, the normal corporate downside scenario is maybe a 5% or 10% decline versus base case, which isn’t really a scenario at all, but more of a smaller version of the base case. A more useful scenario is to work out how we would still thrive if sales fell by 30% or 50%, or how we would grow if competitive substitute product X gained critical mass. How would we deal with costs? Where would we still invest, or even increase investment? Which divisions would we let go? What resources would we try to acquire? What we are not doing here is trying to create a plan for every single situation that might come about. What we are doing is stretching our thinking, in order to understand those common things we need to do to thrive in whatever scenario might come about, and preparing ourselves to respond to the inevitable unpredictability.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (3/4)

2009-02-17T16:27:00.005Z

In our first two posts in this series, we discussed how "cognitive traps" help us fool ourselves into thinking we're making rational decisions, when the opposite is true. We covered six common traps and their sometimes disastrous consequences. In this post we cover the final four of our ten traps.

Trap 7: “Overconfidence in calibration”

In this trap, people under-estimate the potential range of possible outcomes. In particular, people are often not sufficiently pessimistic with downside scenarios and/or attach too low a likelihood to major problems and pitfalls.

This issue is rife in business planning and financial projections. The more discrete and separate a business unit, the more visible is the variability; groups of partially-related businesses can appear easier to predict just because of the averaging of different under- and over-performing units. We often see business plans that overall are at or slightly below target, but consist of component businesses that show enormous variations from the original projections. For some reason, we as managers believe in our ability to perform within a tight range of projected expectations, despite this consistent evidence to the contrary.

Trap 8: “The fallacy of conjunction”

This is a trap in which people overestimate the likelihood that a series of highly likely events will all occur, and conversely underestimate the likelihood that at least one of a series of unlikely events will occur.

This leads management to believe that its mid-case scenario (which consists of all those highly likely events) is much more likely to happen that it actually is. The corollary is that it is reasonably likely that at least one of the many highly improbable, left-field, events will occur, and management will correspondingly be less likely to be ready for it.

We see this fallacy most often, again, in business planning, where a great deal of thought and preparation is given to the central scenario in the business plan, which from historic experience very rarely turns out to be true. It is why we at Latitude see business planning as a helpful process to prepare for possible futures, but see business plans as simply a means to this end.

Trap 9: “Failure of invariance”

This trap recognises that people are risk averse when prospects are positive but risk-seeking when they are negative. In a famous experiment, the vast majority of participants preferred a 100% chance of winning 500 pounds versus a 50% chance of winning 1,000 pounds. The same group preferred a 50% chance of losing 1,000 pounds versus a 100% chance of losing 500 pounds.

Companies approaching distress or who have experienced the initial failings of an investment seem to follow this risk-seeking tendency by trying ever more unlikely approaches to getting back their original money. It is almost always more rational and loss-minimising to write off sunk cost or a percent of equity, and to look at each decision on its own merits without the need to regain lost ground. Using share options as a reward mechanism can exacerbate this problem by actually making the risk-seeking rational for the individual manager, incentivising to act against the best interests of other stakeholders.

The other side of this coin, risk aversion when the company is ahead, is also very common and can lead to tremendous lost opportunity in new areas of business. This can be such a strong mindset in the team that created the company’s success that changing a winning team can sometimes be the only solution when seeking continued growth.

Trap 10: “Bystander apathy”

In this trap, people abdicate individual responsibility when they are in a crowd. Sometimes it is the apathy that stops anyone in a large crowd stopping a mugging; sometimes it is abdicating individual judgement to the perceived wisdom of the crowd. It seems that the risk of taking the contrarian path and being wrong is worse than being the anonymous lemming going over the cliff with all the others.

We see this in the various fads and booms that we fail to understand but cannot afford to miss out on. The recent “arbitrage” profits experienced in the world of private equity from ever growing P/E ratios is an example. Every Investment Director we spoke to when we surveyed them about this in 2006 knew that the P/E growth would need to stop at some stage, and admitted to stretching beyond managements’ business plans to make the investment case for purchase. But no-one felt they could afford not to keep investing. Everyone could see problems coming, and knew what would happen if they were left holding the baby when P/Es inevitably started shrinking, but to stop investing was to step out of the game.

There are numerous other cognitive traps, such as contamination effects from irrelevant data and scope neglect where we don’t minimise harm; but you probably already get the drift – people aren’t as rational as they think they are and they make irrational and potentially harmful decisions without realising it.

In our fourth and final post in this series, we suggest two ways of combating these cognitive traps, used for years in science and sport, in an attempt to throw some good sense and rationality back into the mix.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (2/4)

2009-02-16T16:12:00.005Z

In the first post of this series, we explained how "cognitive traps" trick us into making irrational, and potentially harmful, decisions without realising it. We explained traps one and two, and their damaging business and financial consequences. We will cover ten such traps in this series, and conclude the series with some suggested methods of staying rational, and countering what seems an inevitability of falling into the traps.

In this post, we cover traps three to six, and their consequences.

Trap 3: “Availability bias”

This trap causes people to base decisions on information that is to hand, usually in their memories, versus the information that they actually need, like the car driver who loses his keys at night and only looks for them under lamp posts.

We see this at its most dangerous in Board or management workshops where the day is being run on the basis that all of the important knowledge is in the room. We have even heard facilitators use this we-have-everything-in-our-heads-already as a key premise for the entire strategy that emerges.

This cognitive trap also biases us to recency and proximity – we don’t look back far enough for similar patterns or warning signs, and we don’t look far afield enough for analogous evidence of failure or success.

Trap 4: “Confirmation bias”

This trap causes people look for evidence to prove what they believe to be true, rather than looking for evidence to challenge it: why Tories read the Telegraph and Socialists read the Guardian.

We see this bias at its most damaging in investment cases for acquisitions and in business cases for investment of money and time into new ventures or projects. Even when employing a third party professional to assess the acquisition, venture or project, the investor or business manager will actually ask for affirmation or substantiation – “I’m just looking for confirmation of my hypothesis” - rather than “Challenge me and tell me where I’m wrong”.

Trap 5: “The affect heuristic”

This trap causes people to allow their beliefs and value judgements to interfere with a rational assessment of costs and benefits.

We find this most dangerous at either of two extremes: on the one hand where the decision maker is very passionate about a subject, or on the other where he is once-bitten-twice-shy.

In the former case, whilst we find it critical that managers be passionate about their products or services, this passion can blind the person to reality, and can be impossible to address without introducing a very senior individual with authority to challenge assertions with information.

In the once-bitten-twice-shy case, we have seen private equity companies abandon entire sectors following one painful loss, and refuse to entertain the most solid business case that shares even the remotest common characteristics of historic loss-makers.

Trap 6: “The problem of induction”

Induction is the process of generating a general rule from a series of observations. In the absence of clear indisputable deductive relationships, induction can be all a person has to go on. The problem of induction is that the brain will look for neat patterns and will try to create a general rule even if it is based on insufficient information.

In acquisitions, people can over-estimate the performance and prospects of a company by seeing how satisfied its customers are. This creates an overly-positive pattern from what is essentially a self-selecting group: non-customers and disgruntled ex-customers need including for the full picture. Another example of poor induction is where management projects forward on the basis of a new product’s first year’s sales and forget to consider that this first year was a golden year, where everyone without the product bought one and would never need another.

A very common area where induction knows no bounds is in the practice of regression: correlating one factor against another to create what superficially appears to be a causal relationship. For example, it is possible to infer high price sensitivity when analysing price-volume relationships, and miss the over-riding effect of heavily marketed promotions that commonly coincide with lower prices. I was humbled to the limitations of correlation when an analyst working for me at my former company determined an almost 100% correlation between pallet demand and GDP. We started to doubt the causality when the analyst realised that she had used the wrong source data and correlated UK pallet demand with Polish GDP numbers. Our confidence in the causality was damaged further when the correlation with the "correct" driver, UK GDP, was about 30% lower.

In our next post, four more cognitive traps, after which we will conclude the series with some suggested counter-measures.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (1/4)

2009-02-06T15:49:00.004Z

The shocking financial consequences of how we think

Niall Ferguson’s best-selling and televised “Ascent of Money” covers beautifully the evolution of the financial system from ancient Mesopotamia to today. It is a superb book that relates the crucial role of financial tools in the growth and decline of empires and dynasties. Ironically, in amongst this excellence, the chapter that resonates most strongly is the afterword. This is called, suitably and contemporaneously, The Descent of Money.

The theme of that chapter, and this post, is how our hard-wired thought processes cause us to make decisions with a mindset that was useful for our evolution, but that in business and finance is destructive and irrational. He lists a series of cognitive traps - ways in which we make poor decisions without realising it.

We at Latitude recognised every single one of these traps, both in ourselves and in the companies we support and review. We could also relate to the considerable damage that each one could cause if unchecked.

We illustrate some of these common traps in this post and the next two posts in this series. The terminology is complex, but the ideas are simple and you will recognise every one. Even becoming aware that they exist should help avoid their destructive consequences. In our fourth and final post of the series, we attempt to go one step further in helping to steer clear of trouble and distress by proposing two well-tested answers that have been used by science and sport from their outset.

Cognitive traps 1 & 2

Trap 1: “Extending the present”

In this trap, the individual assumes that the present is good guide to the future; much better than examination of previous experience illustrates.

We see this at its most common in business planning where future revenues and costs are based on the present, plus or minus a small percentage. The reliable rule that we apply to such plans is that they will usually be wrong, though the future profit out-turn may end up being more-or-less the same with good management and a little luck. The alternative to extending the present – acknowledging that we are much less knowledgeable about the future than we think we are - is a more uncomfortable state of affairs; but this more realistic mindset can lead us to adopt valuable approaches such as scenario planning, which make us much readier for when the unforeseen does happen.

Trap 2: “Hindsight bias”

Hindsight Bias is the trap that causes people to attach greater probabilities to events after they happened than they did before they happened. Whereas in Extending the Present, people assume the present is a better guide to the future than it actually is, with Hindsight Bias, people over-rate the past as a reliable guide to the future.

When we attempt to learn lessons from the past, we must therefore make sure we cover the failures as well as the successes. For example, we can blithely look at many successful companies and conclude that they were much more focused in the services they offered than their more mediocre counterparts; that service or product focus is a pre-requisite for success in all market-leading companies. We could use this to conclude that we should rid ourselves of all products, services or skills except those that are part of this single core. However, if we look at the failures, we see that many of those companies were also very focused, but the successful ones were the minority that just happened to focus on the right thing. Looking at the full set of information, we would conclude that focus with no contingency plan is a high risk strategy, which more often than not will fail.

Hindsight Bias also leads us to project forward assuming that the models and mechanisms that worked in the past have a high probability of working in the future. We forget, or don’t realise, that what actually happened was the one of a myriad of possibilities that happened to be supported by the circumstances of the time. Stepping into the present, those myriad possibilities still exist and the chances of the future turning out as we project are much less likely than we think.

In our next post: four more common cognitive traps that help us cause destruction without even knowing we've done so.

Copyright Latitude 2009. All rights reserved.

Latitude Partners LLP
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

Geographic expansion - how to make it work and not lose your shirt (5/5)

2009-02-04T09:33:00.006Z

If you've read the previous four posts in this series, you will be aware that two-thirds of geographic expansions are either closed or still losing money after two years, and that there are some common steps that the successful expansions take to stack the deck in their favour. In the last three posts, we covered the first three of these steps: preparing the company internally by creating a replicable business model; following the money to choose the right location; and, warming up the market with leads, contacts and relationships before creating a local presence. In this post, we cover the fourth and final step: committing to the chosen location.

Such a commitment is about three things. First, focus on one country or region at a time, and make it successful before moving on to the next; each new location will take up serious management time, and multiple additional locations are major distractions that pull management further back from the required tipping point. Second, don't dabble in markets. Just like learning a new language, you either need to immerse yourself or accept that you will never be credible. Third, take active steps over a major period to bed the business into your global business, for example by using six-month exchange programmes for new recruits at head office.

Lane4 is one of the leading and most successful executive development consultancies in the UK. It has strong demand for services world-wide from global clients. Conscious of the need to retain control over quality and have a commonly-understood way of operating, Lane4 is very deliberate in its new office opening. It has effectively created a queuing system so that one office is opened at a time, every 2-3 years. It has done this successfully in Australia, the US and Switzerland. New offices always contain long-term senior company employees in their management teams. Lane4 even relocated one of its founders to the US office to invest in the offices development and support local academic relationships with his contacts.

This deliberate, committed approach can be contrasted with a famous operational consultancy (unnamed in this post out of respect for interviewees) that experienced a rapid growth in international demand for its services based on a best-selling business book. It opened a series of international offices simultaneously to support overwhelming demand. It made no proactive effort to integrate new staff, though the rapid expansion would have made this unviable anyway. Furthermore, the company's laissez-faire appraisal system reduced the chances of a uniform approach to close to zero. The result was a patchwork of offices with inconsistent approaches, and numerous false starts within many countries. With a series of loss-making international offices and investment write-offs, the company itself closed down after five years of losses, despite the fact that its home office was highly profitable over the period.

Our messages from this five post series are, firstly, that the perils of international expansion should not be under-estimated and, secondly, that there are a series of steps companies can take, that are common to successful expansions we have observed and that can be used to stack the deck emphatically in your favour.

Of course, there are legion other issues to consider in expansion, such as what business model to use, whether to have a physical location, etc. These are determined by the specific circumstances of the particular company, and will be the subject of a future post.

opyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf or to sign up for our monthly newsletter of insights.

Geographic expansion - how to make it work and not lose your shirt (4/5)

2009-02-03T12:21:00.004Z

In our last two posts we covered the first two steps in stacking the deck in your favour for a profitable expansion into a new geography: preparing your company internally for expansion and selecting the right location to expand into. Once those are done and you have chosen a market, the next step is to prepare the market for entry.

You should never, ever go into a market cold and start from scratch there. If you've followed the previous step, you are following the money and will already have at least one long term client in the new location. But the new market needs more warming up before taking the big step of opening up a local capability. This usually means working local contacts and introductions from head office, so that the MD or salesman of the new office has a ready list of warm relationships before even stepping foot in the new country or region.

These salespeople must also be local with market relationships and contacts, and an intimate knowledge of the local culture. The ideal person will have spent time in your company already, and therefore already knows how you do things.

The MAC Group was a business advisory firm that sold itself for an enormous return in the 1990s to what became Cap Gemini. MAC's expansion followed a very deliberate path with three important steps always taken before entering any new country. First, MAC always followed the money in the form of local demand from long-term clients. Second, MAC's model was to work with business school professors in client projects, and MAC's senior partners always established and warmed up these academic contacts before moving into any new region. Third, MAC's new offices founders were sales-orientated country nationals. The result: MAC grew into a highly-profitable $250m business at the time of its sale.

The success of MAC's deliberate approach can be contrasted with an operational management consultancy that again we won't name for obvious reasons. This consultancy opened a US office on the basis of a very large one-off project for a client. But the company did no further market preparation, and sent in joint office heads that delivered the client project, but they had no sales skills and were not US nationals. After the client project ended, the two founders achieved no further sales and left the company after six months. They were replaced by a US national who had no knowledge of the company. This person in turn sold no further business and returned to the EU head office, with relocation for his family to be employed as a consultant at head office. The US office was closed on his relocation.

We hope these examples illustrate the importance of the third step in our apporach to geographic exansion: spending time and energy warming up a market before committing resources locally, and the likely perils of not doing so.

In our next post will will cover the final stage of profitable geographic expansion - committing yourself to the chosen geography.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf or to sign up for our monthly newsletter of insights.

Geographic expansion - how to make it work and not lose your shirt (3/5)

2009-02-01T16:31:00.005Z

In our last post we looked at the first step you can take in stacking the geographic expansion deck in your favour: preparing the company internally by using a clear business model that can be replicated easily, multiple times. In this post, we look at the second step: choosing the right commercially attractive location.

We have a mantra for this step; and if we want people to remember one thing from all our findings about geographic expansion it is this mantra: "follow the money". Follow the money means two things. First, it means following demand from existing clients that have major budgets that you expect to be spent on you over a period of years. Second, it means moving into locations that have strong latent demand for your services. These factors both need to be in place. It's just as bad to follow a single client into a backwater as it is to set up in a major corporate centre with no established ongoing client to support you.

"Follow the money" is the demand-side of selecting the right location, but we should also look from the supply-side perspective. That is to choose from locations where you have knowledge, experience and contacts. Failed and loss-making geographic expansions are littered with examples of talented, energetic people starting from scratch in a new location, to abandon the project with few leads and no sales six months later. Even if you are following an existing client, a new location needs this broader base of contacts and internal local knowledge to grow and thrive.

Monitor Company's geographic expansion was based at its core on following the need of long term clients. But if you look at Monitor's network, these client locations are also all major corporate centres. With each of its new offices, Monitor was deliberate in using the knowledge and contacts of nationals of the new location that already worked at the company. At the time of writing, Monitor had established profitable offices in more that 25 locations world-wide. We can contrast Monitor with a supply chain consultancy (which we won't name for obvious reasons) that took the more usual approach to geographic expansion: an enthusaistic individual opened an office on the basis of a one-off client project, but had no knowledge, contacts or experience of the location. After the six-month assignment finished, work dried up; the office was closed two years later with a write-off of more than one million dollars.

Now we have covered the first two steps in improving the chances of profitable expansion: preparing the company and choosing the right location. In our next post, we'll cover the next step to improve the chances of success further: preparing the market.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.

Geographic expansion - how to make it work and not lose your shirt (2/5)

2009-01-22T17:53:00.007Z

In our last post we looked in overview at the four steps companies can take to stack the deck in their favour in a geographic expansion. These are common-sense measures applied in the 30% of expansions that make money after 2 years, and missing in the two-thirds that spend 40% of their senior team's time to set up an initially loss-making and ultimately closed subsidiary.

In this post, we look in detail at three elements of the first step, taken before even looking at a new geography: preparing the company internally.

First is to create a clear, replicable business model, if one doesn't exist already. An employee from head office should be able to go to the new office and know exactly what to do without changing work habits. Without this, the new office will be at best completely autonomous and at worst in constant conflict with head office, either failing to second guess or having to constantly check on every step it takes. Chaotic environments that thrive by winging it, or companies that change tack rapidly at the whim of their current CEO, create chaos-squared when they expand. In the words of a now-global business consultancy: "If our existing model wasn't easily definable, then the new one certainly wouldn't be either - it would have caused complete confusion."

Second is to make sure that there is clear accountability and agreed decision-making processes in place. In most cases, this means having one person with the remit and decision-making power for the new office, before any decisions have been made. If that person can project manage, then all the better.

Third step is to introduce a consistent review and evaluation process that can be applied in the same way to the same standards across all offices, with head office being able to crack the whip to make sure the process remains standardised.

Bain & Company is a classic example of this disciplined approach. Bain is considered a cult within the consulting sector, with an intensive standardised induction programme where new recruits become "Bainies" before being let loose inside the company. Read a Bain presentation or review a Bain project plan anywhere in the world and it looks the same, because everyone goes through the same training programmes. Every Bain office uses the same set of 6 month performance benchmarks in a consistent global review process. With consistent processes and performance standards worldwide, clients have the same experience whichever office they work with. This tightly-managed simple business model has enabled Bain to grow into a genuinely global consultancy, attracting some of the world's top talent and serving some of the world's largest companies year-on-year.

In our next post, we'll cover the next step in stacking the deck in your favour: choosing the right geography.

Geographic expansion - how to make it work and not lose your shirt (1/5)

2009-01-18T15:20:00.008Z

33% of geographic expansions are not in existence two years later and only 31% are profitable. Successful attempts require commitment: profitable expansions take up large amounts of senior management time, on average 28% of it. This sounds like a major investment to make something work, until you realise that unsuccessful expansions took up even more time, on average 39%; i.e. the senior management of these businesses spent 2 days of every weak creating either a loss-making international presence or one that would close within 48 months. (Source: Latitude study of 74 international expansions).

In this five-part series we will look at common characteristics of geographic expansions that have been profitable and sustained. Today's post gives an overview, which we'll cover in more detail in subsequent posts.

Successful expansions followed four stages, which are essentially a series of steps to stack the odds in the company's favour, and are summarised below. There were exceptions, but this is the rule:

1. Prepare the company for geographic expansion

Create a clear replicable business model that can adopted easily by the new country team and can serve cross-geography teams.

Ensure that there is a clear agreed accountability and decision making process between head office and any potential new country or region teams, i.e. who is responsible for what.

Develop a consistent global review and evaluation process with no differences between offices.

2. Select the right country or region to enter

"Follow the money" - set up to serve existing clients with significant budget over a long time frame AND where the market offers long term possibilities, i.e. follow your best long term clients but don't follow them into a backwater.

Choose a location where you have knowledge, experience and contacts.

3. Prepare the market for entry

Warm up the market with existing relationships where head office can give introductions to buyers - never go into any market cold.

Recruit, or ideally transfer, local sales people and nationals who have local budget-holder relationships and know the local language and culture. The ideal person is a country national who has worked for you for years, the next best is recruiting that same national several months in advance of opening in the new country.

4. Commit to the chosen geography

Take one country at a time and make each successful before moving onto the next.

Have conviction - commit to the geography only if you know you want to be there long term. Don't dabble in markets.

Bed in the business by taking time to integrate new recruits properly into the company.

We'll expand on each one of these stages in subsequent posts, and give good and bad examples of each.

To give some perspective on the benefits of investing in such a deliberate approach and following these stages, clients of ours that have taken this approach have on average grown local sales by 25% annually, all have been profitable within 12 months, and new offices have supported international growth by an average 10% annually.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.

How to write an effective business plan (2/3)

2009-01-13T10:56:00.004Z

In our last post we covered some of the common errors we see in plans we review. In this post we cover the key aspects of an effective plan.

Writing an effective plan

Be clear about who and what the plan is for

You need to think about this to determine what is in the plan and how much you need to explain. The plan is confined to information and context relevant to the target audience to achieve this end. For example, a plan used to attract an external investor will need a market section explaining the fundamentals; one used to generate Board agreement about a new course of action may only need a commentary on recent changes or trends.

Convince yourself first

A good plan needs to convey both passion and credibility. Credibility is the factor that is almost always lacking. The harder the plan writer challenges his own thinking and his own assumptions, the more credible and higher quality the plan. Your own concerns and lack of clarity will come out at some stage during the process, so you need to be the one that takes control - test and pre-empt them before someone else does.

Realise that the plan is step one of many

The most successful, well-written plan will not be the single killer step that by itself secures investment, agreement to proceed, or whatever the ultimate objective may be. It is only step one, to be followed by meetings, questions and challenges.

The role of the plan is to help clarify the opportunity for all involved and build your credibility, so that subsequent discussions are productive and focused on how things are going to get done.

Be brief and clear

The plan needs to contain enough to describe the opportunity, why it is attractive, how you are going to exploit it, and no more. If you are enthusiastic about the opportunity, you will be able to write at-length, most likely well beyond the tolerance level of most readers. You will need to be deliberate in your efforts to bring out the most important points, reduce redundancy, and be clear and specific about anything that is open to interpretation. Use the document to intrigue the reader, not cover every angle.

That covers the key characteristics of the most effective plans we review. In our next post we outline contents of a typical plan.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.

How to write an effective business plan (1/3)

2009-01-12T21:00:00.001Z

Business plans are vitally important documents, both for raising investment and for generating common understanding about proposals for the future. Most of these plans take weeks to produce, and many are written with the help of corporate finance advisors and other professionals. We have the pain and privilege of being a paid reviewer of plans, and the frightening reality of our experience is that most of them sit somewhere in the range of poor to terrible. However, most of the problems can be fixed with some simple disciplines.

In this three-part post, we list the most common errors we see, and some recommendations for writing a more effective plan.

Common errors

The plan is too long

No one will invest straight off the back of a plan. If they are intrigued by it, they will want to meet you and find out more. The plan needs to be sensible, but if they invest, they are investing in you. They will be backing your ability to achieve the plan or, more likely, something just as good when life inevitably turns out differently. So your objective is simply to say enough that the reader can decide that they either want to meet you or that they are not interested, and no one’s time is wasted as a result.

Whoever your target reader may be, they need to read the plan in one sitting and retain what they read. This means you have 10-20 pages to get your plan across. You cannot possibly detail every idea, initiative and piece of evidence in a ten-page document. So your challenge for the plan is to summarise the important points, just enough to whet a reader’s appetite and either entice them to want to meet you or decide quickly that it’s not for them.

The plan is overtly optimistic, ignoring the risks and negatives

Plan writers naturally try to put their idea across as positively and attractively as possible. This is natural, and it is important to be positive and put across your passion; but most plans end up as blatantly optimistic sales documents, with little thought to risks and downsides. Unfortunately, this propensity increases with the use of poorly qualified advisers.

Readers want to see their concerns being pre-empted and addressed rigorously in the plan, not dismissed or ignored. Your plan is an opportunity for you to put yourself across as a passionate but practical business person, and build your credibility before meeting potential investors. If the plan dwells only on the upside, you come across as unrealistic.

It looks like a filled-in template

Some sections of plans really are necessary most of the time. It’s rare that you don’t need a section discussing the relevant market trends, the distinctive differences of your service or the projected financials. However, crow-barring in a SWOT analysis or a Porter’s Five Forces puts you in serious danger of looking like an amateur business plan writer, rather than a smart professional with a convincing investment proposal. If a section adds to the reader’s understanding in a neat, focused manner, then go ahead with it, but blind application of template business tools will make your plan much worse.

It contains too many broad generalisations

Most plans focus on a specific opportunity in a specific market, but descriptions of the market and the opportunity are often so generalised as to be meaningless. If your plan is for home pet-sitting in London, showing how many millions of cats are bought every year in the UK is almost irrelevant.

Describe your service, your market and the reasons people will buy as precisely as possible. You will need to make assumptions, but as long as you state what they are and why they are credible or conservative, then you have a context that is meaningful to all involved.

It is written in language that impairs the readers’ judgment of the business

It is amazing how many people have a writing style that detracts from the quality of their thinking and business ideas. A business plan is a serious document that needs snappy, simple writing to get the point across: one idea per paragraph, one point per sentence. No sales-speak, no rhetorical questions, no use of complex technical language. Furthermore, too much business-speak is common in many plans but gives an impression of vague thinking and lack of real world practicality, it can be annoying and a turn-off for the reader. Language may not improve the appeal of your business but it allows the reader to clearly understand your thinking without distractions.

OK, that's what not to do. We cover key aspects of writing an effective plan in our next post.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.

How to write an effective business plan (3/3)

2009-01-12T20:12:00.006Z

In our last two posts we covered the classic mistakes people make in writing business plans and some characteristics of the most effective plans we have reviewed. Classic mistakes are that the plan is too long, it is blatantly optimistic, it looks like a filled in template, it contains too many broad generalisations, and it is written in language that impairs understanding. Key steps used by writers of effective plans are: being clear who and what the plan is for, convincing themselves about risks before writing the plan, treating the plan as step one of many, and using clear language.

Now we review typical sections that we expect to see in some form in the plans we review:

Plan contents

The bullets below show a typical framework for a plan. This framework is a start point and no more than that. It needs to be cut and changed to tell the story you want to tell in the clearest, most relevant way. With the right mindset and style for the plan, you can adapt the sections below to get your idea across, and generate credibility and interest from your target audience.

Business Plan Template

Executive summary (1 page)

Summary description of the business containing enough for a person to understand it in 5 minutes. One paragraph each on:
– Business background (description of the business)
– Vision and strategy
– Relevant market background and trends
– Revenue and cost expectations (short summary table)
– Key next steps in implementation plan

Business description (1-2 pages)

Background
– Description of the products or services the business will provide, and why they are better or different than what already exists
– Description of the customer groups
– Any other relevant background needed to understand the business
– Any relevant history

Vision
– Description of your vision for the business that will get people excited. Include any tangible targets in terms of sales, customers, product performance, market share, etc.

Strategy
– Summary description of how the business will achieve the vision described above. Include relevant descriptions of how your product or service will developed and marketed, and any other important issues to get right, e.g. technology, sourcing products, etc

Market (1-2 pages)

– Description of the market including estimates of overall size and the opportunity for your product/service
– Description of any market trends that are relevant to demand for your product/service

Competition (1 page)

– Description of direct competitors and alternative products or services customers have to buying your products/services
– Explanation of why your product/service is better or different than the competition

Revenue streams (1 page)

– Description and quantification of all major revenue streams for a three year period, being clear about all assumptions

Costs (1 page)

– Description and quantification of all major costs for a three year period

Implementation plan (1-2 pages)

– Explanation of all major steps required to get business up and running, and performing in the first year. This is best done as a table describing with all major actions with deadlines and responsibilities

Financial projections (1 page)

– 3 year summary profit and loss account
– Description of all major investments

Team background and credentials (1 page)

– One paragraph on each of the team members

So there you have it. At its heart, a great plan will describe a great idea, supported by a great team, but will do so in a brief, clear way, that gets to the point and intrigues the potential backer.

The last plan we wrote was for a start-up sports team and it raised a £40m investment, from the first backer the team approached, within two months. The plan was short and simple with not a SWOT analysis in sight, but it was a great idea and had a great team. The plan was just step one.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.

Turning around distressed companies (3/3)

2009-01-11T17:27:00.001Z

In the previous two posts, we covered the first four stages we see in successful turnarounds: establishing the facts about the business and its market; working out what went wrong to get the business into its distressed state; and, once the problems have been identified and solutions proposed, taking control of time and taking control of money in the turnaround process.

Once in control, the turnaround team needs to make the first steps to develop some momentum in the right direction.

5. Make a series of promises you know you can keep

At the start of a turnaround every party with an interest is worried: employees, shareholders, banks, creditors, business partners, customers and suppliers. Increasing their confidence is critical to making any progress.

It is in management’s interest to be proactive and make a series of promises, which it knows it can keep. Hitting these checkpoints is the most effective tool management has to build its credibility. The most basic, and likely required, is a revised budget, but other forward-looking checks are also helpful. With every check management hits and promise it keeps, it builds credibility and confidence, financiers become less stringent and heavily involved, customers and suppliers go back to their regular relationship with the company.

To be successful, this approach naturally works its way down the organisation. For the CEO to promise a series of financial achievements to investors, he needs to be confident that his team can deliver on their promises in each of their areas, and so on.

This approach also has enormous and innate internal benefits - hitting promises helps organisational self-belief when the company needs it most.

The most important characteristic of such promises is not that they are ground-breaking, but that they are achievable in short time. As the mantra went in IBM’s turnaround “win small, win early, win often”.

6. Change the team

We have never seen a dramatic change in the fortunes of a company without a corresponding change in the senior team. This means at least two or three changes in senior personnel, almost always including the CEO.

It is usually self-evident, and often self-selecting, who is engaged in the turnaround and who wants out. We believe it is the job of the CEO to check the attitude of each member of the team and make the decision quickly. We have yet to come across a successful turnaround CEO who has regretted changing the team or has said they did it too quickly. We also find that getting the right turnaround team together is predominantly a matter of attitude; aptitude rarely comes into it.

7. Simplify

Complexity is a double-edged sword in turnarounds. Companies often get into trouble when they have taken on too much; and when they are in trouble they try extra things to get out of it.

By definition, many of these are not working and at best create a mass of distraction that the business can do without.

When cash and time and goodwill are constrained, the business needs to concentrate on doing a small number of things well. This can mean reducing product lines, cutting or selling business units, outsourcing business processes or numerous other simplifications depending on the situation. Whatever is done, the process of simplification needs to go far enough to give the remaining activities the focus of management time and investment required to do them well.

So there we have it, the seven stages we have seen successful turnaround teams take that distinguish them from the 70-80% of turnarounds that fail:

1. Establish the facts
2. Understand what went wrong
3. Take control of time
4. Take control of money
5. Make promises you can keep
6. Change the team
7. Simplify

All of these things are common sense and relatively obvious, but all of them are also easy to duck or delay. Hopefully, this article illustrates that our clients that have performed successful turnarounds simply do the sensible things that experienced managers know they should be doing anyway.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.

Turning around distressed companies (2/3)

2009-01-11T17:25:00.000Z

In our last post on successful turnarounds we covered the first stage: establishing the facts about the company's performance, particularly the often-disregarded investigations of whether the market remains attractive, if the competitive position remains secure, and what customers plan to spend with the company next year.

Having established whether the business has potential worthy of continued investment of time and money, the next stage is to understand what went wrong to get the company into its current sorry predicament.

2. Understand what went wrong

Companies we support in turnaround find themselves there for two generic reasons: either something major went wrong for a short time, usually loss of a dominant customer or a dramatic market change; or something minor went wrong for a long time, usually poor understanding of customer or product profitability, that led to misguided allocation of capital and resources. Either way, the reason for the problem needs to be flushed out and addressed. Any recovery plan is simply not credible without this process. In our experience, the forensic exercise to find the source of the problem is rarely difficult for fresh eyes.

It is tempting to blame market changes when things go wrong, and we hear this all the time. Sometimes market downturns do happen unexpectedly and these can land the company in trouble. So the company was unlucky. That doesn’t matter – the turnaround doesn’t hang on whether anyone was to blame or whether they were battered by fortune. What matters is that we need to establish whatever went wrong and fix it.

3. Take control of time

Senior teams, and particularly CEOs and finance teams, in distressed or turnaround situations, experience relentless demands on their time from all sides: owners, owners’ advisors, banks, banks’ advisors, customers, creditors, worried employees, worried Board members; the list goes on. At the same time, management is constantly harried by a series of apparently urgent tasks, each of which appears to be critical in its own way.

Tempting though it may be to heroically charge from fire to fire, coming up occasionally for air to report to lenders or answer questions from advisors; the senior team cannot possibly effect any sort of successful turnaround in such a responsive way.

The CEO needs to create breathing space for the business.

From our observation, the first thing successful turnaround CEOs do to achieve this is take control of time. They understand the requirement to accommodate communication needs and put out the urgent fires; but they also recognise the crucial necessity to protect the time that they and their team need to think, understand the problems in the business, formulate the plan, delegate and implement it. This protection takes numerous forms, such as establishing regular update meetings with all parties to limit repetition, setting weekly time aside to plan or talk to key customers; whatever it takes to promote the important so it is on par with the urgent.

4. Take control of money

Equally important to taking control of time is taking control of money, understanding where every pound is going and coming from. It goes without saying that the CEO needs to take decisive action on business solvency and a plan to return to profitability, which most usually means addressing cost. Where successful turnarounds differ is in the management of details, and the corresponding flows of money. The most effective turnaround CEOs we know make a habit of establishing and monitoring a realistic pipeline, creating a bottom-up budget and making the team accountable for every pound of income and spend.

In addition to problems of solvency and profitability, most companies in turnaround situations have issues with liquidity. Whereas profitability can be addressed internally by sensible planning and performance management, liquidity usually requires external support from financiers, ranging from payment holidays through to cash injections.

This liquidity brings breathing space that allows management to make calm, rational decisions that support long term survival and profitability. Without it, the company can end up in a frenzied cash and business chasing environment, of constant triage with an eye only on today’s problems.

The senior team has numerous tools at its disposal to persuade financiers or creditors to extend liquidity: the CEO’s personal turnaround track record, the business pipeline, the bottom-up budget, evidence of future customer spend or market growth, a plan to address what went wrong. But management’s strongest card, and now a regular requirement from lenders, is to make the liquidity conditional, i.e. making continued or extended financing subject to hitting a number of agreed goals. We cover this in our next post.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.

Turning around distressed companies (1/3)

2009-01-05T15:46:00.000Z

Turnarounds of distressed companies rarely succeed. Here are some observations of what I have seen to work.

First, to be clear, the common definition of a turnaround is very broad. It is basically about improving performance from bad to good. At one extreme, turnaround stories are about turning an under-performing company into a world-beater; using sports language, taking a regular team player and turning him into the world champion. This article is about the other extreme of getting the regular athlete out of intensive care: taking a company that will not survive in its current form to a position where it is profitable and sustainable.

Using this definition, most turnarounds do not succeed. The majority of respected surveys put the success rate of turnarounds between 20% and 35%, depending on the definition of underperformance and success. Those with turnaround experience know also that they are usually highly stressful and, if unsuccessful, very poorly rewarded.

We believe that it does not have to be this way. In our experience, there is almost always a decent business in amongst the detritus of a struggling company; which a smart CEO can rejuvenate with some tough decisions and a close eye on the business.

We work with some outstanding turnaround CEOs, whose success rate is close to 100%, and whose approaches share a series of common measures, which we summarise below. This list is not meant to represent a guaranteed recipe for turnaround success, it does not reflect the importance of addressing the specifics of each unique situation, and by definition it is incomplete. It is nevertheless a set of simple actions common to all the successful turnarounds we have witnessed and supported. We describe these measures in the broad order in which we observe them:

1. Establish the facts
2. Understand what went wrong
3. Take control of time
4. Take control of money
5. Make promises you can keep
6. Change the team
7. Simplify

We have written this article from the perspective of the new CEO. This is because we believe that a new CEO, brought in or promoted internally, is pre-requisite for getting a company out of intensive care or creating any step change in company performance.

1. Establish the facts

It is an almost universal practice and requirement for turnaround and recovery experts to establish the short term (three to six months) viability of the business. This is typically a rapid, internal exercise focused on contracts, commitments and cash flows. The exercise is absolutely necessary, but sufficiently well-understood and common that we will not cover it further.

Less common, but equally vital is ascertaining the one-year viability and two-year potential of the business.

This exercise is not a luxury: successful turnarounds almost always require liquidity from either debt or equity; and these sources will need to be reassured that there exists a viable business in the mid term, and that they are not throwing good money after bad.

The work requires an investigation of commercial reality, looking both inside and outside the business.

Externally, it requires interviews at a micro level to understand as clearly as possible customers’ budgets and spending intentions, and research at a macro level to garner the full facts of relevant market trends and competitive developments.

Internally, it requires a robust analysis and understanding of sources of profit and loss by either product, customer or market.

The entire exercise can take as little as two to three weeks for an experienced team, can be performed with minimal disruption to the business and if done well forms the basis of evidence for the recovery strategy. Armed with genuinely solid and accurate information about the external and internal business reality, the recovery strategy is rarely complex and generally obvious.

It is rare that we look beyond two years in distressed or turnaround situations. The time to look at outer years is when the fires are mostly out.

In our next post, we will look at the next three elements of the most successful turnarounds we have experienced: working out what went wrong, taking control of time, and taking control of money.

Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.