What to Look for in a Consultant

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

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

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

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

“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”

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)

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