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Successful companies are those that execute.  That is about as blunt as one can get.  Companies executing a mediocre strategy will out-perform any company that fails to execute a great strategy.  Then why don’t they teach that at B-School?  Because it is messy.  Because it has so many variables.  Because it involves people!  A great manager, Peter Drucker said, obtains extraordinary results with ordinary people.

What is the biggest roadblock to execution of a great strategy? “Good Enough”!  Excellence is undermined by acceptance of “Good Enough”.  Managers and the individuals they work with accept “good enough” when the goal is either poorly explained or seems to move.  The key to Great Execution, the key to Excellence, is FACE-time.  FACE stands for Focus, Actionable Goals, Compelling Intensity and Engagement Cadence.

Focus – some companies are convinced that if a few goals are good, then a lot of goals are great.  The idea being that if you have, say 20 different goals, then some of them are bound to be achieved.  But studies have shown that the more goals one has, the FEWER are achieved…not on a percentage basis, but on an absolute basis.  If a company has 2 or 3 goals, it will achieve 2 or 3 goals.  But if it has 4 or 6 goals, it will achieve on average 1 or 2 goals.    More than 10, the odds are none will be achieved.

I have been a firm believer in having three goals for a company.  With three goals, you can avoid gaming between the goals.  We all know, I hope, that profit or EBITDA are measures that depend, in part, on accounting decisions or policies.  What level items get expensed versus capitalized, how obsolete inventory is calculated or accounted for, etc. all affect these figures.  So having a single goal of EBITDA can ultimately be meaningless to the overall performance of the company.  A footstool needs three legs to stand on its own, likewise three goals allows the performance of the company to stand on its own.

Actionable Goals – The focus of the team should be on goals that they can actually affect.  For example, if the corporate goal is to increase cash balances by $250K by year end, the actionable goal may be to improve AR days.  The team can then break that goal down into smaller actionable goals that they can immediately affect, such as reduced billing errors, reduced shipping errors, and reduced booking errors. 

What is a Goal?  The best description of a Goal is (verb)(measure) from (X) to (Y) by (when).  For example: “Reduce billing errors from 10 per thousand to 2 per thousand in 12 months”.  “Reduce” is the verb, “billing errors” is the measure, “10 per thousand” is the “X”, “2 per thousand” is the “Y” and “12 months” is the “when”.  Any goal that isn’t constructed this way isn’t a goal.  It may be a “Hope” or and “Aspiration” but it isn’t a GOAL.

Compelling Intensity – Businesses that succeed have an energy.  You walk into a successful company and you immediately feel the excitement.  What causes the excitement?  The heat of competition.  People love to win.  The only way to tell if you are winning – or losing - is by looking at a scoreboard.  Six Sigma devotees know that the only way to drive behaviors is to have a visible scoreboard, publicly posted, with the goal and milestones easily distinguished. 

A good acronym for how to set up the scoreboard is MUCAS.  Motivating, Updateable, Complete, Accessible and Simple.  Motivating – they must display the information in a way that motivates the observer to action.  Updateable – Scoreboards are worthless if the numbers can’t easily be updated.  Your CFO can help develop the measures that and methods to keep the figures updateable.  Complete – Scoreboards must show all of the actionable goals for the organization.  Whatever isn’t shown won’t be worked on.  Accessible – EVERYONE in the organization needs to be able to look at the scoreboard whenever they need to.  Simple – the measurements need to be easily understood.  Your CFO can help the team to define the measures so that everyone can understand them and how they affect the corporate goal.  Compelling Intensity is all about getting people to play!

Engagement Cadence – Successful companies engage the associates in the goals on a regular basis.  This cadence, just like a coxswain on a crew team, moves the team at a higher level of effort than they could achieve on their own.  A regular drumbeat of review creates windows of action and set time frames for achievement.  By regularly and reliably gathering and reviewing progress towards the goal, accountability is developed.  Organizations easily develop the “Are We Still Doing That?” attitude if they are regularly engaged.  How can that be?  Because Goal Achievement is extraneous to their regular job!  Their Day Job is what pulls them away from Goal Achievement.

Think about it like this – most people trying to do weightloss earnestly want to lose weight.  But then the holidays happen and they get pulled towards the pumpkin pie.  If they are being regularly reminded of the goal, and the progress to the goal, they will back slide.  That is why all successful weight loss programs have a regular weigh-in, and celebration of progress towards the goal.  Weekly meetings of the team are required for successful engagement.  Your CFO can develop the goals and tracking systems necessary for this feedback mechanism.

Weekly meetings should be short reviews with a fixed agenda.  They work best as “standing meetings”  where everyone stands during the meeting.  The Agenda is simple.  Associates report on the actions that they had committed to the prior week that would move their score, how they affected the score, and commitments for the next week.  Managers need to make sure that they report on actions that can affect the score, NOT on their day job activities.  Regular meetings create a drumbeat of progress and move the team quicker than they could ever imagine.

Getting ready for 2010 is all about Preparation, Execution and Accountability.  No plan is successful without strong, steady execution.  The key to execution is to Focus on key areas, create Actionable goals, create Compelling intensity through scoreboards and an Engagement cadence for a steady drumbeat of progress.  Your CFO is a key element to making the execution happen through directing goals, creating scoring systems and providing the regular feedback to leaders throughout the company.  If you company doesn’t have a CFO, isn’t now the time to hire one?  At B2BCFO, we believe every company should have a CFO, but most don’t need one full time.  We help you exceed your goals and generate cash.

Often we try to make the keys to success complex.  Whole industries have sprung up around involved methods that purport to drive companies towards successful achievement of their Goal.  Six Sigma, Lean, Balanced Scorecard – the various “solutions” go on and on.  The more involved the solution, the more the business owner becomes dependent upon a mystic “expert” to guide them to their commercial nirvana.

For the owners of businesses who still know the employees by name, who think about their business like a family member, these processes are intimidating.  And overwhelming.  And ultimately inapplicable to their day to day concerns.  Success in business can be, should be, simple to describe and personal to deliver.  Something as small and simple as a PEA can describe the elements of success.

PEA stands for Preparation, Execution, and Accountability.

Preparation:  Define, Understand,  Decide, Explain

Define:  Just like a football team prepares for their next opponent, a company needs to prepare for their next year of business.  A coach defines his team as a passing team by focusing around a quarterback, or a running team by building around a running back, or a defensive powerhouse that wears down their opponent.  Defining their team is important to how they approach the next season.  As business owners, defining the business is the key first step to approaching the New Year.

One key way to measure of a corporate definition is the owner’s elevator speech.  As an owner, think of being in an elevator with a key business prospect.  You have six floors to tell this business prospect what it is your company does, and does better than the competition. If you can do it compellingly in 60 seconds, you have defined your company well.

Understand: One of the keys to understanding your company’s abilities is to look at it through the eyes of your customer.  As the business owner, you should know what draws your customers to your company, what makes it unique enough that they want to continue to do business with you in spite of numerous companies that do much the same thing.

How do you do this?  The best way is to ask them.  The Owner or President of a company should be THE BEST salesman for the organization.  Call up your customers, take them out to lunch and ask them for three to five reasons what it is about your company that attracts them to buy from you.  Listen to their responses and write them down.  If you are like most companies, a handful of customers make up the bulk of your sales, so the process won’t take long (and you might get some additional sales out of the process).  Don’t send out questionnaires; don’t do this over the phone.  Look them in the eye and watch their body language.  This will tell you as much as their words will.

Decide:  Just as a football team has a play book with hundreds of plays, success depends on selecting the right plays for the opponent that they will face.  A team could use every play in the playbook and never repeat themselves but the confusion and inefficiency of doing so would lead to a certain loss.  Instead a Super Bowl Team tailors their plan, using the same or similar plays over and over again because they want to focus at what they are good at and the weaknesses of their competition.

You as the owner need to decide what your company is good at.  The decision is straight forward -  your best customers have told you what you do well and what distinguishes you from your competition. The difficulty is giving up those things that you don’t do well.  Peter Drucker once said that Americans are strange managers – they always work to improve what they don’t do well.  Successful companies, he said, do more of what they do well and less of what they don’t.  Your CFO will provide key information regarding gross profits by product line, sales growth trends, and the effects of the decisions on expenses and profits.  The key to the decision step is to pick no more than three characteristics or products or services that your customers have told you distinguish your company, focus on them and stop doing everything else.

Explain:  As the owner, you now need to explain your game plan to the other players that are going to help you execute the plan.  Working with your CFO, you need to document the steps that you have completed.  This document is your business plan for the next year. 

The other stakeholders – those people who will help you in achieving your goals – such as your banker, insurer, tax preparer and employees, need to have a clear understanding of the plan and how it may affect them.  Working with your CFO, you can explain whether the plan requires additional working capital for sales growth, additional equipment to replace or expand productive capacity, or changes in the standard performance ratios as obsolete inventory is liquidated.   By explaining in advance, all the supporting players know what will be expected of them in the coming year.  But preparation, no matter how strong, requires strong execution.

Recently I read another blog about the 5 C's of credit -- character, capacity, capital, collateral, and conditions – the mnemonic criteria used to assess a borrower's creditworthiness. Character, capacity, capital, and collateral refer to the borrower's willingness and ability to repay the debt. Conditions include the borrower's situation as well as general economic factors.   While these concerns have long be the basis of banks and customers to understand the credit process, in today’s market we need to look at other “C”s to be able to assess the commercial relationship.

Character – This is always listed first as it is the basis of the commitment. This comes from the day when a banker could look the borrower in the eye from across the table and judge by the firmness of the handshake and the reputation in the community just what sort of person was asking for money.  “How is the owner considered in the community” is a good example of a character question and while asking such questions can be revealing about the owner, what really needs to be considered is the Culture of the organization he runs.  How do they treat customers? Vendors? Employees? How the organization treats these stakeholders will reflect how they will think of their credit relationship, because the organization reflects all of the people who affect performance as well as the markets in which the organization operates.

CAPACITY – This reflects the way in which the company intends to repay the loan.  CASH FLOW is what we should really be thinking about – not a formulaic EBITDA number, but has the company thought about the additional inventory that is demanded for this expansion.  What about the increase in Accounts Receivable?  More to the point – does the customer track and project their cash flow and cash requirements?  It is one thing to provide a static spreadsheet at the time of the credit request based on what the company thinks the cash flow will be, but do they have a way to track and project their cash needs?  If not, how will they be able to maintain their cash flow to insure repayment?

CAPITAL – This reflects the value that the owner has retained in the business – retained earnings, contributed capital, capital stock.  How much money has been invested in the company?  A common mistake in looking at financial statements of privately held companies is to think that capital acts the same as in public companies.  Not true and dangerous.  By adjusting their draws – which are on top of their salaries – owners can change the capital investment in the company during the year.  Monitoring the CAPITAL FLOW – are the owners taking more out in draws than the company is generating in earnings – is difficult if the financial statements aren’t being generated according to GAAP on a timely basis.

COLLATERAL – Traditionally is what “security” is being offered in the transaction?  But let’s face it, no lender wants to be liquidating collateral; the nation is awash in REO property.  But a key intent of collateral was to measure the borrower’s COMMITMENT to their business and to their lender.  Commitment is easier to measure than the value of the collateral, which can change based on the market, technology, or ability to attach.  Commitment can be measured by whether the company generates and maintains budgets.  Does it “plan the work and work the plan?”   Does its performance to the plan matter or is the owner more likely to be found on the golf course than at a customer?

CONDITIONS - the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? What are the current economic conditions and how does your company fit in?  Does the company know who their competitors are?  What their market share is?  What will happen if the conditions change?  In today’s environment, does the company have a CONTINGENCY to react to changes?  If so, they have thought through foreseeable impacts and have a handle on managing their company.

CULTURE, CASH FLOW, CAPITAL FLOW, COMMITMENT and CONTINGENCY are the new 5C’s of credit or any commercial relationship.  B2BCFO works with companies up to $100 million to provide answers to these new 5C’s – establishing and maintaining a 13 week CASH FLOW forecast, generating and maintaining timely GAAP compliant financials, establishing and maintaining strategic plans and operational budgets and asking the hard “What If” questions to consider CONTINGENCY planning.  Does the company have the CULTURE and CHARACTER to bring on board B2BCFO?  If it does they will have made a COMMITMENT to the future.

Why do we invest time, sweat, and frustration in the traditional annual budgeting process? Think about it.  What does your organization commit to its annual budgeting process? It is estimated that the average $10 Million sales company spends over 250 man hours per year in the budgeting process.  These are key individuals pulled from the operation of the company to create the budget.

Think about all the deception, the managers who sandbag their estimates or who simply cut numbers because “that’s how we’ve always done it.” Think about how they either use last year’s figures or next year’s hopes to produce a “best guesstimate.” Then think about how all of this deception and guesswork gets transformed into the document that is supposed to guide the success and profit of the company for the next 12 months.

Many managers will diligently plan their opening moves in this Annual Budgeting Dance – at times more than they plan their actual job. Their goal is to submit something that is sufficiently credible to avoid outright rejection yet remain low enough to be easily reached. They plan strategies so that, when the totals are all compiled, the result will be sufficiently above whatever the magic number that is needed to please, well, themselves, the owners or the board.

The Annual Budgeting Dance is an annual rite of passage.  It is musical chairs but not nearly as much fun. It explains why managers will float trial balloon after trial balloon.  Managers in the field will gasp in exasperation, “Just tell me what you want the number to be. I am tired of guessing.” The Owner will reply, “I want to empower you.  It needs to be your number. You need to own it.” The manager quickly lets him know, “It quit being my number long ago.”  Or the owner will accept the last budget submitted because the company is already three months into the operating year.

In many ways, the Annual Budgeting Dance explains why budgets can destroy motivation and ultimately be disempowering. Many managers use budgets as a crutch: If the amount is in the budget, he has to do it; if it is not in the budget, that he doesn’t have to do it. He never has to make a decision on whether he should do it.

So again, why do we keep doing this Annual Budgeting Dance???

Because in most organizations, incentive compensation is based on reaching budget targets. They want to “pay for performance.” In reality this is one of the worst practices in management, because companies end up rewarding managers who successfully negotiate low expected performance and execution - to “under promise and over perform”, instead of rewarding the best achievers. Forget about “being all that you can be”,  I have had managers tell me that they “would never agree to a budget that could not be easily reached; it’s just not done.”

This negative effect compounds year after year. When the low bar is reached, the mechanics of plan design often limit the upside; they have financial incentives to slow performance so that next year’s target will also be easily reached.  If they over-perform this year, even more will be expected next year when the bar gets reset for incentive compensation.  Who is to blame? Your budget process bears that blame.

What should you do instead? Use a long term strategic plan that sets a direction with intermediate target objectives. These objectives should be realistic so progress toward the goal can be tracked even though reaching the objectives in a year is unlikely. The objectives should reflect the environment and the industry that you operate in. There should be a comparison to your competitors, to your peers, and to world-class performance. EVA is one sort of commonly used metric.  Switching to a rolling forecast to instead of annual budgets changes the type and number of objectives measured.  And attaining those objectives should be the basis of incentive compensation.

This frees up the rolling forecasts to better reflect the changing environment, enabling you to better steer your organization. But avoid the devastating practice of “paying for forecast accuracy.”   The forecasts are intended to clearly show direction, not land at a specific spot.  Rewarding or penalizing based on accuracy is one of the dumbest things owners can do.

The only time a forecast could always be absolutely accurate is if none of the forecasted processes had any variability. Reality a company consists of thousands of variables constantly interacting with each other. Management needs to measure and understand them, but paying people to consistently hit certain forecasted numbers driven by those variables is a disincentive.  To hit those forecasts, managers would have to constantly manipulate or misreport the operations of the company, ensuring that management never gets an accurate, unbiased measurement. So they never understand the system’s variability, nor improve the processes to reduce variability. So any improvements are illusionary and unsustainable.

None of this should be tied to incentive compensation. Why not? Because people should be paid for what they actually achieve, not for what they hope or promise to achieve. When you separate the two, you get a better idea of what can be achieved, what investment and what risks are required.  But also you get honest input on what alternatives should be considered. You want real results that put an end to the Annual Budgeting Dance.

Business owners used to have a simple goal for themselves and their organizations: stability. They wanted little more than predictable earnings growth.  Market transparency, labor mobility, and instantaneous communications have blown that scenario to smithereens.   Successful companies develop the ability to constantly change to their environment.

In major transformations – like we are experiencing in today’s economy, owners and their advisors conventionally focus their attention on devising the best strategic and tactical plans.  But to succeed, they also must align the company’s culture, values, people, behaviors, and metrics to encourage the desired results. Plans alone do not increase a company’s value; value is realized only through the sustained, collective actions of employees who are responsible for executing and living with the changed environment.

Significant  transformation has four characteristics: scale (the change affects all or most of the organization), magnitude (it involves significant alterations of the status quo), duration (it lasts for months, if not years), and strategic importance. However companies will only reap the rewards when change occurs at the level of the individual employee.

Owners often say they are concerned about how the work force will react, how they can get their team to work together, and how they will be able to lead their people. They also worry about retaining their company’s unique values and sense of identity and about creating a culture of commitment and performance. Leadership teams that fail to plan for the human side of change often find themselves wondering why their best-laid plans have gone awry.

No single methodology fits every company, but there is a set of practices, tools, and techniques that can be adapted to a variety of situations. What follows is a “Top 10” list of guiding principles for change management. Using these as a systematic, comprehensive framework, executives can understand what to expect, how to manage their own personal change, and how to engage the entire organization in the process.

1. Address the “human side” systematically. Any significant transformation creates “people issues”.  An approach for managing change — beginning with the leadership team and then engaging key stakeholders and leaders — should be developed early, and adapted often as change moves through the organization. It should be based on a realistic assessment of the organization’s history, readiness, and capacity to change.

2. Start at the top. When change is on the horizon, all eyes will turn to the CEO and the leadership team for strength, support, and direction. They must speak with one voice and model the desired behaviors.

3. Involve every layer. Change efforts must include plans for identifying leaders throughout the company and pushing responsibility for design and implementation down, so that change “cascades” through the organization. At each layer of the organization, the leaders who are identified and trained must be aligned to the company’s vision, equipped to execute their specific mission, and motivated to make change happen.

4. Make the formal case. Individuals are inherently rational and will question to what extent change is needed, whether the company is headed in the right direction, and whether they want to commit personally to making change happen.  The articulation of a formal case for change and the creation of a written vision statement are invaluable opportunities to create or compel leadership-team alignment.  

Three steps should be followed in developing the case:

1.)    Confront reality and articulate a convincing need for change.

2.)    Demonstrate faith that the company has a viable future and the leadership to get there.

3.)    Provide a road map to guide behavior and decision making. Leaders must customize this message for various internal audiences.

5. Create ownership. This requires more than mere buy-in or passive agreement; it demands ownership by leaders willing to accept responsibility for making change happen in the areas they influence. It is best created by involving people in identifying problems and crafting solutions. It is reinforced by incentives and rewards. These can be tangible (for example, financial compensation) or psychological (for example, camaraderie and a sense of shared destiny).

6. Communicate the message. Successful change programs reinforce core messages through regular, timely communication that is both inspirational and practicable and are targeted to provide the right information at the right time and to solicit input and feedback. Often this will require overcommunication through multiple, redundant channels.

7. Assess the cultural landscape. Successful change programs pick up speed and intensity as they cascade down, making it critically important that leaders understand and account for culture and behaviors at each level of the organization.  Identify the core values, beliefs, behaviors, and perceptions that must be taken into account for successful change to occur. They then serve as the common baseline for designing the new corporate vision, and building the infrastructure needed to drive change.

8. Address culture explicitly. Company culture is an amalgam of shared history, explicit values and beliefs, and common attitudes and behaviors. Change programs can involve creating a culture, combining cultures, or reinforcing cultures. Leaders should be explicit about the culture and underlying behaviors that will best support the new way of doing business, and find opportunities to model and reward those behaviors.

9. Prepare for the unexpected.  Effectively managing change requires continual reassessment of its impact and the organization’s willingness and ability to adopt the next wave of transformation. Fed by real data from the field and supported by information and solid decision-making processes, change leaders can then make the adjustments

10. Speak to the individual. Individuals need to know how their work will change, what is expected of them during and after the change program, how they will be measured, and what success or failure will mean for them and those around them. People will react to what they see and hear around them, and need to be involved in the change process. Highly visible rewards, such as promotion, recognition, and bonuses, should be provided as dramatic reinforcement for embracing change. Sanction or removal of people standing in the way of change will reinforce the institution’s commitment.

The B2BCFO helps the owner to focus on these key elements, working as a partner with the owner to anticipate needed change, adapt the organization to the landscape and maintain the key elements that create the individuality of the organization.  Working as long term advisors, B2BCFO’s help the owner focus on their company’s culture and growth while providing timely financial and strategic insight.  This article was adapted from an article in Strategic Business  By John Jones, DeAnne Aguirre and Matthew Calderone of Booz Allen.

Employee Theft:  The Missing Margin

A quick perusal of statistics coming out of this recession has been the rise in employee theft.  From petty cash misappropriations to stock shrinkage, employee theft is on the rise.

A study published by the Chubb Group of Insurance Cos. found that executives at 60 percent of the companies surveyed expect employees may steal money or equipment from the company. Executives at 34 percent expect their employees will steal from their clients. A  study released by the Association of Certified Fraud Examiners, estimates that the typical company loses 6 percent of its annual revenue to fraud, which can include theft of company property, corruption schemes and accounting trickery.  For many companies, the 6% can make the difference between profit and loss.

There are a number of tactics to prevent theft – restrict access to inventory, establish and maintain proper controls over cash, etc.  But as the economy moves to a service economy, how do you prevent theft by service workers, where there is little tangible evidence of their “production”?  In a service environment, what is often stolen is the most important asset – time!

Time can be stolen in a number of ways.  First and foremost – the internet.  Time spent surfing, shopping, or just checking up on their Facebook can steal enormous amounts of billable time.  One engineering company terminated an employee who was devoting over half his time to World of Warcraft play!  The best way to prevent theft is to eliminate the temptation.  Restrict access to the internet whenever possible through the use of software to eliminate websites and subnets to isolate computers.  Also, monitor usage on a regular basis – there are a number of software packages that allow you to see just how long your workers are spending at each site they visit.

Second – Second job.  Another company had a head of Engineering who was always busy, working in the lab or at his computer.  Trouble was, a lot of the time he was doing reverse engineering work for his own client base.  The company who provided him a paycheck was hosting this work unknowingly – providing the tools, equipment and time for this obviously profitable sideline.  Employees in a service environment need to have meaningful metrics for productivity and those metrics need to be Measured and Monitored.  And just as access to inventory is limited, time spent on significant pieces of equipment (spectrum analyzers, CMM’s, etc.) should be matched against work logged at that work center – better for costing and better for control.

Finally – Lead by example.  Employees can sense when the rules don’t apply to management.  If they see this inconsistency, they will seize it to justify their own actions.  This is true especially in this current economy where they are being asked to sacrifice in other ways.  They will see management’s ethical lapses as permission to pursue their own agenda.

At B2BCFO, we work with management to review potential sources of fraud, waste and abuse – those potential points where profit leaks from the company.  We can create the IT infrastructure to reduce lost time to the internet, internal controls to monitor billable time and contract costs, and finally to eliminate the sources of temptation that lead otherwise good people to hurt the companies they work for.