employees

As secular and cyclical performance pressure mounts, leadership teams wrestle with the appropriate response.  Unfortunately, most teams end up taking the easy way out, causing long-term damage to their performance. An old Italian economist holds the key to a much more promising approach.

Taking the easy way out - and paying the price

As revenues erode, cost cutting becomes a top priority for all firms.  What are the favored approaches?  There is the great leveler – everyone is mandated to take the same percent out of their cost base.  Most can see that this makes no sense – all costs are not equal and some parts of the business are much less productive than others.  Unfortunately, this tends to be the most common approach to cost reduction. 

Some companies are slightly more sophisticated – they mandate the same percent reduction but then establish an appeals process where executives can make the case that their costs are different and require special treatment.  This gives a release valve for the executives who are most politically adept at lobbying for their special interests but it rarely provides objective metrics to make an independent judgment about the need for exceptions to the broader rule.

Support services operating as cost centers are disproportionately targets for cost reduction in challenging times.  Unfortunately, executives often fail to realize that, if these services are doing their job, they are actually critical to generating revenue and profitability.

Some companies are organized into P & L driven business units and the exercise is to prune low performing businesses – targeting them for sale or closure.  This is certainly better, but it is more of a meat cleaver than scalpel approach.

What’s the result of all of this?  Near-term performance improves because costs do come out of the business, but longer-term performance suffers as the consequences of unfocused cost cuts become visible.

Asking a different set of questions - the Pareto questions

So, what is the alternative? There’s one approach that can be implemented quickly. It  provides an opportunity for very significant cost cutting in the near-term while at the same time strengthening the longer term performance of the business.

I first wrote about this approach over five years ago as many companies were wrestling with the aftermath of the dot com bust.  It is based on a key insight by an Italian economist, Vilfredo Pareto, over one hundred years ago.  Pareto discovered that much of human activity follows the 80/20 rule – 20% of the inputs often generate 80% of the results.  He first noticed this during a study of wealth and income distribution in England.  He discovered that 20% of the population accounted for 80% of the wealth. As he explored other domains of human activity, he realized that this was a remarkably pervasive pattern.

So, what does this have to do with cost cutting?  The 80/20 rule provides the foundation for a relatively simple exercise for executives.  It involves answering the following questions:

• Which 20% of the products or services generate 80% of the profitability?
• Which 20% of the customers generate 80% of the profitability?
• Which 20% of the geographies generate 80% of the profitability?
• Which 20% of the assets generate 80% of the profitability?

These are powerful and revealing questions, yet few companies today are able to answer these questions given the way their accounting and information systems are set up. As a result, the answers are generally hidden from management view. Unfortunately, the questions themselves rarely get asked.

Accounting and information systems need to be restructured to provide greater visibility along these dimensions on an ongoing basis. But, from my experience, quick and dirty approximations of the answers to these questions can be generated relatively easily – especially if management can get comfortable with “directionally correct” answers. The results are usually eye-opening. For example, one management team discovered that the product line it thought was most profitable was actually its biggest money loser.

One caution: in answering these questions, executives often focus on one financial period.  Unfortunately, profitability of resources needs to be measured over a lifecycle, not a snapshot of one period.  For example, one can get very misleading results by looking at customer profitability over one financial quarter.  Real measures of profitability include an assessment of customer acquisition cost, the average lifetime of a customer and the margin generated from the customer for each period over that lifetime. The same principles apply to products and assets as well.  Try getting that out of today’s accounting and information systems!

Leading to the more fundamental question

Once these questions have been answered, here is the question that can focus management discussions around strategic cost cutting:  why are we continuing to invest in the 80% of the resources that generate only 20% of the profitability?  Of course, the answer is not to mechanically cut the 80% resources that are low performing in terms of profitability, but to create a series of reasonably objective screens that can be used to test whether these resources are in fact playing a productive role. Some of these screens are:

• What is the growth profile of these resources? Many business initiatives are at an early stage of investment but have already started to show promising growth potential. The key is to focus on actual revenue and profitability growth trajectories or some other form of operational leading indicator to test growth potential.
• What are potential interdependencies between these resources and the high profitability resources?  Explicit dimensions of interdependencies need to be laid out and used to test any claims in this area.
• What short-term initiatives might be taken to significantly improve the performance of these resources?  Defining explicit six month milestones for operational and financial performance improvement becomes critical to ensure results.

The causes of invisible diversification

Bottom line, though, most companies spread their resources much too thinly across too many product, customer, geography and asset plays. This is a much deeper problem than the diversification across many different businesses or business units.  Even within an individual business unit, portfolios of products, customers, geographies and assets have become broader and broader.

There are many reasons for this invisible diversification.  In far too many cases, it is the result of incremental, near-term strategic thrusts over a long period of time that have never been rationalized.  In other cases, it is the outcome of organizational fragmentation and politics and the lack of clear and uniform metrics to drive decisions on new business initiatives.

Another driver of this invisible diversification is risk aversion.  We launch portfolios of initiatives to cope with risk by placing bets across a broad front.  Unfortunately, most companies lack the discipline to remove bets even after the results are known. 

But there is also a more fundamental economic driver of this kind of invisible diversification.  Many companies have built up a large fixed cost infrastructure either on the supply chain side or on the sales and distribution side or, in too many  cases, on both sides simultaneously.  Once these infrastructures are in place, an insidious logic takes hold.  The only way to cover these costs is to drive more volume through the infrastructures, even if the incremental volume generates minimal margins.  The infrastructures begin to run the show even though they were originally deployed to support the main act. The economic logic is compelling in the short-term but can lead to deteriorating profitability over time. 

The most basic question of all

The only way to escape this bind is to pull back and question the need for these fixed cost infrastructures.  Thus a simple and relatively straightforward application of an 80/20 analysis can lead to a discussion of the most basic question of all: “what business are we really in?” This in turn requires a systematic framework for thinking about business unbundling, something that I have covered in other venues.

If companies want to move beyond marginal cost-cutting that can often hamper long-term performance, they would be well advised to apply the 80/20 analysis to their business. It can deliver quick and very deep cost restructuring that actually positions the business to perform far better in the future. It is a powerful tool for reframing the cost structures of the business through a new lens.

But that's not all folks

The Pareto 80/20 rule can be used to reframe the business across two other dimensions as well – growth platforms and institutional innovation – but these are topics for future posts.  Let me leave you with two key messages.  As competition intensifies on a global scale, companies will not be able to survive with marginal or incremental approaches to cost reduction – they must restructure and reduce costs at a much more fundamental level.  Cost reduction alone is necessary but not sufficient. Without finding powerful new sources of growth and leverage – even in trying times – cost reduction alone will only shrink the business as cost savings get competed away and captured by customers.

What’s wrong with GM and what should be done about it? Is the industry even worth saving and who is responsible for this? Who has the strongest brand in the world, why, and what does that have to do with the GM situation? Listen to Alan rant on this podcast and find out.

and now also on iTunes

Click Here for entire podcast series table of contents

© Alan Weiss 2008. All rights reserved.

Post from: Contrarian Consulting

If you would like a discounted rate on a RainToday, December 4 teleconference on my new book “The Global Consultant” (with Omar Khan), then you can read about it here and enroll at the special price here.

Post from: Contrarian Consulting

Having just completed conducting the 11th Million Dollar Consulting® College, and always learning more than anyone else, I’ll share some insights:

• If you don’t understand something, do two things. First, question it immediately, because otherwise the ensuing structure will have a weak foundation. Second, try to apply it in your circumstances to integrate the learning.
• People learn in different ways, so notes, recordings, mind maps, and holographic telepathy are all fine with me. But if you don’t have three things (or less) emphasized for you to move forward at the end of the day, you may have quantity but nto quality.
• The 1% solution: tools for change® says that if you improve by 1% a day, in 70 days you’re twice as good. But if you don’t learn carefully and instead become confused, the opposite can actually occur. People can get dumber.
• When creating pragmatic representations of conceptual images, whether brands or graphics or process visuals, it is ALWAYS better to work with a small team you trust for quicker and higher quality results.
• Failing, and learning as a result, among peers is better than mindlessly succeeding among inferiors.
• Emotion is as important as intellect in integrating learning.
• The female advantage in learning: less ego investment and more openness. The male advantage: less tendency to take disagreement personally and to focus on the issue not the person.
• Groups don’t bond through dumb ice-breaking exercises. They bond through sharing challenge, contributions, disagreements, and socializing.
• All groups claim that they want to stay in touch and reconnect. The ones that do most successfully always have an organizer or organizers who take on that responsibility.
• If the facilitator isn’t learning constantly, he or she should go into another line of work. Simply doing something well and receiving plaudits is like watching people applaud a movie you’ve already made years ago.

I’m asked why I left organizational consulting after such success, and my reply is that I got bored, because there are primarily 11 things that are going on, and to say to a CEO, “It’s numbers 3, 7, and 10, that will be $245,000,” was not going to fly.

1. Leadership is inept in that key people are not serving as avatars of the behavior they are seeking in others.
2. Team building is sought when, in actuality, the organization has committees and needs committees, not teams.
3. There are silos headed by powerful people defending turf.
4. Problem solving is prized over innovation and “black belt nine delta” nonsense takes over people’s minds like a bad science fiction movie from the 50s.
5. There is excessive staff interference instead of support, typically from HR, finance, IT, and/or legal.
6. There are too many meetings that take too long and are overwhelmingly focused on sharing information, the worst possible reason to have a meeting. The organization’s talent and energy are squandered internally instead of applied externally.
7. The customer’s perceptions of the organization’s products, services, and relationships are different from the organization’s perception.
8. The reward and feedback systems are not aligned with strategy and are not encouraging and discouraging the appropriate behaviors.
9. Strategy and planning are mistaken for each other.
10. Career development and succession planning are not wedded.
11. The organization is bureaucratic, in that is focuses on means and not ends.

© Alan Weiss 2008. All rights reserved.

Post from: Contrarian Consulting

Are you the snake or are you chasing snakes? What does that have to do with consultants? You will have to listen to this podcast and hear Alan share his story.

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and now also on iTunes

Click Here for entire podcast series table of contents

© Alan Weiss 2008. All rights reserved.

Post from: Contrarian Consulting

Q1. You are well known for generating a seven figure income on a 20 hour week as a independent sole consultant. A phenomenal effort. How long did it take to get to that level, and what specific advice would you give to consultants wanting to follow your example?

I was fired in 1985. I wrote Million Dollar Consulting in 1991. But it took me until about 2000 or 2001 to seriously reduce my labor intensity while making more money, thereby increasing discretionary time, which is the real wealth. Advice: Focus on outcomes, not tasks; never let the client dictate your methodology; never charge by a time unit; don’t fall in love with your own methodology; remember that the easiest way is usually the best (Occam’s Razor).

Q2. I have read and applied your gravity concepts of marketing. And it works, undoubtedly. But what marketing advice can you give to people who need to get their pipelines full today? People who don’t have the time it takes to build a “gravity focused” approach to generating a brand.

That’s a fallacy. You’d better make the time WHILE you’re also looking for short-term cash, or you’ll ALWAYS be looking for short-term cash. The only really quality ways to generate short-term income: Call everyone you know and ask if they need your value or they can give you the names of people who do (most consultants are too embarrassed or have low self-esteem); organize a breakfast or lunch with prospects where you do nothing but provide value; find a firm or other consultant who needs subcontracting work. This is not a good profession for short-term cash.

Q3. The people you see in your mentoring college (Million Dollar Consulting® College) are self selected. They are motivated people who have thought through this enough to seek you out. Can everybody who has that level of motivation do this?

I don’t understand this question. The people who seek me out for any of my programs, e.g., zero to $300,000, realize that they need to invest in their own development, and they need to do so with someone who has personally and obviously had that success. There are too many “coaches” who are only coaches with no track record of success. Would you learn to ski from someone who has never traversed a hill? My Mentor Program has had over 700 participants, which is a lot, but what about the other 200,000 consultants? Life is short. Why take five years to learn something you can in five days, or why have ten years of experience which is the same year repeated ten times? If as a solo you are not making a minimum of $300,000 in this business with ample free time for yourself, you’re just kidding around. And your business is on shaky ground.

Q4. You are the thought leader on Value Based Fees. An approach aimed at charging as per the value that you deliver, not based on the work required to achieve it. How do you deal with clients who want to tie your revenue (payment) to the results? What is your opinion on these risk sharing approaches?

I tell them that I can’t control the variables, such as key people leaving or competitors’ technology, those are strategic concerns and that’s why THEY are being paid what they are. I don’t like “performance fees” for that very reason. I’ll deliver my value and you pay me. Why should I incur risk that is not within my control to influence?

Q5. With the economy tightening up, and some sectors already starting to see contractions many of our readers are feeling challenged. You have written and spoken a lot about finding work in tough times, but what is the value that consultants can offer now to companies that are really feeling the pinch?

Don’t start preaching survival, preach how to thrive. Use your normal value to show that this is the time to gain on the competition. I recently did a teleconference on How to Accelerate Business in a Dismal Economy. It sold out (downloads are available). But I’m shocked that not every consultant making under, say, $250,000 didn’t try to get on that call. A lot of millionaires were on that call. You have to be aggressive, and learn the best techniques from others.

Post from: Contrarian Consulting

The Million Dollar Club met for the first time at the Ritz-Carlton in Naples, Florida, November 2-6 (Hurricane Omar closed down our original venue at the Four Seasons, in Nevis, West Indies). Rob Nixon suggested that I create this almost a year ago, and it has come to fruition.

Seven organizations from Australia, Germany, and the US were represented by 11 people, including business partners and spouses. Six organizations employed people and infrastructure, while one was a solo practitioner. We worked in the mornings, relaxed in the afternoons, and had incredible dinners.

The goal of the Million Dollar Club is to bring together very successful entrepreneurs in an environment which is ego-free, open, trusting, and innovative. Each of us expected to help the others to accelerate progress toward personal and professional goals, as well as learn a great deal individually. You’ve all heard me talk about Tools for Change, the 1% Solution®: Improve by 1% a day and in 70 days you’re twice as good.

During these several days together the improvement was more like 10% a day or better. We were all astonished at how our very high expectations were exceeded.

There is no adequate way to describe the power of the meeting or what the transformational affects were of sharing personal techniques and offering constructive insights among peers. My wife, Maria, perhaps offered the most incisive observation of any of us: “I’ve been attending meetings with you and on my own for 25 years, and this is the first one in which no one, at any time, ever said, ‘Yes, but…’ ”

I’ll be sharing some of the great process ideas and success traits we agreed upon in the “0-$300,000” and “Six Figures to Seven” workshops. Here’s just one sample: Successful people build structures which create future problems if they are not constantly reviewed with an objective eye. That is, many small business and solo practice obstacles arise not from past problems, but from past success, because they are no longer suited for the future, but are remnants of the past. Entrepreneurs, ironically, don’t take a strategic view often enough, because they are so good at tactics and opportunism.

When we get the photos I’ll post them here and identify the participants. None of us is ever too successful to learn. We all invested a lot in this learning, and it’s paid off in huge dividends. Next year’s meeting is already on our calendars.

What are you investing in your own learning to accelerate your career?

© Alan Weiss 2008. All rights reserved.

Post from: Contrarian Consulting

I’m at the Million Dollar Club at the Ritz-Carlton in Naples, Florida (relocated after Hurricane Omar closed the Four Seasons in Nevis) We’re having a great time and being treated royally.

We work only in the mornings, so Maria and I were on the beach this afternoon, where we’ve seen turtles, dolphins, all kinds of birds, and fish. (One of our group, Guido Quelle, saw a shark.)

I watched a flight of three pelicans race by my entrenched position in single file. When the first bird changed its orientation—flapping wings, or gliding without flapping—the second and then third bird in line did the same in sequence with the discipline of an air force acrobatic team.

I don’t know if each bird sensed a change in currents a second apart, or if the bird behind simply emulated the attitude of the bird in front of it. But I do know this, having observed the maneuvers a dozen times by the time I left the beach: The third bird was always the last to change.

What order do you want to fly in?

Many racers, whether race car drivers, or cyclists, or marathoners, try to “draft” by allowing the person ahead to bear the brunt of the wind and resistance, and gain a bit of relief by cruising in their wake. That may save energy when you’re racing, but you can’t win in third place and you can’t see very well what’s up front when you’re staring at someone else’s caboose.

I’d rather be the lead bird, taking my chances with the currents and thermals, being nimble and quick, and finding the destination before those behind me.

Guess which bird saw the fish first?

© Alan Weiss 2008. All rights reserved.

Post from: Contrarian Consulting

Interview with me which may be of interest to many of you can be found here:

http://www.consultingpulse.com/2008/11/million-dollars-worth-of-advice-from.html

Post from: Contrarian Consulting

Click Here for entire series table of contents

© Alan Weiss 2008. All rights reserved.

Post from: Contrarian Consulting