How the focus on year end destroys value

Here in Australia the tax year ends 30 June. The retailers are into a frenzy of EOFY sales and every road that can be repaired is being dug up to use up unallocated funds.

The Japanese have a word for it. Mura - unevenness. This unevenness is costing the economy billions. Because unevenness causes all sorts of other waste - over production, errors, excess inventories. The list goes on. This is even more extreme than the "end of the month" syndrome.

Much of this is of our own making. June 30th is just the end of the tax year. That's all. Except for tax treatment it is a completely artificial deadline. 

Deloitte recently released their latest paper on red tape focused on companies' own rules entitled "Get out of your own way" and I'd certainly include the budgeting and financial reporting that businesses do as part of this. 

Once the financial year end is out of the way and your CFO or Financial controller has come back from their nervous breakdown, do yourself a favour and review your whole process to get rid of the waste and frustrations of a process not designed for purpose.

I'd review the process not just on the "budgeting" or "reporting" bits but on the whole Joined Up process of strategic management. Very few businesses can afford to wait for three years for a new strategy and need to review this more frequently, quite possibly more frequently than annually. And if that's even partly true, then the annual budget doesn't fit any more or at the very least isn't enough.

In reviewing the process some obvious questions to ask are:

1. Timing. When would it be most logical to have the company financial year and how closely should it be linked to the planning cycle?
2. Frequency. Why only plan and forecast annually?
3. Purpose. What is the purpose of the budgeting process? For whom? if its for the accounts department - you've got a problem.
4. Accountability. How do you intend to get real accountability? Hint: most budgets don't do this.
5. Decisions. What real-time information do you need to run the business?
6. Clarity How to communicate progress against real (not artificial) goals

Some solutions businesses are now applying include:

1. Have trailing results and a rolling forecast. Don't have a massive budgeting process but review performance every month INCUDING a forward 12 month view. The power of a trailing 12 months is that seasonality is always allowed for and a forward looking 12 months then only one month is being introduced - all the others are just being reviewed for any obvious changes. For more on this TEC speaker Nick Setchell has some fantastic tools
2. Look at cash movements. The Profit and Loss statement  will need  modification if you are really going to run your business effectively. Alan Miltz, another great TEC speaker, reminds us that in particular working capital movements are essential to monitor and plan and operational strategies can have a big impact on the cash generating abilities of the business  
3. Use Visual Management -  Graphs and Trends. The CEO may have got used to a spreadsheet full of numbers, but it doesn't mean the executive team have. If you don't show it graphically, with the distortions taken out, your team won't see the same picture as you. If currently graphs show a sawtooth pictures of sales and profits, smooth it out by using a rolling 3 month or accruing some expenses.
4. Focus Accountability for tactical activities on the shorter term. Consider quarterly targets; usually 12 months is just too far away. If you wish to share some form of self funded bonus then this also can be done more effectively on a quarterly basis with the carrot dangled a little close to the nose of the sales teams - and less temptation to ease up.
5. Avoid driving by the rear view mirror.  Financial results are an outcome. The business is driven from inputs - so ensure as a management team these make up the bulk of the indicators you drive in the business.

Do you have a lighthouse for your organisation?

In 2016 I was walking the Cape to Cape track in Western Australia. It goes from one lighthouse to another, but not in a straight line. It's a windy trail which lets you see the Cape Leeuwin lighthouse, but if you've never been on the path before, you don't know exactly what it's going to take to get there. You can see what the end goal could look like, but the only sure thing is that you can't take a straight line across the bay.

The “Vision, Mission and Values” Trap

Many businesses I come across, especially here in Australia, have vision and mission statements. “That’s impressive”, you may say. Until you conclude that many of the senior leadership don’t know why they have them. What is more, there seems massive confusion between the terms. Often some clever consultant has come in and facilitated a strategy workshop; thrown in a few “Values” for good measure, usually quoting Jim Collins and “Good to Great” along the way. 

Is it any coincidence that so many organisations struggle with the concept of CEO accountability? Short term financials are a very poor proxy for what a CEO is charged to do. Financials are easy to measure and even long term financial performance is very narrow in its context.

I do see some great organisations with powerful statements of intent. I just don’t get how these are joined-up with their operational plans. You would hope especially that in the Not for Profit sector organisations would have a clear Purpose, usually enshrined in their mission statement. You would hope........ in my experience these are often very broad statements intentionally designed to allow an organisation lots of wriggle room to expand into areas outside their original remit. In the commercial world, often the founder’s purpose has been lost to be replaced by a generic feel good statement of meeting customers’ needs. 

But if the purpose isn’t clear, the destination is even fuzzier. Jim Collins introduced the concept of the “BHAG “ – The “Big, Hairy, Audacious Goal” and described very clearly how it could be used to align a joined-up strategy. Most businesses have forgotten how to fully utilize this. Not for Profits seem uncomfortable with setting a specific objective, often because of the social challenges facing the sector and the understandable difficulties in defining "Impact". Commercial organisations fall into the trap of setting financial objectives without teasing out the underlying story behind the numbers.

Peter Drucker said:

“Whenever you see a successful business, someone once made a courageous decision”

Behind that statement is usually a story about a founder that had identified a need that their organisation could fulfil; some call that Vision, but often in start-up situations its very hard to define a Vision or a BHAG with a longer time horizon. What is clear is that very few businesses that have gone beyond start-up have succeeded without getting much clearer about the longer-term destination. Once the organisation grows beyond just being in the control of the founder the initial focus and drive is in danger of being lost. It usually starts by everyone in the senior team having a broadly aligned idea but then gets diluted, sometimes by new opportunities, often by different perceptions of urgency and timescale and different views on risk and risk appetite.

Add to this, we are looking at a world where disruption of business models and technologies provide an environment of increasing Volatility, Uncertainty, Complexity and Ambiguity (VUCA) and the path ahead is less clear. Some CEO’s, recognising this, feel it is pointless to have a long term plan at all. What this leads to however is the need to make strategic decisions from the ground up all the time; a need to keep tight controls and a forcing of strategic decisions up the tree, leaving only tactical and operational decisions within the organisation. This is not exactly motivational for the executive team and the layer below them.

There is a middle way between having a rigid multi-year plan and an ad hoc strategy decision making process. Its by identifying the Lighthouse.

Making joined-up decisions in a VUCA world

One of the issues facing all organisations in a VUCA world is the need to make strategic decisions much faster.

What if we could have a simple model that allowed not only the CEO and the Board to quickly assess strategic decisions, but also the entire leadership community? How much time could be saved in constant discussions over well-meaning proposals when everybody has an opinion? What if other factors were able to be considered, when pure financial return analysis doesn’t feel adequate? (and does it ever?)

I know several CEOs who are considering geographical expansion and some broadening of their service offering. While any decision of this substance and strategic importance will always need to answer the questions of “does the potential reward / return justify the risk / investment?” and “can we afford it in terms of financial, human and leadership resources?”, I remind the CEOs that they should only consider opportunities that answer two more fundamental questions first:

1. Does it fit with the Purpose?
2. Does help us get closer to the Lighthouse destination?

Discussion on Purpose is for another day. I will focus simply on the Lighthouse concept, the destination. Jim Collins said in an article entitled “The Good to Great Pastor”:

“You must ask, "What do we mean by great results?" Your goals don't have to be quantifiable, but they do have to be describable. Some leaders try to insist, "The only acceptable goals are measurable," but that's actually an undisciplined statement. Lots of goals—beauty, quality, life change, love—are worthy but not quantifiable. But you do have to be able to tell if you're making progress."

 

A Lighthouse destination needs an emotional context

The Lighthouse is the organisation’s destination – where it is going. As Jim Collins so eloquently describes, it must be describable – you must be able to tell if you are making progress. A Lighthouse for an organisation might be called a “Key Milestone”, a Vision, an Ambition, a BHAG, but the label doesn’t matter, its what you use it for that counts.

At its heart, the Lighthouse will most likely be a statement that's based in emotion, not just numbers. Let’s say a really ambitious target is to triple sales over the next five years. Why is that important to you? How will employees feel about that? What will customers feel about that? Then translate those emotional responses into describing the lighthouse in a way that captures these emotions.

It is in development of the Lighthouse that emotions can and should be unleashed. That is because any chosen destination should stimulate the discussion around “If we really, truly mean this, then what are the implications?” It challenges the status quo, it fleshes out all around a central theme the implications in terms of resources, culture change, market reach and other critical factors that will be needed to ensure success. It’s also a sanity check that should stimulate passion and emotions including surfacing of doubts and fears which need to be addressed rather than suppressed.

The Lighthouse looks and feels like a “Winning Aspiration” (another label) as described in the book “Playing to Win”. It becomes the CEO’s soundtrack – often introduced by a story about an individual impacted by the organisation achieving its destination, but then fleshed out by the implications. It is not a single statement but a series of implications from a central theme.  Success is always defined by the outside world recognising the achievement of the organisation, a stakeholder view of the destination.

“Clarity creates Confidence, Confusion causes Chaos” Greg Bustin, Vistage Chair and Accountability author 

Having a clear destination is a fundamental building block in ensuring a whole organisation has an accountable structure.

Without it, all roads look the same, executives can interpret a destination for their own purposes. Without it a board continues to ask questions when they should be letting the CEO develop and implement a plan to reach the destination.

What does a Lighthouse session look like?

1.   Involve the board and a strategically competent executive team; but don’t design by a committee. The CEO must be the primary owner. 

Often it is argued that the board determines strategy; in practice it is the organisation’s leader that has to be the architect of the direction. This can be within the remit of the organisation’s purpose and constitution which can be safeguarded by a board and the board has a final sign-off but nobody can replace the full time senior executive officer in owning this.

2.   Use an outside facilitator. (Of course I’d say this..) 

Emotions need to be tapped, consequences fleshed out. Outside-In impact needs to be considered. It is impossible for the CEO to facilitate this discussion; they need their opinions to count so they are not best suited for the process. Similarly, the board needs to be actively engaged in the content not just process for this part of their role. A good facilitator will ensure there is adequate challenge to ensure clarity is there for those outside the meeting.

3.   Keep the Lighthouse session separate from planning.

This phase is clearly part of the Strategy Development phase. In an increasingly uncertain world, this needs a degree of opening up and “outside the box” discussions. Planning on the other hand is a focusing and narrowing process requiring very different dynamics. This should follow a few weeks after the Lighthouse session.

 4.   Assume this is where you are heading but do allow in the regular review process for a change of destination if conditions significantly change.

With a clear destination in place, paradoxically, an organisation can change the direction and then identify the consequences of that change. Nothing is cast in stone, but clarity effects every single decision made in the organisation. This way an organisation can “pivot” very quickly if it has to.

I'd be interested to hear of others' experiences and journeys and if you have other suggestions to the basic elements I've outlined here.

Superhero or Servant Leader - You Choose!

Are you a servant leader or a superhero? A bit of both perhaps? If so, which gives you more fulfillment as a leader? And which role is better for the long term sustainability of your organisation?

I often come across senior executives frustrated by what they perceive to be a controlling CEO. At the same time, some of the business leaders I work with are reluctant to let go because they do not yet see the right “Strategic” talent, usually without considering whether they might be part of the problem.

The end of Superhero leadership

In “Good to Great” Jim Collins profiled "Level 5 leadership" which is characterised the absence of the trappings of status and power. In "The Misguided Mix-up of Celebrity and Leadership" he found to his surprise that there were more Level 5 leaders than he expected. They just didn't often get to the top of the organisation. He observed: “Then it dawned on me: Our problem is not a shortage of Level 5 leaders. They exist all around us...

Our problem lies in the fact that our culture has fallen in love with the idea of the celebrity CEO. 

He goes on to say "Our problem lies in the fact that our culture has fallen in love with the idea of the celebrity CEO. Charismatic egotists who swoop in to save companies grace the covers of major magazines because they are much more interesting to read and write about than people like Darwin Smith and David Maxwell. This fuels the mistaken belief held by many directors that a high-profile, larger-than-life leader is required to make a company great. We keep putting people into positions of power who lack the inclination to become Level 5 leaders, and that is one key reason why so few companies ever make a sustained and verifiable shift from good to great."

This has been taken even further by The Shingo Institute, established to guide leaders in creating sustainable, principle based cultures of excellence. The Shingo Principles include two cultural enablers that provide the foundation for excellence, capturing the essence of a servant leader: "Lead with Humility" and "Respect every Individual" 

One of TEC’s perennial speakers, Colin Chodos recently shared his thoughts around the Harvard Service Profit Chain model with one of my groups. Profits come from satisfied customers who get great service provided by engaged employees led by servant leaders. He challenged my members in how they engaged their teams. As I listened to this discussion I came to the same conclusion that Collins came to some 15 years ago. Level 5 leadership is within many of my members, but often they struggle with the challenges of the day to day to live this consistently.

The Myth of the Servant Leader

So why is it so hard to put Level 5 leadership, especially the concept of service, into practice? Certainly the people I work with have got beyond being status conscious, but still many struggle with how they need to change. As Marshall Goldsmith Says "What Got You Here Won't Get You There".

The very fact that they’ve been successful is at the core of this issue. Whether a successful entrepreneur or a professional and successful CEO there is usually a sub-conscious dependency culture, reinforced by suggestion.

Suggestion is addictive. You feel good, the other person feels good. The short term results are often better. But what of the long term? 

This is even more acute when dealing with potential successors. Succession planning is one of the hardest issues any founder faces. As baby boomer entrepreneurs seek exits and handovers this is becoming an epidemic.

At the core of the issue is the belief by incumbents that a servant leader has to let everything go. This is a myth, its not an "either-or".

Defining "Founders Purpose" or "the Legacy" and setting fundamental distinctive values remain the leader’s role. These are the "whys" of an organisation. It's with the what's and the how's where the servant leader stands back. This is empowerment but not abdication.

Start the shift towards being a Servant Leader

1. Get honest feedback

• A coach is good but peer groups such as TEC / Vistage CEO groups is even better. A recent book The Power of Peers describes this process.
• Use a 360 tool, with a focus on the conversations. I use a profiling tool called VoicePrintwhich analyses how you use conversations especially in 1on1 discussion
• Practice asking questions, developing a more coaching style. Two great books are Susan Scott’s “Fierce Conversations” and Greg Bustin’s “That’s a Great Question”

2. Be transparent

• Use visual management tools. An empowered organisation has to be aligned and engaged. Visual management at all levels of the organisation enables both and creates the context for the conversations.
• Encourage accountability to all - not just upwards. Transparency promotes dialogue with all parts of the organisation.

3. Get out of your comfort zone by meeting your people

• Management by Walking Around (MBWA) was popularized by Peters and Waterman – Kraig Kramers called it Walk the 4 Corners (W4C). In Lean it is Gemba Walks.
• All these are informal ways of engaging with people on the front line and middle management (don’t forget them Chodos reminded us). However, this is not a “Regal Tour” – conversations should be meaningful about the business not about the football results.

4. Lead by example

• Lead with your vulnerability. That’s what we do in TEC. Uncomfortable, but incredibly powerful. This means asking for help, sharing the issue.
• Share with people around you that you are trying to change. It’s not a secret and people will notice the difference, so get them to give feedback on how you are doing.
• Share your values. Publicly. Discuss what they mean to you and explore what behaviours you would expect to see.

In a VUCA world no leader can be across everything. We need all the organisation aligned and engaged. A visionary but servant leader rewards both their organisation and themselves.

I’d be interested in hearing other people’s stories in how they have taken steps towards being a servant leader. Leave your thoughts and experiences in the comments below... 

It's Not Personal - It's Just (Family) Business

Consistently voted as one of the greatest movies of all time, The Godfather is a goldmine of business and leadership lessons. The movie highlights many of the biggest issues facing any family business, in particular the tension between “business” and “family” and even more acutely between the founder and the next generations.

Anyone running a family business knows what I’m talking about. It's never easy to transition even with the most benign family environments. Add a mix of sibling rivalry, a divorce or two and the scenes in Godfather are all too recognisable, actually they are mild compared to real life. It's the second and third generation of business ownership where things get particularly challenging, as this means there are more and more voices trying to make decisions - often with gut instinct rather than strategic rationale.

I work with several family business CEOs and last month I was lucky enough to hear the CEO of one of Australia’s most successful family business describe his story. What struck me was success was linked to a clear governance structure. Sustainability is all about transition from the founder to a more structured approach, which includes a need to be hard headed about the legacy business as the world gets smaller and more competitive.

The challenge, then, is to create a system of governance that preserves the various strengths associated with a family business while limiting many of their inherent weaknesses. To do that, we need to look at the path many family businesses take as they grow.

There isn't always a clear exit strategy

While true entrepreneurs from day one know that they're growing a business to sell it, not every business is formed with a clear exit strategy in sight. There is a minority of founders who set up a business with the sole purpose of passing it across the generations, most only work this through once the business is truly established.

There are plenty of examples of family businesses that have become bigger and bigger over the generations. The confectionary empire of Frank Mars is now into its second century, still 100% owned by the family. Cadbury went 150 years before it started to lose the family ties. Ford is still recognisable as the company Henry founded and the family is still involved, but at shareholder level. These are just the tip of the iceberg. In Australia where I now live there are many privately held but exceptionally strong family businesses that haven’t hit the headlines. But the issue of influence, of ownership and power is as acute here as anywhere.

It's this distinction between ownership and governance that's so important for family business owners to be aware of, as it allows them to find more effective ways of balancing power between multiple stakeholders. Peter Crow, who specialises in Family Business Governance, said that a family business needs to use a proper board structure when the owners can’t all fit round the kitchen table. I think that is a really useful image.

"A family business needs to use a proper board structure when the owners can’t all fit round the kitchen table" 

When does a business need a Board?

Once the ownership gets that size, then by definition not all can have an equal voice. Without proper governance, Uncle Ned will feel he has been undermined, Auntie Florence still wants to invest in her pet project, Cousin Jack wants some money to invest in his own business. And Dad, who is now 85, still sits at the head of the table and thinks that what got the business to where it is today will keep it there.

Strong Governance is now essential; emotions are likely to get more intense otherwise. In many ways the issues are exactly the same as those faced by Publicly Listed Companies – investors need to be informed, but be kept out of micro management and they need to entrust their wealth to others, who manage the business in the interests of all stakeholders.

What Governance is, and what it isn’t.

Governance acts as a necessary antidote to the emotions and gut-feelings that so often dictate decisions in a family-business environment. Adrian Cadbury's definition puts this into perspective, defining governance as "The system by which companies are directed and controlled".

"System" is the key word in that definition, as the very mention of the word separates it completely from anything that could be inspired by gut instinct or emotion. Instead there are processes in place that channel the potentially disparate whims of family shareholders into actionable decisions through the professional CEO supported by some independent minded Directors.

There's a common misconception that governance is compliance. Peter Crow emphasises forward looking business strategy as the priority; compliance is purely a rear view mirror exercise. With most businesses expected to be disrupted significantly within the next 5 years it is almost criminal not to have both strong governance and a forward looking strategic stance. This in my view should be led by the CEO but with an Independent Chair managing the Governance process, supporting the CEO and managing the interface between the business and the family.

Who has the Courage to make the change?

Family businesses often have a unique set of inherent values which have significant effects on the way the business grows and how the topic of succession is discussed. They can be patient and benefit from the virtues of patience in that they tend to have stronger balance sheets and are less dependent on debt. This also means they can take quite exceptional risks in new ventures.

However, there is always a risk that later generation family members develop a sense of entitlement, an attitude of inherited wealth and an expectation of a job to fit their lifestyle.

At some point a second generation leader has to step forward and implement the transition as a professional CEO.

The courage this requires is exceptional. The founder may acknowledge the need for succession, but rarely without some misgivings. The extended family anticipate, correctly, the loss of their direct control. The leadership role here is a massive communication effort to the extended family to promote the inevitability of the transition and the underlying principles of fairness, accountability and creating value.

Key Elements for a Sustainable Family Business

Governance Structure

Separate the extended family from running the business by having a Council – with broad representation from the current generation and a Board, with both family and independent representation and an independent chair.

Leadership and Succession

Choose the best people to run the business whether family or not. Family members who wish to pursue a career in the business get help in training and development to give them the best chance, but no automatic entitlement.No family member should expect a job as a birthright or entering the business in a management role.

Values

Enshrine the original founder’s values with the purpose of sustainability, but do not get stuck in heritage. These include the respect for the Board’s authority in running the business and the Council’s authority in dealing with family distribution issues etc.

Strategy

Focus on creating family wealth and sustainability. A rational and value driven approach to business opportunity with a long term investor mentality; many times this requires some portfolio thinking and diversification from the core business and sometimes this means the original businesses are eventually passed to others.

Those CEOs who have succeeded in this transition usually recognised early on that they cannot do this alone. Advice from outside the family and strong emotional support from peers and mentors is at the heart. Expect the journey to be rocky at stages and keep an eye on the longer term prize. In Australia support is available from TEC groups and from Family Business Australia

I'd be interested to hear of others' experiences and journeys and if you have other suggestions to the basic elements I've outlined here.

Image Credit: An original illustration by Hamish Lindsay. 

A Joined Up Journey to Business Excellence

When senior executives and business leaders are trying to get their minds around how to raise the bar in business performance where do they look?  The latest Guru Superhero's book? Inspiring articles or TED videos? The trouble is the focus is more usually on the achievement and less about the journey itself. For most people trying to transform their organisation its messy, its hard work and the day to day urgent things get in the way. "Surviving" is the usual word, not "Thriving".

Share with others trying to achieve sustainable excellence

One of the best ways is to acknowledge that you are on a journey. Sharing the experiences and the real challenges with others while studying inspiring examples is a way to envision what excellence will look like for your organisation. At the same time, it is allowing you to acknowledge you are in pursuit of perfection, but you sure as hell haven't achieved it yet!

One model that aims to help organisations achieve excellence is the Shingo Model™. The Shingo Model is not an additional program or another initiative to implement; rather, it introduces Shingo Guiding Principles on which to anchor current initiatives and to fill the gaps in efforts towards ideal results and enterprise excellence. The flip side of this is if you don't apply these Principles you are in danger of losing momentum or start going backwards. "

The ten Principles are shared below

Its all about behaviours

As Peter Drucker once was supposed to have said "Culture eats Strategy for Breakfast". By "culture" what we are really referring to is the way we behave in and organisation. The Shingo Institute also has identified Three Insights of Enterprise Excellence™ around behaviours. 

1. Ideal Results Require Ideal Behaviors
2. Beliefs and Systems Drive Behaviors
3. Principles Inform Ideal Behaviors

Way too often business performance improvement is focused on Tools, Structure and Processes only. Many training courses are academic exercises leading to tick box qualifications. A focus on behaviours requires reflection, sharing and, for a leader, an honest assessment of their own behaviours.

A structured approach to Managing by Walking Around

What leaders need is a structured approach to identifying behaviours against a set of principles. For most this is uncomfortable, new and hard to put into practice. It isn't a "Regal Tour" talking about the football but a purposeful conversation aimed at uncovering ongoing issues and opportunities. In short it needs practice and a willingness to go though an unfamiliar and potentially uncomfortable learning process.

Don't try this on your own

Just like any habit forming find some peers with whom to share the experience. Manufacturers usually can find some kindred spirits but for service businesses this is still in its infancy.

The Shingo Institute, through their affiliates (SA Partners in Australia) run experiential workshops hosted by a local organisation already embarked on their journey. Details are linked below.