KEEPING TRACK OF THE PROFIT

When a company is small it is easy to see where its revenue comes from. Products, services, clients and markets are generally simple and traceable. This changes however as the company grows. Everything becomes more complex and opaque. We might be able to track pretty accurately which products generate which revenue, but it might already be difficult to determine which products contribute to profit. The reason is usually that there is no clear overview or understanding of the allocation of resources. For example, how much time was spent on a client or on developing a certain service or product, and how should this be allocated in a fair way to reflect real earnings? In reality we may allocate resources to a product which generates higher revenue, but if we don’t do this deliberately we lose track of how much we have already allocated and therefore lose sight of whether or not the product is profitable. The risk is that we forgo investment in one potentially profitable product or client while ploughing disproportionate resources into something else that doesn’t warrant further expenditure at all. This “blurring” is unfortunately a typical manifestation of an unclear organisational structure and thereby unclear accountability. Because tasks and responsibilities are unsettled or unclear, profit tracking and accountability cannot be clarified.

This lack of control will also manifest itself in how the company grows. Rather than driving the company according to a deliberate strategy with clear priorities, the company becomes opportunity driven.

A typical mistake is to blame this lack of control and clarity on the IT systems. Typical complaints sound like “We don’t know what is going on, we get the wrong information, late, and we can’t make any changes because our information and budgeting systems are too difficult to change”. Unfortunately, a lot of companies in this stage invest in very complex, costly and time-consuming system changes, which make the situation worse and can even sink a company completely. They should look instead for the solution to the real problem, the organisational structure.

The purpose of any organisation is to satisfy a need that no individual can satisfy alone.

Our hunter-gatherer ancestors were most likely organising into smaller groups as early as 1.8 million years ago. We can see from prehistoric cave drawings (the oldest from 40,000 years ago) how different members of the hunting group had different roles in capturing prey. Some would corner the beast, while others brought it down. They organised to make the hunt “economical”, with each person expending as little energy as possible, while enabling feats beyond the strength and reach of any person acting alone.

If you have ever watched very young children play football, you will have noticed it is almost impossible to give them defined and fixed positions on the field. All the kids will focus on one thing only: running after the ball to kick it. No matter what direction, even tackling their own team mates, as long as they get the ball. All of them will be all over the field. The same behaviour can be seen in some young companies.

A lack of coordination in the early days is entirely normal, but can still create problems. Normal problems usually pass by on their own when the organisation reaches a more demanding level. However, if the organisation is unable to solve its challenges in enough time to move to the next level, the normal problem may become abnormal and may hamper the company’s growth.

As a matter of fact, if we return for a moment to the junior football example, if the coach tries to introduce a strict structure too early, it will not work. If the coach forces the children to try playing like a team, they will freeze at their positions and stand waiting for the ball to reach them. They are not ready to play like a well-organised team. They only understand what to do and not so clearly how to do it yet. They are primarily conscious of their own individual interests and only to a limited degree able to see themselves as part of a team with a collective aim.

The “first 100 days” should therefore be the priority of the CEO, but other key people should be involved in setting the content too. Managers, influencers, union leaders and any other employees with power and know-how should all be involved if you want support for implementing your changes.

The first 100 days are symbolic and crucial. This is a time when the new leader enjoys a lot of goodwill. Expectations are still positive and he/she is not yet seen as “part of the problem”. This time of about three months is long enough to make real progress, yet short enough to be impressive when you look back to see how much you’ve accomplished already. It creates energy and reinforces goodwill. Initiating your strategic direction through visible action during the first 100 days is the key to successfully implementing your new strategy and structure. It is part of building trust and respect.

What I describe in this chapter took place the first 12 months but I continued to work with this client for 5 years in total.

The CEO’s list for the first 100 days was simple but ambitious:

• To define a vision and mission for the new corporation

• To define the main strategic goals and objectives

• To create a new organisational structure

• To uncover all major improvement potentials and initiate work to capture the improvements

• To identify all procedures and processes that should be unified and streamlined and initiate necessary implementation work

• To do this through broad involvement

The first item on our list was therefore to define a vision and mission for the corporation. As preparation we agreed to reinforce the strategic business reasons behind the merger. We should clarify the whys and wherefores and make sure they were expressed through the broad participation of shareholders, managers and employees. They should be repeated until everyone knew the reasons by heart. The list of reasons should also serve as a helpful reminder or guide to the correct course of action if we ever had conflict over strategy and structure.

The company had two-three years of very tough internal cleaning up to do. They had to establish new, efficient administrative routines and procedures, catch up with the maintenance lag, install professional management in the Green business units, set tough priorities regarding investments and in short position the business for success. Much of their energy and focus was spent on internal challenges. They lost money during the first three years after our turnaround and the investment fund was unwilling to invest in a new critical project. However, the two founders did a remarkable job and at the end of the third year they even hired an external, professional CEO. Both founders continued in the company but took a much more strategic position as active board members. After another couple of years, and another restructuring which transferred administrative resources to the Greens and even added a new agro-education Green unit, the company had positive cash flow and made a profit. The business even gained new market share and was well on the way to success.

The company is in the beverage industry and was founded c. 50 years ago. It operates in several countries but has its main production facilities in one large African country with very poor infrastructure. The roads are absolutely terrible outside the larger cities, and these are clogged with traffic. The biggest challenge for the company is to transport their products to retailers and wholesalers. Trucks break down very fast in this kind of environment. Good, trustworthy drivers are difficult find and develop. It is almost impossible to manage a fleet due to absent or unstable mobile and internet communication.

The company has therefore established several manufacturing and storage facilities around the country. The biggest problem in this regard is that the country is tormented by terrorists. One brand new manufacturing facility was abandoned almost immediately after opening because of a terror attack that killed several employees. The political system is corrupt and bureaucratic. The only constant in this market is that “everything” is unpredictable. These are quite different types of problems than what I’m used to! However, Africa is a huge market, and everyone needs drinks, so it sounded to me like a great business opportunity. And the company’s products are market leaders in some of the markets they operate in. The product’s quality and purity are impeccable, as indeed they have to be when you produce beverages.

In this environment, crises are the norm rather than the exception. Operating a business here requires strong nerves and reserves of patience, smarts and flexibility. A company can easily end up in a crisis because of the constant unpredictability. Whenever a company faces a serious crisis, the natural instinct is to “freeze” whatever you can control in order to protect what you have achieved so far. It is very difficult to build a solid and robust system in this kind of environment. When faced with a major crisis the typical response is therefore to retreat to a previous stage of survival. This company had been through many cycles of development, but when they told me their 50-year history it seemed to me that they had returned several times to the same start-up stage or “infancy”.

Take-home values from this chapter:

• Create a sense of urgency through a participative diagnostic process (this has to come from within the organisation or people will write it off as “just the consultant’s view”). Stress the serious problems found and ask rhetorically “How long have you had these problems and if you continue to operate as now, will these problems be gone next year?”

• Create dynamic energy for change through a participative strategic workshop, defining what needs to be changed to widen perception of markets, clients and what needs can be served. Identify opportunities and threats in light of this and describe what has to be done now for you to be in the right position tomorrow.

• Make sure your new mission statement includes a description of the market, client or potential opportunities – this is the outline of the new structure. Without this logical connection and “motive” the structural work will be very difficult.

• An aging organisation is possibly efficient but certainly not effective. The organisation probably has well-organised systems but clients’ needs are poorly satisfied. Actually, this is the definition of Bureaucracy. Efficiency is preserved at the cost of effectiveness by avoiding changing products or services, which allows the organisation to keep the present systems unchanged.

• Organisational changes that could make the organisation more responsive to client needs will create internal conflicts. The aging organisation would therefore prefer to sacrifice the client’s needs rather than get into internal battles.

• When changing the structure, make sure you empower the client-serving units (which I usually call “business units”). This is done by first mapping the sources of income and bringing them together in logical clusters. Emphasise that the client serving units are the most important, our raison d’etre, and build support behind this view. All other functions are “only” there to support the client serving units. Attach as much as possible of the support functions directly to the business units.

What would happen if two or three managers in the same senior management team think they are the highest person responsible for a certain task? Or if, for example, four different managers each think they have operational responsibility for the same task? There will obviously be confusion, parallel efforts and conflicts. The question is of course whether this is only a matter of redefining tasks and responsibilities (and then the problem is solved), or if it is a structural problem, in which case it requires a much more complex solution.

To find the answer, first you have to understand what should drive the business. This is not always clear and not always easy to find out, but you could start by clarifying your strategic intent, your mission. This does not necessarily entail making a detailed and comprehensive strategic plan, but rather finding a way to describe your purpose. This is not a tired old cliché written by the marketing department, stating the obvious about what you are already doing. No, this is to describe why you are in this business and what you are going to do for whom. It should include what to do with the opportunities and threats you believe lie ahead and what priorities you are setting: both what to do and what not to do.

As described in this book, this is the basis for your entire structure. Only after you are sure you have the right structural design, tailored to your specific needs, can you proceed to making the Responsibility Matrix. The point of the matrix is now to clarify tasks and responsibilities based on the right combination of authority and power.