Bad Business
I’ve adopted the song Bad Business as the unofficial anthem of my new business. Our operating companies aren’t bad, they’re just not as good as they could be.
I discovered a great band this past year, little hurricane from San Diego, California. I love the simplicity of this blues-y drum-guitar duo. They posses great songwriting and musicianship. Their newest release Same Sun, Same Moon made #2 in my Year in Review: Top 5 Albums.
Bad business
You got me tied up in knots
Strung up like a dog,
and I’m all out of luck
Bad business
Yeah you’re all the same,
Say yes to the money
Then you pass the blame, yeah
All I see now is your greed
Dollar signs in your eyes
Got a lot on my mind
Want nothing to do with it
Got nothing to do with it
I love the music but the lyrics struck me in relation to asset management and operational excellence. If we are honest with ourselves and if we have the experience we can see where the organization could be more successful, if it would just stop getting in its own way.
Short-Term Earnings
In W. Edwards Deming’s Deadly Diseases of Management disease number two is Emphasis on Short-Term Profits. Mr. Deming, a pioneer in modern quality management, believed management that worship the quarterly earnings would sacrifice the company’s long term growth. It is easy in today’s business climate to substitute asset management for quality in his words. His words are as true in 1984 as they are in today.
For a variety of reasons, including short shelf-lives, senior leadership’s behavior is driven by short-term financial management. In turn, the organization is driven with urgency to deliver instant results. How those results are realized seems far less important.
Declared versus Earned Results
Most leaders today are taught to deliver results. Of course they are. Business is all about the results.
It is far easier to manage costs than to assure or improve performance. For senior leadership there is a lever for cost control, but there is no similar lever for production. The cost lever is easy to pull. There’s 100% certainty in a cost reduction strategy while there’s much less certainty of success in a production improvement strategy.
A bird in hand is worth two in the bush.
I spoke to a middle manager at a maintenance and asset management conference a while ago who insisted his senior leader was willing lose $100 just to save $1 in costs. I laughed at the hyperbole and suggested that simply couldn’t be true. By the look the manager shot back to me, exaggeration or not, he firmly believed it.
We all appreciate companies are financial institutions. In companies where goal setting is driven primarily by earning needs there might not be alignment with what the assets are capable of achieving. These organizations control costs with iron fists. Operational leaders are motivated to manage for cost and hope for performance. In so doing they take on risk and forgo opportunities to improve their unit cost of service fundamental to business success.
Few leaders are encouraged to earn those results with improved and sustained best practices that in time provide more overall value to the company and its stakeholders.
Perhaps this leadership behavior and culture is why companies are surprised to find themselves stuck with third-quartile results.
Throwing a Bone
There is management technique euphemistically described as throwing a bone. Here’s how it works:
Finance always knows exactly what earnings it requires to meet its strategic financial objectives. To their credit, financial management is a mature discipline with well established practices. To meet the business needs, finance determines the operating and capital spend constraints and with market forecasts the required production expectations. These targets are then imposed on the operations in the business planning process.
Operations, with their management system generally far less mature and formalized than finance, often can’t offer a strong logical and confident counterargument. So, operations does its best to meet those expectations. Sometimes they can; sometimes they can’t. The point is, Finance is writing checks on behalf of the assets in the business plan that the assets may or may not be able to make good on.
Hey Operations, “Go fetch the bone!”
How many times have we seen managers be asked to cut their budgets 5, 10, 15% for their upcoming or current year annual budget? Leaders don’t have enough lead time to improve their practices to earn the reduction. So how do they go about this? The usual action is very reasonable, I suppose. Leaders look at what they planned to do, decide which plans are the least value and lowest risk and cut that work. In the cases of maintenance work or capital investment, those plans (if selected properly) would have added value. More risk has been accepted. The problem in the case of people, means head count reductions. Less people to do the work.
Cutting your way to meet the business objectives is the vicious kind of goal seeking in business planning.
Managing for cost and hoping for performance. This behavior is a way of managing; tried and true. But it doesn’t yield the best results. It drives sub-optimal behaviors. Hope is not a strategy.
Extending the Runway
Contrast the behavior above with a company I had the opportunity to visit a few years ago. Their management and leadership culture valued continuous improvement. They had a mature operational management framework. They considered themselves the top quartile for their industry. While it was clear they were very proud of their performance they didn’t often share with other organizations so I felt lucky to observe how they operated.
The general manager I met with was an incredibly confident man. It was clear the organization had some ambitious goals for his business. He advised he had five years to improve his department’s performance to a new sustainable threshold 15% lower than their current cost of service. It was a stretch goal for his business unit to be sure but he had plans in place to improve his practices and find value in increased efficiency and effectiveness.
This GM had full accountability to realize the required value. Most importantly, he had the time and resources to develop practical strategies, set goals and objectives, and develop specific action plans to achieve the desired business results. He had an excellent track record and was fully confident in his ability to meet his business unit’s objectives.
This GM was provided the runway length necessary to get the plane up to speed and allow the lift forces carry it safely into the sky.
Better Business
A key to better business results is to manage your performance and the lowest sustainable life cycle cost. It is harder to do but the benefits are substantial.
To do this you must ensure your unit cost of service, your production unit divided by the cost to produce that unit is driving downward. Managing your assets well means you can affect both the numerator (production unit) and the denominator (total spend) separately, or together.
If you know your target cost of service then you know how much you need to improve. Every initiative needs to be an investment that exceeds the target by a margin sufficient to move the dial from the current to the new cost of service. This becomes a hurdle rate in effect where the quantity of initiatives and their respective return are required to achieve business success.
Earning your way to meet the business objectives is the virtuous kind of goal seeking in business planning.
I used to believe it was impossible to get something for nothing, to get more production with fewer resources. Like blood from a stone. I’ve changed my opinion over time and with experience.
Organizations almost always have some degree of sub-optimal business results. A motivated organization can invest in its people and business tools to improve the efficiency and effectiveness of its people, practices and decisions. It can earn sufficient value within a reasonable time frame to make a meaningful positive and sustained step change in business performance.
That is just good business.
Scio Asset Management Inc. empowers operational leaders to See. Think. Decide. Act.
