Category: General Management

One of my wife’s professorial colleagues in the business school, Dr. Steven Postrel, has a post over at Organizations and Markets (hat tip: Virginia Postrel), which starts off by posing the question, "What contribution does management make toward producing output?". One item that drew my attention (snipped a little out of context) is:

In other words, management’s effect on capabilities is best understood as avoiding incidents of inconsistent behavior.

Consistency analysis can be an important tool to use in management consulting. I refer to a different flavor of it in an earlier post as one fail-safe method (method of last resort) for approaching management problems when one cannot rely on external benchmarking information or clear business theory. I will say, however, that seeking consistency at a tactical management level presumes that consistency is the right strategy in the first place (which may be considered a leadership or portfolio concern)!

I’ve never been one to have new year’s resolutions stick very well. I think in prior years, I have had goals about exercising more, eating more healthy, spending more wisely, etc. The general sayings are that goals should be specific and that  one should regularly monitor and measure progress towards goals. No arguments from me there.

Still I’ve managed to make progress over the years and keep things in balance. Making progress and actively thinking about what I would regret if I did not do something – these are two things that have worked for me.

On "making progress", I remember working in one startup and working very hard. But after a year had passed, we had wondered whether we were pressing too hard and running the business model in the right direction. Of course, we had had some tremendous wins and beat the odds that year, but we had to step back and think about whether we were making significant enough progress. In the end, we decided to change directions, and people generally felt better and resolved about new direction.

To illustrate the second point on regret, on a personal front, I had a decided a little more than a year ago to "trade down" on my near-term career potential. The guiding principle steering that decision was that I was thinking about how much I was going to regret other things going on in my personal life if I decided to forgo those things for a "richer" professional life. Careers can always take new turns. They can restart at any point. But some things in one’s personal life only come once. Actively thinking about regret made me make the right choices. As another story, although I’ve never asked my father, I like to think that one of the reasons he stopped smoking many years ago was because he thought about regret scenarios. It wasn’t a twelve-step program that got him to make significant self-improvement. It was one wake-up call.

I don’t pretend to know what works for other people in terms of new year’s resolutions and setting personal goals, but feel free to share your stories. As 2005 closes out, I wish everyone a safe holidays and best wishes for the new year. Best!

When I was a practicing engineer early in my professional career, I remember alumni giving me a glimpse of the future of a typical engineer where the engineer would after a number of years move into a management role managing other engineers. Although I didn’t give it much thought at the time, what I didn’t think about was that moving into an engineering management role might make my engineering skills obsolete. Over the years, I did take a path that led me from detailed design engineering to systems engineering to project/product management types roles. Although I stayed on the cutting edge in terms of industry knowledge, along the way I became more interested in business, and I found that my specific engineering trade skills became anemic and obsoleted.

In business, similar things can happen too. For example, many successful sales executives started in an area such as marketing. Maybe down the road they became field sales people and then grew into roles of sales manager, area director, regional VP, or executive VP down the road. With each advancement, they may have become further removed from trench-level sales work. Or they may have helped the organizations become more specialized in productizing the sales process (e.g., for a large company with thousands of existing customers). In these cases, such executives may have set up separate people doing inside sales, other people doing proposals, other people pulling together the technology pieces of a proposal, etc. The executives end up maintaining relationships with customers at the executive level and having the final say in how deals are crafted and how things shape up. In these cases, the executive plays a tremendous role in the larger organization – the situation may be loosely akin to a general in the battlefield. The general becomes far removed from the front line but clearly has tremendous influence and can command respect without having to "do" anymore.

Down the line, management executives (like some military generals) may have more difficulty in moving from large scale environments to entrepreneurial or startup environments. They become accustom to having many resources and telling people what to do. While such executives may have invaluable knowledge and experience about the rise from nothing to sales monster, they may have forgotten what it is like to actually be in the trenches and/or have to do work. Or they may have forgotten what the rise actually entails (which would be a shame if that is the case). I know of many entrepreneurs who lament about venture capitalists or other investors insisting that executive sales VP of brand name Fortune 50 company should become head of sales for seed stage or Series A stage company only to find nine months and millions of dollars more poor that the entrepreneurs were better at selling an early market product with no brand name than the experience sales lifetimer.

This is not to say that managing only is bad. But managing only will create a specialization (which may be rewarded in its own right), and pursuit of that specialization should be a conscious decision. Some managers balance things out by ensuring that they perform a certain amount of work from time to time or visiting the field often. For example, sales managers may not only have regular, internal sales review meetings with field sales people but also travel with field sales people to visit client prospects. Multiple purposes are satisfied with the manager keeping skills fresh, monitoring performance of field sales, and smoking out end-to-end sales and marketing process problems that may be affecting the larger organization.

There are also tradeoffs with just "doing" too. People that get so focused on execution may find that they cannot scale the model. If managers focus on doing as opposed to managing, they may end up micro-managing, failing to utilize others, or failing to develop their managerial skills.

So what’s the answer here? Personally, I think the optimal choices depend somewhat on the nature of the game one is playing. In some industries (e.g., auto manufacturing), the sales and delivery process tends to require specialization to get scale. "Managing only" may be more acceptable. In other industries (e.g., consulting), scale may be harder to achieve and tend to require sales and delivery processes to be closer together. Managing and doing may need to be closer together.

So all said, one needs to recognize that there are different games that can be played. There are also tradeoffs in the types of players that can fill the roles too, much like a guard plays a different role than a center does in basketball. The key is to both match fit with appetite and skill with the game at hand and also to make sure that the process of renewal (e.g., maintenance, training, retraining) is in tune with long-run needs.

Ralph Muse, a fellow Texan, ex-Booz Allen management consultant, extremely experienced interim manager, extremely respectable father, and honored serviceman (among many other impressive things) recently started up a blog, and one of my favorite posts by him is entitled, "Super Salesman CEOs". The post is written in the context of trying to place a CEO in a startup, but I feel the post also reflects the situation in numerous client engagements I have seen, for example in cases where more mature companies are looking to enter new businesses or develop new product platforms. In Ralph’s post, he writes (bracketed text mine):

[An executive search firm] needed help finding the perfect person for a CEO search. The position description called for someone who had spent their whole career in Sales …

I have heard this request before. It seams to be a trend. While I think every good CEO is a salesman, not every sales VP can be a good CEO. If fact for most startups after the salesperson “makes the sale” the CEO will have to close the deal by convincing the customer that the company has a sound business strategy that will succeed.

One take that I have on this situation is that visionary and "salesy" (for lack of a better word) CEOs need to find someone or someway to complement their strengths if the CEO lacks execution skills, strong lieutenants, and/or the time and bandwidth to employ structured methods for tackling problems. I have seen a number of efforts fail or get stalled because they overlook some of the soft stuff to get businesses to work, like team building (as Ralph mentions). See Ralph’s post for more.

I originally wanted to write a post for Father’s Day earlier this year but missed my opportunity. But being on an engagement in Northern Spain, I have had some time to reflect upon being a dad and being a businessperson. And recent crossings in cyberspace with an old PRTM friend have given me pause to reflect upon life because of his tremendous integrity in both life and business.

I personally think there are a lot of things that one can work on in both being a dad and being a businessperson.

Being supportive plays an important role in business. In the past I wrote about how I think having a supportive manager swamps all other factors in terms of career advancement. Apparently I’m not alone in this view, at least when it comes to management positions. When 363 finance executives were asked by CFO magazine what were the top three factors that helped them to achieve their position, having a supportive boss was either #1 or #2 depending on whether the executive was male or female (see bar chart about a third down the page).

Being supportive as a parent is also key. Paying attention to what type of environment one’s kids thrive in is very important to helping them advance in life. Although "politics" may play less of a role in the family environment compared to a business environment, kids enter into environments where they may be subjected to greater numbers of groups, cliques, social settings, etc. in their personal lives than many adults even face in a normal workday. One needs to help kids to develop social skills, tools, confidence, etc. much like one needs in business.

For me, being supportive takes focus. It takes the kind of focus that one needs when trying to bench press heavy weights on a weight machine – no other distractions allowed. Sometimes it’s hard to be focused during a busy workday. Sometimes it’s hard to do that after a busy workday. But being supportive may be one of the most important things one can do as a parent and as a manager.

Communication also plays an important role. Think about how often and how you communicate with your boss or subordinates? How does the quality of communications compare with your personal life? Is the balance right? Do you need to develop better skills in one environment or the other? At one point this year, I found myself asking my boss more about how things were going than I asked my kids or wife. That was one indicator that things had gotten somewhat out of whack, and so I have started to refocus things.

There are lots of things that can be adopted between being a business person and being a dad. I’ve only cited two that come to top of mind. I used to have a few books on my bookshelf that influenced my thinking in these areas including, "The Road Less Travelled", "Venture Capital Dad", and the "Seven Habits of Highly Effective Families". While there are clearly differences and pitfalls in directly applying methods from the business world to the personal environment (e.g., stemming from the fact that a boss-worker relationship is different from parent-child), the fact that people learn so much in one environment or the other … well the power of leveraging those learnings more consciously has helped me.

Having been schooled at Chicago, considered an institutional icon in espousing free market and efficient market theories, I am always initially skeptical of things that fly in the face of efficient markets. This post by Douglas Smith, however, is excellent and reflects upon a WSJ journal article in which Treasury Secretary John Snow maintains the widening gap between high-paid and low-paid Americans reflects a labor market efficiently rewarding more-productive people.

Of course, I submit (perhaps a little unfairly given recent circumstances) Exhibit 5, to Douglas Smith’s list of exhibits. Joe Nacchio, former CEO of Qwest, was once in the top 10 of all compensated CEOs and earning in excess of $100 million/year. As a former shareholder in the firm, I think I saw my shares slip in value close to 50 times during his term (here’s an article from 2002 that adds some color to the craziness of the compensation situation). Although I recall Nacchio (or folks on his behalf or in defense of his raises) claiming that Nacchio deserved compensation competitive with what he could get elsewhere in the market, all I can say is that Nacchio was neither Larry Ellison nor Michael Dell in terms of delivering value to the shareholders.

This is not to say that I don’t believe in higher pay for senior executives. Executives have a lot of leverage created in part by their span of control. Tremendous value in excess of market comps can be created or destroyed in fell swoops. But questions remain as to whether businesses (and the people that run them) have put in place the right control and reward structures, as Douglas Smith’s post points out.

Today I wanted to write about perhaps one of the most important lessons I learned in managerial accounting (as opposed to financial accounting), and it is something that I have seen improperly applied in many organizations (both profit and non-profit). It can be a very subtle concept related to accounting and pricing, but it can have very bad effects. The situation is called the "pricing death spiral".

Imagine a company that manufactures and sells gumballs. Suppose that the gumball company produces and sells 100,000 gumballs a year. The cost of manufacturing each gumball is $0.01 per gumball and the sales and marketing costs are $1,000 per year. No other costs apply. If one tries to unitize sales and marketing costs, over the number of gumballs produced, the sales and marketing costs are an additional $0.01 per gumball. If the company sells the gumballs at $0.02 per gumball, it makes no profit.

Now suppose that that sales are falling and so the company only produces and sells 50,000 gumballs in a year with the same sales and marketing costs. Now sales and marketing costs are double when one looks at the per gumball price. Costs are then $0.01 per gumball (manufacturing) and $0.02 per gumball (sales and marketing). So the company needs to raise prices to $0.03 per gumball just to breakeven. Herein lies the death spiral of pricing. Raising prices in this context artificially creates less demand for products, and thus, fewer sales. Weak sales seem to generate higher costs which causes higher prices which creates less demand and even weaker sales, etc. If the company (incorrectly) tries to unitize the sales and marketing costs across the gumballs produced and then folds that into the pricing of its products, it can wind up in a self-reinforcing situation where it is raising its prices despite falling demand and without regard to the competitive environment.

Some variations of death spirals I have seen in organizations I’ve worked with:

• a non-profit child care center has low enrollment (below breakeven) and raises monthly fees for next year’s class to amortize the administrative office costs across all children
• a professional services firms prices its services too high because it spreads out the costs of G&A of all areas of the business into the cost structure of a services group of a smaller division of the company (which in turns creates less demand for services and fewer subcontractor partnerships than optimal)
• the standard costing for a construction job is based on amortizing the entire cost of the field force the number of jobs performed – in a weak construction season, the next year’s costs are calculated to be too high to feed the pricing equation.

While the realities of an organization’s financials may dictate how closely cost structure should affect pricing, the error in the above pricing methods come down to this: the organization needs to separate out fixed costs (or sustaining costs) from variable costs. The organization also needs treat excess production capacity (or in the opposite case production levels in excess of normal operating levels) separate from unit costs.

Thus, in the example I had above on the child care center, rather than calculating the cost of providing care for a child by spreading out all G&A costs over the number of children enrolled, a unit cost per child should be calculated by spreading out a proportion of G&A by the child care center’s normal operating capacity. When the child care center runs below normal operating capacity, it runs a temporary loss equal to the costs times the number of children below normal operating capacity. The shortage in income could be made up by assessing the families of the children by a monthly (or lump sum) fee. One key benefit of pursuing this latter pricing mechanism is that the price of low sales is separated from the cost of production. Families of the children are only assessed fees to cover temporary shortages in enrollment, and the situation does not evolve into a case where the "permanent cost structure" is raised (thus forcing ongoing prices to be raised excessively).

The other cases of pricing errors I describe above are a little more subtle. In the second case, the error is that the company should again calculate variable unit costs for producing individual business unit services. While spreading out G&A for the business unit itself may be less suspect, spreading G&A from the entire corporation may be excessive (although computationally convenient) and should be viewed as a sustaining cost for the business. In the third case, the construction company would be better to allocate a portion of G&A to the individual job cost structure presuming that the construction company is operating at healthy levels.

So while there is no single, silver bullet for avoiding a pricing death spiral, first steps are recognizing the situation and then separating out the considerations so that more accurate responses can be taken (i.e., if production problem then solve production problem, if sales problem then solve sales problem -> improper accounting can mask the problem at hand). If one finds that the price of one’s products or services have more to do with the size of the finance organization in your company that the manufacturing or services costs, this may be a good warning sign.