We recently held our Asia-Pacific Annual Conference in Brisbane. It was a great success as are all of our conferences but the most gratifying part of it for me was our launch of the Paul O’Byrne Cure for Cancer Foundation. Read more…
The Cherokee Indians, as is the case with all native people, use insightful stories to convey meaning and seek understanding of people and their behavior. One such story that the elders tell their children is about fighting wolves. They say that inside every person are two wolves constantly fighting. One of these wolves is an evil character who is angry, jealous, lazy, impatient, self-centered, egotistical, negative, irresponsible and unforgiving. The other wolf is loving, kind, generous, humble, caring, enterprising, positive and responsible. Typically, a child when told about this will ask “which wolf wins?” To which question the elder will answer “which ever one you feed.”
Which wolf are you feeding?
In today’s busy world it is so easy to be drawn into negative thoughts, to complain, to blame circumstances, to become angry and impatient. And the more we allow this to define our behavior, the worse it seems to get and the less content we are. In other words, what we give most mental attention to seems to be what actually becomes our reality–a self fulfilling prophecy so to speak. Now, it is said that 90% of what we do each day is driven by habit. A habit is simply “learned behavior” so if you can learn a habit you can unlearn it i.e. replace it with a better habit or as the Cherokee might say, feed the good wolf.
My point here is that if you are not enjoying a great life then you are most likely feeding the wrong wolf. You need to change your habits by consciously eliminating those that you know are not useful to you and adopting those that you know are useful. I’m told that a habit (of any sort) can be broken withing 3 to 6 weeks but you have to work at it. Having been a very heavy smoker, I know exactly what this means but I also know that it gets easier over time. If a smoking habit can be changed so can any behavioral habit! You can, in other words, dramatically change your life simply by consciously looking at your behavior and taking a decision (i.e. thinking about then acting upon) to adopt a different thinking habit.
I’m in the process of reviewing questionnaires from people who will be attending a Boot Camp in London and a fairly typical response to a question I ask on “your key frustrations” is something like: “lack of original thinking from the team and the speed with which they deliver.” I have heard this a thousand times and I can say with confidence that as long as you believe (i.e. think about) your team members lack the ability for original thought and/or are inherently slow, that will continue to be the prevailing outcome.
People under-perform for one of two reasons: indifference or incompetence. If it is the latter get rid of them. If it’s the former, you need to ask yourself why is that person indifferent? I’ll bet you’ll find the answer in the area of communication and since what you think about (that person and his/her ability) determines what you talk about I suspect you’re allowing yourself to be drawn into negative thoughts about that person. This will result in you being unwilling to stretch that person through delegation, a reluctance to invest in training and a failure to help that person see the “big” picture (your vision) for your business and how s/he fits in with that.
When I meet with the Principals of firms that are doing extraordinarily well financially, the defining characteristic that separates them from those that are not doing anywhere near as well is in the way they talk about their people, their clients, their vision for the future of their firm and their passion for what they are doing both personally and professionally. These firms are drawing their team members from exactly the same labor pool, they service the same type of clients, offer the same type of services, use the same technology as other firms and yet they are getting superior results.
It is not, therefore, a question of what resources you have to work with it’s how you work with these resources and the “how” comes back to what you think about. If you think the same thoughts as “winners” and if you believe you will experience the same outcomes as they do you will be a winner, it’s really that simple; it’s called modeling excellence. This is something that Kerry King will be talking about at our Annual Conference in Brisbane next week.
I’ll leave you with this thought from Jack Canfield, author of the best selling Chicken Soup series of books.
Do you realize that your life at this very moment is the result of everything that you have ever thought, done, believed, or felt up until now? You can start right now to consciously and delibrately attract whatever you desire in the lifetime. Through the Law of Attraction, you can attract people, resources, money,ideas, strategies and circumstances–literally everything you need to create the future of your dreams.”
Something to think about? I’d welcome your thoughts!
I well remember when I was a kid thinking anything was possible. Superman was my hero and I was convinced that I could fly like him so with a raincoat attached to my neck, a 15 foot ledge to spring from and a tree branch only 10 feet away I proceeded to test that thought. Needless to say my broken wrist confirmed that, at that time anyway, I quite obviously still had some flight training to do. In later years I discovered that airline assisted flight was more comfortable and convenient.
Anyway, there are many things that are well within our reach if we’re willing to let go of our limiting beliefs and firmly implant in our mind the boundless possibilities that are there to be pursued.
I recently came across a video that I believe is worth taking a look at and thinking about. As business advisors we are in a fantastic position to help our entrepreneurial clients get moving and lead the world out of the malaise it’s slipping in to. Every day an opportunity will present that we can latch on to that will make a difference to someone at some time
Take a look at this video then read on.
For some unknown reason after watching this video I was attracted to my library and reached for Napoleon Hill’s 1937 classic: Think and Grow Rich--if you haven’t read this book get a copy today and do yourself a favor. I flicked it open and randomly fell on a page from which I quote:
“Never in the history of America [apologies to readers from the rest of the planet] has there been so great an opportunity for practical dreamers as now exists. The six year economic collapse has reduced all men, substantially, to the same level. A new race is about to be run. The stakes represent huge fortunes which will be accumulated within the next ten years. The rules of the race have changed, because we now live in a CHANGED WORLD that definitely favors the masses, those who had but little or no opportunity to win under the conditions existing during the depression, when fear paralyzed growth and development.
We who are in the race for riches, should know that this changed world in which we live is demanding new ideas, new ways of doing things, new leaders, new inventions, new methods of teaching, new methods of marketing, new books, new literature, new features for radio, new ideas for moving pictures. Back of all this demand for new and better things there is one quality which one must possess to win, and that is DEFINITENESS OF PURPOSE, the knowledge of what one wants, and a burning DESIRE to possess it.
The business depression marked the death of one age, and the birth of another. This changed world requires practical dreamers who can, and will, put their dreams intro action. The practical dreamers have always been, and always will be the pattern-makers of civilization.”
Hill is talking about the power of vision and belief that you can achieve great things. He’s also talking about the opportunities that exist when the weaknesses of an old order of things are revealed. Now is a time for us to really start re-thinking our business model and the potential it has to create value.
Several years ago I attended a Grateful Dead concert in San Jose with a bunch of Canadian friends. We were accompanied by about 20,000 other people most of whom describe themselves as Deadheads—which is another name for extremely loyal (bordering on fanatical!) fan who range in age from teenagers to the oldest baby boomers. The concert was incredible in every respect and it really got me thinking about organizations, leadership, customer loyalty and most importantly synergy.
Jerry Garcia
Jerry Garcia, the founder and main “face” of the band, had been dead for several years before the concert I attended but the show goes on (no one is irreplaceable) and what a show it is. The backend revenue stream has to be seen to be believed and even though they have not had a #1 hit, they allow concert-goers to record the concert and they very rarely release an album. Despite this, they continue to this day to be a phenomenal money-making machine so I can’t help thinking: these guys have been around since the 60’s (that’s nearly 50 years!) and they have endured. What’s their secret?
First, they know their customers and what they want …. and they deliver an excellent product, at an affordable price, they execute with precision and passion, they obviously love what they do and they work as a coordinated, very focused, team. They have vision, clarity and focus. Once again we see the application of the time honored principle:
Purpose + Passion + Synchronization = Synergy
Individually these guys are very good, but not great, musicians. Through chance they met. Through good management they combine to create a whole that is immeasurably bigger than the individual parts. They can do that because they work as a team. They each respect and understand what every other person does. Not once, for example, did I notice the drummer decide it was time for him to play the guitar. At various times different people assume the role of lead singer and the rest of the band was in support. Perhaps the neatest thing I saw was at the end of the concert when the performers knew they’d done a great job they openly embraced each other. They were deservedly pleased with what they’d accomplished and they weren’t afraid to show it.
I think we can learn a lot from this band from both a management and marketing perspective. Here are a couple of links that you might like to take a look at to get a sense of both the Dead’s phenomenally successful business model, its brand power and its innovative marketing strategy—they have been light years ahead of the curve in the marketing department.
David Meerman Scott
http://www.marcomprofessional.com/posts/david.meerman.scott/marketing-lessons-from-the-grateful-dead
Glen Rifkin
http://www.strategy-business.com/press/16635507/9095
On May 12 the Australian Treasurer brought down the Federal Budget. Predictably it revealed an enormous deficit and much talk about the recession and economic realities etc. I find it so thoroughly depressing to listen to all the negative drivel coming from the mouth’s of all the naysayers and championed by a media that delights in putting a negative spin on everything. An absence of business and consumer confidence is a primary cause of a recession and without wishing to over-simplify the solution, a fast recovery is much more likely if the media would either shut up or better still, focus on the positive things that are happening in the world especially emerging trends that auger well for a solid recovery. We can stop having a recessionary mindset if we just stop measuring and reporting on GDP until it starts to move back into the black!
One emerging trend that can’t be ignored is the growth of the “middle class” in China. I read recently, that by 2011, 290 million Chinese are expected to reach the bottom rung of the middle class and by 2025 it’s expected that there will be 520 million Chinese at the upper end of the middle class scale. These people will be looking to buy the same things middle class people have been enjoying in western countries for a long time. The demand stimulus that will come from the emerging economies including India, Russia, some ASEAN countries and some South American countries will be the highlight of the 21st century.
It seems to me that we should be looking at the present situation with a “glass half full” attitude rather than a “half empty” one. In fact, in my view, the glass is actually more than half full. In a recent series of seminars I have been doing I’ve put the proposition: if you were planning to start a business at what stage in a business cycle would you like to be? Looking at the diagram below, what’s your answer?
When I ask the question everyone says they’d prefer to be starting a new venture at the (or near) the bottom of the cycle. That being the case surely it makes sense for us to be really optimistic about the future and looking to make investments in it. It’s also significant to note that the above diagram reflects another relevant fact of economic life: booms and busts constitute the essential fabric of an economy and have done for thousands of years but each successive boom ends at a high position than all those before it. In other words the good times will return and they will be better than anything we have experienced in the past.
In these times of economic opportunity SMEs need the help of their advisors more than ever. In particular they need someone to help them identify and focus on their core business strengths , they need help with managing cash flow and pricing, they need assistance with identifying their pockets of profitability and areas of loss. Importantly they need someone to give them the emotional support required to weather the storm in the knowledge that they are on the right track and they that can capitalize on their strengths and take advantage of others’ weaknesses. Large businesses have CFOs who are there to support the rest of the “C-team”–small businesses do not even have a C-team let alone a CFO. They need their accountant, their trusted advisor, to assume that role. SME’s will lead the world out of recession and to the extent that accountants have the potential to have a dramatic impact on their clients’ profitability (and therefore collectively on GDP) they have an incredibly important job to do.
One of our clients, Cameron Patterson, very kindly reminded me of a small audio segment taken from one of my Boot Camp presentations. It is a short piece where I talk about the real reason we, as professionals, should be helping people run a better business. In my view it cuts to the core of our primary professional purpose and to a very large extent explains why I do what I do now. If you’re interested, click here to listen to what I had to say.
I was talking with a young Australian Chartered Accountant recently and he told me he had just received his full CA qualification and was planning to leave the firm he’d been with for several years. When I asked why, he said he was sick of working for a dictator!
I recall reading an excellent comment on this by Hans Finzel in his book, The Top Ten Mistakes Leaders Make. I quote:
No one likes to live under dictators–they take all the fun out of life and work! Dictators in the business world hog all the decision-making. They feel that by virtue of their ownership, position, intelligence, or birthright, they are in charge of every key decision that will be made in the company or organization. These traditionalists do not see the value of facilitative leadership or the power of teams. Needless to say, dictators attract weak workers and cannot create a positive, empowering workplace.
I often wonder how common this style of leadership is in professional service firms. I believe it’s more common than many people think or are willing to acknowledge. What a huge cost that is to the growth of the firm, its clients and especially its team members.
In a recent post I referred to memo a business manager sent to his direct reports concerning the need to maintain margin even in tough times. I received a comment from a reader who wanted to know my views about pricing when you have surplus capacity in a industry with many competitors and low entry barriers. His view was that discounting makes sense in such a case especially if you have a lower cost structure. On the surface I would have to agree with that suggestion but I thought it would be useful to throw a few more thoughts around.
Pricing is both and art and a science but it’s the “science” bit that I’m going to refer to now. It is arguable that the pricing decision is the most important decision that any organization makes given its critical impact on revenue.
Other things being equal if you raise price the quantity of your products or services that customers are willing to buy will fall and vice versa when you drop your price. It’s important to note, however, that a decline in the physical volume of sales as a result of a price increase does not necessarily result is a decline in revenue. It might (and in fact often does!) result in an increase in revenue for the simple reason that people do not consider price to be the most important factor in their decision to purchase or, to put that another way, “all things” are NOT equal. Economists refer to this situation as inelastic demand and the more effectively you can “brand” your products or services and/or differentiate your business in other ways, the more pricing power you will have.
The big point is that you should always focus on pricing for profit not for revenue. If you have a lower cost structure than your competitors then you can drive home this competitive advantage by pursuing a low price strategy. If there are enough customers who consider price to be an important factor in their purchasing decision this would be a successful strategy–but note, the essential strategic focus is profit not revenue. Even though you have a cost leadership advantage you may also be able to differentiate in other ways that are valued by customers in which case you may choose to “bank” your cost advantage and let those other points of difference drive your volume.
But what if you do not have a cost leadership position? There may be times when you must consider lowering your prices. For example, suppose there is a downturn in the economy and a key customer demands a price drop; you probably don’t have a lot of choices unless you have significant supplier power to match your customer’s buying power. As long as the agreed price is greater than the variable costs associated with supplying the product or service you will achieve a positive contribution margin. This would be a rational pricing decision in the circumstances.
The above situation should be viewed as a special case because simply generating a positive contribution margin will not necessarily yield a net profit at the end of the day; this will only occur when your total contribution margin exceeds the total of your fixed costs. Any rational pricing decision needs to be cognizant of costs as well as pricing realities because although in the short term a loss may be tolerated as long as there is still a positive contribution margin, in the long term it will be necessary to raise prices or find some other way to reduce costs in order to return to profitability.
Remember, however, you may not have to drop your prices across the board (this should be an absolute last resort strategy) nor do you have to drop your prices for all of your customers. When you consider just how much additional physical sales volume you need to compensate for a price drop it’s easy to see why such a strategy will inevitably lead to lower profit. The table below shows that 50% more volume would be required to maintain your profitability if you were operating on a 30% Gross Profit and you were considering a price drop of just 10% - even if customers were that responsive to a 10% price cut it’s highly unlikely you would be able to accommodate a 50% volume increase with your existing capacity constraints. You can download this spreadsheet by clicking here.
Margin Table
There are other strategies you might consider. For example:
By far and away the most important strategy to implement in tough times is an unrelenting focus on your customer service protocols. For the most part, customers are not moved one way or the other by discounts. If you are attentive to your customers’ needs you should not have to discount to retain their loyalty. What’s most important is that you don’t fall into the trap of believing that in tough times revenue is king. Cash is king and cash flows from profit together with sound working capital management.
You know how frustrating it is to have a client call at the last minute and cancel an appointment or worse still, just not show up. Not only does it negatively impact your productivity it can be soul destroying when you consider what you could have organized to do with that time. No matter how you look at it, time is our limiting (and non-storeable) resource.
Our friends in the health care industry seem to have got a handle on this issue. Dentists and doctors now routinely contact you the day before your appointment to confirm that you will be there. This serves as a reminder to you as well as an opportunity for the service provider to slot another patient in. Could you do the same thing? Do you do that?
Recently, I noticed an interesting no-show policy used by the University Health System here where I live in Nevada:
“You are required to call our office to cancel 24 hours prior to your appointment. This allows other patients who are in need of a doctor’s care an available appointment. If you fail to cancel 24 hours prior to your appointment you will be assessed a $25 fee which will be added to your account and must be paid in full prior to any follow up visits. If you fail to show up for a scheduled appointment more than twice during a one year period, you may be asked to seek care from another service provider.”
This is not what you’d call a very customer-friendly policy (not that you’d expect that with most of the US health care facilities) however, it does make some sense. When clients fail to show up for meetings they are wasting your time. If they are serial time wasters you should seriously consider telling them “to seek care from another service provider.” Just a thought.
This is about as close as it gets to describing the role of a managing partner.
What are your thoughts?
I recently had the pleasure of meeting socially with the manager of a large business unit of a listed public company. As any self-respecting accountant would do immediately after meeting someone new, I invited him to look over my shoulder while I did some work on the Fundable Growth Rate model in GamePlan. His eyes lit up and he immediately recognized how valuable this type of analytical tool must be for our members’ business clients. He was so impressed with the FGR application, especially in the current economic climate that I decided to record the conversation we were having so you can get a sense of how business people relate to analytical tools such as this.
Listen to a conversation I had with the manager. It’s a 10 minute chat - 10 minutes well invested as you’ll hear some good advice from someone who thinks just like YOUR clients.
One of the matters that came up in discussion was how the FGR model could be used to graphically show the lunacy of focusing on volume rather than margin in tough times so I gave him a working copy of a small Margin Table application for him to take away and play around with. A couple of days later he sent me a copy of a memorandum he’d just sent to his management team.
I have reproduced his memo below after removing all confidential data but otherwise what you see is what he wrote — this is precisely the sort of analysis every single one of your business clients need to be having with you today.
Hi Team
Please see an attached spreadsheet called Margin Table that graphically shows the negative effects of discounting our pricing to win work and the profit impact of gaining 1 or 2 or 3 percentage points of margin operationally or as a pricing strategy.
As a team we have had many discussion over the last few months on the impact of discounting work just to win a job and what that means from a revenue perspective to ensure we achieve our profit target.
By making the decision to invest our capacity (a finite resource) in lower margin work, as you can see from the table, the pressure that puts on us to bring in more revenue is great. Take our budgeted Gross Profit Margin (GPM) of 25% (currently our YTD is actually GPM 23.5%). If 2009 pans out as expected and economic times become harder and we find ourselves cutting margins to get work or we continually find ourselves chasing jobs on price and cutting margins as a result of competitive pressure we’re going to be for a really tough time.
For example, say we cut our price by 4 percentage points (to a GPM of 21%), to compensate for this deployment of capacity (overhead) at this lower margin we will need to find an additional 19% of revenue to maintain budgeted profitability (or $X.Xm of additional work over and above our budget revenue). With work already being hard to get, that’s going to be hard to achieve.
Exactly the same thing will apply from an operational perspective. For example, if we are loosing 4% on the job due to poor supervision, cost management, poor estimates, etc. the same impact applies. You can also see that if this goes to 10% as a result of both poor management and soft pricing (say a GPM of 15%), we will need to find an additional 67% of revenue ($XX.Xm) over budget to compensate for this and remain at the same profit level.
As you are all aware, any business has an overhead commitment that can deliver a certain capacity. In our business our capacity is not determined by machine output BUT people output (administration, supervision, estimating, sales, management, etc) and as such any overhead investment can only deliver a finite capacity before additional costs need to be brought into the business. As you can see at a 10% erosion of margin any business with our GPM will run out of capacity to deliver the additional 67% of revenue required, assuming it can find the new work, no matter how efficient. As such this business strategy is an irrational and fruitless exercise.
As with all things, the inverse applies (and remember in business it is far easier to loose money than make it). If we can gain an extra 2% at the pricing stage or drive it operationally on the job, that means 7% less revenue we will be needed that year (assuming a 25% GPM). With our revenue target of $XX million an extra 2% means we do not need to find $XXXk worth of work to achieve the same level of profitability. We all know how hard it is to find $XXXk worth of work, it’s usually easier to get an extra 2% operational improvement or increase in price by selling harder the non price benefits of using our services.
This is even more valuable information for the smaller branches as you will run out of capacity far quicker than the larger business units.
I hope this is useful information and please remember it the next time we are having discussions over margins, pricing your next job and why we cannot let them fall. I understand that all jobs must be priced on a case by case basis BUT the overall end result must achieve the budget GPM (in our group for this year it is 25% - that is a 33% mark up on cost) and every fraction of a % drop from this makes life very difficult, to the point of becoming impossible. It will also be a false dawn as everyone will be working hard and feel they and the business are very busy but the end results will not be there financially and this can break morale.
This memo reflects the type of conversation every business advisor should now be having with his or her business clients. In tough times it is margin rather than volume that’s important.
Too many of your clients are knee-jerking into the wrong actions in a desperate bid to maintain market share and you need to be able to show them the way.