Ric Payne's Blog

It would be an understatement to say there’s a lot of talk about the need for accountants to get into the advisory space. Like the folk tale of chicken little, the prophets of doom are screaming from the bell-tower that the end is neigh for the traditional firm and yet there does not seems to be much movement.

We’re told by neuroscientists that our brain weighs about 2.5% of our bodyweight but consumes close to 20% of our energy. Over our evolutionary history it has developed two different cognitive capacities to help us survive long enough to procreate. This dual-system thinking capability has enabled us to source food, find shelter, and defend ourselves against bigger, faster, and stronger predators as well as nature’s other dangers like earthquakes, fires, volcanic eruptions, floods, droughts, and each other! They have achieved that by giving us communication and social skills that have made collaboration, cooperation, and organization possible. Psychologist and Nobel Laureate, Daniel Kahneman describes these thinking systems as System 1 and System 2.

One of the things that is interesting me at the moment and which I’m including in my book is reflected in a fabulous book by General Stanley McChrystal called Team of Teams: New Rules of Engagement For a Complex World which deals with organisational design and management in a complex (as opposed to complicated) world.

Steve Ballmer, the ex-CEO of Microsoft, is one of the wealthiest people in the world. While doing some research on Microsoft’s strategic positioning over time I came across the following questions: how much is Ballmer worth? Answer: $81.252 Billion. And how did he make his money? Answer: he owns 333 million shares in Microsoft.

That’s the wrong answer!

A frequently asked question by people in management positions is “how do you motivate employees?”

The first thing to understand is that the word “motivation” is a compilation of two words: motive + action = [a person’s] motive for action. When defined in this way it could be said that the “action” piece may be positive, neutral, or negative. The second point is that the direction of action will be driven by the interaction of two more factors: the aspirations and attitude of the person and the environment in which s/he is working.

They say the tool used to measure an object does not change the object. In some situations and for some types of measurement devices that’s not true. Here are 2 examples.

A year ago I decided, on the advice of a friend, to install a 5.5kw solar system on my roof. The total coast was $7,102. During the last 12 months my electricity has totaled $218 compared with $1,463 so my net ROI is about 17.5%. A substantially better risk-free rate of return that I can otherwise get. But there’s more as the spruker says … in addition to the money bit the system has saved 4,658kg of CO2 emission or the equivalent of planting 139 trees! And it will do that every year it’s on my roof.

The object of measurement on this case is power used during a 24 hour period. The measurement device is an iPhone app that’s linked to the solar inverter. It enables me to monitor usage in 15 minute segments which in turn enables me to plan my usage behavior. I’m now more conscious of lights being left on unnecessarily and using things like dishwashers, dryers, ovens etc at a time that’s best.

I have not become a power preserving zealot but just being aware of what’s going on enables a behavioral change. I still have a pool filter running 8hrs a day, air con on when I feel like it and I don’t wander around the house with candles at night.

And that brings me to the second example of the connection between a measurement device and outcome changes.

I once had a client (not really a client actually) who supplied perishable food products to petrol stations (gas stations). He was making about $60k a year and really wanted to get to $80k. He was not my ideal client in that I did not see much opportunity for growth in his business because of the trends in the emergence of highway service centers etc.

But he was a nice guy so I did a few calculations to find the volume he needed to get to $80k net take home income. There was a fairly decent gross margin and no additional fixed costs so he only needed about a 15% increase in volume to meet his goal. When he saw the goal his eye’s lit up because he realized that was possible which is the first step in any performance improvement process – the belief that it’s possible.

This is one of the lessons I learned while in the advisory business which they don’t teach you in business school – when someone believes something is possible it becomes possible … in fact that’s usually the ONLY time it’s possible. Not only that, they get a renewed sense of resolve to not just get to the goal but to better it.

Which is exactly what happened. He ended up heading towards an income of $95k and was thrilled. Apart from fiddling with some calculations and working with him to set some targets and helping him draft a couple of sales scripts plus one POS sign with words something like this: “If you’d like something fantastically filling, and fresh you need to try me” with a picture of a hoagie type of sandwich filled with beef or chicken.

I was with him for half a day and called in a few times after that for a chat to see how he was doing but I never charged him a penny because he didn’t really fit with our advisory client profile and although I could have signed him up as a compliance client we were not looking for those type of clients (at least I wasn’t). Interestingly, he referred a friend of his who became a 5 figure client so what goes around comes around and what Pat Lencioni talks about in his terrific book Getting Naked is so right.

Now, you might be asking yourself “what is the measurement tool and what is the object of measurement in this sandwich case.” The answer is firstly the break-even analysis formula to calculate the volume he needed to achieve his goal; and secondly, the object of measurement was the hoagie volume, gross margin, and the manufacturing and distribution process.

The result he got turned out to be only partially volume driven because with his new-found confidence he raised his prices slightly and he improved his manufacturing process and reduced waste and more efficient buying procedures which reduced his inventory by quite a lot. These initiatives improved his margin and cash flow. He also improved the frequency of his communication with his customers and that improved the relationship he had with them.

Finally, I gave him some training, using a simple template, on how to calculate gross margin and the volume at different price levels to achieve his profit goal. This made him feel in control of his business which further lifted his confidence and was confirmation of another thing I had learned in the advisory industry, we sell confidence as well as advice and usually the confidence bit is the most important part of our value proposition.

There was a time when I was young, opinionated and stupid that I thought people who invested their time, energy, intellect, and taxpayers’ money studying ants, termites, fungi, and fossils were nuts. I’m now starting to understand that we can learn a lot from animals and organisms that have occupied our planet very successfully with practically no change in their basic nature for hundreds of millions of years. Here’s why.

Exactly 23 years ago I presented a program in Reno Nevada at the Peppermill Casino to 593 people who were members of the Results Accountant’s Network in North America. This was followed with the same program in Sydney and Stratford-upon-Avon in the UK. In total 1,176 people attended. It was called Results Revisited and it drew together every idea we had shared with past delegates to the Accountants’ Boot Camp on how to add business development advisory services to their service arsenal.

In a recently published book (sept 2020), When More is Not Better: Overcoming America’s Obsession with Economic Efficiency, Roger Martin argues that a short term focus on maximizing shareholder returns contributes is the cause of economic inequality and instability. A second, more comprehensive, work on the causes, extent, and consequences of wealth and income inequality is Thomas Piketty’s book, Capital in the Twenty-First Century. Inequality is contributing to geopolitical instability that we’re seeing around the world. There is good cause for concern.