Month: May 2010

2010 Graduates: Live a Great Life

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Graduates, I encourage each of you to “Live a Great Life”.  This is your right, your choice and your destiny. 

We each live in three worlds: the world of commerce, the world of choice and the world of community.  I believe that “a great life” comes from balancing these three worlds.  In eighth grade, our industrial arts teacher, Mr. Laurie, told us that our first project would be a foot stool and that it would have three legs.  One student spoke up, “Mr. Laurie, I think it would be better with 4 legs”.  Mr. Laurie calmly responded, “Tom, I have found that 3 legs provide the proper balance for a successful footstool.  If you tried 4 legs, it would take you the whole semester to make them the same length and the final stool would be 3 inches tall”.  As I learned in this school, balancing the three legs of commerce, choice and community is essential to “living a great life”.

World of Commerce

The world of commerce is important as we emerge from the Great Recession.  Completing high school is a great accomplishment.  But it’s not the end of learning.  You will continue to build your problem solving and communications skills and you’ll pursue new degrees and certifications.  Lifelong learning is now required for everyone.

Our guidance counselor, Mr. McGinnis, urged us to be serious about our careers.  He said “choose something which interests you, build skills in that field and focus on one industry”.  In spite of the many options and uncertainties in life, pick that one path and treat it like it’s the only one. 

Securing employment is difficult today.  You can improve your odds by thinking about jobs from the employer’s point of view.  Employers want clear “yes” answers to three simple questions: “Can you do the job?  Are you self-motivated?  Are you manageable?”  Focus on these and you will always be an attractive job candidate.

Be confident about your economic future.  Don’t listen to the nightly news.  The sky is not falling.  The U.S. economy grows by 3% per year on average.  That doesn’t sound like much, but since the Diamond Alkali factory in Fairport closed 30 years ago, the US economy has grown by 160%, from $5 trillion to $13 trillion dollars.  There will be recessions, but you will succeed.

Education, career skills and positive attitudes will make you succeed in the world of commerce.  Always invest in yourself first.  Save the first 10% of every paycheck.  Invest it for your retirement.  When you are 53, you will thank me.

World of Choice

We also live in a “world of choice”.  In 1974, we were emerging from a “world of tradition” and sought a “world of choice” where we could “express ourselves”.  Our parents cautioned us to “be careful what you wish for”.  The number of choices and options today can be overwhelming.  You now have great responsibility for your own future. 

First, you must accept and love yourself as you are.   Believe that you were created just as you are for a purpose.  My classmate, Jim Kulma, shared a book with us in 1972. It was titled “I’m OK, You’re OK”.  It sold 15 million copies because its advice was very sound.

This is not an invitation to be self-centered.  We all need to become more self-aware.  Discover your talents and your non-talents.  Listen to others.  Seek feedback and advice. 

Because we have so many choices, engagement in life is critical.  Many adults, in their roles as workers, family and friends, choose to not fully engage in life.  They try to avoid responsibility for themselves and their choices because they are afraid of making mistakes.  Unfortunately, “there is no place to hide”.  Others will hold you accountable anyway.  Embrace responsibility and make it a habit. 

Engage in life; explore and experiment.  When you are older, you will not regret these adventures, but you might regret the things you missed.  Have the confidence to “take the road less traveled”.  As we learned playing “Milk League” baseball, “you can’t get a hit, if you don’t step up to the plate.”

View life as an exciting journey.  Don’t make it a death march in pursuit of a single goal, like career success.  Don’t think “If I only had a better job, a winning team, a better spouse, a bigger house or a full head of hair, things would be different”.  Joy comes from living life, not from dreaming about or even from reaching goals.

Accept that “life is not easy”.  Life remains a challenge.  Use the “in spite of” strategy.  In spite of the challenges, risks, hurts and pains, I will choose to do X.  If the challenges become too great, get help.  Family, friends and counselors are ready to help.  They all want you to succeed.

World of Community

We all need to earn a living and make wise choices.  But, to be happy, we must also live in the world of community.  We live in a world that glorifies material success and the individual.  However, history, science and common sense tell us that happiness does NOT come from wealth and introspection.  Happiness comes from relationships.  Every wisdom tradition, including psychology, has found that people are truly happy ONLY when they live for something outside of themselves.

In our everyday lives, family matters most.  Family life is difficult.  But, we were created to live with others.  We give and we get even more in return.  On my wife’s nightstand, there is a picture of two identical dogs sitting on a beach, much like the Fairport beach, at twilight, with the quote: “Love does not consist in gazing at each other, but in looking outward in the same direction”.  Invest in a high quality family life.  It will provide the greatest rewards.

Fun social groups matter.  Make time for bowling leagues, youth sports, church groups, boy scouts, girl scouts and playing cards with friends.  These low-cost activities create a high quality life.

Your local community matters.  There is great value in the familiarity, pride, loyalty and common interests of the local community.  Village residents already know this.  Your big city neighbors yearn to find this sense of place, security and belonging. 

Our national community and government also matter.  In a society with 300 million members, it is tempting to be a “free rider”.   We have found that democracy is the best form of government.  It allows the hopes and values of the people to be translated into laws to guide society.  Society needs your active involvement in the political process.  Our future depends upon it.

Finally, spiritual belief matters.  We all have a deep need to matter and to be significant.  This is fulfilled by connecting to something larger than ourselves.  We all ask the same questions: “what is the meaning of life?”, “where did the world come from?”, “why was I created?”, and “what happens in the long-run?”  These religious questions are part of our deepest nature.  Finding your relationship with eternity, mankind, truth and god is a vital part of your journey.

We live in these three worlds of commerce, choice and community.  Your generation inherits a world that is more complex, fast-paced and demanding than those of the past.  Some scholars wonder if we are “in over our heads”, with the demands of life exceeding our capabilities.  I believe that we are blessed to be able to lead even richer lives today.  I agree with the author Harold Kushner who says that God always provides each of us with the strength and capacity to make our journeys with confidence. 

On behalf of the “class of 1974” and the Fairport community, I wish each of you success on your journey.  I am confident that you are very well-prepared for the exciting worlds which lie ahead.

Negotiating Work-Life Balance

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During the Great Recession the balance of influence has shifted markedly towards employers.  Labor productivity increased throughout the two years, in contrast to prior recessions when it declined.  Productivity increased because employers were unwilling to replace departed staff and found ways to motivate the remaining staff to redistribute the work load.  Unless firms were already over-staffed by 5% or suddenly found new ways to identify and eliminate activities, this delegation of work is unsustainable in the long-run.  Far-seeing firms and their best employees have a common interest in helping staff to improve their ability to negotiate a healthy and realistic work-life balance.  Firms which push too hard will eventually experience costly turnover.

Many firms tend to push too hard and then back off as needed.  Determining the breaking point for staff is more art than science.  Employees at every level – hourly, salary, manager, director and VP – have an important obligation to push back constructively.  Especially in the United States, where we have embraced the long-term benefits of free market capitalism without the need for balancing social values or government regulation, every employee has a responsibility to attain the work-life balance that optimizes their happiness.   Wise managers will coach staff in this direction while at the same time asking for more!

Employees need to deliver and focus on long-term value, establish personal goals, delegate, prioritize, evaluate options, negotiate and employ proper tactics.  

Employees need to actively participate in identifying ways to deliver 3-5% productivity improvements each year.  This is the price of admission to the modern labor market.  These short-term and long-term actions deliver the value required for organizational survival.  They outline a program of activities that allows managers and staff to minimize the number of reactive initiatives undertaken.

Employees need to establish their own values, mission and goals.  Without countervailing forces, the need to earn an increasing income will always prevail.  A personal life plan is required to provide a counterbalance to the unlimited requests of firms today.  Staff members need to accept that everyone is replaceable and that some day they will be gone and the firm will move on without them.  They also need to observe that most senior managers have found ways to balance their own personal objectives.  

Staff members need to become world-class delegators, moving work down the hierarchy and to supplier partners.  Individuals who constantly attract and retain new responsibilities will become overwhelmed.

Staff members need to deeply understand that there are an infinite number of goals and an infinite degree of performance that can be requested.  This applies to employees at all levels.  It is an inherent component of the employment relationship.  Employee goals need to be prioritized.  Modern firms understand that they must emphasize product innovation, customer intimacy or operations excellence.  They also know that customers desire varying levels of quality, speed, flexibility, value, information, risk and personal relations.  They know that income statement and balance sheet goals, short-term and long-term measures, financial and operational goals, accrual and cash-flow results all matter but with different priorities.  They understand the trade-offs between risk and reward.  Employees must work with their managers to explicitly prioritize what matters most and to set goals based upon achievable results.

Employees need to negotiate their annual and immediate goals.  The quality revolution has highlighted the need to base goals upon defined capabilities, instead of top-down requirements.  Employees need to master prioritization in setting annual, monthly and daily goals.  Employees, managers and the finance department need to understand that there is an optimal degree of stretch in targets and budgets.  Employees and managers need to understand that there ARE short-term trade-offs between cost, quality, speed, flexibility, risk, relations and brand perceptions.

Employees need to be effective tacticians.  Annual SMART goals need to be realistic.  Staff members need to flex their schedules to meet peak demands and address unexpected events.  They need to recoup this time in slow periods. 

In a challenging environment, every employee needs to understand their role and negotiate achievable objectives that help their firm to thrive.

Getting Started on Emergency Preparedness

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We seem to live in a world filled with unpredictable risks: a banking crisis, potential Greek debt default, H1N1 flu, gulf oil spill, Icelandic volcano ash, terrorist attempts, etc.  Many small and medium-sized businesses defer emergency preparedness planning because they are unable to find the handle to get started or they fear a bottomless pit of cost with no expected benefits.  Doing nothing is a choice, but it is not the best choice.

Any firm can complete the first three steps of an emergency preparedness plan in less than one day: outline the potential risks, prioritize their likely impact and outline the required preparedness measures which would address the risks.  Most potential risks are generic.  The attached checklist can be modified to highlight any other risks.

The identified risks can be prioritized through a simple weighting scheme.  For each risk, rank its probability of occurrence in the next 10 years as 1-5, with 5 being highest.  For each risk, separately evaluate the potential human and property/asset risks from 1-5, with 5 being the highest damage.  Calculate the potential impact as the probability score times the SUM of the human and property impacts.  Sort the risks from high to low.  There will be a natural division of scores that highlights your top 5-15 risks.

 For each risk, determine what emergency preparedness steps are required.  Most will be addressed by a small number of generic recovery steps.

  1. Shelter on-site for 4 hours, including emergency air supply.
  2. Shelter on-site for 16 hours, during threatening weather.
  3. Shelter on-site for 72 hours.
  4. Quickly evacuate building and account for occupants.
  5. Activate emergency communications plan/alternate command authority structure.
  6. Activate emergency business recovery plan
  7. Activate long-term quarantine plan.
  8. Other specialized recovery steps.

 Once these first three steps have been completed, progress can begin on developing the recovery plans, including any immediate action steps that can be taken to reduce the risks or impacts of high potential impact threats.

 Emergency preparedness is a major investment.  Getting started is the most important step.

 Group   No.   Risks 
     
 Brand      1  Key executive or representative incident 
 Brand      2  Product recall – safety, functional problems 
 Brand      3  Public relations crisis, fraud, suppliers, legal, political 
     
 Hazard      4  Biological – plague, insects, animals, malaria, anthrax, terror 
 Hazard      5  Chemical – on-site, storage, warehouse, adjacent, terrorist, gas leak 
 Hazard      6  Communicable disease – long-term impact (Avian flu, H1N1 flu) 
 Hazard      7  Explosion – natural gas, terror, plane, truck, car 
 Hazard      8  Fire – on-site, garage, storage, adjacent, roads, utilities 
 Hazard      9  Local  accident, making buildings inaccessible for 30 days+ 
 Hazard    10  Nuclear accident, truck, terror, bomb, other radiation release 
     
 IT    11  Computer virus or malware infection, major 
 IT    12  Major internet access failure for more than 1 day 
 IT    13  Servers and co-location servers destroyed, restart 
     
 Natural    14  Earthquake – structural damage, fire, water, utility damage 
 Natural    15  Flood – on-site, nearby, preventing access 
 Natural    16  Severe winter storm, ice, heavy snow 
 Natural    17  Tornado, high wind storm, hurricane, hail storm, lightning 
     
 Personal    18  Armed threat, violence, hostage, robbery, escapee – nearby 
 Personal    19  Civil disturb, riot, war, occupation – on-site, nearby, country 
     
 Supply    20  Bank, fin system, invest failure, long-term recession 
 Supply    21  Critical supplier, shipper, facility or resource failure 
 Supply    22  Labor supply disruption 
     
 Transport    23  Major loss of staff due to travel accident 
 Transport    24  Major transportation interruption – road, train, air or ship 
 Transport    25  National travel emergency requiring alternate travel
 Transport    26  Vehicles – collision, liability 
     
 Utility    27  Communications, utility service interruption 
 Utility    28  Long-term electrical power outage 
 Utility    29  Safe drinking water failure 

Outsourcing Success

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After four decades of outsourcing in many functions and industries, it is clear that success requires more than leverage.  Outsourcing success requires a compelling rationale, a clear and flexible framework and positive personal relationships.

The rationale for outsourcing is based upon core competencies, provider capabilities, economics, strategy and fit.

  1. Buyer core competencies can not be outsourced.  The provider must deliver the outsourced function as a true core competency, not just a low price.  The provider is able to own responsibility for the outsourced function.  The provider has world-class skills and invests in improvements.  The provider is well-capitalized and experienced in the customer’s industry.  There is no beta site or learning by doing dimension.
  2. The provider has the skills and culture to be a third-party provider, including a customer service mentality, flexibility, creativity and change management skills wrapped around professional competence.
  3. The contract allows the buyer and provider to both win financially.  The provider is capable of reducing unit costs each year.  The provider’s initial bid and investment make economic sense.  The provider can justify a fully qualified account manager dedicated to making this contract work.
  4. The buyer has a clear strategic reason for outsourcing and has structured the deal to ensure its delivery.  This can be cost, quality, capacity, service, delivery time, risk management, creativity, technology, systems or intellectual property access.
  5. The hand-off from buyer to provider is a good fit.  Either the function can be very well-defined and delegated cleanly or the function is inherently virtual and both firms thrive in a matrix environment.  The buyer emphasizes product innovation or customer intimacy and the provider delivers operational excellence (or some other clear division).  The provider is able to perform in the buyer’s steady state or high growth and change environment.  The provider is comfortable with the buyer’s status in the Fortune 100, Fortune 1000 or middle market world.

 

The framework for an outsourcing agreement is well-defined, flexible, empowering, balanced and aligned.

  1. The contract is detailed, comprehensive and robust and meets the needs of finance, legal and operations.  The strategic objectives and measures of success are clearly defined.
  2. The contract is a model of world-class delegation.  Important results are defined, but the means to achieving them is left to the provider.  Micromanagement and administrivia is avoided like the plague. 
  3. The relationship between single agents for the buyer and provider is clearly defined.  The provider account manager is welcomed as a full business partner on the buyer’s staff.  A competent buyer rep is assigned to manage the contract, with his career depending upon its success.  The two reps are given the authority and flexibility to manage day-to-day issues.  A dispute resolution framework, including billing, is defined.  The contract supports a wide range of operating conditions and triggers for re-opening negotiations.
  4. The provider has adequate capacity and power in the agreement to succeed.  The minimum and maximum volumes are reasonable.  The provider has a fair economic deal and leverage to negotiate as required.
  5. Contract incentives align the interests of the buyer and provider.  The contract provides time for the provider to digest start-up costs and benefit from learning curve effects.  Each side benefits from greatly increased service volume.

 

The relationship between the buyer and provider reflects a true partnership, shared resources, trust, opportunities and planning.

  1. The partnership anoints the provider as the sole provider of services in their category.  The contract gives the provider reasonable security and expectations of ongoing business unless someone clearly outbids them.  The business is not re-bid based upon opportunities.  The business is not divided by high and low margin components.
  2. The buyer and provider work together to find every opportunity to leverage their skills, suppliers and knowledge.  Terms reflect the firm with the lower cost of capital.  Transaction and billing costs are minimized, assuming good faith.  Everything learned in the bidding process is incorporated into the contract.  The contract recognizes that there are inherent trade-offs between costs and services.
  3. A trusting relationship is developed.  The provider is on-site, attends meetings and communicates with the buyer daily.  The provider has a quality management system that provides confidence.  The provider is transparent in sharing information and risks, including competitive intelligence. 
  4. Both parties actively promote win/win opportunities.  The buyer is an active reference for the provider.  The buyer seeks new products, services and applications from the provider at list price. 
  5. The provider is involved in the planning process.  They attend strategic planning meetings.  They get 90 day notice of annual budget targets.  Both parties negotiate annual changes in good faith.

 

Buyers tend to have greater leverage in outsourcing services.  To achieve the best long-term results, they need to negotiate long-term win/win deals with providers.

Indiana 2050

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It will take some time for the official 2010 Indiana census to be complete.  The 2009 estimates and 1950-2000 census data can be used today to create a reasonably accurate picture of Indiana in 2050, 40 years from now.

Indiana grew by 24% from 1970 to 2009 and is likely to grow by 25% from 2009 to 2050.  The population will increase from 5.2 to 6.4 to 8.0 million residents.

In 1970, Indiana had only 4 counties with populations of 200,000 or more: Marion (Indy) at 794,000, Lake (Gary) with 546,000, Allen (Ft. Wayne) with 280,000 and St. Joseph (South Bend) with 245,000.  These four counties contained 1.9M people, or 36% of the 1970 population.  They grew to 2.0M in 2009 and an estimated 2.2M in 2050. 

By 2009, there were 6 counties above 200,000 populations, with Elkhart and Hamilton counties joining the list.  By 2050, it is likely that 10 counties will be above the 200,000 mark, adding Porter, Hendricks, Johnson and Tippecanoe counties to the list.

Between 2009 and 2050, Indiana is expected to grow by 1.6M people, or 25%.  Ten of the 92 counties will experience two-thirds of the growth across the next four decades.  Based on recent trends, Hamilton County will add 300,000 residents.  Suburban Hendricks and Johnson counties will grow by 100,000 residents (89%).  Marion and Allen counties will add 80,000 residents at 10-20% growth.  Tippecanoe, Hancock, Elkhart, Porter and Boone counties will each grow by 60-80,000 residents.

Five Indianapolis area counties will experience 70% or higher growth.  Hancock, Hamilton and Boone Counties will grow by 100%, with Johnson and Hendricks Counties close behind.  The nine counties in the Indianapolis area grew by 46%, from 1.25M to 1.8M people, in the last 40 years and are expected to grow by a further 43% in the next four decades, reaching a population of 2.6M.  This 790,000 person growth accounts for half of the state’s total growth from 2009 to 2050.  The Indianapolis area will grow from 28% to 33% of the total state population.

Eleven counties will change population ranks by three or more places.  Boone and Hancock Counties will climb 9-10 places.  Shelby, Clark and Hendricks Counties will rise 3-4 places.  Delaware, Wayne, Henry, Grant and Vanderburgh Counties will decline by 3-4 places.  Howard County may drop 7 places.

Indiana’s population will continue its 0.5% annual growth rate and reach 8 million by 2050.  Growth will be highly concentrated in a small number of urban counties.  The top ten counties, each with 200,000 or more people, will account for 50% of the state population.  The next 11 counties, each with 100,000 or more people, will account for another 19% of the state population.  These 21 counties will capture 80% of all growth,

averaging increases of 60,000 people.  The remaining 71 counties will experience growth of 4,000 people each on average.

       Pop   Pop   Est   2009-50     2009   2050   Chg 
SMSA County City  1970   2009   2050   Growth  Pct  Rank   Rank   Rank 
                     
Vincennes Knox Vincennes       42       38         38           –   0%       37 37       –  
Terre Haute Vigo Terre Haute      115     106       106           –   0%       17 19       (2)
South Bend Elkhart Goshen      127     201       273           72 36%        6 6       –  
South Bend Kosciusko Kosciusko       48       76       104           28 37%       19 20       (1)
South Bend LaPorte LaPorte      105     111       120             9 8%       15 16       (1)
South Bend Marshall Plymouth       35       47         59           12 26%       31 31       –  
South Bend St. Joseph South Bend      245     268       289           21 8%        5 5       –  
Richmond Henry Newcastle       53       48         48           –   0%       30 34       (4)
Richmond Wayne Richmond       79       68         68           –   0%       25 29       (4)
Muncie Delaware Muncie      129     115       115           –   0%       14 17       (3)
Louisville Clark Jeffersonville       76     108       148           40 37%       16 13        3
Louisville Floyd New Albany       56       74         94           20 27%       21 23       (2)
Lafayette Tippecanoe Lafayette      109     168       248           80 48%        8 8       –  
Kokomo Cass Logansport       40       39         39           –   0%       36 36       –  
Kokomo Grant Marion       84       69         69           –   0%       23 27       (4)
Kokomo Howard Kokomo       83       83         83           –   0%       18 25       (7)
Indianapolis Boone Lebanon       31       56       114           58 104%       27 18        9
Indianapolis Hamilton Noblesville       55     279       579         300 108%        4 2        2
Indianapolis Hancock Greenfield       35       68       144           76 112%       24 14      10
Indianapolis Hendricks Danville       54     141       261         120 85%       11 7        4
Indianapolis Johnson Franklin       61     142       242         100 70%       10 9        1
Indianapolis Madison Anderson      139     131       141           10 8%       13 15       (2)
Indianapolis Marion Indianapolis      794     891       971           80 9%        1 1       –  
Indianapolis Morgan Martinsville       44       71       101           30 42%       22 21        1
Indianapolis Shelby Shelbyville       38       45         61           16 36%       33 30        3
Ft. Wayne Allen Ft Wayne      280     354       434           80 23%        3 4       (1)
Ft. Wayne De Kalb Auburn       31       42         54           12 29%       34 32        2
Ft. Wayne Noble Albion       31       48         68           20 42%       29 28        1
Evansville Vanderburgh Evansville      169     175       189           14 8%        7 11       (4)
Evansville Warrick Booneville       28       59         84           25 42%       26 24        2
Columbus Bartholomew Columbus       57       76         96           20 26%       20 22       (2)
Columbus Jackson Brownstown       33       42         45             3 8%       35 35       –  
Cincinnati Dearborn Lawrenceburg       29       51         71           20 39%       28 26        2
Chicago Lake Gary      546     494       534           40 8%        2 3       (1)
Chicago Porter Valparaiso       87     164       232           68 41%        9 10       (1)
Bloomington Lawrence Bedford       38       46         50             4 8%       32 33       (1)
Bloomington Monroe Bloomington       85     131       171           40 31%       12 12       –  
  Subtotal 37 counties   4,091  5,125    6,543      1,418 12%      
                     
  All Others 55 counties   1,104  1,298    1,459         161 12%      
  (Pct of State)   21.3% 20.2% 18.2% 10.2%        
                     
  Indiana     5,195  6,423    8,002      1,579 25%      
        24% 25%          
                     
Indianapolis       1,251  1,824    2,614         790 43%      
(Pct of State)     24.1% 28.4% 32.7% 50.0%        

Prioritize, If You Dare!

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“Managers do things right; leaders do the right things”.  In the current environment, where the “right things” of new products, customers and deals are on hold, the best leadership may lie in prioritizing existing operations.  In essence, prioritization is choosing to “do the right things” within the existing portfolio of activities.

Prioritization begins with the calculation of net benefits.  Maximizing benefits or minimizing costs is insufficient.  Priorities reside in those activities with the greatest net benefits.  This can be defined as benefits minus costs, as a payback period or as return on investment (ROI) or net present value (NPV) for large projects.  The comparison of costs and benefits is the essence of this approach.  Calculating risk-adjusted discounted values of after-tax cash flows within an asset portfolio is usually just “nice to have”.  Rank ordering available projects by their net benefits is the next greatest source of value.

The Pareto Principle says that 80% of net benefits are delivered by 20% of activities.  Mathematically, with any reasonable range of costs and benefits, this relationship holds true.  In simplest terms, the Pareto Principle says “cut off the tail”.  It also focuses on the concept of relative value.  We want to compare the ratio of benefits to costs, investments or activity. 

This applies to time management, where a log of time for one month reveals 10% of activities that should be eliminated.  The bottom 10% of products, product categories, stores, bank and library branches face the same indication that they are not cost justified.  Customers, divisions and business units face the same reality.  Some make money, while others do not.  Activity based costing calculations indicate that the lowest performers cost the firm more than was apparent.  Even individual performance can/should be considered on a rank-ordered basis.  The bottom 5-10% should be identified annually and considered for performance improvement plans in every group of 10 or more employees.

In emergency situations, triage must be applied.  Limited resources must be applied ONLY to the activities that can benefit and survive.  Those which will fail receive no investment.  Those which will succeed anyway, receive no investment.

At times, a two-dimensional grid should be used to determine activities which will deliver benefits.  In the classic Boston Consulting Group approach, business units are categorized by high and low growth and margin potential.  The top right units with high growth and margin potential get all of the investments and high-powered managers’ attention.  Low growth and margin businesses face divestiture.  High margin, low growth businesses become the proverbial “cash cows”, generating cash flows to feed other units.

Opportunity cost is a fundamental concept in prioritizing opportunities.  There is no absolute scale of expected returns.  There is only the “next best alternative”.  Even when business units have poor prospects, they must be compared with the realistic opportunity costs of doing nothing or divestiture.

Prioritization does not apply just to eliminating the negative end of expected business results.  Investments should be made in those activities with the greatest potential.  The Gallup Strengthsfinder approach applies this to human performance, demonstrating that natural talents provide the greatest relative return.  Firms should invest in those products and markets with the greatest potential.  They should also invest in facilities, equipment, IT projects, researchers and sales staff who deliver incremental value.  Many firms are inappropriately constrained by ratios and potential future change management costs.  Investment and product portfolio managers understand that there is value in starving losers and investing in winners.

The most sophisticated version of prioritization is employed in the principle of comparative advantage.  David Ricardo’s theory of international trade applies to countries, companies and units.  Comparative advantage says that relative benefit/cost ratios between countries, firms and units determine the best possible distribution of production.  ONLY those who are comparatively most productive should produce goods or services.  More than a century later Michael Porter applied this to companies, determining that those with true core competencies would succeed in the long run. Treacy and Wiersma’s book on “The Discipline of Market Leaders” indicates that firms can only have competitive advantages in one of the three areas of product innovation, customer intimacy and operational excellence.  Only the “best of the best” will prevail in the long run.  Outsourcing of non-essential functions is indicated.

Given the clear economic advantages of prioritization, why is this not universally applied?  Net benefits, the Pareto Principle and comparative advantage are beyond the comprehension of some economic actors.  Comprehensive, systematic calculations are applied only by a specialized subset of firms and functions. 

Perhaps more important is the personal cost-benefit calculation of individuals.  I could prioritize activities by relative benefit-cost, but I would be subject to criticism for eliminating the bottom 10%.  Perhaps it is better to not “rock the boat” and avoid the penalties of change management.

Some sophisticated managers follow the advice of Dr. Deming who highlighted the great risks of overreacting to random variations.  Managers should set an appropriate time-frame when using relative performance measures.

Dr. Deming also preached that managers need to “drive out fear”. For some employees, any rank ordering or evaluation of performance creates fear.  Some individuals believe that people should not be subjected to performance standards or rankings because this is not “fair”.  For most organizations, the essential competitive nature of employment and corporations is understood and accepted. Highly risk-averse individuals should not be employed by firms which face competitive pressures.

This does not contradict Maslow’s theory that security/safety is at the base of employee motivation.  Security oriented individuals should be guided to careers and positions which meet their needs.  The other 80% of employees should be counseled to understand the long-term competitive nature of labor markets.

Prioritization is an effective and essential business strategy in all business conditions.

Building an Integrated Planning and Control System

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In the process revolution since WWII, we have seen every business function discover that input-process-output descriptions of activities followed by a “say what you do, do what you say, be able to tell the difference” feedback structure are the key to long-run success.  Firms need to evaluate and consolidate these planning and control systems into a single fully integrated system, since they are all attempting to reach the same goals using the same tools.  There are at least five different sets of systems independently active in most firms today.

Strategic planning systems operate at the highest organizational level, attempting to evaluate the situation, set direction, identify critical success factors, define strategies and key performance indicators, and approve major investments and projects.  More evolved frameworks, like the balanced scorecard, attempt to link strategic goals to operational performance.  Many firms have learned to link strategy to measures and projects.

Modern financial planning and control systems have evolved for more than 100 years.  Strategic plans are translated into long-term financial plans to guide borrowing, investment, operations and risk analysis decisions.  The financial plan is translated into a negotiated annual budget.   A financial performance management system evaluates managers against business unit, department, product, customer and project goals.  The key transaction processes are defined and monitored.

Risk management has evolved to become a separate discipline apart from classic P&L management.  Regulatory compliance and external financial reporting have become more technical and legal.  Internal controls have moved to secondary and tertiary levels of safety with an emphasis on “defensible positions”.  Emergency preparedness and disaster recovery have developed into new disciplines.  Risk management tools have evolved from insurance policies to include hedges, contracts and outsourcing.

Human resources systems have grown to become parallel factors.  The regulatory side has greatly increased the emphasis on compliance and risk reduction.  HR performance management systems have become linked to business performance through SMART goals.  HR has been charged with helping managers professionally address frequent change management issues.  HR has also become a senior management partner in attempting to create cultural alignment.

The process or quality systems approach has been the greatest innovator.  At the highest level, a management or total quality management system attempts to incorporate all activities.  The quality approach requires clearly defined customer goals.  All processes must be defined and documented at the staff and system level.  Operations measures are defined to provide simple and direct feedback.  Quality goals are set and quality improvement is defined as a separate goal.  Processes are defined within the generic framework of product, sales and delivery.  IT systems are positioned as facilitators, requiring technical and user documentation.  Individual application systems become more complex, incorporating best practices, but allowing many exceptions.  Change management becomes a sub-discipline, with growing project management expertise.  Process changes are driven by re-engineering, kaizen and continuous process improvement efforts.

Ideally, a firm defines and operates a single planning and control system which integrates the strategic, financial, risk, human resources and quality management dimensions.  Failure to integrate these components leads to added costs, political conflicts, waste and missed opportunities.  A performance management cross-team with representatives from sales, product management, finance, HR and operations is needed to coordinate this effort.

There ARE many components.  We need to overcome the desire to have a fully integrated system that encompasses all possible components as exhibited by the US military in their Afghanistan plans.

http://www.nytimes.com/2010/04/27/world/27powerpoint.html

Goals of an Integrated Planning and Control System

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The proliferation of planning and control systems has led to a large number of goals.  Fortunately, they can be consolidated and categorized to facilitate the development of an understandable consolidated system.  The essential goals are eternal, but the growing complexities of the business environment and processes have increased the number of goals worth monitoring.  On the planning side, firms need to prioritize, clarify, align, communicate and prepare. 

In spite of the countervailing winds of entrepreneurship and empowerment, in a dynamic world with greater value at stake, firms need to set key priorities at the top for direction, values, strategies, investments, projects, critical success factors and key performance indicators.  Without them, even in the best conditions, managers and staff will ineffectively make decisions “as well as they can”.  Clear priorities and expectations can significantly reduce the zero-sum game of internal politics.  Senior management needs to proactively clarify the priorities, trade-offs and commitments made to all stakeholders, including investors, customers, suppliers and internal departments. 

A well-designed strategic plan and its related structures effectively align the decentralized, specialized, outsourced, matrixed and virtual resources of today’s firm.  Intentions, decisions, opportunities, authorities and best practices are clearly communicated.  The well-defined expected and desired future state allows individual functions to optimize within their frameworks.  Long-term commitments are made and managed, allowing business units and functions to flex within the context and pursue immediate opportunities.  Commitments are made at every level at the right time, with confidence.  Scarce resources are devoted to priority objectives and secondary projects consume no resources.

An effective planning process prepares the firm to face the unknown.  Participants at all levels have devoted time to organization level thinking about direction, situation, gaps and solutions.  If simulations, sensitivity analysis and emergency preparedness work has been done, some level of preplanned formal responses and tools has been defined, providing a base and confidence for managing the challenges that were not expected.

On the controls side, the system needs to deliver results while managing assets and risks.

“What gets measured gets done”.  Objectives that are measured and reported receive priority management and staff attention.  Today’s digital dashboards expand the number of goals to be pursued and more clearly communicate their status to everyone in real-time.  This greatly increases the motivation by staff to improve their real performance (and sometimes beat the system).  The quality revolution attempts to move this feedback loop to a higher level, with staff understanding customer needs, defining their own goals, measuring performance and developing quantum leap improvements to serve easily understood definitions of success.

The accounting staff has always been charged with safeguarding the firm’s assets.  In the analog world, this was straightforward.  Today, it requires a deeper understanding of intangible assets such as patents, supplier relations and brand value.  In spite of the loss of firm loyalty, it is apparent today that employees are the most valuable assets for most firms.  Employees need to feel valued for their skills and contributions, and be given opportunities to build their skills and apply their talents.  The human resources management system (job descriptions, evaluations, compensation) needs to be effectively integrated into the overall planning system.  An effective process system also builds the knowledge management value of the firm by documenting processes, accumulating knowledge and improving the rate of knowledge transfer through training and sharing.

In the post-Enron, Sarbanes-Oxley informed world, risk management has become an important board level topic (because board members have new responsibilities).  Developing basic and advanced internal controls to prevent and detect theft is a classic controller responsibility.  Administrative policies and procedures have long been used in large and small firms to increase the degree of compliance with management’s expectations by managers and staff.  Most firms have been subject to some level of regulatory oversight, audit and compliance.  All firms have reported financial results to external stakeholders within generally accepted accounting practices and tax laws.  Firms have always thought about the risks of natural disasters, but today’s decentralized and electronically supported worlds require much more attention to a variety of 10%, 1% and 0.1% risks.  Firms have used insurance policies for basic risks for centuries, but today they must evaluate and guard against a much wider variety and degree of business risks.  Finally, complex and decentralized firms are subject to Murphy’s Law and the role of the weakest link.  The sheer number and impact of risks has caused them to make openness and transparency a top value.

An integrated planning and control system needs to address all of these goals.  Planning must prioritize, clarify, align, communicate and prepare.  Reporting must deliver results while managing assets and risks.