Tag: risk

Talent Day

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As George Orwell demonstrated in his novels, words and word frameworks have tremendous power.  It’s time to replace Labor Day with Talent Day.

The term Labor Day reinforces several old misconceptions and needless conflicts.   Labor connotes physical labor, which became less important to the economy as energy and innovation moved the economic focus from agriculture to manufacturing to services to information.  Labor echoes the Marxian concept of class solidarity which has limited applicability in a dynamic world.  Labor is conceptually distinct from capital in the economic factors of production model, but the two are blended in many economic forms and their returns can be structured the same way.  Public sector (unionized) labor is contrasted with productive private sector capital in political ads, even though public sector employment is a shrinking share of the economy, supplanted by innovative contracting and outsourcing.  The old “labor” no longer exists.

Instead, firms rely upon a variety of human resource talents to succeed.  Physical labor or energy is the least important talent.  Hours worked or energy expended is a minor source of productivity and economic success.

Professional skills and knowledge have become more important and valued in all functions and industries.  Compare the skill levels of nurses, machinists, warehouse workers, purchasing agents, salesmen, engineers, maintenance technicians, auto mechanics, insurance adjusters, physical therapists, bankers or accountants today with those of 50 years ago.  Entry-level jobs today require professional, IT, process, quality and communications skills beyond those of master professionals in the post-war era.

The oddly named “soft skills” have also been upgraded in the last few decades.  In a world that is no longer static, mechanical and bureaucratic, all employees are required to have the skills required for a dynamic, organic and evolving workplace.  Individual character, responsibility and self-management is required.  Supervisors have been eliminated.  Research, development, innovation and improvement are expected of all employees.  Employees and contractors are expected to have teamwork skills, to understand processes that cut across functions and to manage constant change.

The human resources sector is also being asked to assume the risk management function once largely absorbed by capital.  With less labor intensive organizations, the role of financial capital is lowered.  With less employee loyalty, staff are asked to assume greater business risk of unemployment.  With greater outsourcing, contracting and narrow functional specialization in evolving technical fields, individuals are investing in skills with less assurance of ongoing usage.

On this Labor Day, let’s celebrate the value of talent in the new economy and the end of “labor” as a misused word and concept.

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 

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.

Banking in Bedford Falls

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As the Great Recession moves along into its third calendar year, the focus in Washington is on “Financial Reform”.   The backlash at Democrats and Republicans alike over the “bank bailout” continues to grow.  The politicians are posturing to allocate credit for the so-called reforms, but seem destined to “give the people what they want”.  It might help the politicians and the people if there was a shared understanding of the inherent factors universally at play in the home lending market.

I propose that everyone take an evening off and watch the classic 1946 film “It’s a Wonderful Life”, starring James Stewart as George Bailey, the initially reluctant but eventually heroic, manager of the Bailey Building & Loan Association in Bedford Falls.

http://en.wikipedia.org/wiki/It’s_a_Wonderful_Life

The essentials of banking are exhibited in this film.  Bedford Falls is the whole universe.  All of the actors know one another.  The cast is composed of depositors, owners, board members, bankers, borrowers, regulators and landlords. 

There are inherent conflicts between the roles.  Depositors don’t really trust the bank as shown by the bank run.  Landlords would like to see lending restricted to boost rents.  The owners are motivated by self-interest (enlightened or not) and set policy accordingly.  The board seeks a trustworthy banker to be its agent, and provides incentives to attract and retain him.  The banker has fiduciary and personal motives.  The regulators enforce the laws, unaware of all key facts.  The borrowers want loans, even if they can not afford them, in order to escape the costs of the landlords.  People act out of self-interest.  They respond to incentives.  There are trade-offs to be evaluated and decisions to be made.

A bank fills a valuable social role, attracting deposits in order to lend money.  A bank profits by the spread.  A bank is in business to lend money whenever it sees a profitable opportunity, irrespective of the moral concerns of owners, depositors or borrowers.  Banking is subject to real risks such as bank runs.  Banks are subject to poor decisions by bankers, mistakes by employees and fraud by anyone involved in any transaction. 

Historically, banks have operated by the 4 C’s of credit: capacity/cash flow, capital/collateral, conditions and character.  This is especially effective in a small town such as Bedford Falls.  Although George and the audience might hope that every citizen should qualify for a loan, some may not have the earnings to cover the principle, interest, insurance and maintenance of a home.  Some may not be able to save for a down payment to create adequate collateral.  As business conditions change, the income of the citizens is at risk and the ability of the bank to manage its affairs fluctuates.  A banker with a long-term perspective and proper incentives adjusts lending accordingly.  Finally, character counts.  Past financial and personal performance are good predictors of future performance.  Character is part objective and part subjective.

Even in this simplified setting, risks abound.  Public pressure for universal home ownership can result in too many loans.  Regulators can enforce laws mechanically while missing larger problems.  Institutional knowledge can be lost through staff turnover.  A single fraudulent act can threaten a bank.  Changing external business conditions can disrupt the bank.  Lending policies can be too loose or too tight.  Business judgments can be wrong.

The film delivers an escapist, idealist, overly simplistic view of life.  Mr. Potter is the evil bank owner and plotting, fraudulent landlord.  George Bailey is the selfless hero.  Yet, behind the scenes, we have a social institution performing a social function.  We need banks to provide the social function of collecting deposits, allocating credit and collecting from borrowers.  In spite of the vastly more complex institutional structures today, the role of a “building & loan association” is essentially the same.  As a society, we allow these institutions to connect savers and borrowers across varied time frames because this is a necessary function.  Our laws and regulations should be based on this real-world understanding, not upon the simplistic dualism of “good and evil”.

Screening for Leadership Experience

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As firms return to a normal economy where success is determined by the ability to set and implement a distinctive strategy, develop new products, processes and customers, and align functional resources in a project based matrix structure, it is time one again to screen for leadership in the hiring process. For the last 2 years, with an abundance of candidates and a preference for risk aversion, hiring managers, human resources and recruiters have laser focused on finding the very best match between a candidate’s industry, functional and positional experience for an open position, without regard to long-term considerations. Hiring managers should insert more behavioral interview questions about leadership into the process and they should screen for evidence of leadership success in the resume review and screening interview process.

Ask ten experts to define “leadership” and you’ll get ten different answers and lists of competencies, but they’ll cluster into a few areas such as building teams, being self-aware, growing personally and professionally, displaying trust and integrity, communicating effectively, motivating/influencing/persuading, helping others to succeed, setting and sharing a strategic vision, taking risks, innovating, being responsible, making tough decisions, showing tenacity and taking a long-run view of what is best for the organization as a whole. A simple leadership checklist can be used to identify candidates who have the leadership experience needed to succeed.

Leadership Screening Checklist

1. Positional responsibility, staff count, manager count, functional variety.

2. Cross-team member, positional leadership, selection by others, larger projects.

3. Non-work leadership roles, professional and civic groups.

4. Progressively responsible roles and promotions across career.

5. Professional mastery/certification and CPE in one or more areas.

6. Five year tenure at most employers.

7. Variety of recommendations available/given in 360 degree fashion.

8. Internal or external teaching, training and documentation experience.

9. Projects/assignments in new, challenging or unpopular business areas.

10. Projects/assignments in high value, visibility or risk business areas.

11. Matrix experience in product development, IT, M&A, national account management.

12. Formal mentoring, association or accountability partner experience.

13. Strategic, product, marketing, financial or operational planning leadership role.

14. Top-level responsibility for a function or business unit of any size.

15. Variety of headquarters/field, line/staff and domestic/international experience.

16. Variety of industry, function and organization size experience.

17. Change management experience through start-ups, rapid growth, turnarounds, recessions, acquisitions or reorganization.

18. Implementation of new professional methods and technologies.

19. Human resources recruiting, retention, promotions, transfers and morale.

20. Responsibility for new products, sales, suppliers and negotiations.

Organizational success today requires leaders who are experienced and confident in challenging and ambiguous environments. Screening for this broader experience and capacity may be more important than hiring someone who has done exactly the required role at the closest competitor for the last five years.

The Effective CFO: Black and White!

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A friend of mine has been a highly successful CFO with middle market companies for 25 years.  I pondered what made him succeed in a variety of companies and industries.

 He’s professionally competent and intellectually curious.  He’s always had a large professional network.  He is a good listener and is especially skilled at cutting through ambiguous or complex situations to identify the core problem or most promising solution.  He understands the basis for business success in his industry and he’s a good negotiator.

 On the other hand, he’s sometimes overly direct, not a technical leader in the CPA profession, not someone who automatically attracts the spotlight, doesn’t outsmart the quantitative business analysts and doesn’t often lead cross-functional projects.

 I think he succeeds because he has established a role and the skills to guide all key players to honestly confront the gray reality of situations.  He offers the financial perspective, but is just as quick to insert a sales, strategy or cultural viewpoint.  He ensures that risk versus return is considered through numbers, stories and analogies.  He contrasts short-term with long-term factors.  He plays devil’s advocate as needed to derail quick decisions or to shore up support for a tough alternative that must be chosen.

 In addition to these decision making skills, he has the wisdom, courage and skills to anticipate the perspectives of the key roles and to guide players into greater self-awareness and understanding of other perspectives.

 He helps finance, accounting, HR and IT staff to see that the fully integrated system and a 1,000 page policy and procedure document, without exceptions, is probably too structured.  He encourages engineers and six sigma black belts to reduce variation and to consider financial and strategic implications.

 He works with entrepreneurial owners to support change and risk taking, but to also gauge how much can be digested, how it can be hedged and what an ideal portfolio looks like.

 He works with boards and shareholders to understand that stock values do not always go up in a predictable manner, unless the books have been “managed”.  The long-term growth in shareholder value includes short-term fluctuations.

 He works with IT, engineering and product developers to have resources, time and authority to learn, experiment and develop new products – within a framework of long-term evaluation.

 He provides sales and marketing teams with the freedom and flexibility to meet company goals, but ensures that measures of final results are fair and the system can’t be beat.

 The effective CFO serves as a fulcrum in Jim Collins’ world of “both/and”.  Stakeholders and role players must be able to leverage their talents and preferred styles AND the contrasting factors which must also be considered for long run success.  CFO’s need to be more than gray; they need to be both black AND white.