This is just a quick update while we're at the airport waiting for our flight (economy class tickets as usual), and is intended to briefly answer the many questions we receive regarding business cases. Most of these revolve around the essential elements of a business case. That is, what should it contain?
A business case should contain:
- a summary explaining the reasons for the project and expenditure
- the objectives of the proposal
- the consequence of not proceeding
- the preferred option
- an options analysis
- the scope of works
- the benefits (financial and non financial, and measurable of course)
- the timeframe
- financial analysis
- supporting documents
We can of course help you write a business case. Alternatively, we can review and provide feedback on one you've already written. We are here to help, are cost effective, and talk in a non-jargon manner!
I'll expand on this a bit later. We're being called to the departure gate right now.
Business grow by making decisions around investing. Businesses of all sizes make investment decisions all the time. Some of these are fairly simple and straightforward, and don’t require much in the way of analysis. However, other investment decisions are more complex. These types of investment decisions tend to be for large amounts of money, invested over a period of years, with more than one option to consider. It’s these more complex investment decisions where business often make mistakes.
Here’s a simple example to illustrate:
Consider a business that currently purchases a business input, let’s call it a ‘widget’, and spends $100,000 per year on purchasing these widgets. Over 5 years, they will outlay $500,000 to purchase these widgets. Assume an inflation rate of 8% per annum.
The business has the opportunity to purchase a machine for $350,000 that will allow them to make their own widgets. The ongoing cost will be $20,000 per year. The total outlay over 5 years will be $450,000. So over 5 years, it’s $50,000 cheaper for the business to buy a machine and make its own widgets.
Or is it? This is where the time value of money and the rate of inflation has to be considered.
The time value of money simply means that a dollar today is worth more than a dollar tomorrow. That is, the value of a dollar decreases over time. The longer the time and the larger the inflation rate, the bigger the decrease.
In the example above, even though it appeared to be $50,000 cheaper to buy the machine, it would actually be about $5,000 more expensive over the 5 year period!
Why? Because the business was spending a large amount of money, $350,000, upfront in ‘today’s dollars’. The alternative of buying the widgets was a flat $100,000 per year. The value of $100,000 decreases as time goes on. So the value of $100,000 in the fifth year when inflation is 8% is a lot less than the value of $100,000 today. Add up the 5 year outlay at $100,000 per year, and the total cost is $399,000 adjusted for inflation. This compares to $404,000 for buying the machine and making their own widgets.
This simple example illustrates a couple of things. Firstly, it is very easy to make the wrong investment decision. Businesses make these mistakes all the time. Secondly, there are many variables that need to be taken into account when making a complex investment decision. These include such things as the rate of inflation, the cost of borrowing money, ongoing maintenance costs (if you buy a piece of equipment), and various other operational costs.
If you’ve enjoyed this example and want to know more, or if you have a business decision that you want some assistance with, feel free to contact the team at Clear Patch Commercial Consulting. We provide straight-forward advice that will add real value to your business.
After talking to many owners and managers of small to medium sized enterprises (SME), it still surprises us how many of them are operating in what I call a “strategy free zone”.
Many of these same people believe that corporate strategy is simply an activity performed by, and only relevant to, large multi-national business or government agencies. The classic responses when strategy is raised are “why do we need a strategy? Or we are busy running a business, we don’t have time for strategy.” Ironically, it’s the same people who are typically running businesses that are struggling to compete against competitors, fighting to maintain market share, or simply not meeting their goals. Strategy is just as important, if not more important to SME type businesses, as it is to big businesses.
Before we get further into this, we need to be clear about what strategy is and what strategy is not, as many people have their own interpretations of strategy. Strategy is about setting the long-term direction of a business, based on a deliberate set of choices. The ultimate purpose of strategy development is for a business to articulate where to play, and how to win. So when managers tell us that their strategy is to grow at X% per year, or increase sales by y%… sorry, these are not strategies; they could be the result of a strategy, but by themselves they are not a strategy. Yet this simplistic target setting is the extent of the “strategy” of many businesses.
So how will a strategy help my SME type business I hear you ask? Developing a clear strategy helps on many different levels. Yes, by the end of the process you will have an impressive looking strategy map which helps articulate success for your business and illustrates what you are seeking to achieve. This is great for building employee engagement, and is also an effective communications tool. But more importantly, proper strategy development forces people to understand their business strategically, to make tough decisions regarding how they will compete, and shows them where they stand in the context of their broader operating environment. From our experience, the decisions that are made as part of the strategy development process, are more valuable than the final strategy document itself.
To illustrate, in our view it is not possible for a business to begin an informed strategy discussion without understand their business model. While there are many different approaches to business model generation, ultimately they all look to clarify fundamental business drivers such as: key partners, key activities, key resources, value proposition, customer relationships, customer channels, customer segments, cost structures and revenue streams. By discussing these in detail it forces managers to think very deeply about their business, and specifically how they will compete against their competitors. For instance, is competition based on price, superior customer service, or offering a unique product? As you can start to imagine, there are clear trade-off decisions that must be made which are fundamental to how any business operates. For example, it is very challenging to offer superior customer experience, yet also be the cheapest. If you are focusing on superior customer service, is relying on online and remote channels to engage your customers the best bet, or is this segment looking for something more? Yet in our experience, these types of decisions are very rarely discussed in many SME type businesses. In fact many businesses we work with contact us because they do not have a clear understanding of these fundamental issues, have not made clear decisions, and are struggling trying to be all things to all people. As a result, they are failing to meet the needs of any customer segment, and as a result are struggling to generate sales or attract clients.
Once decisions around key components of the business model have been made, businesses can then begin to understand their competitive threat position in the context of their operating environment. Again, there are a few different ways to do this, but borrowing from Michael Porter’s work, businesses need to understand who holds the balance of power. For example, if you are competing based on product differentiation and there is only one supplier that can provide you with a key input for your product, then you may not have much room to move and you best focus on preserving this relationship. However, if there are many suppliers, you can use this to your advantage. It’s the same story from the customer perspective. Do customers have alternatives to you? If so, why will your customers choose you? What are you doing to stop them switching to a competitor? However, if your customers do not have an alternative, these factors will be less of a consideration. Instead you will focus on how to defend your current position, and maximise the opportunity you have.
The point is that strategy and strategy development is about more than simply setting a target and a nice strategy map. It is about gaining a deep understanding of your business within the context of its operating environment. As mentioned at the outset, ultimately strategy is about where to play and how to win. Given that the majority of SME type business are operating in a competitive environment, it still astounds us how many do not have well defined strategies, and how many businesses aren’t realising their full potential. The owners of these businesses need to dispense of the idea that strategy development is for big business only, and start to have serious discussions around the key strategic issues. The points touched on here are simply the tip of the iceberg. While focusing on operational issues may keep you in business today, focusing on strategy will keep you in business tomorrow. History shows there are many businesses that got this balance wrong and payed the ultimate price. (i.e. Boarders Books, Kodak this list goes on. These are just some of the companies we all recognise, not mention the numerous SMEs that have met the same fate.) At Clear Path, we specialise in working with business to provide clarity around these issues, and helping set them up for future success.
A common issue we come across when we talk to business owners and Executives, is the difficulty they have determining whether their current performance is on track to achieve their operational and longer term strategic goals and objectives.
Often our conversations with clients start something like “I have to convince my board members, managers or business owners that we will achieve our goals. How do I do this, and how do I give them evidence to show that we are on track to do so?”
Most businesses have some sort of performance measures or KPIs. However, choosing the right measures is fraught with difficulty. Managers often struggle with finding meaningful KPIs, and then struggle again to obtain buy-in from management and staff. The result is KPIs that measure activities and not outcomes, that are vague and meaningless, and that lack ownership from key stakeholders.
Firstly, it is important to understand the true purpose of KPIs. Meaningful KPIs provide objective evidence that shows the extent to which actions and decisions lead to the achievement of organisational goals. At Clear Path, we believe KPIs are about driving continuous improvement, and providing a reference point to gauge the extent to which you are on the right track to meet your objectives. While they are key in driving a high performing workplace culture, we believe KPIs should not be seen as a tool for judging and punishing staff.
Below, we will go through some of the most common mistakes we see people make when setting KPIs for their business.
Mistake 1 – KPIs not specific to your business
The first mistake relates to how businesses identify the KPIs that they intend to use. Often this is done by compiling a list in a haphazard manner, through brain storming sessions, searching the net, or by adopting ‘off the shelf’ KPIs that other organisations use. The problem is that these KPIs are generic and not specific to their business and their individual objectives. It does not allow the business to focus on what matters to them, and they are certainly not aligned to their strategy. Additionally they tend to be meaningless or very difficult to measure and usually include fluffy words such as ‘effective’, ‘improved’, ‘reliable’, ‘efficient’ etc.
Mistake 2 – Focus on activities not results
Another critical mistake is to use KPIs that focus on business activities. For example, ‘number of customer interactions’, ‘number of widgets produced’, or ‘hours worked’ are all activity based measures. Why is this a mistake? Because it focuses on tasks rather than results. For KPIs to be truly effective, they must focus on the desired results. This includes short term objectives as well as long term strategic goals. Some examples of results a business may want to monitor include ‘customer’s value our products and services’, ‘our people are engaged’, and ‘our customers have great experiences with us’. See how these are focussed on the desired result rather than on activities?
When we look to develop measures around the results we wish to achieve, it forces us to seriously consider the end-state that we want to reach. This in turn makes it easier to determine meaningful measures for those results. Using the above examples, for the result of
Can you see how the measures are focussed on the results that we want to achieve? If you want your customers to have a great experience with your organisation, measuring customer effort (the degree of difficulty in dealing with you) and customer journey cycle time (time from placing an order to receiving the product), provides two pieces of objective evidence on this. Obviously we can then set specific targets for each of these measures
Mistake 3 – No buy-in and ownership of KPIs
We mentioned earlier the difficulty of getting buy-in from management and staff in implementing measures. Staff and stakeholder buy-in is fundamental because without it these people will not use the KPIs to help guide their business decisions and ultimately not be active in helping your business meet its objectives. At Clear Path, we have found the most successful approach is to get key staff involved in determining not just the measures, but also the desired results of the organisation, at all levels. Ultimately this should paint a picture of the organisational day-to-day and strategic objectives across all levels, and allow everyone to see alignment from their day-to-day activities through to the organisation’s high-level strategic purpose. Our experience shows that by getting stakeholders to identify and agree to the desired results, they will accept the KPIs that are identified to measure these same result areas. This is additionally true when staff and management appreciate that the kPIs will not be used as a tool to ‘punish’ them.
Mistake 4 – Searching for the ‘perfect measure’
When identifying measures of your key results, the single most important thing to consider is not whether a measure is the ‘perfect measure’ or whether a measure has ‘perfect integrity’. What’s important is whether the measure has enough accuracy and reliability to be trusted as a source of information that will lead to making better decisions than making no decision, or making an uninformed decision. There is simply no such thing as the ‘perfect measure’.
As we stated earlier, performance measurment is about continuous improvement and focusing on the things that matter. When that becomes embedded in the organisation, it becomes an organisation with a high performance culture that achieves its goals and objective.
For further information on performance measures, or any other issues related to strategy development, financial management and general business management, or to book a free 1 hour session with our specialists, please contact us at email@example.com
We often come across organisations that are generally profitable, but have cashflow issues.
A successful business owner asked me recently, “We’re making good money, but we are always running into cashflow problems. How can we be making money, but be having trouble paying our staff and suppliers on time? It’s always a juggle. How can this be, given how profitable we are?”
It’s a great question. Many business owners are very good at providing a great product or service to their customers, but not always so good at running their business.
There’s common confusion around ‘profitability’ and ‘cashflow’, and the relationship between them. To answer the question of the business owner above, we need to define what ‘profit’ and what ‘cashflow’ actually mean. And do so, without getting into an accounting lesson!
Profit is the difference between revenue and expenses. This is no secret; however, this is where the confusion begins. If an organisation generates $100k in revenue, and $80K in expenses, they have obviously made a profit of $20k. However, the mistake some clients make is equating that $20k in profit as equaling $20k in cash (or cash equivalents) ‘flowing’ into the business over the period that the profit was made. Isn't this the case? Well, no. It's not.
To explain, we have to go one step further than simply saying that profit is the difference between revenue and expenses. Profit is the difference between revenue earned and expenses incurred over a period.
There is a difference between earning revenue and receiving payment. During a normal business period, most organisations earn revenue but don’t actually receive payment for that revenue for some time. Invoices have to be generated, then sent to customers who generally have 20 days or so to pay that invoice. Therefore, payment for revenue earned in one particular month may not be received for two or perhaps three months later. In some circumstance, it’s not received at all.
On the other side, there is a difference between incurring expenses and actually paying for them. Expenses are also often incurred in one period but not paid for sometime. For instance, a business incurs expenses for utilities everyday, but may only receive an invoice and pay for those expenses every three months or so. Similarly, payments can often be made in advance. For example, 12 months of business insurance can be paid in one month but incurred in the following 11 months. However, there are of course regular payments that have to be made at fixed times. The most obvious one is the payment of salaries to staff.
It’s important that organisations are profitable. However, it’s also important that organisations actively manage their cashflows. Cashflow problems often cause profitable businesses to get into difficulty. Almost always, that difficulty can be avoided.
If you are having cashflow problems with your business, or you’d like to discuss this issue further or even ask a question on this topic, please feel free to contact the team at any time. We’d be happy to assist you.
So a few weeks ago I wrote about my concerns around the use of psychometric testing. Since then I have had a few people ask me what the alternative is. To sum up, the common question has been “So how are we supposed to identify high potential employees if we don’t use psychometric testing?” This leads to today’s blog which poses the question, what is more import to consider in recruitment, previous performance or future potential?
As a starting point let us distinguish between employee performance and employee potential. Performance is simply the ability of employees to achieve outcomes and to meet organisation goals. High performers consistently exceed expectation, and are manager’s go-to people for difficult projects because they have a track record of getting the job done. The distinction between good performance and bad performance is non-subjective and can be easily assessed.
Managerial potential on the other hand is far more subjective. The Corporate Executive Board claim that high potential employees have the 3 key attributes of aspiration, ability and engagement.
The first issue with this position is that unlike management performance the characteristics are subjective and cannot be assessed in a quantitative manner. Furthermore the definition is circular in nature. We define a high potential individual as someone with the ability, aspiration, and engagement to rise into and succeed in more senior roles, but we can only know that they do indeed have this potential once they have actually succeeded in a more senior role.
Despite this, a lot of thinking in the business world suggests that potential is more important than performance. A recent journal article that surveyed Human Resource Managers across various industries claimed that “potential wins out every time. Further, firms are willing to hire and pay more for high-potential candidates than those with proven performance. The research found that participants were more excited about the candidate with the thinner achievement score and greater potential score.”
However, I maintain that when we step back, ultimately all businesses survive on their results, not their potential. Shareholders invest capital into companies on the expectation they will get a return based on the businesses actual performance not on its potential. Even when investors do invest into a company for the long term, their decision is always grounded on previous results. To be successful this mindset must ultimately extend to the management team. Every employee needs to deliver if the business in question is to survive and grow. As such performance must be manager’s number one consideration and the main criteria by which employees are judged.
So what is your focus when recruiting, performance or potential??
Psychometric testing, whether it is Myers Briggs, 16 PF, the big 5 or one of the many others out there; we have all been subjected to them at some point in time. Not surprisingly, psychometric testing is a big business, with the industry generating over $500m in revenue in 2010 alone. All these tests are intended to allow managers and HR departments to trying and predict employee behaviour and performance.
But, do these tests actually tell managers anything about employees? To be honest, I really do not believe these tests are worth the paper they are printed on. I especially have concerns when the outcomes of these tests are used to make staffing and recruitment decisions. Basically, I have four fundamental issues which apply to every psychometric test on the market. Firstly, there test / retest variation rate is terrible.
To illustrate this concern, let’s look at the Myers -Briggs Temperament Indicator which is the most popular psychometric test used today. In fact 2.5 million people take the test each year. It is reported that about half the people who redo the Myers-Briggs test within in one month of originally sitting it will end up with a different profile. To me this sets of alarm bells. If there is such a large degree of variation, should managers be relying on these results to make critical recruitment and staffing decisions? I seriously doubt managers would make financial decisions based on assessment results with such large variability, so why should people management be any different? This issue of test / retest variance is common amongst psychometric tests and not just limited to the Myers-Briggs test.
The next issue I have with using psychometric testing to predict performance is that despite the number of psychometric tests available, there is no independent statistically significant evidence to support the fact that any of these tests actually predict future employee performance. I don’t want to turn this into a mathematics session but of all the psychometric tests available, the big 5 has the strongest statistical correlation to job performance. Even this test has only had limited success in predicted performance against soft skills and no success (or correlation) in predicting the performance against hard skill. So if we are looking at the pure mathematical science of these tests, they just don’t stack up.
The third issue with psychometric testing is that there is no agreement on what a good result is. Cultural backgrounds and environments will heavily dictate what is perceived as a normal response. For example, someone administering a test in a western culture would probably be looking for an employee who scores high in individuality and autonomy, but people administering the same test for the same role in an Asian environment would probably be looking for conformity and willingness to obey direction from above due to their hierarchical culture. The point is there is no correct or best answer to these tests, they are totally subjective and almost non-comparable across groups. This is becoming a bigger issue as companies start set up business in multiple countries.
Finally, all these tests assume that people will answer them honestly. I think we can all agree this just does not happen in the real world. For example when these tests are used as part of a recruiting process (which they often are) it is often in the candidates best interest to not answer the test truthfully, but rather supply answers which they believe the recruiters are looking to find. Yes I know some test have built in lie scales, but these are pretty obvious to pick up on when sitting the test. Can anyone actually say that when they completed a psychometric test as part of a recruitment process they answered with 100% honesty, and were not trying to create the profile they felt the assessors were looking for?
Despite all this, psychometric testing is still used extensively in the workplace. I would love to hear your thoughts about these, why you use them and what value you get form them.
James Hamilton & NEIL HALLs
The founders have years of experience across a diverse range of industries and business areas. Their aim is to ensure the team at Clear Path Commercial Consulting use this experience and their individual knowledge and skills to help our clients in their own business.