Preparing for the Change
How Large Organizations Respond to Change with Agility: Teaching Elephants to Dance
by Trenegy Staff
Imagine teaching a four-ton elephant to dance. The agility required is not natural considering the animal’s physical structure. This parallels a large organization’s ability to respond immediately to change and new challenges. The challenges can include both lingering and urgent issues, such as mergers, acquisitions, spin-offs, system transitions, and major events. With large corporations divided into departments and multiple reporting layers, communication can be stymied. Stymied communication delays and inhibits idea generation, prioritization of ideas, and ultimately execution.
Lack of collaboration between departments leads to uninformed or conflicting decisions. Although good ideas may be developed in organization silos, the idea’s originator may not be able to organize an action plan to ensure successful execution. Organizations with ingrained reporting structures experience difficulties when trying to actualize change, as shown in Diagram A. The waiting game for approval leads to delays and status quo results.
How can large organizations rapidly solve problems spanning multiple departments?
Many organizations hesitate or give up in their attempts to teach the elephant to dance, but when great organizations face the challenge, they don’t hesitate or stop.
Great organizations accelerate, collaborate, and execute. Organizations need a defined and collaborative method for rapidly addressing complex issues. Trenegy has established the ACE Method (accelerate, collaborate, execute), allowing organizations to pull together to respond to complex challenges in days instead of months or years associated with traditional problem solving.
The ACE Method assists larger corporations in quickly finding an effective solution for urgent problems, offering speed and skill in responding to client needs. An ACE Method initiative typically takes two weeks, including the preparation, workshop, and the presentation phase. The core of the Ace Method is the two-day workshop designed to bring the organization’s experts together to define a roadmap for action. The workshop starts with a simple concept challenge and ends when idea synergy is reached and final action plans are developed.
Each concept challenge follows an iterative process flow, as shown in Diagram B. During the brainstorm phase, individual teams work together to generate ideas. Each feedback session is used to gain ideas from other groups and eliminate infeasible ideas. For each chosen idea, the team develops a charter. This allows the participants to weigh the practicality of the initiative and its overall effect on the organization. After repeating the brainstorm and feedback sessions, final charter prototypes are ready to be presented, discussed, and developed into a roadmap for implementation. Charters present action steps, while roadmaps prioritize initiatives and set the timing of implementation. The final concept challenge is important, as it considers all dependencies across charters and gives a realistic timeline of action steps to execute.
The ACE Method protects good ideas from being stifled by functional barriers and denied action, as illustrated in Diagram C. The versatility of the ACE workshop allows teams to address diverse issues rapidly. For instance, in a merger of two companies, each with strong independent silos, the new, single company would need to unify its departments and processes. The ACE Method workshop allows the companies to brainstorm the structural, procedural, and cultural changes that should be made as a result of the merger. Once the main action steps are identified, they can be developed into action plans via the charters to include the recommended steps, benefits, costs, risks, etc. that are associated with each one. After completion of the charters, roadmaps would be created to include dependencies, such as overlaps in the charters and the order in which to execute the steps.
The Trenegy ACE Method workshop can be held at an off-site location or at the place of business. An off-site environment separates the participants from the everyday work environment, providing freedom from the normal constraints of the office, including distraction and stifled creativity caused by daily routine. Trenegy also offers an ACE workshop solutions center in northwest Harris County where the workshop can be held off-site, allowing for accelerated results.
The ACE Method ensures effective and rapid solutions. Delayed action only stunts future growth. Clarifying the present issues and clearly laying out an action plan gives organizations the freedom to move forward quickly and confidently.
If you are leery of an elephant’s ability to dance, see below for proof:
Read on to learn how leadership can successfully lead change.
Leading Change: No Guts, No Glory
by William Aimone
Why do most organizations continue with ineffective, inefficient operational business practices and leadership rarely seems interested in making improvements? It boils down to three things: expertise, trust, and guts.
Late in the 1800s, a large freight ship owned by the Magellan Tea Company carried massive amounts of cargo across the Atlantic Ocean, enabling textile trade between Europe and the United States. After a few years, issues arose with the crew’s ability to meet scheduled deliveries and minimize cargo loss.
Magellan’s owners hired a consultant to observe the shipping practices and make recommendations for improvement. The consultant quickly learned the underlying cause of the Magellan Tea Company’s issues was morale. Crew conditions on the freight ship were deplorable, and many crew members complained of the ship’s foul odor. The consultant provided the ship captain with a long list of recommendations for crew hygiene and odor control. The first items on the captain’s crew hygiene list involved providing the crew with a change of undergarments. Early the next morning, the captain called the crew members together on the deck and announced, “To begin our new hygiene program, I would like for each of you to change your underwear everyday. Smith, change yours with Jones. Johnson, yours with Vickers. Peterson, yours with Michaels.”
Clearly the captain didn’t understand what the consultant really meant by “change.” Many leaders find themselves in similar situations. When an attempted change results in failure, organizations often equate change with failure. Over time, organizations can become programmed to resist change, causing leaders to spiral downward and be usurped through a takeover, bankruptcy, or divestiture.
How can today’s business leaders pursue excellence, change the organization, and reverse the spiral? First, we must understand what gets in the way of change and explore why business leaders resist making bold changes required for success.
Most senior executive leadership teams are filled with highly intelligent, capable executives with a track record of success. Executives have a broad range of understanding and experience in finance, engineering, legal, risk management, and human resources, to name a few. However, executives may become distanced from detailed operations for a few years or may not have industry-specific knowledge. This lack of expertise turns into the hesitation to drive change in the right direction.
For example, an engineer in a large chemical company caught the ear of the manufacturing SVP regarding a new product distribution method requiring the company to outsource distribution, improving margins by 10%. The engineer test marketed the idea with a few customers and it was well received. The general manager of logistics quickly protested the change, indicating outsourcing would hurt connectivity with the customers. His argument was complete balderdash. The logistics GM secretly revealed that he was close to retirement and didn’t want to leave the company with the legacy of having to lay off his entire staff of long time chums.
Unfortunately, the SVP of manufacturing didn’t have the customer expertise to make the call and overturn the logistics GM’s recommendations, so the idea was turned down. A few years later, the young engineer joined a competitor. His ideas were adopted in a few years and profits rose at his new company. Soon after, the competitor purchased the engineer’s former company in a stock buy out. The logistics GM was granted his retirement a year early and the manufacturing SVP lost his position. The manufacturing SVP’s lack of expertise blocked the change recommended by the engineer.
A large oilfield service company’s CFO was approached by a junior marketing manager with an idea allowing the CFO to reduce the number of administrative accounting hubs and significantly reduce staff overhead. The marketing manager wanted to streamline the customer pricing and contracting process with an automated work ticket billing system. The new system would reduce manual billings created by the hundreds of administrative support staff in the field offices around the world. The operations VP protested the idea, claiming the field administrative requirements were too unique to standardize the company on a work ticket billing system. Secretly, the operations VP was comfortable having the administrative staff on site and did not want to lose control of the billings.
The CFO wasn’t sure who was right or if she should approve the change. She had a banking background and did not have a complete understanding of the back office billing processes. However, she did have a trusted confidant in the field operations controller. The field controller had spent years in various divisions in the field, understood the billing process, and came from one of their marquee customers. The CFO confided in the field controller’s expertise. He fully supported the marketing manager’s suggested changes. The change was test marketed in two regions, and administrative costs dropped dramatically. Today, the oilfield services company is rapidly growing and has been able to leverage their technology to acquire more customers in their market. The CFO’s ability to trust someone else’s expertise enabled the change.
An SVP of operations at a midstream oil and gas company rose quickly through the organization. What the SVP lacked in operational expertise was offset by his discernment, leadership, and vision. He was well on his way to becoming CEO, taking the company to new heights. Prior to becoming SVP of operations, he was given charge of one of the fledgling operating divisions as division VP, western U.S. When he acquired the western division, his team seemed complacent. Any new idea seemed to fall on deaf ears.
Early one morning on a field visit, he asked a senior maintenance supervisor about the complacency in the division. The supervisor revealed multiple failed attempts at change and a lack of direction from the long-standing middle management team. It was time for change. The division VP quickly reorganized his division management team. Protests were heard: “You can’t fire Joe! He may be difficult to work with, but he’s the only one who understands our marketing systems and customers.”
The division VP had the guts to ignore the group think, removed most of the middle management team, and turned the division into the one of the most successful in the company. Today, as SVP of operations, he is effecting change across the organization, and the results have paid off through integrating additional pipelines and growing a profitable business.
Change leadership is not simple anymore. The business environment is too complex for senior leadership to be experts at everything and expect success. The business leaders of today need the guts to make the difficult changes and have certain experts in the organization who can provide sound advice when changes are needed.
As leadership leads change and makes improvements, cutting costs is a common topic of discussion that arises. If you’re in the process of change, read below for some advice on cutting costs.
How Not to Cut Costs
by Alan Quintero
“Monty Python and the Holy Grail” is one of funniest movies I’ve seen. One of my favorite scenes is the Black Knight skit. For those who haven’t seen the movie, you can watch the five-minute scene here (although I recommend you watch the whole thing). In the scene, King Arthur tries to cross a bridge, but the Black Knight refuses to let him pass. They enter into a sword fight and King Arthur cuts off the Black Knight’s limbs one by one. The Black Knight responds:
After his left arm, “’Tis but a scratch.”
After his right arm, “Just a flesh wound.”
After his first leg, “I’m invincible!”
After the second leg as King Arthur crosses the bridge, “Oh I see, running away then… Come back here and take what’s coming to you. I’ll bite your legs off!”
I’ve always thought of cost cutting to be like a surgical procedure where a doctor wants to remove diseased tissue and ensure the patient stays alive and gets better. However, it seems that cost cutting in energy companies looks more like the Black Knight in Monty Python and the Holy Grail, with companies continuing the fight although they’re missing arms and legs.
I admire the gumption of the Black Knight, but this is no way to go about executing cost cutting measures in your business. Here’s why:
Somebody else is deciding what to cut.
In the movie, King Arthur does the cutting and the Black Knight has no say. When executing cost cutting measures, it’s best if management decides what to cut. Letting analysts, board members, and other external parties make these decisions won’t work because they don’t have the insight into your long-term strategy and/or the full understanding of your current position.
There is no path to being as healthy as before the cuts.
There’s no way for the Black Knight to fully recover after losing his arms and legs. Likewise, overzealous and under planned cost cutting can leave your organization critically wounded. Instead, use a deep understanding of your current state and long-term strategy to eliminate costs today that don’t impair your future. Try to make these cuts scalable so they can be reversed when the up cycle returns. Use a scalpel, not a sword.
Regardless of how hard you fight, the competition still gets the advantage if you make the wrong cuts.
In the end, even as courageously as the limbless Black Knight fights, King Arthur crosses the bridge. When making cuts, understand what elements of your business are critical to the bottom line and competitive position, and begin cutting elsewhere. Otherwise, you might be opening a door for your competition to pass you.
Trenegy’s three-step methodology clearly confirms what needs to be cut, maps out how the trimming can be done in a scalable way (which allows for future growth), and ensures you stay ahead of your competition.
Survey: Clarify your strategy, the levers that drive your bottom line, and your current processes, organizations, and systems.
Target: Develop a clear vision of what your organization, processes, and systems should be to achieve your strategy while lowering costs.
Roadmap: Prepare a detailed step-by-step plan to achieve your cost reductions rapidly (while maintaining a healthy organization) that provides quick wins.
When times are tough, cost restructuring is necessary, but bravery alone will not get you through it. To paraphrase King Arthur, although you may be indeed brave, don’t be a loony.
Read on for a continued deep dive into reducing costs.
3 Ways to Seriously Reduce Costs
by William Aimone
Salaries are a typical corporation or organization’s largest expense, excluding raw materials. When boards demand cost cuts, executives are hesitant to take aggressive action to cut employees. The results are a tuck here and a nip there. When pressure from the board subsides, costs invariably creep back up. The cuts are equivalent to a cleanse where you lose 20 pounds drinking lemon water for 10 days.
What should an organization do when it’s time to get serious about cost cutting? The typical method includes increasing span of control and creating division of labor by cutting positions at the bottom of the organization. Once cost cutting pressure is off, these positions are added back. The traditional methods alone do not work. We recommend a different, three-step approach, resulting in permanent cost reduction.
Set Internal Targets
Every organization is comprised of a basic set of operating units or profit centers where products or services are supplied and direct costs are incurred. Each unit requires a level of operational or administrative support from headquarters or local personnel.
To set the target, evaluate how many administrative personnel are needed to support a single operating unit. For example, a drilling company might estimate the need for one accountant to handle general accounting, reporting, billing, and payables for one rig. If the company has 30 drilling rigs and 48 accountants, the additional 18 personnel needs to be justified. Valid explanations might include the need to support public company audit requirements, SEC reporting, or international tax requirements. Otherwise, accounting should be challenged to better understand what is happening in the organization.
Gain a Deeper Understanding
Why does the drilling organization need 18 more people to support accounting? Most executives often trust their managers to determine the need for additional resources to perform a task. Unfortunately, managers use fear to defend the position of needing more resources—“If we don’t have a tax accountant in every country, you’ll go to jail, CFO.”
Inefficiency exists everywhere and can be revealed with objective investigation. Listening to operations first then balancing operational needs with functional support activities always reveal inefficiencies. For example, accountants are laboring over spreadsheets to provide operations with unused detailed reports. Buyers are creating complex purchase orders containing a level of detail irrelevant to operations or vendors. HR has created an elaborate hiring process which operations sees no value in following. Identifying inefficiencies and eliminating waste can be performed with a deeper and objective evaluation of what is really happening.
Rationalize the Executives
Determine the level of experience needed to oversee each part of the organization. Why have a vice president over a part of the organization versus a director or manager? A simple way to rationalize executive positions is to consider three points: fiduciary accountability, risk mitigation, and number of people requiring oversight. For example, a mid-sized manufacturing company had 24 VPs earning $500,000+ per year, but was able to rationalize the VPs into nine.
The company used three criteria to decide whether a function or a set of operating units justified a dedicated VP:
1. Fiduciary Accountability: Is the role accountable for more than 30% of the company’s costs, working capital, or revenue? VP roles overseeing the manufacturing plants, finance, and sales are justifiable. The accountability yardstick forced the company to consolidate regional VPs into a smaller team of hemisphere VPs.
2. Risk Mitigation: Does the role mitigate risks with the potential to cause operating losses? Justifiable risk mitigation roles typically include General Counsel and Safety Compliance roles.
3. People Oversight: Does the position oversee more than 100 people within the organization (after right-sizing, of course)? The role would be an executive running the plants or the sales organization.
The company applied a similar criterion with similar hurdles to justify director and manager roles within the company.
The three-step process will be disruptive, but without disruption, advancement never happens. Anyone who wants to live a disruption-free life should shed their belongings and move into the woods. On the flip side, people within an organization who truly believe they are doing the right thing for the company will jump in head first and be a part of the team leading disruption.
Read on to learn how to advance your organization through structure and realignment.
Goodbye, Mediocrity: Basic Principles of Organization Alignment
by Trenegy Staff
Bureaucracy. Conflicting communications. Countless emails. Duplicated efforts. Many companies lack the lean, efficient operations they desire. Large companies find themselves with excess organizational layers, complicated procedures, unmotivated people, and unclear lines of communication.
Urgent decisions cannot be made quickly because people are afraid to take a stand and endorse a decision. Instead, countless meetings are scheduled to gain consensus, which delays decisions and spreads the blame when something goes wrong. Moreover, employees justify their paychecks through self-generated busy work. Supervisors request ad-hoc reports which quickly become institutionalized processes. A simple mistake is solved by adding a department or function responsible preventing the same error in the future. As a result, companies fall into a cycle of complacency and mediocrity.
It’s never too late to break the cycle of mediocrity and stimulate an organizational revival. There are two fundamental guiding principles to steer companies through the process of creating an optimal structure and drive how decision making is delegated and distributed.
First, competitive business drivers should ultimately drive how an organization is structured. Second, the distribution of decision making can be defined by the external product, geographic, and customer complexities faced when competing. Following these two guiding principles, Trenegy has developed a comprehensive organization design and decision making framework that has been used to revitalize many companies.
Trenegy has found that most companies do an ample job of addressing the rewards and people components of their human resource strategy. However, these companies continue to struggle with organizational structure.
Organizational structure issues arise out of poorly executed mergers, poor hiring decisions, and legacy practices.
Part of designing the right structure is getting back to the basics of the business model, core work processes, and competitive business drivers.
Core Work Processes
The core work processes of an organization are essential to fundamental operations. Ask: What major overarching processes are essential to customer delivery? An example of core work processes for an organization could be as simple as Plan→Market→ Engineer→Operate.
Each core work process should be tied to an operational function. An example of corresponding operational functions is Marketing for Market, Engineering for Engineer, and Operations for Operate. The functions that offer support to each of the operational functions are known as support functions (HR, IT, Finance, etc.). Sub-processes performed under each core work process are known as organizational competencies. The competencies are simply a list of what the organization must do well to differentiate itself and compete.
Business Drivers and Organization Design
Business drivers are core external drivers that drive complexity and variability in an organization. Business drivers are typically geography, product/service line, function, and customer. Companies should analyze their business drivers to determine how and where decisions should be delegated and divided.
A company organized by geography coordinates structure, decision-making, and processes around the physical locations. When business practices or product/service offerings vary greatly by location, this is a viable option for organizing the company’s operations.
Managing business operations across multiple locations adds complexity, particularly in areas with differing cultures, business practices, local laws and regulations, languages, climates, physical geography, and infrastructure. A multinational company may need to differentiate its market approach to better concentrate efforts on needs presented by each location. Geographic differences limit the ability to standardize all business operations and competencies into a one-size-fits-all format.
The disadvantage to organizing by geography is the difficulty of sharing resources across boundaries. The physical separation of resources leads to more complex logistics and often increased wait time to contact needed personnel, receive documentation, and access raw materials, supplies, approvals, etc.
2. Product type
When business practices or product/service offerings vary greatly by product type, an organization may want to delegate decision-making to different product or service line leaders. Organizing by product type allows for faster product development.
The disadvantage to organizing by product type is a decrease in standardization, leading to more complex and differing standards, processes, and equipment. With product customization resulting in fewer common equipment parts and materials comes a decrease in both buyer power and the ability to buy in bulk. Furthermore, a customer may now have multiple points of contact with which to interface.
Although GE runs business activities all around the world with corporate offices, manufacturing plants, global investments, and operations in more than 100 countries, they organize primarily by product type and secondarily by geography. Operations under each business unit is empowered in their decision-making and allowed necessary diversification across product types and geographies. Support functions are shared across all business units under the GE global umbrella.
Organizing by customer provides the ability to customize products/services. With increased focus on customer needs, personnel are empowered to build deep relationships and focus on customer loyalty. Personnel are also empowered to bundle and cross-sell services, increasing the quantity and range of services available. Organizing by customer helps avoid the commoditization of the company’s service offering.
The disadvantage to organizing by customer is the divergence of standards between customers. This disparity in customer service could lead to challenges in manufacturing. Increased manufacturing customization and focus on the customer can lead to duplication of resources and increased overhead.
When companies organize around function, a centralized structure is typically implemented. If the other business drivers (product type, customer, geography) do not vary significantly, then organizing by function may be most efficient.
A company organized by function operates when designed around its activity groups or departments, such as Marketing, Finance, Production, and Research & Development.
A functionally-organized company leads to increased knowledge sharing and economies of scale. Functions are able to build depth and specialize. This structure supports the implementation of standardized processes. With a strong focus on a given function, a company is able to achieve economies of scale and leverage with vendors.
Aligning by function means that the true integration of functions occurs at the leadership level. Functions operating in silos cause contention over cross-functional performance goals and shared resources. Organizing by function also creates difficulty in managing diverse products and customers due to less flexibility in making changes. With decision makers concentrated at the top of the organization, employees are less empowered to make decisions based on diversified needs of the customer or a particular geography.
Types of Organizational Structures
Once the organization structure is defined around the key work processes and business drivers, the delegation of decision-making can be addressed.
Organization type is about where decisions are made versus where people sit geographically. A geographically dispersed company can be run in a centralized fashion and vice versa. Large retailers are a prime example where all decisions (staffing, merchandising, layout, pricing) are made centrally while most of the personnel are in the stores. As the structural needs of a company are assessed, the operations and support functions should be considered independently.
The three basic organizational structures are centralized, decentralized, and matrix.
The centralized structure is utilized when knowledge, information, and decision making are concentrated at the top and filtered down to lower levels for implementation. The centralized model drives a vertical reporting structure most commonly implemented by companies that require leaders to closely manage decisions and attentively enforce those decisions.
The key advantage of the centralized structure is heightened control over decision making by top-level managers. Top-level managers have the power to shape organizational change and ensure change remains consistent with the organizational strategy.
Corporate leadership of a centralized organization must have an in-depth understanding of the complexities in which the company operates. A centralized company operating in multiple geographies may fail to recognize differing cultural, legal, and business practices across locations and countries. It is difficult to diversify operations in an effective manner with use of the centralized structure. With a strong dependency on a few top leaders for strategic decision making, a company would be greatly impacted by the loss of a leader, whether temporary or permanent.
The decentralized structure is characterized by decision making responsibilities distributed to lower levels or divisions of the same organization. This structure type is most commonly implemented by companies offering differentiated products and running service operations in multiple geographies.
The diversified nature of decision making offered by decentralization increases participation and democracy in decision making across the organization. Managers and key decision makers are spread across the organization and the reporting structure can be relatively flat. This provides increased accountability and employee empowerment across the organization. Employees are better able to see the results of their efforts. The decentralized model provides the organization with increased flexibility to respond to minor issues and changes that arise.
The diversified nature of the decentralized structure does not easily yield economies of scale and operational efficiencies. Standardization is difficult to achieve due to the changing needs of the customers and business operations across different geographies. Decision-makers may come to conflicting or competing decisions and goals, creating role confusion and inconsistent direction for personnel. Finally, the decentralized model offers less ability to control the consistency and quality of product/service offerings.
Weatherford International would be considered a relatively decentralized organization with various separate entities/business units, operating under the Weatherford International organizational umbrella. With operations in more than 100 countries, Weatherford has acquired a large quantity of smaller entities and located authority closer to the customer. While efficiency within the individual entities may be achieved, the decentralized model may not allow for commonalities among entities to be leveraged or for lessons learned to be shared across the larger organization.
The matrix is a dual structure, combining both functional specialization and business product or project specialization. This structure theoretically takes the best of both the centralized and decentralized structures and creates the ideal structural model, intended to balance the power between the two sides of the matrix.
Key advantages of the matrix structure are characterized by the capitalization of intercompany communication. The dual-reporting nature of this structure increases information flow through cross-functional communication channels.
The dual-reporting relationships of the matrix structure can prove disadvantageous by creating a lack of accountability for performance goals, resulting in unmet performance measures or uncompleted important tasks. Dual reporting relationships may provide conflicting directions, creating role conflict and ambiguity for personnel. Personnel may feel a loss of prestige, authority, and control over their conventional roles. The matrix model produces increased costs as a result of the additional managerial and administrative personnel hired to support the complex structure. Matrix companies tend to be bureaucratic and decision making can be overly complex.
In sum, centralization is appropriate for the assured enforcement of internal controls and compliance while decentralization allows for diversification across geographies. Due to the increased complexity of the matrix structure, it is often the most difficult structure to implement with proven efficiency.
Trenegy uses the following approach to help our clients through the design process:
- Define key leadership roles. This starts with defining the key leadership team underneath the CEO. Executive leadership can outline the company’s core work processes and translate them into the key executive roles.
- Define division of responsibility. This means deciding how the organization’s operations will be segmented. The company should examine the degree of complexity and impact each business driver (product, customer, geography) has on the company. For example, organizations with a high degree of differences across product lines should divide organization responsibilities between product lines.
- Define delegation of decision making. This means defining the level of centralization and decentralization of decision making. The company should take a look at the organization’s core processes and decide where accountability should be delegated. Customized processes requiring specialization may be delegated or decentralized while repetitive decisions may be kept centralized.
- Define specific roles. Based upon leadership roles, division of responsibility, and delegation of decision making, the company should define the manager and supervisory roles. This includes identifying knowledge, skills, and abilities required for each position.
- Execute action planning. Once the design is finalized, the company should define what other considerations need to be implemented as a part of the new organizational structure. This includes identifying changes to processes, rewards, and performance management processes.
After a company goes through the process of redesigning their organization, several considerations for implementation should be evaluated:
- Develop organization charters (roles and responsibilities). Compile relevant information for justification and assign owners to ensure committed sponsorship of each action item.
- Prioritize supporting process improvements. Define the process improvements needed to ensure a smooth transition to the future state.
- Identify employees. Define the roles and responsibilities needed for the new organization and fill positions with the right people.
- Develop a communication plan. Set a clear timeline for the implementation plan. Determine how you will effectively present and promote these changes to the internal and external stakeholders of the company. Identify and empower key personnel throughout the organization who are strong opinion leaders and will help to advance the efforts of the transition among their peers.
- Finalize the roadmap. Ensure that the plan is well-defined, achievable, measurable, and has executive leadership buy-in.
- Implement the new structure. Define how the executive team will operate once changes are realized and remain actively involved and invested in the transition process. Listen to affected personnel along the way and manage expectations while refining the implementation plan.
Read below for guidance on managing teams after your organization has completed the alignment process.
Eliminating the “Manage the Managers” Mentality
by William Aimone
The popular cult classic, “Office Space,” satirized a company where job functions solely existed to hand off paperwork between departments. Superfluous functions “managed the managers” to ensure paperwork flowed smoothly. Employees were stumped when the consultant asked, “So what do you actually do here at Initech?” Unfortunately, the “Office Space” satire is reflected in many large organizations where superfluous functions exist. The most common superfluous functions are Quality, Strategic Sourcing, Corporate Strategy, Process Improvement, and Shared Services Administration. The existence of these functions dilutes accountability for results and they become organizational crutches.
Quality is important and should be part of everyone’s job. Large organizations try to drive quality by assembling teams of people to manage and measure quality in the organization. The quality teams dream up complex measurement systems rarely understood by the people doing the work. The common result is operational departments shirking accountability for quality. Eliminate the quality function in non-manufacturing companies and hold operations accountable for defining, measuring, and delivering quality.
Organizations set up strategic sourcing functions as permanent bastions for vendor warfare. The fight to optimize pricing and quality often costs the organization more than what is saved. Vendors facing customer’s strategic sourcing departments hike up their initial bids knowing a tough negotiation is impending. As an offensive tactic, the sourcing functions develop a complex array of measures to justify their existence through overstated savings. Strategic sourcing should be an initiative instead of a permanent function. The buyers in an organization can collaborate with operations to optimize vendor spend and quality on an ongoing basis.
Defining and planning strategy is an event, not a function. The strategic planning event actually involves several functions, including market planning, financial planning and operational planning. The strategy function rarely collaborates well with each of these functions and tends to work in a bubble. For example, the financial planning assumptions rarely tie closely with the strategic planning assumptions. The discrepancies create duplication of effort. Strategic planning and financial planning can be integrated and tied together into one process. Marketing should drive market planning and operations should drive operational planning. The CFO’s financial planning and analysis function can be the glue that ties the planning processes together.
Many large organizations have teams of people focused on helping the organization through process improvement efforts. While it seems to make sense to improve processes internally instead of spending money for outside consulting, most organizations grow tired of the internal process improvement teams. The internal teams are rarely exposed to what peer or leading companies are doing. The lack of exposure results in a lack of innovation and the inability to achieve the step change needed to compete. Leading organizations have folded process improvement into Internal Audit. The combination has allowed the companies to leverage the work already performed by Internal Audit and balance process improvement with the audit assessment process. The remainder is best left to outside experts.
Shared Services Administration
Shared services seems to have taken on a life of its own in many large organizations. Lengthy service level agreements, administrative invoicing, and complex process measurements have required organizations to have a team of people solely focused on the administration of the shared services functions. Many of our clients have simplified service level agreements to eliminate the need for the administration of shared functions. Finance agreements are managed within the CFO’s organization and human resources agreements are managed within HR. A stand-alone department focused solely on administering the shared services processes can be eliminated.
The bottom line is that most of the superfluous functions drive accountability away from operations and support functions. When accountability is diluted, performance declines. High performing organizations should seek to eliminate these superfluous functions and streamline.
Read on to learn how to make the most of things when business gets tough.
3 Ways to Make the Most of a Down Economy
by Jenna Howe
I hate getting sick because my type-A personality makes me feel that time resting is time wasted. However, time in bed with a cold forces me to slow down and rest. Likewise, downtime in the economy allows businesses to catch up on tasks that may be overlooked in the whirlwind of day-to-day operations.
These times can be a forced opportunity to slow down and evaluate the business to make sure it’s as efficient and effective as possible. As oil prices continue to fall and project budgets continue to get cut, you may be wondering how your company can improve with a limited budget. Consider the following:
1. Ask yourself, “Am I excellent?”
When business is booming, it’s easy to jump headfirst into new offerings or initiatives and drift away from core profit-making activities. A slower economy provides the opportunity to evaluate processes key to your bottom line. Make sure the processes actually accomplish the right thing (effective) with as little waste as possible (efficient).
To achieve operational excellence, evaluating front-line activities is key. Review safety and environmental programs, reliability and maintenance, project management, and operational procedures to ensure they are streamlined and producing the desired results.
In times of rapid growth, introspection around two of your most valuable assets—customers and employees—can be lost. Look at employee and customer feedback to make sure that you are addressing what is valued most.
2. Empower employees to share knowledge
Collaboration across departments is essential for companies. Unfortunately, employees may not understand how each department fits into the overall business. It’s important to communicate not only department-specific plans, but an overall strategy and master plan to employees. Encourage employees better understand the business as a whole by speaking with those outside their department and seasoned employees who once walked in their shoes.
It’s the informal communication process that allows information to flow freely between employees. Whether the kitchen or a lounge area, provide a space for these exchanges to happen and make sure management encourages the process. Knowledge sharing should be highly valued and rewarded, not punished.
Allow employees to lead internal trainings or lunch-and-learns to share knowledge. If the company relies on external parties for training, consider bringing training in house to reduce costs and encourage employees to share experiences and knowledge.
3. Evaluate current systems
In times of rapid growth, databases can become polluted and workflows unyielding. Make current systems more efficient by using downtime to review workflows and clean up old data. Review software and license counts to verify what’s being paid for is what’s being used. Take time to look at the portfolio to see if any unnecessary software can be eliminated to reduce costs. One client, a contract driller, saw a 35-40% cost reduction after reviewing and consolidating their systems.
Assess single user software to determine if it’s needed and see if there’s an available alternative. Single user licenses are typically more expensive and rely on outside support for troubleshooting issues. Maximize software capabilities by communicating with power users to ensure all available system features are fully utilized.
Don’t Let the Economy Get You Down
Don’t let low oil prices get the best of your company. Take advantage of the time to improve processes, engage employees, and rationalize existing systems. If you take the proper steps while resting, you will come back stronger and smarter than before.
Read below for insight into how your company can gain a competitive edge.
How Industry Leaders Gain a Competitive Edge
by Justin Gibson
Drive on any major interstate in Texas and you’ll see a billboard with a cartoon beaver, stating, “Fabulous Restrooms! Buc-ee’s 150 Miles.” This message guarantees most travelers will pass all gas stations and drive 150 miles to their next restroom break. Travelers are rewarded for their patience with signs every few miles: “Got porcelain? 100 miles,” and “Almost there. You can hold it! 50 miles.”
Passengers arrive to 50 gasoline pumps, immaculate restrooms, and unlimited snacks. The smiling beaver thanks departing travelers and informs them the next Buc-ee’s is 200 miles away.
How do organizations attract new customers and gain the same loyalty as the beloved Buc-ee’s? The most successful companies use the following techniques:
Excel in One Area
It is unusual for a company to deliver the best products in a market across all of its product offerings. However, successful companies must excel in at least one area to draw in customers the way Buc-ee’s does. Buc-ee’s promises immaculate restrooms. They excel in providing an exceedingly clean environment where other gas stations generally don’t. These companies then focus on expanding the customer’s footprint by making it easy and cost effective to buy other items and services.
Deliver Superior Service
Providing the lowest price or highest quality product is not enough to create the same level of loyalty as Buc-ee’s. Bad customer service will lead to low customer retention and the best companies focus on providing better service than the competition. Better customer service not only guarantees more loyalty but studies have shown that people will often spend more if they receive higher levels of customer service.
Manage Add-on Products and Services
Buc-ee’s is great at getting travelers to part with their money as they walk out of the bathroom. Travelers invariably purchase more than needed based on the product offerings, store layout, etc. Managing add-on products and services is a bit more difficult for most companies. Sales teams are not properly informed and mismanage the opportunities to sell add-on services. To successfully sell add-on products an organization’s salesforce must be knowledgeable and continuously updated about add-on products.
Follow up After the Sale
Buc-ee’s provides first-class service from the time customers walk in the door and thanks customers after leaving with billboards saying, “Aren’t you glad you stopped? See y’all soon.” In addition to attracting new customers and providing great service, an industry leader must retain existing customers to keep its competitive edge. Most companies do a poor job of training the sales force to follow up after products or services are delivered. A simple email or hand written note will often result in loyalty and another sale.
Increasing sales by just five percent will have an immediate impact on a company’s bottom line and must start with aligning the organization to focus on its core competencies. Getting in the door with core products, providing the best customer service, effectively selling add-on products, and following up after the sale are all keys to success.
Read on to learn why organizational structure is key as your company gains a competitive edge.
Competitive Advantage in the Oil & Gas Industry: Why Org. Structure Matters
by Gracilynn Miller
Oil and gas companies are challenged with maintaining efficient processes, retaining knowledge, and growing talent. How are oil and gas executives stepping up to these challenges? The most successful are first addressing how they are structured. These companies find that organization structure is a key component of becoming a world-class organization.
Best in the World
The Hedgehog Concept discussed by Jim Collins in “Good to Great” calls a company’s core competency the “Best in the World at” factor. Whether a company seeks to excel at subsea engineering, well control techniques, or grinding bentonite into drilling mud, the organization must focus on optimizing its core competency to remain competitive. A company’s core competency is supported by all of the functions in the organization (engineering, human resources, technology, and finance). Logically, if the company is to excel at its core competency, then the supporting functions must also excel. Most companies fail to be the “Best in the World at,” because one or more of the internal functions are weak.
We have found most global companies, particularly in the oil and gas industry, are generally not organized in a way that allows them to capitalize on their “Best in the World at” factor, diluting the specialization of their operations, impairing knowledge management, and driving away talent.
Oil and gas operations tend to be highly decentralized. Oil fields are in remote locations across the globe with limited communications and diverse environments. This geographical variance results in isolation of talent, inconsistent practices, and knowledge barriers.
Isolation: In a decentralized organization, teams are disjointed and career paths are unclear. When groups remain separate, new employees learn only from their direct supervisors in their respective geographic area. While standardized training procedures may be followed, a new employee’s training will be a direct reflection of the manager’s knowledge and predisposition.
Career paths appear limited due to segmented functional organizations. Field HSE departments at one of our clients recently experienced high attrition rates. Since field managers had little connection with HSE groups in corporate or other business areas, their career paths seemed contained within their own geographic area. With little opportunity for progression, they moved on to competitors.
Inconsistent practices: The more people in an organization are isolated by geography and differing management strategies, the processes across the organization become inconsistent and inefficient. For example, the headquarters of one of our clients provided financial forecasting guidelines for all business units, yet the actual forecasting process performed in each business segment varied tremendously. Consolidating inconsistent forecasts became a useless exercise.
Unfortunately, corporate hired more finance staff to develop forecasts in hopes of improving financial visibility; however, this proved ineffectual. Hiring additional staff to compensate for inefficiencies within the company wastes time and money.
Knowledge barriers: Many oil and gas industry employees are nearing retirement. As these critical employees retire, the industry faces the risk of the acquired experience and specialized knowledge retiring with them. One of our clients was a senior drilling engineer in Cairo. Reflecting back on his career, he spoke of the limited opportunity to share his knowledge beyond the few people he worked with locally. Eager to share his experience and knowledge, he is now consulting with one of his former employer’s competitors.
Today’s Attempted Fix
Oil and gas companies, among others, attempt to offset the barriers to being the “Best in the World at” with expensive systems and extravagant human resource strategies. These solutions serve only to patch the sinking ship. New systems are not a guarantee for efficiency and sometimes increase attrition. One of our clients introduced a new handheld device to field personnel to improve data collection. The result was arduous and time-consuming data entry for project managers, which frustrated them and drove them to join the competition.
Another oil and gas company implemented rotational programs to combat geographic silos. Young professionals are bounced across geographical locations and functional groups in order to expose them to a wide variety of roles, processes, and managerial perspectives. The young professionals are motivated with the high hopes of a fast track to vice presidency. While the younger generations are well-versed generalists in a variety of disciplines and roles, they lack the specialized knowledge required to address function-specific challenges. Moreover, the organization is limited in vice president level positions, which furthers the dissatisfaction of many high potential employees.
A Real Solution
To optimize retention of industry experts and to improve process efficiency, organizations should start thinking about how to align functions in the organization. Functional alignment does not imply a physical centralization of all staff to a headquartered location. However, aligning along functional expertise will enable the company to optimize its core competency, achieve sustainable growth, improve talent retention and development, increase process uniformity, and enhance knowledge sharing.
Aligning functional expertise in the company will improve the staff’s ability to grow, as junior personnel have the opportunity to learn from a team of veteran experts. An aligned function enables the sharing of technical skills, industry knowledge and innovative strategies. Aligning teams of experts into functions is where large organizations can gain competitive advantage over smaller, entrepreneurial competitors who are stealing talent.
Maintaining a functionally aligned organization increases adoption of uniform processes across a global organization. One of our client’s project management staff reported locally to the geographic business unit leaders. Project management processes were inconsistent across the company, project overruns were endemic, and sharing of resources and knowledge was non-existent. After the company aligned all project staff under a corporate function with disciplined processes in place, the company reduced project overruns to a negligible amount. The functionally aligned organization provides functional leaders with a direct line of sight into the activities that make the function operate efficiently and effectively. Even as leaders retire or knowledgeable individuals are lost, processes are explicitly defined and can continue without interruption.
Aligning the organization functionally enhances encourages knowledge sharing across the organization. For example, an oilfield service company’s sales representatives were aligned to each of the dozens of service lines. One sales representative would sell stimulation chemicals and another would sell wellhead equipment. There was no incentive for the individual sales representatives to sell across service lines. After receiving negative feedback from two of their largest customers (explaining why sales were declining), the company aligned the sales teams under a global sales organization. The sales organization began to share customer requirements and feedback across service lines. As a result, they were able to secure a number of sole-source master service agreements with their largest customers.
It is imperative for oil and gas companies to invest the time and resources required to support their “Best in the World at” competency. With proper organization alignment, companies will be equipped to innovate, keep costs under control, and be more responsive to customers.
Read on for a deep dive into company spinoffs.
New Organization Design
Why Do Spinoffs Continue to Outperform?
by William Aimone
Company spinoffs continue to outperform the market. The Guggenheim Exchange-traded Fund, CSD, focuses on investing in six to thirty-month-old spinoff companies. CSD outperformed the S&P 500 by almost twofold in 2013. Does this imply former parent companies make poor decisions by spinning off high return assets? Not necessarily.
Spinoffs provide a unique opportunity for a company to start fresh. The spinoff’s executives are no longer under the stranglehold of the mother ship and experience a sense of euphoric liberation. The liberation translates into eliminating any hints of what was previously hindering the company from decision making and competing effectively. We have worked with spinoffs to achieve outstanding results by eliminating waste, adopting fit-for-purpose ERP solutions, and only accepting people who will make the company successful.
A new spinoff with eyes on success will rationalize or simplify business practices and eliminate waste. Targets for simplification include the back office administrative tasks. Budgeting and reporting is usually the first target. A large energy spinoff was able to eliminate more than 100,000 hours per year by overhauling the legacy budgeting process and adopting a fit-for-purpose process. The fallout was an elimination of more than 100 reports and spreadsheets containing mounds of CYA data.
In the immediate term, the spinoff organization typically has no choice but to use the former parent’s ERP environment under a transition service agreement (TSA). One of the first priorities is to shed this expense as quickly as possible by moving to a fit-for-purpose ERP. A mid-sized oil and gas company that spun off from its parent was under a ten million dollar per year TSA agreement for ERP and systems support. The spinoff quickly implemented a fit-for-purpose ERP solution at an implementation cost of less than half the annual TSA support fees. The new ERP annual administrative support cost was less than ten percent of the TSA annual fees. The return was less than one year.
People for Success
The newly appointed spinoff executive team can be in a position to hand pick management for the new company. Typically the former parent company will first attempt to slough off the dead weight and move poor performers into the spinoff organization. The shrewd spinoff executive team from a newly formed chemical company resisted. The spinoff CEO and CFO turned the tables and halted the random assignment of people to the spinoff and began an intentional selection process for management positions. The spinoff was marketed as an avenue for people to be a part of something new and exciting. Positioned properly, the best and brightest will be attracted to the spinoff.
Unfortunately, the former parent company is left with dead weight. The people who administer the legacy back office functions are now doing as much work for a smaller company. The expired ten million dollar TSA charge for ERP support is reabsorbed by the parent company. Much of the excess overhead remains with the parent company. To address the dead weight issues, the former parent company must go through some level of realignment.
Read below to learn what makes a spinoff successful.
The Benefits of a Spinoff and What Makes It Work
by Katy Wyrick
Amid low oil prices and the subsequent struggle to maintain profitability, companies are looking for more drastic ways to cut costs. Specifically, lenders and analysts want to see companies reduce their general and administrative (G&A) expenses. One way to cut costs is to spin off unique assets.
The decision to spin off assets is complex and undertaken for reasons such as increasing profitability, refining product focus, or complying with regulatory requirements. The latter, regulatory compliance, has induced many energy industry spinoffs resulting from mega mergers.
In order for a spinoff to be successful, the new company must have a clearly defined and differentiated offering, the right people in the right organizational structure and fit-for-purpose technology.
In order for a parent company to spin off an efficient, high-functioning subsidiary, a clear product or service delineation must be present. Precise segregation provides the spinoff a singular focus on design and service delivery. For example, a company that produces pipeline and valves would have an easier time spinning off valve production in its entirety, rather than spinning off a company based on geographic location. The delineation comes from what drives complexity within an organization, and complexity is typically derived from the product offered and how it is delivered.
Similarly, an E&P company that operates both CO2 injection and high-pressure wells could potentially benefit from only spinning off their CO2 injection assets since operating CO2 wells requires a specific skill set and specialized technology. Spinning off would allow the company to eliminate entire systems and resources specific to CO2 activities. Spinning off unique assets allows both companies to focus on core functions with the intention of improving profitability, quality, and service.
The spinoff’s executive team is charged with the task of maximizing productivity with the most efficient organizational structure. From the number of employees to which departments or functions will be outsourced, these decisions are often based on capacity and risk management. For example, it is less risky to outsource payroll services than industry-specific accounting functions due to the universal nature of payroll opposed to the unique nature of land, joint interest billing, and revenue accounting. Outsourcing considerations depend on which functions are unique to the business and which are universal across industries. Strategic functions aren’t good candidates for outsourcing.
Organizations spinning off from parent companies will go through several iterations of change, allowing visibility into which positions are necessary and which can be combined. Once the organizational structure is finalized, invest in relocation and executive search services to ensure quality candidates and efficient hiring. Though it’s tempting to allow some employees to split time between companies, it is important to assign employees to only one organization and be willing to let employees leave with the company that is spinning off.
There will be a transition period as two separate entities are formed. It is tempting to assign transition activities to employees of the former parent company, since they’re knowledgeable regarding business functions and data. In our experience, it is better to include the new employees of the spinoff in the transition activities to familiarize them with new processes and help them become independent of the parent resources.
In most cases, the spinoff will be a smaller, more focused operation, which will significantly change business processes and data collection. Major technology, especially the ERP system used by the parent company, will likely be too robust or too specific to the requirements of the parent company’s structure. It is important to analyze the current system and capabilities in order to assess other available options. Smaller, more financially feasible systems are available for companies with less data and simpler processes.
During the transition period, the spinoff will most likely be under a Transition Service Agreement (TSA) for use of the parent company’s technology until the spinoff can function on its own. Commonly, TSAs are more expensive than licensing a new ERP, so it is beneficial to implement a new ERP as quickly as possible. Help from the system provider, outside consultants, and sufficient support from decision makers and internal resources will ensure a smooth and successful implementation.
Smaller systems outside of the ERP should be thoroughly assessed and consolidated based on business requirements and system functionality. For example, rather than using a robust document storage system, a new spinoff can use an internal server to share files. Rationalize the specific operations systems to decide which ones can be eliminated. A recent spinoff client was able to eliminate 35% of its operational systems and reduce G&A dramatically. As a result, the parent company discontinued all licenses associated with the new company and reduced its own recurring costs.
Spinoffs provide an unusual opportunity for a fresh start. A spinoff is most successful when the assets being spun off are unique, when organizational structure and business processes are optimized for the new company, and when systems are purchased or configured to fit the new organization.
So your spinoff was successful. But it doesn’t end there, does it? What should come next? Read below for insight.
After the Spinoff, What’s Next?
by William Aimone
People permanently shedding unwanted pounds rarely keep wearing their old clothes. Corporations shed unwanted pounds through spinning off assets or lines of business. However, many corporations continue to wear old clothes (organizational structure, existing business practices, and supporting technology) that don’t fit the organization. The poor fit is reflected in inefficient business practices, organization frustration, and lack of agility.
Leading organizations have found ways to put on new clothes and become the lean and nimble company they hoped to become with the spinoff.
1. Reorganize the corporate structure
Pre-spinoff organizations are designed to address the corporate challenges inherent with the complex legacy company. Following a spinoff, new priorities and challenges arise. The new challenges are typically improving a core competency such as innovation, customer service, or quality. For example, a large oil and gas drilling company spun off a series of low-tech rigs. The spinoff enabled the company to focus on building and delivering new technologies. Consequently, the company completely reorganized global operations. Following the change in operations, the finance, human resources, and information technology functions naturally followed suit. A 30% reduction in general and administrative costs was achieved and the company is beating analyst profitability expectations.
2. Rationalize business processes
A spinoff creates an opportunity to streamline and simplify business processes. Trenegy’s research has shown that the most common opportunities for simplification are in finance, accounting, and human resources. For example, a large oil and gas services company capitalized on their spinoff and completely overhauled planning, forecasting, and reporting processes. This process cut thousands of hours out of the planning process and reduced reports by 50%. Operations was able to focus on execution instead of never-ending corporate planning meetings.
3. Shed excess information technology
Information technology solutions are typically designed to meet the scale and complexity requirements of the pre-spinoff company. Rationalizing business processes after a spinoff creates an opportunity to simplify the technology applications environment. A diversified oil and gas company shed their pipeline and services divisions to focus on exploration and production. The pipeline spinoff company was quick to migrate to a hosted ERP environment and shed the transition services agreement. The migration left the exploration and production organization with an ERP system designed to support more than what was needed. The company replaced their ERP solution with a fit-for-purpose application. The replacement cut annual application support costs by 60% and improved business processes. The new system was tailored to meet an exploration and production company’s needs better than the legacy generic ERP solution.
Read on to learn how to find metrics that matter and use them to your advantage.
Other Best Practices
What Are You Hiding? Finding Metrics That Matter
by William Aimone
Organizations often develop a complex series of metrics or key performance indicators (KPIs) only to find managing to the metrics does not lead to success. Margins erode while operating metrics indicate otherwise.
The lack of success is directly related to the typical approach of developing a set of metrics to address a perceived problem rather than looking at what is really important.
This problem focus just forces the organization to squeeze one end of the balloon while the other end is about to burst.
Dean Smith, lauded as one of the most successful college basketball coaches in collegiate history, understood what performance measurement really meant. Before coaching, Dean studied mathematics and developed a penchant for numbers. Early in his basketball coaching career, he studied the numbers in the game and devised a system to measure every aspect of the game. He was able to identify and link atypical metrics to what it took to win the game.
Pundits might say measuring game performance is simply whichever team scores the most wins the game. Dean didn’t give in to this simple notion, because he knew teamwork was the critical factor for winning on a consistent basis. He measured assists, passes, setting effective screens, and even taking dives on the floor for the ball—all considered unselfish play for the sake of teamwork. We’ll let Dean’s 879 wins speak for themselves.
Most organizations tend to focus on profits and very little else when it comes to measuring performance. Everyone in the organization is told to focus on profits, translating into cutting costs and increasing sales. One large service organization focused so much on profits by cutting all costs, including maintenance. Equipment declined to a state where catastrophic failures chased all their customers away. The company’s leadership then put pressure on the sales organization to sell more, but the damage was done and sales efforts failed. The organization went through a bitter bankruptcy and has yet to recover.
How does an organization define the metrics that ultimately predict success?
Dean quickly learned that there was a science and art to developing and implementing a performance measurement system that encouraged winning. Trenegy’s research of 100+ energy companies that have tried to implement strong performance measurement systems has shown the same.
The science begins with identifying the right pool of metrics to be considered for measurement. Identification requires the organization to clarify the critical competencies and work processes required to meet strategic goals. This process starts with the organization defining competencies, reflecting how they compete and differentiate themselves in the marketplace. For example, an oil and gas company’s competencies include: exploration, development, production, marketing, etc.
Once an organization defines its core competencies, leadership should define the critical success factors (CSFs) that ensure each competency is met. The same oil and gas company’s Exploration CSFs would include: finding high-producing wells, maintaining lease agreements, and increasing proved reserves. Each of the CSFs should be supported with metrics to measure success.
The definition of each CSF metric should define what is important to measure. Any measure that does not tie to a CSF should be eliminated.
Ultimately, the organization ends up with a long list of metrics organized under each competency. The science only solves the question of what should and should not be measured. The art ensures the definition and implementation of a metric drives the right behaviors and outcomes.
The art begins with prioritizing, then defining the metrics, and then assigning accountability. Prioritization is internal benchmarking of the organization’s metrics to identify which are important and which are meaningless.
Benchmarking is accomplished through a sensitivity analysis of the key metrics correlated with the expected results. Trenegy encourages “war gaming” each metric to ensure it will drive the right behaviors and outcome: Does higher throughput make us more profitable, or do more customers make us more profitable? High level analysis may prove that more customers mean more profits, right? The art asks: Do more customers translate into sustainable profits?
For example, an oilfield services company analyzed its profitability and found the districts with more customers had higher profitability than those with fewer customers. The analysis was a one-time snapshot of profitability. However, when the oilfield services company examined which districts sustained success over time, the districts with fewer customers were more successful. The company decided customer count was not a good indication of success, and they found better metrics to measure sales team success.
The second part of the art is the definition of the metric. For example, a land drilling company analyzed asset utilization across all of its districts and discovered no correlation between profitability and asset utilization. The districts with high utilization were less profitable than those with low utilization, which made absolutely no sense to management. The organization further examined the asset utilization metric and found the calculation was not being captured consistently across the organization. Certain districts manipulated the calculation to only include a 40-hour work week while others were basing the metric on a 24/7 model.
This is where hiding behind metrics occurs. The art decides what represents reality and what does not. The lower performing districts devised a metric based upon a 40-hour work week to make their reports look good. Organizations should develop a consistent measurement definition across all business units.
After the high priority metrics have been well defined, accountability for results should be assigned. Again, this is an art. For example, it may sound logical to assign responsibility for collections to the Credit and Collections Department, making them responsible for days sales outstanding (DSO). However, further examination may say otherwise.
For example, a large specialty chemical company’s sales team was selling products to customers known for slow payment. These customers were an easy sales target since most of the lower priced competitors were not eager to sell to slow paying customers. The sales teams, driven by sales revenue targets, were not accountable for DSO. The sales team was hiding behind increased sales instead of the cash needed to run the business. Cash flow began to dwindle and the Collections Department had to add staff to collect from idle customers. Later, the company decided to hold the Sales Team accountable for sales collections (tied closely to DSO). The sales team began to get involved in collections and shifted the sales focus to more reliable customers, alleviating the strain on the company’s cash flow.
The art of assigning performance metrics requires an organization to think outside typical functional boundaries.
A robust performance metrics program starts with the science and ends with the art. The science is a logical framework for identifying the performance metrics that tie to the organization’s critical business processes and strategy. The art is the prioritization and assignment of metrics, which requires a combined understanding of what drives business behavior and how the business operates.
Behind every metric lies the logic and the responsible party. If both are not clearly examined and accurately assigned, the metric loses functional integrity.
Read below for insight into implementing “lean principles” within your organization.
3 Signs Your Lean Program Is Fat
by William Aimone
Lean manufacturing principles have contributed to record success for hundreds of global companies since Toyota started implementing lean principles in the 1980s. Lean principles focus on eliminating waste and leveling work to optimize productivity and profits. Innovative organizations have applied the lean principle beyond the shop floor and into back office organizations. Finance organizations have achieved incredible efficiency gains in accounting, procurement, payables, and order processing (to name a few). IT has used these principles to migrate to the cloud.
Unfortunately, some back office finance and IT organizations have not found success when implementing lean principles. The less successful organizations have over-engineered or misapplied lean principles.
Done Is Better Than Perfect
One principle of lean is seeking perfection. Unfortunately, the pursuit of perfection can slow an entire process. A department will strive to get everything as perfect as possible while their perfection creates issues downstream. For example, a chemical manufacturing company wanted to cut their close process in half. A critical path in the close process included accruing raw material purchases. Several years ago, the payables team was given the ultimatum to ensure the accrual for raw materials purchases was perfect. The raw materials accrual became a critical path item for the close, extending the close calendar by two days. Introducing the concept of “done is better than perfect” is not a lean principle. However, further analysis concluded the payable group could create an accrual within a few hours (well within materiality thresholds) and allowed the organization to cut the close by two days.
Lean Is Not a Religion
Tools created for lean programs are excellent guides for problem solving, but many finance organizations force fit the use of these tools into every decision-making process. A large field services company was experiencing a 5% customer invoice rejection rate. The finance organization conducted a series of in-depth root cause fishbone documentation and bottleneck analysis over several months with no avail. They were using the wrong tools and wasted time. A simple Gemba (visit to field) found the field service reps were using an outdated listing of field service codes. After the reps were given the proper service codes, 90% of pricing and invoice errors disappeared. Extensive analysis using the lean tools is not always necessary to solve a problem.
Measuring the Measuring Tape
Part and parcel to a lean program is quantifying results through measurement. While measuring what matters is important, not everything is worth measuring. Sometimes it can take longer to measure something than complete the task being measured. Finance and IT organizations can spend an inordinate amount of time measuring and displaying the intricate results of every possible activity. An auto parts manufacturing company created a vast array of IT measurements, visual displays, and report out meetings occupying at least 20% of management’s time. For example, IT was measuring, reporting, and displaying in the hallways the number of service calls closed each week by person, type, and department. Nice measurement, but they were not acting on the information. Bottom line, organizations should eliminate measures not influencing future actions or decisions.
Applying lean principles can be very useful for back office finance and IT organizations, but the principles need to be applied in a fit-for-purpose manner. As soon as finance or IT leadership sees the lean programs slowing decision making or occupying too much time, it’s time to make the lean program lean again.
Read on to learn how to be strategic not just about lean principles, but about cutting costs and advancing your business.
Strategic Sourcing to Cut Procurement Costs
by Katy Wyrick
Oilfield services (OFS) companies are being challenged by their customers to cut prices and manage to lower AFE budgets. Many OFS companies are taking a hard look at ways to reduce their costs, from retiring underperforming assets to cutting payroll. Others are trying to implement strategic sourcing programs centered on establishing a centralized procurement organization.
The best long-term investment in cutting costs is to implement a set of fit-for-purpose procurement processes supported by technology as opposed to an entire organization dedicated to strategic sourcing. We don’t believe that an external organization needs to be established specifically to create and enforce purchasing guidelines. We see strategic sourcing at its best when it’s part of everyone’s job—built into the supply chain process and governed by logical rules.
A procurement program that has well-designed processes and is accelerated by the right system can provide:
1. Spend data: A procurement database gives supply chain, finance, and operations visibility into spend analytics and vendor organization. A company can ensure they are not over purchasing or overspending by implementing a system that monitors inventory and vendor pricing per item.
2. Inventory visibility: A cluttered or nonexistent inventory management system makes for messy decision making. Why would you need to buy additional pipe when you know you have a full pipe yard with exactly what you are looking for?
3. Compliance metrics: Cleaning up the organization of suppliers and catalog items will drastically decrease maverick spending (where employees buy unnecessary inventory or overpriced supplies), which is a major issue for OFS companies without an established procurement system.
Why are OFS companies hesitant to put a strong procurement program in place given the benefits? There are many reasons, but often, companies hear the term strategic sourcing organization and want no part of it. Procurement processes designed for your organization will help you receive all the benefits without the excessively complicated governance.
Implementing a Successful Procurement Program
Set high-level rules. The balance between standardizing processes and allowing room for impromptu decisions is difficult to find. Although emergency purchases are necessary on occasion, it’s important to determine limits and guidelines. For example, a purchase order may not be required for field personnel if a gasket blows in the middle of the night. But when the need for additional pipe is known two weeks in advance, the proper sourcing activity will allow the OFS company to receive the lowest possible price for the same item. Clarifying what defines an emergency situation is a critical task.
Create simple, shared processes. Procurement software alone is not a procurement system. To ensure high-level rules of system use are followed, the process must be simple. Employees will work around the process if purchasing common items like sand and casing for drills becomes a burden. A logical process will allow them to see the benefits of the system and comply with protocol.
Train employees. Provide the proper training to field users. From the roustabouts to the production engineers, participation in training is imperative. By giving the field personnel proper training, users will gain confidence in the system, their work, and their role within the company. Confident users make for successful systems. When strategic sourcing becomes everyone’s job, the need for overhead-intensive procurement departments disappears.
Measure compliance. Be sure to set fair standards and enforce the rules. Measure compliance, but do it fairly. If you expect employees to use the system from the field and on the go, give them access through a mobile application. End users can access a procurement database from almost anywhere in the world with advancements in procurement technology.
Read below for economic guidance as your organization continues to grow.
Change Management: Leveraging Economic Opportunities
by Ashley Crozier
U.S. corporations celebrated the new year with optimism and excitement after the passing of the new tax plan in December. Companies should be equipped with more cash on hand, which will lead to opportunities for growth and change. We predict more mergers and acquisitions.
Successful change management plays a key role in withstanding the turbulent nature of an acquisition or merger. We have recognized three common practices among companies effectively capitalizing on change during an acquisition.
1. Communicate early, often, and openly
Effective communication is the simplest and most overlooked of these three. People often dislike change. However, people are much more willing to accept change when included and informed beforehand. Imagine an employee who is the last person in the company to find out his job of 10 years is being altered. He is obviously going to feel betrayed. Now picture an employee given this information directly and asked for input in the process of redefining the job role. The employee will likely be less resistant and feel empowered to help create change. The key is to communicate directly and transparently with the people being impacted. Creating an open dialog early on will gain employee buy-in as well as valuable feedback to be leveraged.
2. Engage the people who know
In every acquisition, a select few individuals are considered highly valued assets due to their knowledge. Maybe it’s the accountant who has been with the company for decades and knows all the nuances of each company-specific process. Or perhaps it’s an employee in IT who is the only person who fully understands how systems are integrated. Knowledgeable employees can be a huge help during a merger when utilized correctly, but companies often don’t engage knowledgeable employees early enough in the process. The work required to complete the merger is underestimated. The result is resistance and frustration which leads to knowledge leaving the company and integration delays. Leadership should engage knowledgeable employees when planning the merger to optimize synergies. When included in decision making, knowledgeable employees can become a strong advocate for change across the organization, resulting in change management success.
3. Utilizing the best of both cultures
The most challenging of the three concepts is the successful merging of two company cultures. Each company has its own personality with strengths and weaknesses. Merging two cultures together presents a unique opportunity to combine the strengths and eliminate the weaknesses in the newly merged company. The result is a better culture together than either company had individually. Creating synergies takes effort from management to establish impartiality and respect for both companies. Leadership must first consider each culture’s attributes as being different rather than better or worse, then identify aspects of each culture to retain and to remove. The last step is clearly and directly communicating the vision for the newly unified culture to the company. Make every attempt to highlight and encourage the positive behaviors being retained. The effort can be made through informal actions such as offering verbal praise and recognition in a meeting. The effort may also be made through informal actions, such as a presentation over the values driving the culture of the newly formed company.
With the approach outlined above for managing change, companies can better leverage the current economic situation to grow business while creating stability as the economy fluctuates.
Read on for further economic advice, specifically regarding tax reforms as they impact your business.
3 Ways Tax Reform Helps Middle Market Business in the U.S.
by William Aimone
The 2017 Tax Reform Act reduces the corporate federal income tax rate from 39% to 21%. Every corporation should be rejoicing, yet the large corporations are not. Why? According to the GAO, the large corporation’s effective federal tax rate already averages 16.9%. On the surface, the tax reform equates to offering discounts on snowmobiles to someone who lives in Florida.
Many large corporations have built an intricate web of perfectly legal internal methods to defer or avoid certain taxes. The methods require hiring accountants and attorneys to build tax shelters of which middle market businesses could never afford. The previous tax code gave large businesses a competitive advantage over middle market businesses.
Now the tables have turned:.
Large organizations have moved more than $2.5 trillion overseas to take advantage of lower international corporate tax rates, according to the Citizens for Tax Justice. Prior to Tax Reform, the U.S. corporate tax rate averaged 38.91% while that of other developed countries averaged 22.96%. GE and Microsoft have each saved more than $100 billion overseas. Middle market businesses could not afford the expense of opening overseas bank accounts, offices, and the associated legal fees. Moving the corporate rate to 21% will lead many large corporations to repatriate and make investments that create business for middle market companies. Exxon announced plans to invest $50 billion in the United States partially due to tax reform. In the long term, the tax reform will benefit the larger corporations, saving millions by eliminating unnecessary cost supporting a complex tax structure.
Fewer Tax Incentives
The Tax Reform Act has eliminated a host of corporate tax credits and deductions. The corporate deductions include manufacturing, local lobbying, fines paid to governments, and dividends received deductions. Many of the tax deductions were offered to incent larger company behaviors and have been specifically eliminated or limited to where the larger organization cannot benefit. On the flip side, minimum revenue requirements for cash-based accounting have been raised from $5MM to $25MM. The requirement helps fast growing companies reduce administrative accounting and tax burdens. Longer term, larger corporations will begin to look for ways to shed certain internal entities designed to enable the tax credits.
Growth in Middle Market Businesses
Small businesses employ 49.2% of all private sector employees in the U.S. Many small businesses are organized as s S-Corporations where the profits are taxed against the owner’s personal income instead of at the corporate level. The incentive for small businesses to organize as S-corporations has virtually been eliminated under the new tax law. Once S-corporations begin to migrate to traditional C-corporations, investment opportunities will increase along with the significant reduction in tax liability. This transition will result in a significant number of small businesses growing into the middle market category with new investors and more cash on hand.
Many of the incentives for large corporations have been eliminated and the new corporate rate is now on par with other countries. Large corporations can no longer justify the tax havens, and middle market businesses are now able to compete on a level playing field when it comes to corporate income taxes.
Read valuable insight below regarding your corporation’s structure.
Jumping off the Bandwagon: Benefits of Abandoning the MLP Structure
by Erika Clements
This article was written in collaboration with two Kinder Morgan executives.
On May 17, 2018, Enbridge announced plans to consolidate their MLP subsidiaries into a single publicly traded entity. Enbridge is one of many companies that has forsaken the MLP structure in favor of the traditional C-corporation structure over the past few years. Among the first to make the move was Kinder Morgan in 2014. We interviewed Kinder Morgan executives who shared how the company has benefitted substantially since making the transition to a corporation. Enbridge and other companies following suit have these benefits to look forward to.
Master Limited Partnerships (MLPs) began in the 1980s and served to make it economically viable for midstream energy companies to develop large infrastructure required for the processing and transportation of oil and gas. In a nutshell, an MLP marries the tax benefits of a partnership with the liquidity of a public company.
However, the attraction seems to be losing steam following a few fundamental changes impacting the overall value prospects of the MLP structure. In addition to Enbridge and Kinder Morgan, we have seen major companies like ONEOK Inc., and Targa Resources Corp. drop their former MLP distinction in favor of the more traditional C-corporation structure.
There are a several key benefits these companies, among many others, stand to reap following the dismissal of their MLP structure:
Benefit 1: Decreased Complexity
The MLP structure, for all its benefits, also yields greater complexity. K1 filing and the management of multiple companies are just a couple examples. Kristin Tatum, Vice President at Kinder Morgan explains, “There is always a lot of complexity behind IDRs, K1s, and the overall MLP structure, and complexity isn’t always properly rewarded.” Following the merger, the complexity went away and what was left was a typical C-corp structure everyone understands. Without the MLP complexity, investors could more efficiently assess the company and its operations. A simplified corporate structure also created opportunity for greater flexibility and cost savings associated with managing only one company rather than several individual entities.
There is also a significant decrease in workload without the MLP structure and K1 filings. Consolidating to a C-corp creates the opportunity to right-size the company and redistribute the workload as is best suited.
Benefit 2: Cashflow Flexibility
Many MLPs bear the burden of Incentive Distribution Rights (IDR). This means, as the MLP receives greater payouts, the General Partner receives an increasing percentage of the MLP’s distributable cash flow. Though it is certainly desirable for the MLP to grow, there comes a point where this structure is more restrictive than helpful. David Michels, Chief Financial Officer at Kinder Morgan, explained that 16 years into the life of their MLP, they were already “deep in the splits,” siphoning off nearly half of their overall cashflow back to the General Partner. In Kinder Morgan’s case, though the General Partner never contributed more than its contractual obligation of 2%, the MLP grew to the point that 48% of their cash flow was contractually obligated to the General Partner. Doing away with the IDR structure frees up a significant amount of cash flow and allows greater opportunity and flexibility throughout the enterprise. Additionally, the consolidation of the many companies to one unified C-corp creates a more diversified set of assets, increasing the overall value of the resulting C-corp.
Benefit 3: Improved Investor Perception
To the average investor, the complicated structure of an MLP paired with the requirements of K1 filings could be enough to sway them away from MLP investments, in favor of the more easily understood C-corp investments. Switching to a C-corp could make a company more attractive to potential investors, as was the case for Kinder Morgan. Kristin Tatum explained that investors were more eager to invest as Kinder Morgan shifted to a C-corp and received a more accurate valuation. Tatum also shared, “News of the shift from MLP to C-corp was received very well by the investment community, and greater value was returned to unit holders relative to what they could have expected in the MLP structure.”
A notable draw of investors to an MLP is the idea of receiving increasing quarterly distributions. This being the case, MLPs are forced to devote a primary focus on increasing distributions each quarter to remain attractive to investors. Unfortunately, this can discourage innovative technology investments not yielding immediate and tangible results. For example: investing in a leading technology to improve long-term maintenance workforce efficiency. If long term investments mean significantly reducing distributions in the meantime, investors may not stick around. Transitioning to a C-corp gives companies the option to retain cash for strategic investments since their valuation is not tied to increased distributions.
Although the structure of the MLP has its obvious appeal, it is worth digging deeper to evaluate the possible benefits rewarded to those companies making the switch to C-corporations.
Why Wait? Cut Costs Now
by Bill Aimone & Peter Purcell
Cutting costs is never fun or easy, but for companies facing tough times, it’s often the only realistic solution. If your company is faced with pressure, what are you doing about it? Are executives taking quick action?
Unfortunately, when companies realize they’re starting to hit a wall, they either wait too long to take action or take the wrong action. We’ve talked with many executives who, in retrospect, say, “I wish we didn’t wait for so long to cut costs.” Many simply don’t have confidence in their own decision-making and don’t recognize the possibilities until it’s too late.
When companies finally get around to cutting costs, everyone is quick to point out where cuts should be made. That is, in other departments than their own. The Chief Operating Officer says, “You could make cuts in the back office,” and the Chief Accounting Officer suggests, “You could make cuts in the field,” which leaves the company stuck in a push-pull without real answers.
Today, companies usually follow one of three paths when it comes to cost cutting:
- Acquisition seekers who look for acquisition opportunities in an attempt to achieve synergies
- The procrastinators who wait it out or do it halfway
- The doers who take the bull by the horns and cut costs the right way
The Acquisition Seekers
Some companies start looking in the market for acquisition opportunities so they can say, “We bought another company, so now we can become leaner and achieve synergies through this acquisition.” This doesn’t always work as planned.
Consider the Sears and Kmart merger. The two companies merged to form a larger organization and create synergies, but they didn’t do much cost cutting or rationalization. While Sears once owned the crown-jeweled Craftsman and Kenmore brands, you can now buy Craftsman and Kenmore products anywhere. Sears simply wasn’t proactive enough.
The Sprint and Nextel merger is another example of an acquisition gone wrong. They thought combing their customer bases and service offerings would help them grow. However, there was a huge culture clash, they had different approaches to leadership and business operations, and many executives departed soon thereafter.
Putting two mediocre companies together won’t make them great. If you merge two companies but don’t take advantage of the synergies and don’t rationalize your costs, organizational structure, etc., the merger become futile.
This approach to cost cutting happens more often than not. Executives know cuts must be made, but they wait it out or do it halfway. When going through the budgeting process, they might say, “We are cutting travel expense for the rest of the year,” or “I was going to hire five people this year, but now I won’t.” The problem is, these costs creep back up. Those five people who weren’t hired last year will be needed this year, so they end up hiring them anyway.
Successful companies take the bull by the horns and proactively cut costs. Consider the following examples:
In 2008, Ford Motor Company knew a downturn was coming, so they aggressively cut costs, reduced product lines, and received a line of credit. When things got bad in 2008-2009, they were the only U.S.-based auto manufacturer that didn’t use federal money or merge with another company.
Best Buy was under pressure for many years once Amazon and online resellers increased in popularity. Best Buy has done a great job of cutting costs by downsizing the size of stores. Ten years ago, Best Buy was a huge store, but now they’re smaller and more focused on the community to whom they sell. They’ve been in cost cutting mode for a while, and they’re still around. Their online sales are also very good.
So How Do You Do This?
Engage the right people in the organization to create more buy-in and decrease the hit to the culture. Utilize a combined top-down/bottom-up approach:
Top-down: Understand your differentiators in the market and develop a clear strategy for the future. Prioritize what is important to the organization and let the remainder be “up for grabs” for cost cutting.
Bottom-up: Understand what is happening in the field (aka a grassroots understanding). Talk to field service technicians, people in the stores, people in the warehouse and distribution centers, etc. to learn what they need, what works, and what doesn’t work.
People in the field are not likely to buy into or comply with a purely top-down approach. Including a bottom-up approach, they will likely own the changes. People in the field know when a company is struggling, and they might have ideas that are more dramatic and effective than the ones developed by corporate. Read more on how to cut costs here.
There’s no one-size-fits-all approach to cutting costs. The most important steps are to be proactive and do better with what you have. Most importantly, protect your crown jewels that make you different and better than the competition.
3 Ways to Avoid Bankruptcy
by Bill Aimone
In 2019, Dean Foods announced they had filed for Chapter 11 bankruptcy. Many were quick to blame the growing alternative milk market for the bankruptcy of Dean Foods, but there’s another likely culprit: high operating costs.
Evidence suggests that cow’s milk consumption has declined over the past few decades while nut, plant, and lactose-free milk alternatives have grown in popularity and availability. That doesn’t mean the market for cow’s milk is dead. The playing field is simply expanding as new competitors continue to enter the market.
So how can a company like Dean Foods stay afloat in this changing market? Strategic, consistent cost cutting.
In 2017, Walmart figured out how to produce milk at a lower cost than Dean Foods, so Walmart cut ties with Dean. You would think a company that specializes in producing and selling milk would have the process down to a science and operate at the lowest possible cost. But in this case, Walmart did it better and Dean lost one of their top customers.
In Dean Foods’ 2018 Annual Report, the company discussed plans to reduce their existing cost structure and execute a cost productivity plan. Did they wait too long?
Unfortunately, the best laid cost reduction plans often go awry when companies fail to do the following:
Take immediate action. Executive leadership tends to adopt a wait-and-see attitude toward cost cutting, particularly following a large acquisition. Management wants to get things working as quickly as possible so costs will fall into place with natural attrition. Leadership banks on the notion that people will leave the organization during the transition and they won’t be replaced. Unfortunately, this rarely happens as quickly as needed. Middle management has no incentive to leave a job open for fear they will have to spread more work over fewer people. Instead, executive management should reward the organization for eliminating unnecessary work.
Know what drives costs. Most organizations can measure profitability across each of their operating business units, sales organizations, or divisions. However, they rarely take time to understand what it costs to acquire, serve, and support every customer. For example, a consumer products company might know the cost of manufacturing each product. However, they might not understand the cost of acquiring and supporting a high-maintenance vs. low-maintenance customer. A high-maintenance customer might require a full-time support team, but the additional cost is not reflected in the pricing. At the same time, a low-maintenance customer might feel neglected and become easily wooed by a competitor. Organizations should annually review customer costs that include acquisition and support costs. That way, customer service expectations can be set without disruption.
Question everything. Organizations are filled with strong-willed middle managers who are not willing to give up their fiefdoms. Anytime they are challenged during budget season, they will claim, “If you cut our budget, the company will come to a screeching halt.” This comment is usually followed by technical jargon and stories of mass destruction, mob riots, and pirate attacks. During budgeting rounds, executive leadership often avoids challenging the hordes of doomsday middle managers and they walk away with their budget in tack. Instead, executive leadership should look to peer companies to see how they are addressing the challenges. Benchmarking organizational activities usually requires an outside perspective.
Keys to a Successful Turnaround and Restructuring Experience
by Bill Austin
The business environment has become volatile and unpredictable, leading an increasing number of companies to take dramatic action to change quickly or risk going out of business. For a company to have a chance at surviving such a crisis, management must consider turning around a company when addressing declining or negative profits and stagnating sales. Restructuring is the final option when addressing cash flow issues or insolvency and bankruptcy.
There are three phases of a company emergency: a strategic crisis, a profit crisis and a liquidity crisis. During the first phase—a strategic crisis—the company is no longer able to compete effectively. In a profit crisis, sales stagnate or decline while profit margins turn markedly negative. Failure to address underlying issues and continuing to burn cash leads to a liquidity crisis. In a liquidity crisis, the company faces the fact that it may soon lack the financial resources necessary to continue operating.
This is the point at which management typically loses the ability to make changes on their own and requires outside assistance. Turning around a company and avoiding or minimizing the pain of bankruptcy requires the following:
- Understanding the stimulus (or reasons) for change
- Performing a deep dive into the operations of the company to identify the root causes of issues
- Aligning the interests of ALL stakeholders
- Developing and implementing actionable solutions on a rolling 13-week roadmap
Understanding the Stimulus for Change
Many companies immediately begin a turnaround or restructuring initiative by executing a cost takeout effort. Investments, head count, and projects are immediately cut with little analysis. While this may be necessary to immediately stop the bleeding, it usually does not address the reasons why a company is in crisis.
Taking a quick step back to understand why there is a need for change is critical. Companies rarely have the time for trial and error. Understanding the stimulus for change enables existing or new management to focus their remaining efforts in the right areas. Companies that are losing market share should focus on how to improve sales, marketing, profitability, inventory turnover, and customer retention. Companies facing macro market forces out of their control, such as the massive drop in oil prices, need to focus on a broader range of working capital management and operational restructuring initiatives.
Performing a Deep Dive
A deep dive analysis to identify root causes should be performed once the management team has identified the likely causes of the crisis. Companies that are losing market share can determine if sales and marketing are focusing on the customers who provide the right mix of revenue and profit. Operations should focus on providing high-quality, cost-effective services to retain those customers while mining additional opportunities. Companies facing macro market changes require a broader review because the overall cost structure must support demand while generating required profitability.
Revenue enhancement opportunities should drive new sales forecasts. Once these forecasts are created, the management team can determine how the organizational structures, processes, and systems should be changed. The management team should take a hard look at asset profitability, inventory turns, SKU proliferation, vendor management, credit management, and lease cancellation options.
Aligning the Interests of All Stakeholders
The management team must work with all stakeholders with interests in the company. Banks, private equity firms, shareholders, and employees should all be engaged from the beginning so the rolling 13-week plan is understood, accepted, and supported by interest-holding stakeholders. Banks and private equity firms are more likely to provide monetary support during a turnaround or restructuring if they are involved early and often. Critical employees are more likely to remain at the company if they understand what is happening. Furthermore, most employees will be willing to accept pay cuts if they are involved.
Creating a 13-week Rolling Roadmap
A quarter-by-quarter rolling roadmap addressing the liquidity should be created once management understands the root causes of the profit and liquidity crises. The steps should address customer profitability and retention, G&A cost takeout, and operational cost takeout. In some cases, the roadmapping process can be done faster (4-6 weeks) depending on an organization’s needs.
Restructuring is usually brought on by financial stress due to an external crisis. At Trenegy, we help companies regain control of the restructuring process by making it a proactive experience. Success happens when reactivity is turned into proactive action.
Cost Savings: A “Wartime” Strategy for CFOs
by Bill Austin
In a strong economic environment, the CFO should be focusing on improving the overall value of the business by obtaining funds for positive ROI investments, keeping investors informed and happy, and helping the company grow. However, during bad economic times the CFO should change their focus. While cost savings and cash flow are always important, it becomes the primary topic of every investor call and management meeting. This focus calls for a CFO to change their management approach to handle these “wartime” challenges. The CFO’s primary objectives become lowering costs and staying cash-flow positive.
Here are five tactics for any CFO to quickly lower costs, increase cash flow, and better manage the organization’s profitability.
1. Adjust Vendor/Supplier Terms
A quick way to immediately improve cash flow and even reduce costs is to first work with vendors. Identifying essential and non-essential vendors will help you determine where to be flexible and where to cut activities. Almost immediately a wartime CFO will look to:
- Work with Procurement to delay purchases and lower essential vendor prices and rates
- Lengthen payment terms with non-essential vendors (30 to 90 days)
- Eliminate non-essential spend
- Cut independent contractor temporary worker hours
2. Stop Non-Revenue Producing Projects
High-cost capital projects that have soft benefits or only back office process improvements can be put on hold. Only revenue or current year cost saving projects should be pursued at this time. This can help to improve both cash flow and near-term cost reduction. Some example projects to pause include non-essential refurbishments, asset builds that have more than a six-month go live, and system/ERP upgrades.
3. Maintain Business Viability
The CFO organization must constantly asses the business viability of current and future products, service, and customer relationships. Can our products/services compete? Are costs under control? Is pricing covering our total cost? Are there operational restructuring opportunities (closing manufacturing, consolidating products/services)? These are important questions and the answers may change quickly.
4. Increase Sales and Revenue
The CFO may not have the same levers to pull on the sales and revenue side as the CEO or COO. However, it’s important for the CFO to provide guidance regarding financial performance of certain business lines and ask the tough questions: can the company can raise prices, expand markets, or increase sales? Leveraging strong management reports and KPIs can help shed light onto these top-line revenue growth opportunities.
5. Pursue Emergency Financing Instruments
Proper financing agreements are critical to stabilize the company and ensure consistent cash flow. CFOs can always be searching for improved financing options by assessing the balance sheet, reviewing covenants, and constantly communicating status to existing lenders. Sometimes the public financing markets will not be interested in financing a struggling company. A proactive CFO needs to scour the landscape for alternative financing (not banks) that can provide a lifeline in troubled times.
Every downturn has its victims, but companies often rise from tough times stronger and more profitable than ever before. Trenegy has a history of helping companies survive tough times and leading the way toward a more valuable future. For more information, email email@example.com.
After McKinsey Leaves, What’s Next? Addressing the 3 Fault Lines
by Bill Aimone
Your board and executive team are basking in the glory of the quarterly earnings call. The CEO eloquently discloses the grandeurs of a 9-digit cost reduction turnaround plan. The industry analysts on the call surreptitiously respond in gleeful adulation. The anticipation of a steroidal cost reduction injection bulking the company’s stock valuation is certain.
What could go wrong? Your board hired a renown global strategy firm (fill in the blank: McKinsey, Bain, BCG) to identify opportunities for value-creating cost savings. It’s a safe bet and executives never get fired for hiring a top tier strategy firm.
Fast forward three quarters. Unexpected side effects of the cost savings are rearing their ugly heads. Cash flow shortfalls and margin erosion slowly starts to chip away at the sustainability of promised savings. The fallout is overwhelming operations, sales, and finance teams while talent is lured to the competition. Departing talent is keenly aware of the vulnerable pretenses of the cost savings and sees the inevitable erosion of future incentive compensation. Things are not looking good and preparing for the next quarterly call will be a mess unless quick action is taken.
Now, we’re not bashing the big strategy firms. In general, the strategy firms arrive equipped with long standing methodologies, innovative ideas, data to support recommendations, and they effectively challenge executives to think outside the box. Their mastery of data manipulation and new jargon drives executives to consider all the opportunities for value creation through cost savings, and it’s the envy of all consultants. The lurking problem is execution.
We see this all too often with clients when we follow a big strategy firm’s engagement. When considering the root causes, it all comes down to three fault lines: process, project delivery, and performance metrics.
Here’s how to fix the problems before it’s too late:
Fault Line 1: Process
Process, policy, and procedural changes must be reviewed and addressed as part of new cost reduction strategies. For example, one of our global service clients embraced the strategy firm’s recommendation to centralize, outsource, and offshore their global billing and collection processes to India. The new offshore model promised a substantial reduction of general and administrative costs. The company eagerly eliminated local high-cost staff and moved the billing and collections to the facility in India. Following the move, DSO began to slowly rise due to delays in invoice creation and increased customer billing disputes. High paid engineers were distracted with resolving customer billing issues to stop the bleeding of cash. Each global region seemed to have a different set of issues and the billing challenges impacted collections.
We worked with the client to dive deep into the end-to-end order to cash process to identify tactical solutions to get DSO under control with the new offshore structure already in place. Overall, we found the company did not adequately address or change the underlying end-to-end processes or procedures impacting billing accuracy. We worked with the company to make the right process changes to get control of billing errors and collections and sustain the promised cost savings. The offshore organization change recommended by the strategy firm failed to look beyond the billing process itself and ignored the necessary procedural changes required.
Fault Line 2: Project Delivery
Strategy firms usually assign a hefty list of projects or initiatives to key leaders in the organization for implementation. With many cost reductions already in place, the organization doesn’t have the bandwidth in house to effectively manage, monitor, and keep initiatives on track. The lack of bandwidth tends to impact cross-department communication of initiatives and the recommendations tend to be implemented in silos. The lack of coordination causes misalignment of changes and duplication of effort.
We visited with a global energy company who hired a large strategy firm, and many activities required for implementing costs savings were causing excess costs in other parts of the organization. For example, the company’s implementation project teams were duplicating efforts and two divisions were considering competing software solutions to solve similar challenges. The company was far down the path of purchasing both software solutions while they could have simply put their heads together and implemented a single solution. This had the potential to increase costs in the long run. Our team worked with the energy company to align project teams and look at solutions that solved end-to-end process problems instead of individual silos. We helped develop a project governance model to ensure the right communication protocols, accountability, and expectations were established across all initiatives.
Fault Line 3: Performance Metrics
Strategy firms’ recommendations include performance metrics to track the success of value creation initiatives. Unfortunately, they tend to myopically focus on these metrics while other seemingly competing metrics are pushed aside. For example, a multi-national services company’s fleet of assets were critical to serving their customers. One of the opportunities for improvement included reducing cycle time for preparing assets for new customer jobs. The strategy firm’s research and analysis found that reducing change-over time (C/O) would result in a 5% increase in annual revenue. The company’s singular focus on C/O caused them to overlook quality checks when assets were in the yard for inspection. Customers began to experience equipment downtime due to unplanned maintenance and repairs. The 5% revenue increase began to erode quickly while customer perceptions were at risk. To alleviate this challenge, we worked with the company to perform an asset preparation value stream analysis to identify how to reduce C/O without impacting quality issues. Ultimately, the value stream analysis helped the organization reduce C/O and unexpected downtime.
Trenegy specializes in helping companies execute their strategies. Our skilled project managers are well versed in process design to support new efficiency goals and helping companies get the right information to manage performance. To discuss how we can help you implement your strategic initiatives, contact us at firstname.lastname@example.org.
Cost Cutting with Long-Term Results
by Bill Aimone
Current economic conditions and the pressures of inflation are causing companies to reevaluate and rationalize their cost structure. As a result, there have been widespread layoffs across various industries as companies try to stay afloat.
Many companies adopt an across-the-board, one-size-fits-all approach to cost cutting (e.g. cutting 20% across the organization). Accounting is cut by 20%. IT is cut by 20%. HR is cut by 20% and so on. This is a problem, because not everyone is starting from the same place.
Suppose an organization decides to lay off 20% of their workforce across the board by the end of the month. The fundamental problem with this (aside from associated severance costs) is that the costs end up creeping back in because the organization failed to thoroughly examine who was being laid off and why. The work is still there and needs to be done—there’s just no one to do it—so the organization hires contractors. Contractors aren’t part of the employee “headcount,” but they still cost as much if not more than full-time employees. In the end, costs aren’t really cut at all.
A more structured approach to cost cutting is required to see real, long-term benefits. Many of our clients are taking a proactive approach and cutting costs not in response to an event but in response to what they see coming down the pipeline.
How to Cut Costs for the Long-Term
We recommend a 3-step process outlined below:
1. Set internal targets rationally
Setting targets involves focusing on the business from a macro perspective and evaluating operating entities. For example, suppose you’re an executive of a restaurant chain with 5,000 restaurants across the country. Inside the restaurant are cooks, servers, managers, bartenders, etc. Outside the restaurant are support functions like accounting, purchasing, HR, marketing, legal, facilities, etc. You’re needing to cut costs—but where to start? In a cost cutting effort, costs are not typically cut at the customer service level, so support functions must be evaluated.
It’s important to rationalize job roles from an individual operating entity perspective. If you just had onerestaurant, how many people outside the restaurant (support functions) would you need to keep that one restaurant running? After analyzing their workforce, organizations can identify gaps, determine where employees are not needed, and identify what value is added by justifying an increased headcount.
2. Understand the why
After identifying gaps, it’s important to gain a deeper understanding into why each support function is needed. Say you’re a global organization needing an internal tax team to address a variety of international tax issues. Here’s the why: This internal tax team would be helping your organization optimize your tax position, which adds value. By helping allocate assets and ensure the company complies with tax laws, the internal tax team would enabling your organization to save money in the long-run.
Attempting to cut costs without understanding the rationale behind the cuts will lead to confusion, unnecessary layoffs, and an underperforming team.
As organizations gain a better understanding of the why, we recommend using a RACI (Responsible, Accountable, Consulted, Informed) to map out who is involved in business processes throughout the organization. A RACI helps identify areas to cut costs by revealing where there’s duplication of effort for one business objective (e.g. two departments are accountable for the annual budget process, multiple people are responsible for producing the same reports). Rationalize roles and eliminate what does not add value. More, streamline processes and eliminate unnecessary steps.
3. Rationalize executives
To retain employees, many organizations have promoted people into VP positions. The VP or Senior VP title has become diluted with some organizations having dozens of high-earning, VP-level employees. It’s important to rationalize the VP/executive positions to ensure each adds value. To do so, we recommend asking these three questions:
Financial: Are they accountable for more than 30% of a company’s cost, working capital, or revenue?
Risk: Are they mitigating risks that are significant to a company? For example, a VP of HS&E or a VP of Legal
People: Are they managing a significant part of the workforce? For example, the Head of Sales for a 1,000-person sales force.
If their efforts in these areas are non-existent or don’t warrant a seat at the table or in the boardroom, consider eliminating these positions.
Connect with Trenegy for more non-traditional insights.