Street Cred By Youcef DRIDI ydridi@gmail.com April 2015
Business Survival Guide 1
What Street Cred is Street credits refer to the points you are getting for doing something bold. The more street creds you have, the cooler you are. In a corporate environment, a suggested credit points system would look like this: • 20 points: you develop a profitable startup that changes the world and get bought for or is worth > $ 100 million • 20 points: you turnaround or reboot a losing business (i.e. it is still profitable 3 years after you left) • 10 points: you create abnormal ROI or EVA 3 years in a row • 10 points: you save or create dozens of jobs 3 years in a row • 0 points: no matter how good you are, you get no street cred as long as you remain an employee. Sorry to be the one to tell you this… Street Cred Business Survival Guide ydridi@gmail.com
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Author’s Foreword In my corporate life, I used to be a winner, dazzling senior management with my Powerpoint slides and Excel spreadsheets. I got all the 4 P’s (Pay, Promotion, Perks, Parking place). Until I was invited to do my first corporate turnaround. I learned a few lessons through the journey… Youcef DRIDI ydridi@gmail.com April 2015 3
Author’s Foreword (Ct’d) After pushing the envelope for a couple of decades, I got the pink slip a few times… So I decided to become a Lean Interim Director, helping firms and people find (back) the true meaning of their corporate existence…A turnaround takes 6 months or less. Rebuilding profits takes another 12 months at least. Two very different jobs, whether in a startup or an established firm, but the approach is similar in many ways as you will see…
Youcef DRIDI ydridi@gmail.com April 2015 4
Street Cred
PART 1: Understanding the business you’re in Street Cred Business Survival Guide ydridi@gmail.com
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What a manager can do Manager s can only manage businesses that provide 6 pillars: 1. Stakeholders’ support 2. Proven business model 3. Sufficient ressources 4. Clear goals 5. Decision making autonomy 6. Sense of employee ownership If 2 or more of these pillars are absent, managers CANNOT manage and the business is DOOMED without a professional outsider’s intervention. BTW, first and last ad: my job is to fix or rebuild these pillars… Street Cred Business Survival Guide ydridi@gmail.com
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What’s an entrepreneur? CEOs of established firms are seldom real entrepreneurs: They’re paid to minimize risks and protect cashflows. A real entrepreneur excels at finding a viable sweet spot in a market by finding the answer to a simple question: In the beginning I looked around and, not finding the automobile of my dreams, decided to build it myself - Ferdinand Porsche Entrepreneurs seek 2 kinds of opportunities: an existing market or a potential one. Sometimes, you just cannot prove an opportunity exists, so you have to believe and convince others around you. Whether passion causes success or success causes passion is not the issue. Success may take a very long time, so work hard and be patient. 7
The Startup Case A startup is not a corporation: It’s an organization in a permanent state of bankruptcy, until she finds a viable model and market traction. Her main resources are the determination of its founders and employees, and her timeto-market. If you are not embarrassed by the first version of your product, you’ve launched too late - Reid Hoffman In such environment, the business model is not found yet and the market dynamics are mostly unknown. The role of the CEO and employees is to maximize risks, create cashflows, find a viable and profitable business model. The best KPIs are weekly client growth and retention rates. 8
What’s a corporation? In its simplest form: A group of individuals that hold some common values and beliefs, at least for some time. The group causes people to act in a certain way, which is reinforced when they get the results they expect and desire‌ This self-reinforcing cycle is called CORPORATE CULTURE In such environment, the business model is proven and the market dynamics are known (somehow). The role of the CEO and its managers is to minimize risks, protect cashflows and grow the business in the most sustainable way. Street Cred 9
Business Survival Guide ydridi@gmail.com
What’s a shareholder? In its simplest definition: An individual, a group of people or a company that believes in you, as long as you generate the expected return on investment… You can expect help and support from them only if above conditions are met.
Of course this statement has nuances. Shareholders’ KPI is EVA (Economic Value Added). Yours are Contribution Margin and Return on Working Capital. More about these later… 10
What’s a creditor? In its simplest definition: Anyone who lends you money against a profit, but usually a Bank or a supplier when it’s short-term. Don’t neglect bankers and PE funds: to turnaround or buy an established business, they can be your best shot, because you are using a triple value creation lever: •Legal •Financial •Fiscal Leveraged firms tend to perform better than traditional ones. Agency costs are reduced because as an owner CEO, you/they’ll make sure you generate sufficient cashflows to pay the debt raised, with minimal capital requirements to run the business. So you must bootstrap, just as a startup would... Street Cred Business Survival Guide ydridi@gmail.com
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What’s EVA? Whether money used to run a business is yours or others’, its usage implies a simple rule: You need to generate a surplus for customers + a profit for the invested capital you’re using (investors’ money, assets, inventory, employees). The stronger and more energy/cash efficient the house you build, the better. The value and usefulness of a business is measured by its Economic Value Added… Does ‘High Rise’ refer to ‘Profits’ or ‘Costs’ ? Street Cred Business Survival Guide ydridi@gmail.com
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What’s a customer? The question may sound stupid, but it is not. Let me insist: Your client is your real boss. Should they stop buying from you or paying you, everybody’s gone in the firm: from the CEO to the housekeeper. A crystal clear understanding of this law MUST drive the way you do business… Street Cred Business Survival Guide ydridi@gmail.com
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Street Cred
PART 2: Building Profits Street Cred Business Survival Guide ydridi@gmail.com
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Where to start? Whether a startup or an established business with a proven model: • Value creation comes from a clear understanding of what you can sell, for how much and at which cost you can make it (in this order) • Operations should be organized to produce only what is ordered (no long-range forecasts) • Accounting should minimize transactions handling and focus on helping operations and customer service (Management Accounting versus Activity Based Costing). Businesses must become TIME-BASED companies: sustainable advantage is over. You must respond to the high velocity nature of the market. Hyper competition is the condition of rapid escalation of competition based on pricequality positioning, protection or invasion of established markets, and competition based on deep pockets, (and the creation of even deeper pocketed alliances). In order to compete, you must implement a strategy based on the velocity of your processes and build temporary advantages rather than trying to sustain an unsustainable advantage. 15
ROI = x
Earnings (as % of sales)
Turnover
= /
Profit
Sales
+
Sales
=
+
Selling Costs
Materials
Admin Costs
Net Investment
=
-
Sales
Production Costs
= /
+ +
+
Working Capital
Costs
Income Taxes
Inventory
Labor
+
+
Permanent Investment
Receivables
+
Cash
Funded Debt
-
Liabilities
Overheads
Building a robust and profitable business is like building a house. It has to be warm and welcoming for your clients and employees, but it should be affordable. It also has to be well insulated against external risk factors. Luckily as a CEO, you do not need to be an architect, plumber, mason, electrician or carpenter all at the same time‌ 16
R.O.I. Kept Simple Run your business by focusing on your Contribution Margin. Minimize Fixed Costs, lower Variable Costs continuously. Compare the following ratios: FC VC
with
Debt Equity
Hint: both metrics depend on your Sales‌ Check your CM for each product or service you sell. Contribution Margin is key: profits do not pay bills, they increase your Equity Value. Contribution Margin pays the bills. Paying your bills and increasing your equity value should be your primary concern. For instance, if investors look at getting 6 x times EBITDA from your business, every ₏uro of working capital must return a minimum of 16,67% (or 1/6). 17
About Leadership
Flatten hierarchy, but make sure you put the right people in the right seats: you need all of them‌ Except the Windbag and the Parrot! Street Cred Business Survival Guide ydridi@gmail.com
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About Finance
Finance is about adding, subtracting, multiplying and dividing numbers. So why are financial statements so complex t o g r a s p e ve n fo r managers? Shift the role of finance from detached evaluators to integrated members of value stream teams. There is tremendous power hidden in your finance department to uncover added-value flows and eliminate waste. 19
Standard Cost P&L Statement This Year 100 000
Last Year 90 000
Total Cost of Sales
48 000 (3 000) (2 000) 7 000 (2 000) 2 000 (2 000) 16 000 64 000
45 000 10 000 5 000 (8 000) 9 000 2 000 8 000 (17 000) 54 000
Gross Profit Gross Profit %
36 000 36 %
36 000 40 %
Net Sales Cost of Sales Standard Cost Purchase Price Variance Material Usage Variance Labor Efficiency Variance Labor Rate Variance Overhead Volume Variance Overhead Spending Variance Overhead Efficiency Variance
Quiz: • Can you tell why sales increased while profits did not? • Where should you look to make corrective actions? The only clear statement here is that the changes between years raise more questions than numbers can provide answers…
Street Cred Business Survival Guide ydridi@gmail.com
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Unveiling Finance Power Financial Statements must: 1. B e u s e a b l e b y n o n accountants 2. Eliminate complexity in presentation 3. Have higher assignable costs, lower allocated costs 4. Include both financial and non-financial information 5. Motivate the right decisions 6. C o m p l y w i t h G A A P principles Street Cred Business Survival Guide ydridi@gmail.com
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This Year
Last Year
+ (-) %
100 000
90 000
11.1
Purchases
25 300
34 900
Inventory Material (increase) decrease
6 000
(6 000)
Total Material Costs Processing Costs: Factory Wages (engineers) Factory Salaries Factory Benefits Services and Supplies Equipment Depreciation Scrap
31 300
28 900
8.3
11 000
11 500
(4.3)
2 100
2 000
5.0
7 000
5 000
40.0
2 200
2 500
(12.0)
2 000
1 900
5.3
2 000
4 000
(50.0)
Total Processing Costs
26 300
26 900
(2.2)
Occupancy Costs Building Depreciation Building Services
200 2 200
200 2 000
0.0 10.0
Total Occupancy Costs
2 400
2 200
9.1
Total Manufacturing Costs
60 000
58 000
3.4
Inventory-Labor Overhead (increase) decrease Cost of Sales
4 000
(4 000)
64 000
54 000
18.5
Gross Profit
36 000
0.0
Gross Profit %
36,0 %
36 000 40,0 %
Net Sales
ALTERNATIVE PRESENTATION
Cost of Sales
• Gives clear picture of prime c o s t s ( l a b o r, m a t e r i a l , overhead) • Labor & overhead are segregated into processing and occupancy costs • Processing costs assigned to product family • Services and supplies are under control • Scrap is segregated • Recognizes that Inventory (balance sheet asset) is compr ised of 2 things (material + deferred labor/ overhead) Street Cred Business Survival Guide ydridi@gmail.com
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About Inventory
Inventory is not an asset. If you believe so, tr y to exchange it against groceries at your supermarket’s: •Increase your Inventor y Turnover Rate and reduce Account Receivables •Do it continuously and watch them weekly.
Street Cred Business Survival Guide ydridi@gmail.com
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About Accounts Receivables This is another area of hidden value: you may find out that if > 50% of orders are shipped in the last 10 days of any given month, payment terms will be extended periodically and variable costs will go up…And your cash down. Street Cred Business Survival Guide ydridi@gmail.com
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About Marketing & Sales This is an area of massive waste elimination and profits generation: • Put your M & S people in physical contact with your clients as often as possible • Then put them in contact with operations & finance as often as possible • Cut all traditional advertising and get them focused on social media instead…
Street Cred Business Survival Guide ydridi@gmail.com
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About Productivity gains Gains can’t be made without the full participation of employees: Gains obtained by inventor y reduction often lead to layoffs (you can’t absorb excess labor hours anymore). • But then, how will you increase workforce cooperation to reach Operational Excellence? • You must put meaning behind « our people are our most important asset » •
Securing employment is KEY for reaching Operational Excellence. You need everyone to be onboard and aligned to increase your Equity Value. Layoffs (if you’re profitable) may just show that senior management cannot grow the business fast enough to absorb significant productivity gains. 26
Alternatives to Layoffs Set up a Perfor mance Improvement Task Force (5% of workforce - 20% of their time) • Put some people to training in areas where you are weak (pricing, product development, engineering, web design, social media etc) • You must invest in your people: t h e y t r u ly a r e yo u r m o s t important asset, except concrete heads… •
Many companies try and fail while seeking Operational Excellence. Intellectually easy to agree with, OE is tough to implement and tougher to sustain. Change your ‘cutting costs’ approach to a ‘waste elimination’ one, across the organization. There are many examples of where people pay premium price for on-time delivery (retail, hospitals, aerospace, logistics - think FeDex vs your Postal Office). Allow your people to try and fail. 27
About Innovation Innovation has never been so accessible and cheap: • • • •
•
If one of your employees gets an idea, get it signed off by 3 colleagues The idea must be marketable in < 20 words: targeted clients must get it or kill it Provide a small budget to make a mock-up product to showcase to customers. if you get > 10% positive feedback (trial orders), provide another small budget for making a MVP (Minimum Viable Product), with a clear focus on the « V » Iterate until you get it nailed down
For more information on how to innovate cheaply and efficiently, go to: https://kickbox.adobe.com 28
You Business Grows? What to watch: When demand increases, waiting times (and costs) increase as well: if capacity utilization goes from 80 to 90%, waiting times increase by 125% • Fixed Costs should be kept at the square root of your demand at all times • Variable Costs should continuously decrease whether demand is stable or not • Watch your Contribution Margins, Inventory and A/R •
If you want to keep your costs under control, you have no choice but to increase your velocity across the organization. Map your value streams (current and desired states), divide your activities by product families and eliminate waste continuously. 29
Street Cred
PART 3: Corporate Turnaround Street Cred Business Survival Guide ydridi@gmail.com
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When do you need it? Forget Turnarounds if you’re above break even. You’d do more harm than good: It is a traumatic experience, that is needed only if you have to quickly return to solvency. Beware of fraud: plenty of so-called interims will tell you a turnaround is required, even if you’re making profits. Most turnarounds fail after the business rebounds. Dead Cat Bounce Effect… A turnaround happens best under somebody new, if it only happens. It requires a lot of gut-wrenching but when successful, people start having hope again and breathe fresh air. 31
Why Do Most Turnarounds fail? These are the main reasons, but you can probably add more of them: â&#x20AC;˘ Youâ&#x20AC;&#x2122;re the CEO who got into this mess, so you canâ&#x20AC;&#x2122;t emotionally fix it, sorry â&#x20AC;˘ What about your Contribution Margins? â&#x20AC;˘ Laying off people without valid explanations â&#x20AC;˘ Poor understanding of where value is created and who creates it â&#x20AC;˘ Stakeholders do not buy-in the turnaround plan. They have not felt enough pain yet â&#x20AC;˘ Misalignment of operations, accounting, admin and customer service The late implementation and premature celebration of a turnaround get people not to shift to the next gear: rebuilding profits. A turnaround is blacksmith work with clanging noises to reshape some stressed iron. (Re)building profits is watchmaker  task  with quiet discipline, thought and careful moves. Both shape the metal, but require different mentalities, speed and leadership. 32
Exception: Startup Turnaround For a startup, you do not need somebody new • Founders are key to a successful rebound • In a startup environment call it pivot, when the organization has burned most of its cash, did not find her path to market yet, or cannot manage its growth. •
Street Cred Business Survival Guide ydridi@gmail.com
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What’s a customer? Your client is your real boss. All your efforts should focus on reaching Operational Excellence: • Your goal is to increase Equity Value • Value is first created to customers • Customer value + firm profits = satisfied customers, shareholders and employees Examining your business through this lens generates an unambiguous metric of its success AND a path to continuous improvement We live in increasingly specialized times: death is fast for those who ‘round out’ their offerings with features that can be gotten elsewhere for less - Gary Sutton. 1. Specialize. 2. Do it where the margin lives. 3. Do it better, cheaper, and faster than your competition. 34
What To Do in a Turnaround My 7 Deadly Sins for the first 6 months: 1. Grab the wheel and find where the margins are (much less obvious than it seems: pay attention and forget standard costs) 2. Define what the business does best and laser-focus resources (people and money) on it 3. Sell or shut down everything that has little or nothing to do with the margin-generating part of the business 4. Show the bank accounts and loss rates to those in denial (get them estimate the date paychecks stop) 5. Get rid of the concrete heads first 6. Commit to protecting the remaining jobs 7. Change your pricing and minimize me-too products: differentiate and specialize where your margins live. Stop everything else until profits get back
Hold it for a second: if you think it’s awful, then you’re clueless. Concrete heads are people resistant to change. They’d kill most change efforts you dictate (yes: dictate, because the bankruptcy wall is in front of you). Cutting your tail off an inch at a time causes much more pain. Good employees and managers must demand success and accept there will be no tolerance for poor performance. Hint: If you quiz employees well and involve them (don’t hit them cold with your questions), they’ll help. 35
Increase Your Business Velocity Shift…
again…
and again!
Stop Traditional Way
Develop a Framework
Manage by Value Stream
Improve Continuously
Standard costs and budgets hide waste and inefficiency in financial statements
Map Value Streams from the beginning through to the customer. Make incremental improvements on costs and performance. Old habits are being replaced…
Monitor Value Stream analysis for capacity utilization, cost information and performance improvement. New habits are starting to hold…
It has to remain a way-of-life across your organization: waste elimination, performance improvement, direct costing impacts… Street Cred Business Survival Guide ydridi@gmail.com
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Your Weekly Reporting: The Box Score
FINANCIAL
CAPACITY
OPERATIONAL
Example Box Score for Weekly Performance Reporting
7/14
7/21
7/28
8/4
8/11
8/18
8/25
Goal
6/2
6/9
6/16
6/23
6/30
7/7
Units per Person
15.10
15.63
14.7
15.91
15.90
16.32
20.7
On-Time-Shipment
100%
100%
100%
100%
100%
100%
100%
Dock-to-Dock Days
6.00
6.00
6.00
6.00
6.00
5.5
5.5
First Time Through
80%
80%
81%
85%
85%
87%
92%
Average Cost
$343
$337
$362
$338
$337
$325
$262
Productive
29%
29%
29%
28%
28%
28%
40%
Non-Productive
54%
54%
54%
52%
52%
52%
33%
Available
17%
17%
17%
20%
20%
20%
27%
Revenue
$471
$485
$456
$490
$488
$526
$576
Material Cost
$123
$125
$129
$132
$135
$137
$139
Other Variable Costs
$49
$50
$51
$54
$76
$87
$51
Fixed Costs
$120
$120
$118
$116
$116
$116
$108
Profit
$179
$190
$158
$188
$161
$186
$278
Return on Sales
38%
39%
35%
38%
33%
35%
48%
Box Score used for we1. ekly value stream performance reporting. Note the “Goals” set from the future state value stream map. Specialize.
Figure 2.
2. Do it where the margin lives. 3. Do it BETTER, CHEAPER, and FASTER than your competition.
Example Box Score for a Sales Order Sourcing Decision
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Street Cred Business Survival Guide ydridi@gmail.com
Street Cred
Conclusions Street Cred Business Survival Guide ydridi@gmail.com
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The Road Ahead The tongues in our shoes speak louder than the tongues in our mouths: E m p l oye e s w i l l r e s p o n d t o w h a t management does, more readily to what it says • The most important step is for the CEO and CFO to become active doers in the business transformation • Repor ts should include improvements actions taken the past week, plans for the following week and a list of resources or support needed from management. •
By understanding the true nature of Lean across the entire organization, the question changes from, « How large a cost will we save? » to, « How can we use our newly created capacity to increase customer value and make more money? ». It is important to ask this question every time a future state value stream map is developed because the answer gives you the true financial impact of changes, both short term and longer term. 39
The Payoff More and more Banks and PE Funds now look at lean companies as their best investment opportunities: « It demonstrates that they are focusing on the right things » Warren Buffet • « Unfortunately, there is a shortage of Lean business professionals in our LBO investments » - Jim Walton Arvest Bank Group •
Because they don’t carry a heavy inventory and receivables burden, lean companies focus on generating maximum cash flow to finance growth and debt: the safest way to survive over the long run… Street Cred Business Survival Guide ydridi@gmail.com
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This was Street Cred Business Survival Guide
For more information Youcef DRIDI Lean Interim Director ydridi@gmail.com