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Labour Market Navigator 2012

The Labour Market Navigator is the definitive guide to market trends

labour-market

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Written by Loane Sharp, Dr Neil Rankin, Peter Aling and Ted Black.

Loane Sharp
Director: Economic Analysis, Prophet

Loane SharpLoane Sharp is a labour economist at Prophet Analytics, South Africa’s leading labour analytics company. Loane is an international award-winning researcher who has published widely in books and academic and business journals. His research interests include employment, employment policy and workforce optimisation. He is an expert in the fields of atypical employment and labour productivity. Prior to Prophet, Loane was an investment strategist at Investec, South Africa’s leading investment bank, where he was one of the country’s highest-rated analysts. Loane has an MCom from the University of Cape Town specialising in economics and statistics. He has received scholarships from, among others, the National Research Foundation, and he has been awarded prizes by, among others, the Natale Labia Society. In competition with companies such as Sony, IBM and Vodafone, his work recently won two coveted European awards. He is a director of Productivity SA.

Dr Neil Rankin
Associate Professor, University of the Witwatersrand

Dr Neil RankinNeil Rankin is an Associate Professor and the founding Director of the African Microeconomics Research Umbrella (AMERU) in the School of Economic and Business Sciences, University of the Witwatersrand (Wits). He obtained his doctorate from the Centre for the Study of African Economies, University of Oxford, in 2005 and since then has been based at Wits. One stream of his current research work examines the links between company performance and labour-market outcomes in an African context, and particularly the impact of trade at a microeconomic level. As part of his research he has managed and administered firm and labour-market surveys in Ghana, Nigeria, South Africa, Rwanda and Tanzania. Dr Rankin has published in a number of academic journals, has provided policy inputs to the South African Presidency, the Department of Labour, the Department of Trade and Industry, and the National Treasury as well as the Rwandan Government and has provided consulting work for the World Bank, the United Kingdom’s Department for International Development and the United Nations Industrial Development Organisation.

Peter Aling
Director: Quantative Analysis, Prophet

Peter AlingPeter Aling is a quantitative analyst at Prophet Analytics, South Africa’s leading labour analytics company. Peter joined Prophet after completing his MCom in Economics, Finance and Statistics at the University of Cape Town and is currently pioneering alternative workforce management approaches using self-designed software-based algorithms in the area of human capital optimisation. Known as “distribution-based management”, Peter has successfully worked with a number of JSE-listed companies over the past three years achieving cost savings of over R15 million for clients. Among his personal achievements, Peter is an avid and accomplished tennis player, oarsman, golfer and squash player, having represented his university at provincial level.

Ted Black
Management guru

Ted BlackTed Black has held senior positions in organization development, general management and been a director of companies. Today, he acts as mentor and coach to executives. Using the ROAM model (Return-on-Assets Managed) to pinpoint opportunity, he helps them design high-precision, results-driven projects. These turn strategy into action. In turn, the process grows managers and their teams fast and measurably – the prime goal.

He has published three books. One of them, “Who Moved My Share Price?” was co-authored with Professor Andy Andrews. It was a successful and controversial story about the issue of ethical management, asset productivity and shareholder value.

He also speaks at conferences and business schools, writes regularly for Business Day, and is an affiliate of Robert H. Schaffer and Associates (www.rhsa.com).

SABMiller return on assets managed curve is stirring

SABMILLER was seen as the “only world-class” South African firm 20 years ago. Since its move to London it has done its shareholders proud if you look at the growth in the firm’s value — especially in rand terms. For every year bar one from 2005, its market capitalisation has more than doubled the tangible asset base.

It tells us shareholder expectations are high because management made its strategy clear and stuck to it.

However, does profitability meet what they expect?

Market capitalisation tracks the growth in assets. As much of executive pay today is stock-based, does that also correlate to asset growth, do you think? Despite the fact that asset productivity is the fundamental driver of a firm’s longterm value, most analysts and financial journalists do seem to favour growth instead, don’t they? So, would that make it in managers’ interests to keep growing the asset base if the number and value of their share options follow?

There has been so much consolidation of brewers that opportunities to acquire more firms are few — Foster ’s is one of them. It means focus can now shift to a return on assets managed. During this seven-year period, with assets growing 140%, sales 50% and operating profit only 20%, you would expect SABMiller’s return on assets managed to droop. It has happened to all of them after the long acquisition binge.

That is not to say its asset management skills are not very good. One key measure of efficiency is the cash-to-cash cycle. This is the measure: add the number of sales days of inventory you hold to the time it takes your customers to pay you. Next, subtract from that total the number of days you take to pay your suppliers.

If you end up with a negative number, it means you generate cash from your day-to-day and month-to-month operating cycles. You’ll have cash in the bank. Except for retail firms, many companies find it difficult, even impossible, to achieve zero or a negative cash-to-cash cycle. Every year since 2005, SABMiller has achieved that or close to it. No mean feat, and it shows up in positive cash flows.

It has also reduced its material costs from 30% to about 25% of sales — a key productivity measure.

The operating people in SABMiller are way up the experience curve. They make good, low-cost beer. Their low cost-of sales creates a big gross margin sandpit for the marketing people to play in.

But how are these “brand” champions doing — the ones who seem to get all the kudos? Their “assets” are the “intangible” ones but shareholders still expect them to generate sales and profits.

They weigh heavy on the balance sheet and account for about 50% of the assets to be managed. Bring them into the return on assets managed calculation and it cuts the return down to 8%. That being the case, how good are they at marketing?

Unfortunately, in the annual report, you cannot separate beer from soft drinks. Also, there’s no split of operating assets. There used to be, but not any more.

Nevertheless, with some guessing as to the level of assets for the last couple of years, an interesting picture emerges.

Operating margins have plunged from a high of 27,3% — higher than anywhere else in SAB’s world — to a still healthy 16%. Brewing beer is good business.

In the interests of consumers — not employees — the trade unions and the government should take note. It shows what a bit of tough competition does.

Didn’t Heineken make its entrance in 2008? What effect has that had on the price of beer, do you think?

If there have been positive cost effects for us, that’s all the more reason to encourage investment and competition from outside the country. Today, we seem to want to do the opposite.

However, to get back to marketing, are the brand-building strategies as good as they make them out to be?

If they are, when can shareholders expect a better return on the “brands” management bought with a lot of their cash — all $16bn of it?

It’s now time for a steeper return-on-assets-managed curve. It does show signs of stirring. Maybe dawn has arrived at last after the long party. If they get Foster’s but quickly flog the wine assets, it could perk up even more.

Black, an affiliate of Schaffer Consulting, is an executive coach and mentor.

Roaming for opportunity in the financial crisis

Why do company managers keep employees ignorant, like priests in the Dark Ages hoarding knowledge?

SA WILL not escape the effects of the financial collapse that started in the US. With falling sales, companies will lay off people to cut costs. The sad thing is that many of those who lose jobs won’t even know why it happened. They will think they were doing good work, and they probably were.

Waiting-Room1

However, the crisis reveals a huge problem/opportunity. It is to break down the barriers of ignorance, give people the big picture and release their creativity. They have to understand the only way for a business to be secure is to make money and generate cash. Everything is a means to that end.

It is what business education is all about — the real business of business. Remove ignorance if you want people to work together — especially financial ignorance. Very few companies educate their people this way. In fact, they do the opposite. Most firms keep their people ignorant — like priests did in the Dark Ages.

How many employees know what cash effects their work and decisions have on the company? Do they understand how they create value for customers? Most of them find work incredibly boring. To them, a job is just a job. They become zombies — the walking dead. Their brains get out of bed only when they get back home to do things they enjoy doing.

So, instead, give them the numbers that paint the big picture. Dump the “employee ” way of thinking. You want an educated, flexible, alert company where people think like owners. You don’t tell owners what to do — they work it out for themselves.

This can be achieved through measuring return on assets managed — the ROAM model, which can be used to point to opportunities. It has two key measures: asset turnover (ATO) and return on sales (ROS). ATO is measured by dividing sales by assets and the ROS percentage by dividing operating profit by sales and multiplying by 100 (operating profit ÷ sales × 100).

The most important is ATO, or “as – set spin” as I like to call it. It is the one that management uses least.

Remove ignorance if you want people to work together — especially financial ignorance

 

The great physician Sir William Osler (1841-1919) wrote many aphorisms. Some apply as much to managers as they do to doctors. One that will make male executives wince when they think of their annual medical checkup is: “A finger in the throat and one in the rectum makes a good diagnostician.”

If we were to examine companies with the ROAM model, Osler’s aphorism would be: “A finger in the throat (to test the ROS percentage) and one up the ass-et (to test ATO) makes for a good ROAM diagnosis.” So let’s look at a few patients in the doctor’s waiting room. These can be found below.

Waiting-Room2-1The first is a chart of Didata after its near-death collapse in 2001. Exhibit 1 compares its market capitalisation, or value-of-the-firm (VOF), to its ROAM performance since its collapse.

The link is clear. ROAM — or asset productivity — drives the VOF.

It has been a long haul back since the heady days of the dotcom boom. Two thousand years ago the Roman poet Virgil wrote “Facilis est discensus Averni ” — the descent to hell is easy. Once you’re on a slippery, downward slope, it’s all hell to clamber back up again as Didata’s new management team has found.

They first had to jump into a sobering cold bath after reaching a VOF of $10bn or so. Then they took a good dose of “asset spin” (ATO) for three years to get rid of a $4,5bn headache. That is what they paid for “brains” that turned out to be non-existent.

This caused a negative ROAM in 2003 but moved ATO from a low of 0,3 times to 2,0 by 2004 when they generated a positive ROAM of 3%.

A determined team has stuck to the grindstone ever since. They steadily improved ROAM from 3% to 8,2% and the VOF went from $775m to $1,825bn. The last time they ended a year that high was in 1998.

The question they should ask themselves now is, “What could happen if every employee in Didata sees this chart, and understands what it means and how they can influence it?”

The result might surprise them. Their operating units might soon generate an ATO of three and a 10% ROS. It is an achievable goal if they have the courage to concentrate and focus — to match strengths, not weakness, with opportunities.

Waiting-Room2-2The next patient is Nampak, portrayed in Exhibit 2, and it is not a pretty sight. The ATO and ROAM trends paint a grisly picture for shareholders. It also probably shows why this top management team may not be keen for employees to understand the financial numbers. There has been a steady, inexorable decline since 1994.

To use a yachting metaphor, Nampak’s top management, and what has to be one of the most supine boards in SA, are like the crew of a yacht who set out on a northeast heading, then abandon the tiller to go down below to play poker, roll out the gin and drink themselves into a stupor. Meanwhile, the prevailing wind shifts 180º.

Waiting-Room2-3For 15 years, they sail southwest using a ROS sail of 10% but leave their ATO sail in the locker. The effect on the VOF can be seen in Exhibit 3.

What makes the performance more amazing is that two of the directors on a heavyweight board have first-hand experience of the ATO effect on results. Michael Katz, an architect of the King code on corporate governance, and Thys Visser of Remgro were both involved with HL&H and the Rainbow Chicken fiasco of the late 1990s.

It shows two things. The first is that many senior executives don’t learn because they think they don’t have to. Secondly, the gap between knowing and doing is huge. Instead of giving people ever more knowledge, it is better to keep reminding them of what they already know but don’t do.

Indeed, Nampak’s performance gives rise to another of Osler’s aphorisms that you can adapt for management: “It’s much more important to know what sort of patient (manager) has an illness (a problem) than what sort of illness (problem) a patient (manager) has.”

Waiting-Room2-4As to the chicken and animal feed business, both Astral and Rainbow performed extremely well up to the crash but a ROAM diagnosis raises some interesting strategic issues. Exhibit 4 compares ATO and ROAM for both firms.

Astral holds its leadership with an ATO that averages 2,6 while Rainbow, after hitting an ATO of 2,4, has slipped back to around 1,5 but with an improved ROS percentage.

That is why the trend slopes northwest. Management claims it is the result of producing more added value products — the classic market differentiation strategy.

However, there are costs attached to it. If you delve a little deeper into the notes in the annual report you find that R a i n b ow ’s marketing and distribution costs moved from 5% of sales to 14% of sales while Astral’s remained at 5%. What’s more, Rainbow’s inventory ATO has fallen from 15,6 to 11,4 while Astral’s is 27,3.

Then last year, the ROS% plunged in both companies but the ROAM gap between them widened. It seems to confirm that a higher ATO, lowest-cost strategy always wins in the end — especially in tough times.

Waiting-Room2-5Waiting-Room2-6The results also influence the VOF as Exhibit 5 shows.

The capital market does not seem to reflect Astral’s stronger competitive position, but productivity is not most analysts’ strong suit. ATO drives positioning by raising the first three productivity barriers — capital cost per unit, marketing ATO and cost of goods sold (COGS) — as the model shows in Exhibit 6.

With an average ATO of 2,6 Astral is way down the track before Rainbow has left the starting blocks. It means Astral’s capital cost per kilogram of product sold has to be much lower. Secondly, it spins its marketing assets — inventory and debtors — far faster than Rainbow’s managers do.

Where Rainbow has scored is in dramatically reducing its COGS from 80% of sales in 2004 to 65% last year. The trouble is it has spent a lot more in operating expenses than Astral — 22% of sales against 8,5% of sales, and that could be linked to the differentiation strategy.

“Ready-for-sale” COGS includes all costs to produce products and services — the scrap, rejects, rework and waste in the system. The first three barriers make you the lowest cost-producer — a position that Astral must hold comfortably. They have surrounded themselves with a crocodile-filled moat.

The “costs of the future” in operating expenditure — product research and development, training and development of people, for instance — make you the most differentiated. Finally, the capital market judges the firm in terms of its positioning and risk.

Waiting-Room2-7There is no doubt that ATO is the prime driver of strategic and task-level productivity. If you are still sceptical let’s look at the “house”, or maybe “hype”, that Jack built. Exhibit 7 shows General Electric’s ATO and ROAM performance for 10 years. The data start in the last few years of Jack Welch’s term as CEO. He retired just before 9/11. The board must have hauled him off stage just in time by the look of it and it seems the touted Six Sigma programme was a red herring.

Operations’ ATO — the industrial and commercial interests — declined from 1,2 times in 1998 to 0,5 in 2004. ROAM fell from a high of 25,6% to a low of 7,2%. Now the new boss, Jeff Immelt, is clawing it back. ATO is at 0,9 and ROAM at 14,2%.

As to GE Finance, it contains more than 70% of the asset base. However, it seems that there is a need to undo a lot of what Jack did and get back to what GE is good at good at.

Waiting-Room2-8The last exhibit compares operations to the VOF/assets ratio. The ROAMlink to VOF is clear yet again. It tells us the business model GE had in the 1930s when it started GE Finance probably still applies to a large extent. It was a financing arm to help grow the businesses and sell its products.

So Immelt’s goal is a simple one but not so simple to do. It seems as if he should cut out all the interests in GE Capital that do not support its industrial and commercial firms. This will lift asset productivity dramatically because today they are really bankers.

Finally, one last quote adapted from Lord Byron’s Child Harold V, in which he wrote about Rome the city, seems apt: “When assets spin, ROAM shall rise; when assets laze, ROAM shall fall; and when ROAM falls, the Firm!”

People make assets spin and ROAM work — not spreadsheets produced by accountants who act as if they manage assets but don’t. Most behave like the priests in the Dark Ages. That’s why educating people about ROAM should be a management priority.

Ted Black develops managers. He is an affiliate of Robert Schaffer & Associates (www.rhsa.com) and runs ROAM workshops that help managers identify opportunities and organise 100-day projects to tackle them.

Key to graphs: ATO: Asset turnover COGS: Cost of goods sold ROAM: Return on assets managed VOF: Value of firm/market capitalisation SOURCE: I-Net Bridge, annual reports

Sense of belonging is the cement of success

The depreciation of community within our business organisations hurts them at every level, write Ted Black and Gerard van Hoek.

THE “Greed is Good!” doctrine that fuelled the 1980s boom, the dotcom bubble, and then the investment banksters’ subprime mortgage scam, has caused another crisis.

Community

PEOPLE POWER: A targeted project such as ‘100-Day Rapid Results’ can jump start the process of building a sense of community in an organisation.

The late management expert Peter Drucker saw early signs of it in General Motors (GM) 60 years ago. Now, in this year’s July/ August Harvard Business Review, Henry Mintzberg takes up the issue. He calls it “the depreciation in companies of community — people’s sense of belonging to and caring for something larger than themselves”. He views it as an even greater crisis than the economic one. Tellingly, he says that of some companies that we do admire — Toyota, Semco (Brazil), Mondragon (a Basque federation of co-operatives), and Pixar — all have a strong sense of community.

When Drucker first studied GM in 1943, he discovered amazing team spirit in the workplace. Women, who weren’t there before or after the war, were making tanks and Jeeps for the war effort. The powerful sense of community he found led him to stress that managers should view workers as assets — not as costs and liabilities to be eliminated.

However, during the ’70s and ’80s he saw firms doing the very opposite as they abandoned concepts such as life-time employment. Barring a few special exceptions, he lost hope with American corporations. The extreme riches given to mediocre executives while they slashed workforces sickened him. To find community and human satisfaction in the workplace, he worked with nonprofit organisations instead.

Today, people are now what Mintzberg calls “fungible commodities … to be downsized at the drop of a share price…. The result is mindless, reckless behaviour that brought the world economy to its knees.”

He argues that the problem is rooted in the mistaken belief that leadership is somehow different from, and superior to, management. Too many leaders today are only interested in their own success. This leads to isolation at the top and destroys any sense of community.

It links to another fundamental problem — competition — the driving force behind capitalism and why we value sporting analogies for business.

However, there is a flip side. When it comes to honesty, fairness and responsibility, professional sportsmen are not good role models. Greed for fame and money makes them cheat.

As Nancy Kline puts it in her brilliant book, Time to Think, competition between people achieves only one thing: someone does a better job than the other person did. That doesn’t mean that it was the best that could be done or that it was even good for everyone concerned.

Kline observes that competition is a function of male conditioning. Male traits are to know everything, interrupt and do the talking. The aim is to assume superiority, criticise, control, toughen, conquer and deride differences — even lie if you have to get your way. This approach destroys community. People cannot think for themselves. They must fit in, or else … leave.

Quality work and high productivity is a function of collaboration — not competition. As Kline puts it, when people collaborate they ask questions and listen to each other. They establish equality in an atmosphere of ease and appreciation. People are encouraged to think for themselves, to tell the truth, and to try new ways of doing things.

“I am done with great things and big plans, great institutions, and big success; I am for those tiny, invisible, loving forces that work from individual to individual.”

Successful management is not about one’s own success, but about others’ success — it is to foster and encourage it. Those are female traits. That’s why women in the workplace must never emulate males. When they do, they often do it even better than men do — not a good thing.

All this means we need managers with human skills — not business school academic credentials. Success depends less on managers’ ability to analyse, decide and allocate resources, but more on what they help others do. You learn these skills on the job — not in a classroom.

Executive growth is evolutionary. It takes time and none of us reaches our full potential. You get only so far and stall. If you are very capable, and lucky, you’ll be above average. Left to find your own way, you level off way below what you could achieve. A lack of awareness, challenge, and testing, stunts growth. This is true without exception. However, you can accelerate it through a welldesigned situation. We call it “Building Community-for- Productivity”.

We have asked many managers what was the biggest contributor to their success. None ever attributes it to a course or qualification. It is always an experience they once had. If learning is a process of discovery and invention, then there are two golden rules for doing it. We learn best when we tackle an important “problem/opportunity” with other people and when we have fun doing it.

You build community most rapidly and sustainably when you “force” its members so to speak, to tackle a short-term, concrete, real-life challenge that is important to them. The best way to “jump start” the process is to tackle an issue for which the organisation seems to have no answer.

You do it by designing a 100- Day Rapid Results project. This temporary, concentrated focus of minds drags the problem out of the chaos of everyday life and transforms it into an opportunity you can manage. You are now in charge — not a victim.

You find the opportunities along the value stream of activities that flow from suppliers through to customers. The best ones, without exception, are upstream and they always lie at overlap points between functions and people. That’s where the slippage in performance happens and the place to focus the efforts.

The result you get is “the cart”, and personal growth of team members is “the horse”. Today, most managers “manage by the numbers” — they put the cart before the horse.

Long-lived companies commit to people first, and physical and financial assets second.

As to “community-for-productivity” this is how we describe it. It is a tight-knit group of people who commit themselves to gaining an economic result but with the higher aim of personal growth. They come together thoughtfully with respect for each other no matter how much they differ. They know the one thing they can never do is let each other down as they tackle the issue.

Personal growth of each team member is the only objective. We define it in five ways:

  • Improvement in self-esteem — you feel better about yourself in several important ways.
  • A rise in self-confidence — yo u are willing and ready to attempt new ways of doing things and to risk making demands of yourself and others.
  • Higher level of competence — you develop new management skills that make you more effective.
  • Improved relationships — yo u work more effectively with people critical to your success.
  • Increased open-market value — your capacity to earn more is improved.

The objective is to promote growth in these five ways measurably and sustainably. The change in the number over time tells you how the team is doing. That’s why you have to have a number — it keeps everyone honest. Without one, projects are make-believe.

As they review and reflect on what they have done and learned, managers can genuinely feel pride of accomplishment and start to see how much they have grown during the experience. It gives them the confidence to try new things and expand the process. An organisation filled with growing people eventually reaches a critical mass. When it happens, like leaven in the bread, you get “liftoff”.

So where do you start? You start where people are ready to give it a go. As the American philosopher William James said, “I am done with great things and big plans, great institutions, and big success. I am for those tiny, invisible, loving forces that work from individual to individual, creeping through the crannies of the world like so many rootlets, or like the capillary oozing of water, which given time will rend the hardest monuments of pride.”

Black and Van Hoek, affiliates of Robert H Schaffer & Associates (www.rhsa.com), coach, mentor and help managers design 100-Day Rapid Results projects.

Casting the spell of success by asking for what we want

Business leaders must develop the skill of demanding results if they want to tap potential, write Ted Black and Gerard van Hoek.

Demand-Results

THERE IS NO TRY: Business leaders in today’s hostile, competitive climate can learn a great deal from the no-nonsense approach of Jedi master Yoda from the Star Wars films.

THE Democratic Alliance’s new team in Western Cape sparked much sound and fury after the election. It raised a critical issue ignored at the time. SA’s future success depends on a few factors. The most crucial, because it drives everything we want to achieve, is to build a new generation of results-driven managers.

The African National Congress has discovered from its time in government that only effective managers make resources productive — not politicians and bureaucrats. To be effective, “There is only do or do not. There is no ‘try’,” as Jedi master Yoda said.

The DA’s Helen Zille knows that and acts on it. When explaining her selection decisions, she said in her typically forthright way about one of them, “He can manage!” In other words, he gets things done.

In 1974, Robert H Schaffer wrote a Harvard Business Review (HBR) classic called, Demand Better Results —And Get Them. Reissued in 1991, it became one of HBR’s 10 most requested articles during the 1990s. Maybe that’s because few managers have the ability, or the will, to set expectations in a way that gets results. It’s the scarcest skill but we must develop it if we want to tap into our huge, untapped potential.

Over the years, thousands of managers, in SA and around the world, have been asked to guess how much more productive they would be if overlapping functions were eliminated; there was more co-operation and less internal competition; people worked closer to their potential; there were less politics and ego-driven behaviour; fewer useless meetings, conferences and projects that go nowhere; lastly, that people had to achieve hard, clear, result-driven tasks — not perform soft, fuzzy, activity-driven “roles”.

Almost everyone selects “25% to 50%” and “over 50%” potential to improve. Compare average and best performance among yo u r units and people if you want proof. And it’s even more urgent to release potential in this hostile competitive climate, with its recession, unions agitating for higher pay, and our need to make the poor productive.

Managers invest a lot to get better results. They buy companies, reorganise, and install new technology, plants and enterprise resource planning systems. Widespread training focuses on continuous improvement, culture change, “empowerment”, balanced scorecards with their countless, confusing “key performance areas” and “key performance indicators ”. Then, after throwing academics, corporate resource groups and consulting firms into the mix, look at the cost to value ratios.

You’ll battle to find links to a positive economic impact. That’s because the activities, as good as they are, become handy bolt holes for managers to avoid the struggle of achieving a big step up with the resources they already have. You only get “breakthrough” when a leader decides his people must and can make a big productivity gain, and then demands it.

Why don’t managers make demands? Pushing for big gains can seem risky. It’s because of the ways we assume the world works. They put a serious damper on ambitions for the better.

If you are new in your job, you could threaten and anger your boss by implying he has settled for less. Or, you may fear ridicule if you don’t reach your goal.

Again, you might irritate peers with your high expectations. Efforts to lift performance may expose weakness, uncertainty and lack of know-how as you challenge the existing way of doing things.

With your people, a clear demand for better performance can stir up conflict and dislike — maybe raise another fear. What do you do if they fail?

On top of these concerns, many in the human relations movement see the demanding manager as a villain. So instead of using power to make demands, you have “vision” statements and “communication” programmes all backed with training, incentive schemes, posters and slogans on display around offices and factories.

These tactics stress process and method but weaken the value of results. Little improvement occurs because there’s no forceful call for it. Test any typical enterprise resource planning (ERP) system or change project for proof. The response is, “It’s very hard to measure. Trust us, the results will come .” Left unsaid is, “Like rain in the desert.”

You’ll never achieve superior results as long as you think the right training and indoctrination will produce them. All it means is we lack the courage to face up to the struggle that’s needed to break down the barriers of inertia and resistance that exist everywhere.

We even sabotage ourselves with our own escape routes. We convince ourselves we’ve done all we can to spell out what must be done and say: “Well, if they don’t know what they have to do by now, they shouldn’t be here.”

We play games. “Look, I don’t know where we’re going to get a 15% increase in sales, but I have to stick it in my plan so you must do the same.” Or, we accept trade-offs. “I’ll increase sales but I’ll have to give bigger discounts to get them.”

We back away from tough demands by saying, “Okay, let’s budget for the same level of expenses, but I’d really like to see some reductions when we get into the new year.”

Often, we set vague and distant goals. “By this time next year, I want to see a significant improvement in material utilisation”. Sometimes there are too many. “These are the 30 key goals that we must focus on this year,” says the executive giving “good slide” to the CEO.

Then there’s the bureaucrat’s response. “If you really want to reduce inventory, then let’s first commission a study to find out how we got into this mess — who ordered it, why it’s not being used —and if we need to rethink our whole approach to supply chain and stock control management.”

As to “performance management”, you get a blizzard of documents that forces huge amounts of energy spent on procedures, not results. In the same way, according to most longsuffering operating managers, putting in ERP systems is like “pouring liquid concrete”.

If you want a breakthrough, you have to master the art of demandmaking. It applies if you lead a team of creative boffins, conduct an orchestra, or run a mine. Nothing happens until you make demands that get a productive response. The good news is you can develop the skill, but not in a classroom.

Rehearse and prepare in one if you want, but learn on the job.

Demand-making is not barking orders. Your aim is to get people to drop, for a while, all the “activities” —the studies, preparations, training, surveys and analyses. Instead, make a successful, first attempt to lift expectations, get a tangible result and use the success as a foundation for ever more ambitious steps.

“We lack the courage to face up to the struggle needed to break down barriers of inertia and resistance”

The essence of the process is that a series of demands, limited at first but becoming more ambitious —each backed by careful plans, controls and determined effort — makes success far more likely than a plunge into widespread change from the start. There are five guidelines for designing the breakthrough goal.

  • It is urgent, and compelling. Focus on improvements that everyone clearly and instantly sees as vital and necessary now. Generate the feeling that the goal is an imperative — not nice to have.
  • Anticipate success in 100 calendar days or less — not many months and years. Chunk down from the large and complex — something that concerns say sales, quality, costs or output — to a short-term, first-step goal. Focus on one product in one branch to one customer; one machine in one plant; one hospital ward; one clinic; one customer; one backlog.
  • Make it simple — not simple to do; simple to understand — one with a physical measure you can plot daily. You trigger change with one number — not many of them.
  • Exploit what people are able, willing and ready to tackle now. To guarantee and build commitment, do what excites them — not what you think they ought to do.
  • It is achievable with existing resources and authority. They must do what they can with what they’ve got. All key people involved can commit without hedging bets and finding ways to duck responsibility —there’s no escape.

Selecting a goal and demanding a result this way creates a “credible crisis”. It generates the “must do” energising forces you find in emergencies. There is urgency, challenge, and excitement. Success is near and clear. The pressure to get things done fast stimulates people to collaborate, experiment and ignore “red tape”.

With a clear, non-negotiable demand, you nail them down. Do that and you often find the imagined threats and dangers never show up. If your people are like most, they will respond to the challenge. They achieve the goal. If they fall short, that’s still a success to build on.

Despite first doubts, most people enjoy working in a resultsdriven climate. It empowers them. They contribute and take responsibility for “doing” or “not doing”. They know if they don’t deliver they’ll let themselves and the team down.

Finally, you achieve the prime objective — to grow your people. You do it fast, measurably, just-in-time, on-the-job. They are more confident, competent, improve relationships and increase their personal value. They grow into more effective managers.

The result, the change in the number from the start of the project to its end, does two things. It keeps you honest. It tells you if your people are growing. That’s leading with integrity.

Black and Van Hoek are affiliates of Robert H. Schaffer & Associates (www.rhsa.com). They coach, mentor and help managers design 100-Day Rapid Results projects.

Mergers need a sober approach

The world of business can learn a lot from beverage manufacturer SABMiller, a company that has been an acquisition machine in the world’s beer sector, writes Ted Black

A GOOD prophecy does not have to be right, but it should alert you. On these pages a year ago, we looked at the relationship between ROAM (return on assets managed) and market capitalisation —or value of the firm (VOF) — on the JSE.

It shows a clear, positive correlation between ROAM performance and the VOF. As ROAM rises, so does the perceived value of the sector and the companies in it. The drivers of ROAM are revenues, margins and asset productivity. They result in the three most important financial measures of operating management’s competence:

  • Profit margin (operating profit divided by sales multiplied by 100) multiplied by;
  • Asset productivity, or asset turnover (sales divided by assets), which give you; and
  • Return on assets managed (ROAM) — the total operating profitability of the business.

Managing revenue and margins are both critical tasks, but asset turnover is the most important one of the three. That is why we also took a peek at SABMiller through the asset turnover (ATO) and ROAM lenses last year.

We can learn a lot from a firm that has been an acquisition machine in the world’s beer sector.

First, what governs top management ’s behaviour? It has given up using EVA™ as a measure. It uses total shareholder return (TSR) instead. This combines share price growth and dividends over time.

However, there is a danger when you measure management with share price movements. The late Peter Drucker once said: “Stock option plans reward the executive for doing the wrong thing. Instead of asking, ‘Are we making the right decisions?’ he asks, ‘How did we close today?’ It is encouragement to loot the organisation.”

EVA™ is driven by productivity, but growth is one of the drivers of the share price and therefore TSR. That is why it makes sense for managers to go for mergers and acquisitions to accelerate growth and reward.

According to I-Net Bridge’s analysis, SABMiller directors’ remuneration in rand value has gone up 814% over a five-year period — not a bad return for their efforts.

SABMiller1SABMiller ’s market capitalisation has grown roughly in line with the growth of the asset base through 2004 to this year —about 190%. Exhibit 2 shows the effect of this over the past 10 years on asset productivity — a steady fall from right to left. You could call it “brewer’s droop” after SABMiller’s involvement in the consolidation “beer bust” of the past 10 years.

Mergers and acquisitions are management’s “Sun City” gamble —the big bet with high hopes that are seldom met. Statistically speaking, they seem doomed to mediocre economic performance. There is a reason for that: the sellers walk away with the value, leaving the buyer with a huge cost.

InBev is the latest example of that. It has offered $52bn for Anheuser-Busch’s asset base of $17bn —a premium of $35bn.

Accountants call it goodwill, but it does not generate a return and is bad for ROAM and the VOF. Today, Anheuser has aROAM of 17,3% on total assets. That means each year management will have to generate an additional $6bn operating profit out of the tangible assets to pay for the “opportunity cost”. It is the “winner’s curse”.

Few changes are as complex and challenging as acquisitions. The closing of the deal marks the end of a job well done. Top management celebrates victory and moves on. Making them work is someone else’s task.

That is when large numbers of people from two organisations plunge into the deep, cold waters of a new working environment. After the excitement of the courtship and consummation of the marriage, the offspring can be a big disappointment. The question becomes, how do we turn this unhappy product of a happy moment into a success? Miller is a case in point for SAB.

Despite some impressive productivity programmes described in annual reports, the acquisition seems to have put SAB management onto a permanent learning curve. You never, ever generate high productivity and cash when you learn.

Given the generally accepted 70%-80% failure rate of mergers, SABMiller ’s expansion through foreign acquisitions was seen as high risk at first. To lower the odds against it, the strategy, like all good ones, was simple and based on SABMiller’s strengths.

Its experience curve, a hugely profitable one, is anchored firmly in SA — especially Soweto. That’s not a good address by international standards. So to achieve the vision of becoming a major global player, the mission was clear and brilliantly simple: move the head office to London —a good address —and then: “Buy good beer firms at bad addresses.”

Like everything in life, it was not so simple to execute. Profitability fell steadily as the comp a ny grew in Eastern Europe, Africa, the Far East and Latin America, where it now has a big stake.

The share price languished for a while, but improved results changed capital market perceptions and doubled the VOF over a couple of years.

However, in 2002, management turned its successful formula on its head. It bought a bad beer firm at a good address — Miller in the US. In one move, it jumped onto a long, steep learning curve in a complex, highly fragmented market with a big, hostile gorilla in it.

The results since show that it cannot make the breakthrough onto a US experience curve even with highly competent operating management. The great lesson from SABMiller’s North American experience is to match opportunity with strength —not weakness.

Could that insight have prompted its decision to merge its US operation with Molson Coors and let them manage it?

The beer business is mostly a good one to be in —it has high operating margins and even the worst performers have a return on sales of about 10%. However, most of the well-known players who have been involved in the consolidation “beer bust” now have serious “hangovers ” – an intangible asset burden of around 50% of their total asset base. This causes low ATO and the effects are shown in Exhibit 2.

SABMiller2Low ATO companies rarely see good returns, but high margins compensate for it in the beer sector. The highest ROAM is Modelo’s 20,6% in Mexico — its return on sales is 28%. Unless you have “orderly market arrangements” as most big South African firms seem to, or you have a monopoly, low asset productivity means trouble.

Exhibit 3 shows what can happen. It looks at geographic market segments and InBev. First, compare SABMiller and Molson Coors with Anheuser- Busch’s US beer interests. It is like taking on SAB in SA.

SABMiller3Once the InBev deal is consummated, and $35bn is added to its asset base, Anheuser Busch will collapse in a heap in the left-hand corner along with its Chinese interests. Its ATO will be about 0,2.

That is what Bavaria’s was before SAB bought it, and why the Latin American segment also languishes down the bottom of the left-hand corner.

In last year’s article, the Molson Coors deal was being mooted. The warning given was to be wary of adding low productivity assets to low productivity assets. Rainbow Chickens tried it by acquiring Bonny Bird and Epol from Premier and took many years to recover. As Molson is already reporting poor results, will the US become SABMiller ’s Russian Front, or is this merger part of a withdrawal and regrouping strategy? In SA,Heineken ’s entry pulled SABMiller’s operating margin down to 24,3% from 27,3% and ROAM from 50% to 44%. Competition gets prices down. The very thought of it will change behaviour, which ra i s e s the final issue.

What should shareholders demand from SABMiller today? After the latest frenzy of acquisitions, they must stay sober. With rising input costs and the huge hangover of intangible assets, now is the time to focus on the VOF. The VOF is key to all management interventions. It is not growth, not revenues, not market share, not size; except to massage the VOF.

The VOF is governed by volatility and uncertainty. Volatility equals uncertainty, and uncertainty equals risk. To reduce risk, get managers to focus on economic profit and follow Warren Buffe tt’s advice. Build a crocodilefilled moat around the fortress: “Widen the moat: build enduring competitive advantage — delight your customers, and relentlessly fight costs.”

It means that productivity ratios become the only valid measures of management intent and results —not the share price. Productivity is units sold: resource units used. Improving productivity will reduce risk by influencing price recovery, which is the ratio sales price:resource price.

If you use a high selling price to make money without keeping product costs down, you increase the risk. This is price over recovery. It typically arises from sales price growing faster than resource price.

That is the basis of the information I would seek from management if I were a shareholder —or say Maria Ramos — who has just joined the board. Coupling a productivity focus to Heineken’s presence here would be good news indeed for long-suffering South African consumers. We seem to pay huge premiums for everything we buy, whether it is from the private or public sector.

Ted Black (jeblack@icon.co.za) coaches and conducts ROAM workshops that help managers design results-driven projects.

SA Inc should take less and make more

HR-Strategic-PartnerCOMPANIES and institutions are complex social systems and therefore difficult to manage. Consider the huge and rapid changes of recent decades, the even greater ones in years to come, and people become more important than ever to success.

Despite this challenge, and its diligent efforts over the years, the human resource (HR) function struggles to position itself in management ’s mainstream.

That’s probably one reason why the Boston Consulting Group (BCG) and the World Federation of Personnel Management Associations recently surveyed the views of nearly 5 000 executives in 83 countries and markets. They published a report of their findings and called it Creating People Advantage — How to Address HR Challenges Worldwide Through 2015. It covers 17 topics in human resources management and lists 194 action steps to compete better through people. The three main areas of focus that emerged were:

  • Keeping and developing the best employees;
  • Creating “learning organisations”; and
  • Anticipating change —for global companies this includes managing demographics and differing cultures.

Not surprisingly, the report concludes that the challenges are greater than ever before. That’s probably why transforming the HR function into “strategic partner” was one of the 17 topics raised. This is the “right to sit at the high table” with top management.

If HR managers want that, it seems they missed a DAZZGOTO — a dazzling glimpse of the obvious — during the survey. Productivity was not even raised. The closest to it was “performance management ” — usually this ends up as a more complex version of the dreaded, and mostly ineffectual, annual performance appraisal.

It highlights the problem HR people have. Operating managers see a need for what they do, but it tends to be a defensive one. It’s more a case of “keep us out of trouble” ( that ’s putting it politely), than anything else, and certainly not to help with productivity.

As to productivity improvement, within HR are the human resource development (HRD) specialists. These HRD people claim they already respond to the need through training, organisation development, selection, performance management programmes and incentive schemes. The belief is that improved results will follow these activities but the link is tenuous at best.

During the survey, executives in Africa identified the management of talent, work-life balance, globalisation and diversity as major issues —again nothing about productivity. The issues raised are important but the accompanying rand-dollar chart spells out the challenge and prime focus for South African managers — not least, HRD. Today, we don’t create wealth — we destroy it. The long decline in the buying power of the rand stopped in 2002 but seems about to resume its steady descent. T hat’s because it’s hard to swim against the tide of three numbers.

Our population growth is one of the world’s highest even if tempered by disease. Our inflation rate is higher than our major trading partners. Lastly, our productivity is low and falling compared with the rest of the world. That’s because a common driving value in government and corporations in SA is to “take ” money, not “make ” money.

Indeed, the way we pay people, especially managers, can even cause falling productivity. It’s all about pay and reward for size — size of the asset base, sales, costs, profit, numbers of people and growth —not productivity.

The rand-dollar chart’s wakeup call is loud and highlights a key economic principle —productivity equals wealth and is the most powerful weapon for fighting inflation.

Productivity gains allow companies to increase wages without increasing prices at the same rate. This keeps inflation below wage increase levels and grows real income and standards of living.

Moreover, HRD people with the talents they have are uniquely suited to contribute directly, significantly and measurably to productivity initiatives. However, they have to make a shift and bring meaningful metrics into play — simple ones that people at all levels can understand.

It is time for HRD to work with the finance department —another function that is largely irrelevant when it comes to productivity. If measures influence behaviour, then accountants are hugely ineffective. Most often, the numbers arrive far too late to make any difference and no one understands them anyway.

If you expect to find out if a company is improving productivity or not by reading the financials, you won’t. They mislead rather than inform. That’s why there is a flourishing trade in business school courses and finance workshops for non-financial managers. They achieve little.

In fact, accountants and HRD people share the same problem, but it is also a huge opportunity. They both battle to become genuine business partners and advisers. Their barrier is how to communicate — to present the numbers in plain, simple language for operating people with no formal training. If they did, then employees would think intelligently and suggest ways to improve them — just as they do in Toyota.

This year, in its neck-and-neck race with General Motors, it will probably take the lead and then widen the gap between the two companies. For good reason. Its employees generate one million suggestions a year. That’s around five per person. What’s more, they implement most of them — in many cases without even waiting for management approval.

Toyota has perfected a system that continually improves itself and creates huge profitability through productivity improvements. It is now the benchmark for world-class manufacturing — indeed for the profession of management. What the company shows us through its suggestions is that there is a vast, untapped reserve of potential in every organisation. The trouble is it stays hidden, and then simply fritters away because of historical accounting methods, policy and culture.

As one CEO of a major US company put it: “The three biggest barriers to continuous improvement are top management, middle management and supervisory management.” When anyone suggests a change for the better, typical reactions will be: “We’ve tried that before and it didn’t work so why don’t you go back to your workplace and get on with your job?” and: “No, that’s a silly suggestion. The savings will be too small.”

So what metrics should HRD people use to reposition themselves and help finance do the same? The first trait of the longlived companies that Arie de Geus described 10 years ago in his book, The Living Company, was that extraordinarily successful companies understand the meaning and value of cash in the bank. The second attribute was that no matter how diversified they were, people in long-lived companies felt they belonged. Case histories showed that a “sense of community” was essential for long-term survival.

This community includes not only the internal one, but those on whom the firm depends for its survival — its customers and suppliers. It means the company has to position itself to make it easy and worthwhile for customers and suppliers to do business with it. That’s the strategy part — designing your business to do that. Next is making it happen.

If you had only two measures to tell you about a firm’s health, the first is the length of the “cash-to-cash cycle” — the time it takes from paying your suppliers to the time your customers pay you.

The second measure is based on the classic sales prospecting question. You ask your customer: “Would you recommend us to your close friends and colleagues?” Trended “yes” replies tell you how well you are doing and whether or not you are going to grow.

These two measures — the cash-to-cash cycle and customer perceptions — drive productivity improvement and test the health of the firm. You can’t have many “yes” answers with high inventory turns and fast payment by customers if you aren’t doing a lot of things right.

PRODUCTIVITY is a much misunderstood and often misused concept. There is a physical and financial side to the equation. The physical side deals with quantity of input— resources and time — to quantity of output. The relationship between them defines “productivity ”. If you can get more output with the same level of input, that is a productivity gain. There are several other ways to do it.

Then there is the price of the input — what the resources and time cost — and the price of the output. This is about “price recovery”. If you increase salaries and wages by 10% but increase selling prices by less, the company suffers a price recovery loss. When you multiply the two elements (productivity and price recovery) you deal in rands. The relationship of rands input (costs) to rands output (sales) is profitability.

If your people understand these two elements, they can start to measure, analyse and make changes in the right way.

And the right thing to measure is the system, not people or processes in isolation. W Edwards Deming, father of the modern quality movement that found its genesis in Japan, saw that the typical employee worked in processes that have wasteful activity built into them. People don’t say: “I’ll go and do lots of wasteful things at work today.” Waste is already part of the system designed by management. This means HRD has to get managers to admit that all systems have waste built into them, put a process in place to identify it without blaming anybody and allow employees to eliminate it.

Eliminating waste isn’t the problem. Identifying it is. Only your people can do that—the people who actually execute the ser- SA Inc should take less and make more A great opportunity exists for HR to earn executive respect —by improving productivity, write Ted Black, Gerard van Hoek and Bazil van Loggerenberg A common driving value in government and corporations in SA is to take money, not make money vices or make the products.

Based on research by BCG and the Lean Thinking movement, the amount of time needed to execute a service, to order, to make and to deliver a product is only 5% or less of the time that the service or product spends in the system. That’s from the time you pay suppliers to being paid by the customer — the cash-to-cash-cycle. Attack the waste of time in the system — the cash cycle time — and you will gain remarkable improvements in results.

This brings us to the second trait of the long-lived company. You only get sustainable productivity when there is a strong sense of community — when all people feel they are in it together.

We take the positive view. A community is a group of people who are ready and willing to mould themselves into a close-knit team. They succeed because they:

  • Have a clear, “bottom- line ” goal;
  • Respect each other no matter how different they all are; and
  • Know the one thing they can never do is to let each other down. This is HRD’s prime task if it wants to “sit at the high table”—to help operating managers build communities for productivity. If they succeed in that, they will meet the prime growth needs of South African management. These are:
  • Vastly upgraded skills in the management of change;
  • The management of communication; and
  • The management of diversity and the conflict that comes with it.

You build communities of growing people most rapidly and sustainably when its members are “forced”, so to speak, to develop them under short-term, concrete, real-life challenges that are important to them. These challenges always lie at points of overlap between people along the value stream of activities, from supplier through to customers. That’s where you find the opportunities to lever up productivity and where you can design community-building projects.

THE question to ask that pinpoints opportunities is: “Would the customer be willing to pay for what we are doing here and now?” Answering that question means people can devote their efforts towards eliminating all the things that do not add value.

That is business acumen — being able to see and identify opportunities to make and save money.

The long-lived companies commit to people first, and physical and financial assets second. People are “the horse” and productivity is “the cart”. All it needs is to educate your people in what productivity is. As we all know, very few of them do, and that’s true from boardroom to the work place.

It is a wonderful message of opportunity for HRD people and it is how they can be part of the game of business. They will get onto the playing field as contributors to economic results. No longer will they be just observers while operating management does its thing. Moreover, they will address the prime areas of focus discussed earlier —attracting and retaining the best employees; managing change; and building a learning organisation.

Ted Black (jeblack@icon.co.za) conducts ROAM workshops. He and Gerard van Hoek are affiliates of Robert H Schaffer & Associates Bazil van Loggerenberg, from Loggic LLC, is a developer of analytics and mathematics for productivity control systems.

Time to get serious about productivity

“The future of the planet, and of SA, depends on effective management”

Focus on margins prevents managers from creating wealth, writes Ted Black

Elephant1

AFTER 1994, a rather arrogant, patronising, white, male old guard passed on to a new generation of inexperienced managers and owners some very sophisticated and complex organisations in both the private and public sectors.

Today, the new generation is discovering how difficult it is to run them. And the focus has not changed —it remains the same as the old guard: to maximise sales margins and redistribute wealth, not to create it. The prime lever for improving performance is not through improving productivity of resources but through the power to set and control prices. It is quick and relatively easy, but it is not sus tainable.

From a shareholder’s point of view, management still has only one legitimate purpose — to maximise the value of the firm. Mo r e – over, the value derives fundamentally from productivity. That is where the focus needs to be.

We cannot ignore the elephant sitting on our stoep

As we read of our steady slide down the world’s productivity rankings, then gaze north at Zimbabwe and elsewhere in Africa, we cannot ignore the elephant on our stoep. When are we going to stop taking money and start making money?

Peter Drucker described it in 1980 in Managing in Turbulent Times: “Only managers — not nature or laws of economics or governments — make resources productive.” I would add that you get sustainable productivity only when there is a sense of community — when all people feel they belong and are in it together.

Robert Mugabe has destroyed that in Zimbabwe. Where is SA heading? What are the omens?

Forget the hype about the need for leaders. The future of the planet, and of SA, depends on effective management.

Business literature swamps us with stories about leaders pointing the way and changing people with their visions. A lot of it is rubbish. throughout history, the reality is that few leaders have done that and four recent ones are Lenin, Stalin, Hitler and Mao.

Besides, how many of us want to be led anyway? We might like to be trained, coached, and developed by mentors we choose. We may even agree to be managed in the right way —but not led.

As to South Africa Inc, for this fledgling democracy to succeed we have two critical factors to address — make the poor productive and build a new generation of management. These issues should drive everything we do in the government and the private sector.

We need fiscal discipline, but the blunt instruments of free market monetary and interest-rate controls bludgeon the very people who have least influence over rising inflation—the poor. The negative effects on growth and job creation could damage us seriously and destroy the already fragile community and family structures in SA. The most fruitful way to tackle the thorny issues facing South Africa Inc is to lift productivity and create wealth that everyone can share.

During the previous century a small proportion of this country’s population prospered because of abundant mineral resources. Commodity exports were the lifeblood of the economy and still are. In effect, a mining camp spawned the industries we have today. Moreover, the government protected them with its political system, high tariff barriers and subsidies.

Judged by world standards, these hot-house conditions created highly profitable firms run by quite capable management.

In our Third World economy, with value based on limited beneficiation of exported commodities, corporate strategy was to gain preferential access to raw materials. This meant that productivity focused on low input costs and high pricing tactics in local markets. The aim was to maximise dividends, minimise equity holdings here and to shift money overseas.

Little has changed, except our management. After 1994, in the rush to meet affirmative action and black economic empowerment (BEE) quotas, a rather arrogant, patronising, white, male old guard passed on to a new generation of inexperienced managers and owners some very sophisticated and complex organisations in both private and public sectors.

Today, the new generation is discovering how difficult it is to run them. What is more, our focus is still to maximise sales margins and redistribute wealth — not to create it. The prime lever for improving performance, whether it be for municipalities, Eskom, or private firms, is not through improving productivity of resources but through the power to set and control prices. It is quick and relatively easy, but it is not sus tainable.

In the developing world a major barrier to improving productivity is financial illiteracy. Many of us have a phobia about numbers: we cannot do simple arithmetic and have only the vaguest notion of how business works.

Most people think that money cascades magically through an organisation into their bank accounts on the 25th of the month, whether they get the work done or not. Moreover, more employees are now shareholders with no clue as to what that it means for them.

To compound the problem we have a corporate governance movement that aims to influence boards and have companies compete and prosper in an ethical way —to make society a better place for everyone. However, it stresses social responsibility more than economic results and productivity.

“Business literature swamps us with stories about leaders pointing the way and changing people with their ‘visions’. A lot of it is rubbish”

Despite good intent, it’s hard to measure what it wants. A triple bottom line and balanced scorecards hold no-one to account.

From a shareholder’s point of view, management still has only one legitimate purpose — to maximise the value of the firm (VOF). Moreover, the value derives fundamentally from productivity.

By shareholders we do not include in-and-out traders looking for short-term gains. We mean investors who put their cash in a company expecting an economic return for a long time.

They see management as being ethical, competent and effective — people who do the right things in the right way because they think and act like owners. When that happens, shareholders become more than investors. They become long-term savers.

An example of a company that provides such opportunity is Berkshire Hathaway. As James O’Loughlin wrote in his revealing book, The Real Warren Buffett: “Buffett says he does not understand the CEO who wants lots of share activity: that can be achieved only if many of his owners are constantly exiting. At what other organisation —school, club, church — do leaders cheer when members leave? If this were the case, then Buffett would not be able to fulfil his function as corporate saver —the proper function of the stock market.”

In the 2007 annual report, Buffett says: “We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own the assets.”

He says they are not “faceless members of an ever-shifting crowd but rather co-venturers who have entrusted their funds to us for what may well turn out to be the rest of their lives”.

Contrast that view of management with former General Electric CEO Jack Welch who said: “Being a CEO is nuts! A whole jumble of thoughts comes to mind: Over the top. Wild. Fun. Outrageous. Crazy. Passion. Perpetual motion. The give-and-take. Meetings into the night. Incredible friendships. Fine wine. Celebrations. Great golf courses. Big decisions in the real game. Crises and pressure. Lots of swings. The thrill of winning. The pain of losing.”

Nice work if you can get it! Clearly, he was no corporate saver but he did manipulate Wall Street very skilfully, and that helped pump up the share price no end.

Whether he allocated capital very well is a moot point judging by General Electric’s relative economic performance over the years. Sorry to say he has become a model most modern managers want to emulate.

In stark contrast, Buffett and his colleague, Charlie Munger, see themselves as managing partners and see shareholders as owner partners. It is why today about 30 000 of them rock up for Berkshire’s annual meeting. At the end of one year the same investors who owned them at the start of the year held 97% of shares. That makes them savers, and for good reason.

The result of Buffett’s stewardship is a compounded gain on investment of 21,1% a year from 1965 to 2007. That’s a 400 863% gain over 43 years. The S&P 500 over the same period achieved 6 840%. The VOF today is more than $200bn. Apart from investments in companies, the firm has 76 operating businesses. It is a diversified conglomerate employing 233 000 people. Only 19 of them work at HQ.

There is no share option scheme — Buffett doesn’t believe in them. They violate the principle of rewarding people for their own efforts in their own units. However, most of the key managers of the operations are independently wealthy and none has left the group to work elsewhere.

Buffett delegates to the “point of abdication” as he puts it, and says that HQ has a twofold task. First, it is to “create a climate that encourages (key managers) to choose working with Berkshire over golfing or fishing. This leaves us needing to treat them fairly and in the manner that we would wish to be treated if our positions were reversed.” He rewards them handsomely for making an economic return on capital in their own companies and for sending all surplus cash back to HQ. That’s where he fulfils the second part of the “owner’s” task — to allocate capital for acquisitions or investment.

As he puts it, “our carefully crafted acquisition strategy is to wait for the phone to ring”. The bigger the company the greater his interest will be. He responds to an approach within five minutes if it grabs his attention. He never does an unfriendly takeover and his attitude to start-ups, auctions or turnarounds is, “When the phone don’t ring you’ll know it’s me.”

He looks for well-run businesses “with a fortress-like business franchise ” — a product or service that is needed and wanted, with no perceived close substitute and which is not subject to price regulation. Owners usually run the firms he buys and he keeps them doing it after he buys control. It is how he gets good management into Berkshire Hathaway.

He wants high levels of profitability from a low capital base and low operating costs. In other words, he seeks low risk, high return, cash fountains — not cash drains. Businesses like that don’t need reinvestment to sustain them. Another criterion he looks for is that they must be simple enough for an idiot to run because sooner, or later, one will. In other words, he sets out to minimise risk and maximise return through a simple agenda.

Elephant3

The chart in the illustration, In the shareholders’ shoes, shows how he might position an opportunity. Behind the four quadrants are 17 business safety ratings cases —they provide clear, unambiguous signals for shareholders to rate managerial per formance.

Most managers picture an entrepreneur as a hardened risktaker who shoots from the hip. This viewleads to the master myth of management: all things being equal, higher returns reward higher risks. Driven by the myth, corporate cowboys, egged on by greedy merchant bankers, lawyers and accountants, head for box one.

They might as well be going to a racetrack or casino. They end up in box four where you find the wreckage of corporate start-ups, mergers and acquisitions, the result of high-risk, low-return strategies. Winning firms achieve lowrisk, high-return positions. Only companies positioned in quadrant two will satisfy the long-term shareholder as Buffett sees it.

So, what does his simple agenda mean for the corporate governance movement, company boards and even the South African government? Giving management and employees share options, as so many firms are doing, won’t make them think and behave like owners. You have to do more than that.

“In reality most organisations operate in ways that switch off the brain”

Just as a firm has an external marketing programme to win the minds of investors, it needs an internal one for results. It is the only way to surmount what Buffett calls the “institutional imperative”. We paraphrase his description of it:

  • As if ruled by Newton’s First Law of Motion, institutions resist any change in direction;
  • Just as work expands to fill available time (Parkinson’s law), managers chase the big projects and acquisitions that drain cash;
  • Corporate troops (the bureaucrats) quickly support any business craving of their leader no matter how foolish it is; and
  • Firms mindlessly imitate peer companies, whether they are expanding, acquiring, or setting executive pay.

Buffett says that when he went to business school he got no hint of the imperative’s existence. If he went back to one today he probably still wouldn’t. He thought decent, intelligent and experienced managers would make rational business decisions and he learned that they do not. When the institutional imperative takes hold, and it does in government too, rationality wilts.

It wilts because managers reduce the fear of uncertainty by asserting control. They do it with plans, budgets, forecasts and they manage systems and people by decree. However, this approach triggers other needs —the need for survival and the pursuit of selfinterest. Improving productivity, and allocating capital and resources efficiently and effectively are not the priorities that the business safety ratings can reveal.

In Buffett’s view, the strategic plan creates the institutional imperative. That’s why he doesn’t have one. He believes it gives him his greatest advantage. It means he lets go of the bureaucratic controls that a corporate HQ exerts, the exact opposite of the typical manager. His leadership style conforms to Chinese philosopher Lao Tzu ’s description: “Intelligent control appears as no control or freedom. For that reason, it is genuinely intelligent control. Unintelligent control appears as external domination and that is why it is really unintelligent.”

The institutional imperative becomes a heavy blanket that stifles people’s potential. We talk of the value of human capital and business academics want it put on the balance sheet. However, in reality most organisations operate in ways that switch off the brain.

As to his operating companies, Buffett wants a crocodile-filled moat around the fortress. He urges his managers: “Widen the moat: build enduring competitive advantage —delight your customers, and relentlessly fight costs.”

Growth is not the aim. However, his productivity goals generate the cash returns he then uses for growth opportunities.

In summary, he gets his key managers to focus on productivity — the most powerful competitive weapon for a business and a country. He has no strategic plan and gives no forecasts. The world is too random for that.

This approach frees him and his managers to pursue the vision of thinking and acting like owners. He can allocate capital where, when and at a pace that suits him — not Wall Street.

Given this perspective, we wonder how a board that focuses on productivity would view South Africa Inc and some of its diversified portfolio of industries and companies. Using the ROAM model (return on assets managed) and operating margin (operating profit/sales%) on a small sample of big players, we compare the profitability of their domestic operations with their global ones.

Elephant4-all

You can draw your own conclusions from the accompanying charts. Four conclusions stand out in my view:

  • South Africa Inc is still seen as high risk and is not run by corporate savers;
  • This means South African citizens pay through their noses for the internationalisation strategies that follow from that perception;
  • South African management is not as good as it thinks it is when facing the heat of competition;
  • This is because the productivity focus overseas shifts from pricing tactics to the sales productivity of the asset base — the other prime measure within the ROAM model. This is the sales/assets ratio known as asset turnover (ATO).

South African management is not good at managing productivity because there has been no pressure to do so. It involves work on the entire supply chain through to customers. The goal is to drive out the wasteful activity that exists throughout the value/cost chain— to lift everyone’s productivity — and to speed up the time from paying to being paid. The benefits come through to the customer in more competitive pricing.

However, there is another conclusion that defines the elephant on the stoep even more clearly. The sanctions era under the National Party government entrenched a policy of import parity pricing that led to inefficient resource allocation. Its effects persist today. Even ANC government policies protect high-cost industries that are uncompetitive by world standards.

The long-term weakening of the rand creates huge price overrecovery. This is when a producer charges an excessive price — as most South African institutions seem to do. They extract an everincreasing price subsidy from consumers. This guarantees profit growth but management becomes complacent. With no competition it just becomes a case of cost-plus pricing that encourages waste and low productivity, all to our economy ’s detriment.

A nice example of this in our sample, apart from the obvious ones of Sasol and Mittal, is Sappi. With Mondi, it forms an oligopoly — a small group of typically very large firms that collude to exert power and control over pricing — as we have seen exposed in the steel and food industries.

At first glance, this firm’s low returns — it has an overall ROAM of only 6% — do not reflect the benefits of a monopolistic position. However, you can see from the chart how Sappi takes advantage of the South African consumer with a 19,4% ROS. It is even higher because that figure includes exports at a much lower selling price than its local customers pay.

There is a deep-seated problem with the paper industry. Pe ter Drucker wrote in 1974 in Management Tasks and Responsibilities that since the Second World War the paper industry “has substituted capital for labour on a massive scale. But the trade off was a thoroughly uneconomic one. In fact, the paper industry represents a massive triumph of engineering over economics and common sense.”

“If we are serious about productivity and increasing our national competitiveness we have to change behaviour”

Thirty-three years later in San Francisco on October 22 2007, Eugene van As, at the end of a long career with Sappi, 30 years of it as CEO, candidly endorsed Drucker’s view. “For the past 20 years the top 100 paper companies have collectively destroyed value consistently every year.”

As a wag in the South African paper industry put it: “So why was he there so long? He should have left long ago!” His remark was more colourful than that but it’s the gist of what he said. Many shareholders would probably agree. They have a low-return, relatively high-risk investment.

When it comes to risk, there are two key elements — productivity and price recovery. We define productivity as units sold divided by resources units used.

Improving this rate lowers product cost (all the costs of getting products ready for sale) and lifts profit. It also lifts business safety, because it lowers risk. A low product-cost firm deters competitors. Moreover, it is never that easy to copy what others do.

With ready-for-sale costs, because of the institutional imperative, the potential for improvement is huge. The lean-thinking movement proves that we add cost with value for a tenth or less of the time between paying suppliers and getting paid by customers. That means for 90% of the time or more we pile up costs without adding a cent of value.

Corporations such as Tiger Brands write about “continuous improvement” programmes in their annual reports. What do they mean? Continuous improvement is not about improving what you do well. It is about eliminating all the things that stop you from doing what you do well — all the headaches. That’s waste. It’s what you have to look for and eliminate.

Management — or we should say bureaucrats—design waste or fat into the systems and procedures that people have to follow. It exists everywhere you look. We don’t see it because we don’t look for it. The only people who do see it and live with it are the people doing the work. Rarely do we ask for their ideas on how to remove it. Even more rarely does management act on them. It means that their brains never get out of bed in the morning. They just have a job.

The second major factor is price recovery measured as sales price/resource price. If you use a high selling price to make money without keeping product cost down, you increase risk. We call this price over-recovery. Typically it arises from sales price growing faster than resource price. This lowers business safety.

Managers use price over-recovery to subsidise a company’s ine fficiencies. However, high selling prices linked with low productivity send a signal that provokes competitors to attack. They steal customers with lower prices and better service.

The safest way to make money is to generate high productivity and use some of it to keep selling prices down, which is price underrecovery. You charge less but operate more profitably off a lower cost base than your competitors.

Productivity and price recovery determine business safety. They qualify the sales productivity of the asset base — the most important measure of all. It enables you to measure the productivity of capital —the real capital cost per unit sold — and creates a focus on speeding up the time from paying to being paid. This is sales revenue/ marketing assets managed. It drives ROAM, economic profit and ultimately the VOF.

If we are serious about productivity and increasing our national competitiveness we have to change behaviour. As effective managers know, the best way of doing that is through measurement and feedback, not visions and pep talks.

You only have to tell people you will be measuring them. Even if you don’t give them the measure, the very thought of it will change their behaviour in some way. So, it makes sense to have ones that they believe in and trust.

In the late 1970s, during a severe drought in Clarens in the Free State, no matter how much the town fathers urged everyone to save water nothing happened until the doughty town clerk intervened. She published the names of every householder, showing how much water each used a month. Only then did behaviour change and consumption drop. That’s the power of public measurement.

We could have monthly publication of what we term business safety ratings (BSR). They would apply to all private and publicsector entities. They give clear signals on productivity and price recovery. Boards can use them as part of internal management development and performance improvement programmes and investors can use them as part of their risk-return evaluations.

An additional possibility is that government could apply tax incentives to companies which engage in price under-recovery because they would be lifting productivity to do it and remain viable. It can be done. It just remains for us to start doing it and we will.

In future articles, I will analyse companies to derive business safety ratings and see how big the elephants sitting on the corporate stoeps really are.

Ted Black (jeblack@icon.co.za) coaches and conductsROAM workshops that help managers design results-driven projects.

Greed has never been good

The profit motive is not a prime cause of competent performance, writes Ted Black

Greed2-1

WHEN the Soviet empire collapsed and capitalism became the only game in town, the “greed is good” doctrine took hold with a vengeance. It fuelled the 1980s boom and the dotcom bubble that followed. In turn, this led to the Enron and WorldCom scandals among many others. Now a key public concern is how to regulate roller-coaster stock exchanges and the corporations listed on them.

Driving through the Dimension Data campus reminds us that SA has its share of unbridled capitalists. Didata’s top management palmed its flawed “new economy” business model onto a gullible, investing public. Despite the marketing “spin” coming from the top today, its managers generate a return on assets of only 8%. That accomplishment is still around R2bn short of making an economic profit — probably something many IT people don’t even know about let alone measure.

The names of buildings on the campus —the Wanderers, the Gabba and Roland Garros —remind us how useful sporting analogies can be for the game of business. The trouble is that many of us have lost the concept of sportsmanship. When it comes to values, managers tend to model themselves on professional sportsmen and that’s a bad thing.

In 2004, after a 17-year study with 72 000 interviews, Prof Sharon Stoll at the Centre for Ethics at the University of Idaho in the US concluded that sport is good for “teamwork, loyalty, self-sacrifice, work ethic, and perseverance ” — all the “passion” and “commitment” stuff you see in annual reports. However, when it comes to “honesty, fairness, and responsibility ”, professional sportsmen are lousy models. Stoll ends her study concluding that sport today is about winning at all costs. With the notable exception of people like Adam Gilchrist — Australia ’s great wicketkeeper who walks when he knows he’s out —the driving value is “how to get away with it”.

It’s little different for many in corporations and the government. The price-fixing in the bread industr y followed closely on the Mittal fine. Next we have the dairy men accused of running a cartel, and skulduggery in the furniture business. Finally, Tiger Brands is under the spotlight again with Adcock Ingram’s pharmaceutical products. They all highlight issues of great concern.

Free-market ideologues argue that the relentless pursuit of greed and acquisition leads to best outcomes for society. In other words, the “profit motive” is a prime cause of competent performance. Another belief is that organisations with the best talent, rewarded with lavish compensation, will outperform their competitors. They are myths.

Dr Tom Gilbert wrote a masterful book on the subject of performance management in 1978. Pulling no punches, he argued that the subject of motivation arouses more nonsense, superstition and plain self deception than any other topic. Two kinds of incentive on offer are money and the other ways we recognise people for good work. The most powerful lever of all is money. However, the truth is it has limited effect on productivity because it’s the hardest one to grasp. Moreover, the higher you go in an organisation, the more slippery it gets. Why is that?

It ’s because we confront a host of vested interests in incompetence. The issue becomes highly emotional and political. It’s about distribution of wealth: who do we reward with how much for what?

Greed1-1That’s why top executive pay is such a hot topic. There’s no positive correlation between money paid and competence. Top executive pay derives from one thing. Above all, the value of any firm links to its monopolistic position in the market segment it serves. This enables it to create high profits. These high profits come from being very good at what they do—a good thing—or in some cases collusion with competitors to fix prices —now illegal.

It also means that many powerful people who control company performance systems are not paid for managerial competence. If they were, a lot of them would be out of a job. That fear is a major barrier to the efficient use of money to reward worthy performance.

The power to set and control prices is the only power corporations need to ensure a self-fulfilling profit motive. Exhibit 1 shows some dominant players in SA and the relationship between return on sales (operating profit as a percentage of sales — ROS) and return on assets managed (operating profit as a percentage of assets managed —ROAM).

All the companies shown dominate their market sectors. With the exception of retailers Pick ’n Pay and Cashbuild who strive to sell at lowest price to customers, the rest aim to sell at as high a price as they can get.

The Vodacom and MTN numbers reflect their southern African segments and SAB numbers include ABI. I suspect that if SABMiller’s annual report were to show Beer SA on its own, with a ROS of at least 27% for beer, the ROAM will be higher than 100%. Sasol’s performance is tied to the oil price and PPC cement rides the economic wave. They can’t go wrong even when they performin a mediocre fashion —as do the telecom companies. That’s the power of monopolistic market share.

As to Tiger Brands, after its baking and milling operation was caught colluding with competitors, it used legal firm Edward Nathan Sonnenberg (ENS) to argue that “hands-on” CEO Nick Dennis knew nothing about the arrangement. It was not a good move. His claims of innocence coupled with the ENS study smacked of “he doth protest too much, methinks”.

ENS, known for its skill in running with the hares and hunting with the hounds, was discredited by the Nedbank deal it did at the height of the dotcom boom. That’s when “brains ” became “intangible” assets on company balance sheets. The deal probably cost the bank’s shareholders R1bn if you add in lost opportunity cost to the R500m paid to own these legal brains for five years.

When it comes to corporate governance — and ENS helped define the King Code —the firm’s reputation is spotty. Especially when you consider that it bought its brains back for a mere R50m.

Greed1-2Little has changed with lawyers and cartels it seems. A classic British Board of Trade study in the 1940s observed: “The variety of (cartel) arrangements is very striking and attests to the ingenuity of industrialists, or at least of the accountants and lawyers who advise them.” Given that some things change very little over time, how much collusion goes on among the companies on the chart? The telecoms industry and cement producers for instance?

As to the bread pricing issue, it will not go away. Moreover, it seems that some Tiger Brands executives are either unaware of their own numbers or do not understand what they mean. Exhibit 2 shows group segments at year-end 2006.

Pharmaceuticals, not surprisingly given the latest allegations of price collusion, had a 90% ROAM in 2006. The baking and milling division that sells bread, a consumer staple, achieved a 40% ROAM. It has just announced a further price increase to recover increased costs.

In contrast to Mittal, whose ROS dropped sharply after being fined— it fell from 30% to 25% —Tiger ’s bakers and millers have increased returns sharply over the past four years. The ROS has moved from 9,7% to 16%; an increase of 65% for a staple food. Exhibit 3 shows how well this division is doing.

The question is how much of the improvement can be attributed to the “continuous improvement” productivity programmes proudly described in the annual reports, or to price increases? That’s what Tiger Brands ’ corporate marketing effort should be explaining to the public, the shareholders and most importantly, the company’s employees.

Greed1-3Instead, the SABC website quotes Tiger ’s spokesman as saying: “The price increase is also to maintain employment. So which one is a better devil—to retrench a whole lot of people so that you can push down your labour costs, or cause more poverty and frustration to the poor?” So much for top management understanding and measuring the effect of productivity initiatives!

Corporate marketing should be 80% internal and only 20% to investors and analysts. Most companies get it the wrong way round. They learned to do that from narcissistic celebrity manager Jack Welch whose cost to society and the environment probably far outweighed his value. His greatest skill for GE’s shareholders was his ability to market himself and to manipulate Wall Street analysts, academics, the media, and the share price.

THE reality is that despite the high returns some companies deliver, their people perform incompetently for most of the time because of the systems they work in (confirmed by Tiger Brands’ defence of the price increase above). This incompetence inflates the costs of doing business. Top management, responsible for the design of the systems, then raises prices to cover them. Most of its talent is applied to developing strategies that make the price rises as invisible as possible.

When business slows, customers, especially the big and powerful ones, won’t accept the increases. That’s when the word goes out from the top: “Cut costs!” The message sent is that a higher level of incompetence is fine during boom times when customers can carry the cost burden. However, top management scores either way. When times get tough, after sacking thousands of people they are rewarded with plaudits from the analysts and healthy bonuses from remuneration committees.

In 2005, Boston Consulting Group published one of its brilliant “Perspectives ” on the issue of incentive compensation. Its authors, Andrew Dyer and Ron Nicol, started by asking: “How do you create a hunger for performance in your organisation without creating a greed for reward? Too often, in the pursuit of growth, we strike a dangerous bargain. We start with a promise: ‘I’ll pay you whatever it takes to meet  these goals.’ Then we delude ourselves into thinking we can control the inevitable and spreading greed by installing tighter governance. But greed outsmarts governance. With bonuses at stake and promotions on the line, games get played and figures are faked. Not just accounting figures but also sales, delivery and return figures.”

The danger in all this — particularly in SA — is that capitalism won’t be the only game in town any longer if this situation continues. Tiger Brands’ CEO Nick Dennis will probably walk away with a package that would take the lowest paid worker in the company more than 3 000 years to earn. It’s nonsensical and dangerous.

The least known and most under-appreciated great man of the 20th century was the late Peter Drucker. Because of his focus on management, he probably had more influence on more people than any other writer in the last half of the century. He saw that corporations, with some special exceptions, had lost the communal spirit he first saw in General Motors during the 1940s when the workforce was making tanks and Jeeps for the war effort.

He argued that the first of two reasons for losing this spirit was that workers and employees were viewed as costs—not resources. It all comes down to treating them right. This means “releasing ” their energies to be the best at what they do. And secondly, that even in the 1980s executives were being overpaid when compared to the rank and file.

Finally, levering up margins through high pricing instead of productivity means firms define themselves in terms of the products they produce and not —as Drucker urged managers to do — the customers who buy them. In SA by far the majority of customers are dirt poor. That’s why capitalism driven purely by greed will destroy community and ultimately itself and the nation.

Sir Adrian Cadbury wrote in his book “Corporate Governance and Chairmanship. A Personal View” (Oxford 2002) that the character of a company is in its people’s hands. They inherit its reputation and standing and it is up to them to take them forward. One of his simple, admirable statements of aims was “nothing is too good for the public”.

Ted Black writes, coaches and conducts ROAM workshops that help managers design results-driven projects that grow them and their people.

Motlanthe’s three management priorities

The world cup is a breakthrough project able to harness dormant talent – Ted Black.

World-Cup-2010-1LIKE any new chief executive, SA’s “interim president” has to make today ’s business viable, unlock its hidden potential and turn it into tomorrow’s business.

When you launch a business, you drive for a breakthrough with a superior product, technology or service that has big potential.

Kgalema Motlanthe has that in the Soccer World Cup 2010. It is a mission that can focus brains, win hearts and become a huge step forward towards our vision of a rainbow nation. The global soccer showpiece meets all criteria for a “breakthrough” project that puts participants on a learning curve.

 

Rainbow nation’ is the vision —2010 the mission

World-Cup-2010-2WE HAVE had some disturbing news recently for the good sailing ship SA (Pty) Ltd, and now there’s a new captain — albeit in an acting capacity. However, if President Kgalema Motlanthe acts like most leaders in his situation, he will make the job his own. If he really wants to do more than keep the seat warm for someone else, he will get results fast and have the most important power of all —performance.

To get it, Motlanthe has to tackle the threefold management task common to all CEs. That is to:

  • Make today’s business viable;
  • Unlock its hidden potential; and
  • Turn it into tomorrow’s business.

To continue with the sailing analogy, navigator Trevor Manuel has taken us into calmer economic waters after the stormy seas of apartheid years. However, there are storm clouds lowering on the horizon and we have Tito Mboweni at the wheel. He is steering a high interest rate course that has us sailing very close to the wind. He is “pinching” the boat and we have lost speed.

There is no doubt our ship is seaworthy but, like all of them, it needs constant maintenance, and we have failed at that. We also have our weaknesses and threats—the most serious of them come from within. The organisation’s climate, culture and values among officers and crew are lousy.

There has been a highly acrimonious tussle in the officers’ mess. To add to the unrest, the crew down below squabbles and fights in the destructive ways of the past. It is also mutinous and wants to plunder what it can. Others are jumping ship.

Sadly, that’s because we have followed a course over the past 10 years that has taken us a long way from former president Nelson Mandela ’s simple, inspiring vision of what Archbishop Desmond Tutu ’s words “rainbow nation” meant to him. He said: “Each of us is as intimately attached to the soil of this beautiful country as are the famous jacaranda trees of Pretoria and the mimosa trees of the bushveld — a rainbow nation at peace with itself and the world.”

Some leaders pooh-pooh the idea of visions and missions. That is because political bureaucrats write them for annual reports and outsiders. They become mere slogans. However, if articulated well, they point the way and inspire people to make a difference.

Mandela ’s words expressed the vision for us in a way that meets the criteria described by Jerry Porras and Jim Collins in a seminal article at Stanford Business School in 1989.

It should be concise and simple — simple enough to pass the “grandmother ” test. If she “gets it” then you have something that will hook your people. It has to meet a fundamental need and be convincing enough to last a hundred years. Its purpose is to arouse, excite and mean a lot to people inside the organisation. Lastly, you describe it in the present tense. You can already see and feel what the future will be like.

However, you need steps to get you there. They derive from the mission. In contrast to the ongoing purpose of a vision, the mission is a clear, compelling, urgent, exciting, time-bound and measurable goal. It moves you forward in a steady, unrelenting and purposeful way. It is demanding, even unreasonable, but you are going to tackle it anyway.

President John Kennedy’s vision for the US nearly 50 years ago was for the US to become the greatest, most respected nation in the world. The mission to land a man on the moon and bring him back safely within 10 years was a big step towards that.

Sadly for Americans, that vision, like ours under Mandela, is taking some big knocks today. So, coming back to SA (Pty) Ltd, what is the mission that can focus the brains, win the hearts and become a huge step forward towards our vision of a rainbow nation? It has to be World Cup 2010. It meets all criteria for a “breakthrough” project that puts you on a learning curve. When you launch a business, you drive for breakthrough with a superior product, technology, or service that has big potential.

The curve in the exhibit below shows that a firm will not be economically productive during the start-up phase because of Murphy ’s Law: “If anything can go wrong, it will.” Those are the “Snafus” (situation normal — another f ***-up).

SA has reached the biggest Snafu of all — the fallback stage. We have been chasing numbers — not the vision of a rainbow nation.

Learning is hard work. It consumes energy, resources and time and always takes longer than you think it will.

However, viewed in the right way, the inevitable setbacks become stepping stones to success.

Once you reach a level of competence, the business is viable and can pay its bills. You have the platform to step onto the experience curve. Now you can make many, purposeful moves that tap into the hidden potential.

You standardise ways of doing things but keep improving them. You build teams; train people; develop, redesign and entrench new systems and procedures that take wasteful practices out of the system.

When people do the work together and share knowledge instead of competing with each other, productivity climbs and costs per unit plummet. You make lots of money and generate cash. Your company becomes a cashcompounding machine.

However, what the curve tells us is that you cannot simply switch people from competing with each other to co-operating and collaborating productively. It takes time and focused effort, although you can speed it up. That is where the “breakthrough” project comes in.

It demands change. This is unlike capital projects or annual performance goals, which do not change the way people do the work together. A breakthrough project does. However, you have to make an ego-free admission first and it is what our fallback is telling us: “The way we do things now does not work.”

There is a critically important presupposition behind this admission. It is the belief that no one reaches full potential. If you are very capable, and lucky, you will be above average but you get so far then stall.

World-Cup-2010-3-1Left to find your own way, you level off way below what you could achieve. A lack of awareness, challenge, criticism and testing stunts personal growth. This is true without exception. It applies to all organisations and leaders — for CEOs and their boards and for the president and his cabinet of ministers. No leader can afford to surround himself with “yes” men or to kill criticism from the public and media. It results in disaster as we see happening on our northeastern border —another threat to SA (Pty) Ltd.

Executive growth is evolutionary. It takes time and does not happen in a classroom. No successful executive ever attributes his or her success to a course or qualification. It is always some particular experience. However, you can accelerate it in a welldesigned situation.

To design it, use the conditions that drive people to tackle crises successfully. The factors that typify an emergency do not exist in the daily life of most organisations. Typically, people are frenetically busy doing exhausting work that adds little or no value.

A lot of the time, they are simply playing politics and pursuing their own agendas. They tackle false crises, not genuine ones. When you share stories about the genuine ones — fires, floods, strikes, and other “must-do” situations —they reveal two profound truths.

The first is that people quickly rise to the challenge. They do it without conferences, planning workshops, orders from above, consulting advice, motivational training or team building. Moreover, they do it with no additional resources.

The second truth is that it means every organisation owns and pays for significant, but unused, hidden capacity. A crisis uncovers this hidden potential because there is extreme urgency to get things done.

The goal is near and clear. People take charge. The challenge excites and stimulates them. They collaborate, ignore red tape and experiment. Politics and backbiting disappear. Depending on the nature of the emergency, they have fun doing what must be done. The results that these “zest factors” stimulate can be amazing.

The good news is that you can tap into this huge reserve of potential without burning down a factory or suffering a strike or blackout. So the challenge is for managers to release it. It is the same for SA and its new skipper.

World Cup 2010 has all the elements to unite the nation and to harness the hidden reserve of ability that lies dormant in our population. It is an exciting, breakthrough project — like Kennedy ’s 10-year moon mission.

Done well, it can have an effect on three factors critical to the nation’s success:

  • Make the poor productive;
  • Build a new generation of effective, ethical managers; and
  • Develop tourism.

The mission must be to organise a Word Cup that equals or betters the “best” of all that have gone before and that provides an unforgettably positive response for all visitors to the country.

The 2010 World Cup provides a narrow focus. With communication, less is more. You change an organisation, and a nation, with one, simple, easily measurable goal —not many of them.

To get results fast, there must be a powerful sponsor and a champion with the clout to back team leaders as they cut through the Gordian knots of red tape.

You must have people in the teams who can contribute — not people who are “nice to have”.

This is no time for bureaucratic numbers — the only numbers that count are ones that measure results. There has to be regular review. We have less than 600 calendar days left to execute our own “moon mission”.

There is no doubt our ship is seaworthy but it needs constant maintenance, and we have failed at that

World-Cup-2010-3-2Chunk the 600 days into 100 day milestones. There are only six left. Within the 100 days, have 10- day milestones. That is 60 to go. Every six days that go by take us 1% closer to crunch time. This builds up a sense of urgency as you look at the accomplishment ratio — time lost against results achieved.

World Cup 2010 demands radical change in the way we manage our country. Maximising this opportunity will reposition SA and even Africa itself.

More important, it will kickstart the development of our managerial capacity.

Imagine the improvement in our self-esteem, self-confidence, competence and relationships as we celebrate the end of a hugely successful event. Moreover, our economic productivity will improve. The change in the numbers will reflect the growth in management ability and the way our people work together.

This project is far too important to be throttled by the dead hands of bureaucrats or politicians squabbling with each other. It calls for highly visible, active top-level sponsorship and involvement of “line management”.

Nothing should deflect us — not even next year’s election. There ought to be a “war room” or “bridge ” in the Union Buildings. In it, the new skipper should be able to review at any time a portfolio of projects that have an effect on the overall mission.

If World Cup 2010 is to be the next major port of call for the good ship SA (Pty) Ltd, let us be sure firstly that the crew does not “run ashore” to rape and pillage.

Secondly, let us ensure that more than 90% of the visitors who climb up the gangplank to explore the ship leave us with a resounding “Yes! ” to this one question: “Will you tell your relatives and friends to visit SA at the first opportunity they have?”

Ted Black (jeblack@icon.co.za) helps managers to design results driven projects that grow them and their people measurably.