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.


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 ( 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