Tag Archives: return on assets managed

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.

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.

The phenomenal cash builders

Ted Black gets back to basics with the cash-to-cash cycle and prays Cashbuild continues to do so

CASHBUILD released its best results yet in September. Though relatively small in terms of market capitalisation, it is SA’s leading building materials supplier.

For good reason, this company has fascinated management stu – dents and analysts for more than 20 years. It has had its bad times as many firms do and that’s when “get back to basics” always becomes the management mantra. There are only a handful, and tough-minded Pat Goldrick applied them after becoming CEO in 1997.

Published results since 1986 showthere is one success imperative for any firm, irrespective of whether it is an “old” or “new” economy one. It is the velocity of the cash-tocash 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 dayto- day and month-to-month operating cycles. You’ll have cash in the bank.

Many companies find it difficult, even impossible, to achieve zero or a negative cash-to-cash cycle. It depends on their business design and operating system.

Goldrick understands the measure because he has used his own cash to buy a chunk of the business and owns 10% of it. Being a genuine “owner ”, he thinks and acts like one. Moreover, unlike most “turnaround” managers who tend to bring some order and quickly move on, he is the company’s longest-serving CEO.

The cash-to-cash cycle governs a company’s viability and has done since the days of the pharaohs. It has nothing to do with the fashionable distinction made between “tangible” and “intangible” assets. Nor does it drift into asset theories that treat people as “human capital” and “brands ” as assets.

Cashbuild will be 30 years old next year and as Arie de Geus observed 10 years ago in his book, The Living Company, few firms reach that age. In contrast, the seasons of man’s life, tempered by lifestyle and disease, are programmed to take about 100 years to unfold.

Yet, for companies, infant mortality is high. Few survive the t h re e – ye a r “start-up” phase. Those that do can still die young. Hardly any celebrate 20 but they have the potential to last for hundreds of years.

The paradox is that, like people, firms are different but very much the same. They share a common reality that defines management’s threefold task, which is to:

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

Cashbuild-1EXHIBIT 1 provides a context. The universal “S-curve” reflects an organisation ’s pattern of growth, effort and results over time. Two more underpin it. The first is the bumpy learning curve.

When you launch a business, you drive for breakthrough with a superior product, technology or service that is low on the S-curve but has big potential. The model 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.”

Learning is hard work. It consumes energy, resources and time. However, the inevitable mistakes become stepping stones to success. Once you reach a level of competence, the business is viable and can pay its bills. That’s when you step onto the experience curve and take many, purposeful steps to 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, productivity climbs and costs per unit plummet. You make lots of money and generate cash. Your company becomes a cashcompounding machine.

The Japanese call this stage Kaizen – the process of continuous improvement. After the Second World War, using knowledge of statistical process control and of experience curve effects first discovered in the US in the 1920s, they revolutionised productivity and achieved quality standards and levels of output that enabled them to capture many world markets through the 1960s, 70s and 80s.

A humiliated Western world eventually caught up by using the knowledge it had gained 60 years earlier but neglected. During the 1980s, the mantra was “total quality management”. Today, it has been rebranded as “Six Sigma” and converted into another fad.

When competitors catch up, performance peaks. The S-curve tops out and heads south. What won you leadership is out of date. The time for radical change puts you at the bottom of a new S-curve. If you don’t confront this reality, one of two things can happen:

  • You drive the company crazy by injecting it with one-off, activity driven crash programmes; or
  • You redouble your efforts with continuous improvement.

The first change strategy never works. With the second, you discover how futile it is to revive a company through, say, Six Sigma, if what it does is out of date. At best, you improve productivity and keep products going a bit longer. However, it’s a bit like putting a brain-dead person onto a life support system.

You breathe new life into a company by creating and maximising opportunities. If you continue to pour your best people, resources and effort into yesterday’s problems, your wheels may spin more efficiently but you sink ever deeper into a swamp of diminishing returns.

The S-curve is a great theory but not easy to use. Its great value is in helping you to decide what your initiative aims for. Are you going for “breakthrough ”? Or are you challenging the status quo — siphoning off resources to tap into the hidden potential lying dormant in the organisation?

With the benefit of hindsight, Cashbuild fits the model well. Albert Koopman led the company start-up in 1979 in the Metro Cash and Carry Group and beat the long odds against success.

Corporate start-ups rarely succeed because most managers lack the discipline of genuine entrepreneurs. They don’t have what used to be known as Joburg’s “Newtown ” MBA. Pat Goldrick does have one.

He started work as an ironmongery apprentice in Ireland aged 14. Fortunately, he lacks a “master’s degree in “business administration”— a qualification that would confuse and cause him permanent, bureaucratic brain damage. He knows that management is not a science. It is an art and a discipline that you can’t learn in a classroom.

Under Koopman, the company soon made profits and grew fast. Then in 1983, when there were nine branches, it ran out of steam. As he put it, rigor mortis set in. The fall in profits was only 11% — a bagatelle compared with the corporate collapses of recent years. However, it triggered a change process that revitalised the company.

He claimed the root cause of the problem was his autocratic management style. He felt it destroyed any hope of building a company of loyal, committed people. The change that followed was so successful it became a case study for business schools.

The academics argue that participative management releases people to be “the best”. Involve everyone in making decisions and improved results will follow.

With authoritarian styles of management governing most companies and institutions, the social unrest and escalating violence in the 1980s, the Cashbuild story did send an exciting message of hope. However, participation is only half of it.

Effective executives concern themselves with people and numbers. For Koopman and Goldrick, “empowerment” is not another form of patronising, debilitating socialism that promotes dependence, not autonomy. To executives like them, it means accepting responsibility and accountability for results.

Cashbuild-2EXHIBIT 2 trends some key ones. They are asset growth, the ROAM (return on assets managed) percentage and market capitalisation over the company’s lifetime since listing on the Johannesburg Stock Exchange in 1986.

The curves tell a story.

Koopman left soon after the listing and an acquisition in 1987 hiked the number of branches from 32 to 52 and sales hit R84m. ROAM fell from 16,5% to 10,7% but recovered to peak at 16,7% in 1991. Then it started its erratic 10-year descent to zero in 2000. However, there was a short up-tick after management abandoned a misguided change in strategy during the early 1990s.

To spur growth, it had decided to offer credit and created “Creditbuild” — a bad decision. Builders worldwide are notorious for being hugely inefficient. In SA they are no different. If you give them time to pay, you may never see your money.

Meanwhile, the branch network grew at a steady clip until 1996 when it had 108 outlets and sales of R880m. During the slide down the slippery slope, Koopman’s critics ignored the upward ROAM trend that followed his departure and the big acquisition. They argued his style was too soft and blamed it for the decline. The best way to get results is to “kick ass”, they said.

The fact is that Koopman did manage for results, as does Goldrick. Their styles may differ but, to paraphrase the late Peter Drucker, effective executives come in many types. Some are charismatic and ebullient. Others are shy and diffident. Some booze. Others don’t touch a drop. Some are warm, charming and intuitive. Others are cold, logical, and analytical — they have the personality of a round-eyed trout on a s l a b. All differ, but share one trait. They get the right things done.

Drucker described these “right things” — the fundamentals of management practice — in both Managing for Results and The Effective Executive, in the 1960s. No one has done it better. If there were a “top 10” of the best business books ever written, they would be on the list.

He observed that effective executives get their organisations to concentrate and focus on opportunity —the key to economic results.

In the late 1970s Koopman studied the building material supplies market in SA and saw how desperately black communities in rural areas and townships needed and wanted to build or upgrade homes. Despite widespread poverty and limited personal buying power, Koopman reckoned the market size to be R4bn a year. It was attractive but none of the established chains of builders’ merchants saw it that way. Only a few smaller, regional firms and many individual “owner-managed” businesses competed for it — thousands of them.

The big companies thought it too fragmented and high risk. However, Koopman transformed what others saw as a “problem ” into an “opportunity” and designed a business to capitalise on it.

First, he went where the big players weren’t. He chose to compete in towns with lots of black people living nearby. Locating away from big cities put it in a low-cost position. Branches cost less to build or rent and, because there were more people than jobs, salaries were lower.

Second, he applied the military rule of force — concentrate re-sources on a narrow front. He targeted smaller building contractors and black traders and went for leadership in that niche.

Third, he changed the game. He adapted the business to the economic and social realities of life facing the majority of South Africans by providing the building basics at lowest cost for cash.

Last, with personal growth, effective managers build on their own strengths and the strengths of people around them. Under Goldrick, the management profile at branch level has moved fast to reflect the country’s demographics: 50% of store managers are black and 15% of those are women. At senior level, 30% are black and 10% are women.

Today, having jumped onto a new S-curve that took the company from wholesaling to retailing, Goldrick sees the market opportunity as being R120bn and climbing. Although it is still highly fragmented with more than 3 000 individual players, other bigger firms such as Spar’s Buildit division, Massmart and Iliad are climbing into it.

To hold their leadership position in the face of intense competition, Cashbuild has erected some competitive barriers.

The first is to locate, build and revamp its stores fast to achieve the lowest capital cost per square metre of merchandising space. The stores are designed so as to erect the second barrier: to turn stock over quickly within a relatively small space. Third, Cashbuild works with suppliers to get the right stock in the store at the lowest price.

These three barriers combine to create a moat that makes Cashbuild the lowest-cost supplier in SA and positions it for aggressive defence and attack.

Last, although it operates with a low profit margin, it has to make enough to invest in the future — to train and develop staff and expand at a rate of 10 new stores a year.

These barriers protect the business. Cashbuild concentrates on a chosen segment and dominates it with focused operations. The success of its strategy makes it attractive, sexy, and safe for investors and all who do business with it.

Capital markets now rate the company as a relatively low-risk, high-return business in its sector and, as Exhibit 2 shows, reward it with a climbing share price and a market capitalisation that is bigger than the value of assets that Goldrick and his people are managing.

However, despite its success, there is a “problem-opportunity” looming — one that faces more and more companies as they introduce share ownership schemes which form part of their economic empowerment initiatives.

Giving employees precious equity through share options achieves nothing without a systematic education programme to go with it. In all companies, from boardroom level down, there is widespread ignorance about the rules of the game of business. People are just employees and kept that way. It creates a massive opportunity for productivity improvement.

The prime measure of operating competence, one that few managers pay much attention to, is ROAM. As Drucker observed, if people work at it purposefully, day to day, year on year, it is the easiest and quickest way to improve the profitability of a business. The three key measures of ROAM are:

  • Return on assets managed (ROAM) —the total profit of the business. This is,
  • Profit margin or ROS% (operating profit ÷ sales x 100) multiplied by
  • Asset turnover or ATO (sales ÷ assets).

The most important measure in this equation is asset turnover (ATO). It governs the cash-to-cash cycle. However, let’s first take Cashbuild’s return on sales percentage (ROS%).

Cashbuild-3EXHIBIT 3 shows the close correlation between its profit margin and ROAM since first listing on the JSE.

On the X-axis is the return on sales percentage (ROS%). The higher it is, the higher the ROAM. The message sent by this chart is that Cashbuild has to keep ROS around the 5% mark if it wants a respectable ROAM. That’s the hurdle to keep beating. Even in a growth market, with increasing competition it is a tough ask. So where must they look to make a difference?

Asset Turnover (ATO) and its submeasure — stock turnover (sales ÷ stock) —powers the cashto- cash cycle.

Take a Cashbuild branch. Say it stocks one window at a time and sells it for R100. To get it sold costs R95. The profit is R5 and the profit margin is 5%. If it turns its window stock once a year — sells a window once — that’s a 5% return on the asset. If it can turn its stock twice —sell two of them — then return on the asset doubles to 10%. Sell it six times and the return is 30%.

To raise profit margins through increased selling prices, bigger volumes and cost-cutting in a highly competitive market is very difficult. Yet, to increase asset turnover by 10% and more a year by “turning” the inventory faster only means using the Cashbuilders ’ brains purposefully. It needs some consistent hard work inside the business, but especially with suppliers.

Goldrick took charge in 1997. Cashbuild ’s ATO for the years 1997 to 2007 averages out at 3,1. That means for every rand of assets that Cashbuild manages, it generates on average R3,10 of sales each year. In 2007, with an extra week, it generated R3,40. For the previous seven years, it averaged R2,90.

With the branch network growing steadily each year, Cashbuild ’s key lever for lifting asset productivity is inventory.

Cashbuild-4EXHIBIT 4 uses a statistical process behaviour chart — a valuable but rarely used management tool. It shows that the business model — the system designed by management — generates the numbers.

The graph shows Cashbuild ’s sales productivity of stock since listing in 1986. It answers this question: for every rand of stock, how many Rands of sales do we generate?

The performance is typically random but relatively stable and predictable. The first plot, falling outside the upper limit in 1986, was probably due to year-end “window dressing” in preparation for the first year of the listing. Management most likely reduced stock as low as possible or used some accounting artifice to improve the result.

The time series from 1997 when Goldrick took charge shows that R1 of stock generates an average of R5,73 in sales. The task is to get it above R6—say R6,50 —a 13% improvement. Goldrick would probably expect more than that to get the brains really working.

To expand this “problem/opportunity”, the company is about to install a system from SAP. Will this help or hinder it?

A recent Economist article posed a question about SAP’s new product launch — a web based product code-named A1S. It asked if SAP could overcome its history of selling complicated software to big businesses. A systems consultant replied: “People still haven’t forgotten that implementing SAP is like pouring concrete into a company.”

The last thing shareholders would want is for an entrepreneurial company such as Cashbuild to be throttled by bureaucracy. It is a very real threat. A recent study by Micro Focus® of some the world’s leading companies across five countries in Europe found that they ignore the size and value of the IT assets under their control.

Less than half of chief financial and information officers try to quantify the value of these assets and, even more appalling, less than a third have ever tried to value their contribution to business performance. That won’t surprise long-suffering operating managers but it is bad news for Cashbuild — unless they approach things differently.

Effective managers perform well with or without IT systems. If high-performance IT people, not high-tech ones, supported them they could probably achieve spectacular results. IT people are among the most talented in organisations. However, they only talk the ROAM and management of change games. They don’t play them.

If they want to play the game of business, they must start seeing themselves as a centre for value creation, not technology. To be a “fee-for-service” firm is less important than attitude, self-image and mission. If they hold the view that “you can’t operate without us”, they will never deliver the way they could and should.

So, that’s the Kaizen’s goal for the next year or so —to get Cashbuild ’s new IT assets to deliver a ROAM higher than today’s 18%. For IT and financial people it is more of a “breakthrough ” goal, but the company is still on the “retailing ” experience curve.

The omens for immediate improvement are not good. During the late 1990s research indicated that most enterprise resource planning implementations tend to depress ROS and ROAM for a few years before they deliver economic results. Look at BCX’s results for the last two years for proof of that. By its own admission, the company whacked itself with a SAP implementation. That’s hardly surprising when we learn that most financial and IT people can’t be bothered to measure themselves anyway.

Because Cashbuild operates with a low ROS percentage and Goldrick is a genuine “owner ”, perhaps it won’t fall prey to accountants and IT “techies”. If they don’t, then we’ll have a wonderful success story worth the retelling and more great lessons from them.

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

Performance power is what counts

Asset productivity drives the engine of efficient companies over the long term, writes Ted Black

THE share market and the pressures it creates for top management is a significant, topical issue raised in the latest McKinsey Quarterly Review (Richard Rumelt, Strategy’s Strategist). Generous share-option schemes can aggravate the problem, stimulating managers to pursue the wrong goal.

As we know, prices are volatile. They respond to speculative expectations about future changes in industry and market sectors — less so to individual company performance. Top managers may think that’s unfair, but what does it mean for them?

They have to grit their teeth and detach themselves. They must play the ball, not the market players. They must stop pandering to analysts; ignore short-term share-pricemoves and perform their prime threefold management task, which is to: n Make today’s business viable; n Identify and release its hidden reserve of potential; and n Turn it into tomorrow’s business. Do these three things well, and the numbers will follow—not least the share price. We know that the valuation mechanisms of professional investors and analysts can be hugely inefficient for a long time. However, in the end, performance power counts. It is the most important power of all. For a company, a key driver of it is asset productivity. High productivity buys you the time and leisure to think creatively —a rare activity for most people in most organisations. Thinking people make assets work. When they work, they generate cash. Cash creates options and opportunities. Seize them and you leave competitors trailing as you take charge of your own destiny —your growth and evolution. The first trait of the long-lived companies that Arie de Geus described 10 years ago in his book, The Living Company, was conservative financing. Extraordinarily successful companies do not risk money needlessly. They understand the meaning and value of cash in the bank.

The three most important financial measures of operating management are:

  • Return on assets managed (ROAM) — the total profit of the business. This is
  • Profit margin (operating profit divided by sales multiplied by 100), multiplied by
  • Asset productivity, or asset turnover (sales divided by assets).

Using the latest year-end numbers, Exhibit 1 is a snapshot using data from more than 100 companies in 27 sectors on the Johannesburg Stock Exchange. It compares ROAM performance to a measure of value creation.


It shows clearly a strong, positive correlation between ROAM performance and the ratio of market capitalisation to assets managed. As ROAM rises, so does the perceived value of the sector.

However, as Boston Consulting Group pointed out as recently as 2003 in its Value Creators Report, Back to Fundamentals, the measure in ROAM that is most significant from a competitive viewpoint is asset productivity (asset turnover, or ATO in accounting jargon). It drives ROAM and, fundamentally, the value of a firm.

Its findings showed that the days of relying on “expectation premiums” to fuel total shareholder returns are over. They argue that these premiums eventually decline to their long-term market average of zero. Only firms with strong fundamentals can achieve superior returns. Moreover, the top performers rely on asset productivity more heavily than cash-flow margins to lift profitability.

To back that view, a momentous but predictable event occurred this year. Toyota passed General Motors (GM) to become the biggest, most profitable car manufacturer in the world. However, a warning light flashed on more than 25 years ago.

Toyota landed a car from Japan outside GM’s HQ in Detroit at better quality and a lower delivered cost than GM could achieve in the US.

Ironically, that’s when Tom Peters launched his career as a management guru and hyped GM as an excellent company in his, and Robert Waterman’s, blockbusting In Search of Excellence.


Exhibit 2 shows a major reason why Toyota is the leader today.

The latest results (car-making only) illustrate the relative, competitive ATO effect. Toyota’s asset productivity, with Tata close on its heels, is about 60% higher than the rest. It has been way ahead of GM for years.

Firms worldwide are now applying its manufacturing principles, not only in production plants, but also in service industries wherever managers are determined to drive waste out of business systems and change the way their people work together.

We applaud management heroes who rescue companies. However, few of them build sustainable businesses. They bring some order, then move on. In contrast, the truly successful companies have no heroes.

Very few of us can name the man who runs Toyota. As Jim Womack, coauthor of Lean Thinking puts it, its success comes through the work of lots of “farmers”, not heroes. These farmers are people who plough straight furrows, fix fences and keep a beady eye on the weather.

Moving back to SA, there were many heroes in the information technology sector a few years ago. Most IT companies are not highly valued today.


Overall, the sector’s market capitalisation to assets managed ratio is 0.7, despite a booming market. Exhibit 3 displays its performance.

Again, the ATO effect is clear. Datatec, Didata and Business Connexion account for 85% of the assets managed. Their combined ROAM is 6% — a very mediocre result. The top performer is Paracon, but its core business is to find and place IT people — not sell software, implement systems or “drop boxes”.

As to Didata, the boys from Roosevelt High have learned the truth of Virgil’s maxim from the Aeneid (Book 6): “Facilis discensus averim… Sed revocare gradum …Hoc opus, hic labor est” — the descent (to hell) is easy …but to recover one’s steps … that’s the task and effort.

Once you’re on the slippery slope, it’s all hell to get back again.

It is easy to be carried away with hubris, but ego can stop top management from doing much needed weeding and pruning in the garden even though the numbers tell them to do it. Half of Didata’s asset base generates 37% of sales, but 74% of the operating profit. The rest of the assets generate 63% of sales and only 26% of the profit. To make matters worse, the poor performers probably attract more than 80% of the central costs of $34,5m that wipe out their contribution anyway.

And the final message from this sector? A recent Financial Mail article about Business Connexion says it all: “The move to a business management software system from SAP had a material adverse impact on the collection of trade debtors.” So much for asset productivity.

One can only wonder about the number of companies that have been whacked by SAP-wielding IT people who do not seem to understand what productivity is or know how to use their technology to make a measurable impact on it. Their systems seem to tighten, instead of prising off the throttling grip of bureaucracy ’s dead hand. 

Then we move into the retailers. Exhibit 4 compares the relative asset productivity and ROAM of the big three food retailers in SA. Until its latest results, Shoprite trailed Spar and Pick ’n Pay with both measures. Its sales margin has lifted ROAM, but not enough to catch up.


There is a lot we can learn about business design and supply-chain management from these big retailers —some of it not always good. There are suppliers who would prefer to deal with terrorists — at least you can negotiate with them, they say.

However, in contrast to the traditional, confrontational buying approach of most firms, Wal-Mart in the US raced ahead of Kmart during the early 1990s by paying its suppliers sooner and working closely with them. Faster inventory turn led to better instore product availability. This meant they sold more, which pushed up sales per square metre and fixed asset productivity.

To achieve these improvements, management chose a measure that Wal-Mart’s then 1-million employees would understand. That criterion eliminated EVA™(economic value added) and CFROI (cash flow return on investment) as measures. They wanted something that everybody could grasp easily and commit to —it was ROAM.

The effect was dramatic. Over a three-year period, sales increased 47%, but inventories grew only 7%.

Taiichi Ohno, Toyota’s legendary plant manager, was the architect of the company’s manufacturing system. He visited Ford Motor Company before and after the Second World War. He found no change the second time and learned nothing from his trip.

However, while there, he walked into a supermarket for the first time. The experience sparked Toyota’s asset productivity-driven design. He switched it from “push” to “pull” production, and knew that suppliers had to become a key part of that shift in strategy. Today, Toyota’s business model is the machine that is changing the world.



If retail and IT companies are asset-light, what about capitalintensive industries such as mining? The sector’s market cap/assets ratio is 2.1 and individual companies are plotted in Exhibit 5.

The picture is the same. ATO drives up ROAM. Kumba and Lonmin lead the pack. Harmony and Anglo Gold bring up the rear.

The writing was on the wall for Harmony in 2004. Management’s strategy doubled up the asset base and halved its productivity. It has bumped along or below the line at the bottom left-hand corner of the chart ever since.

As to one of SA’s exemplar companies, Exhibit 6 compares SABMiller ’s various business units with each other and for further comparison, includes Anheuser Busch’s and Molson Coors’ North American beer interests.



Yet again, the asset productivity effect is clear. We can only hope that management doesn’t fall prey to ego, and match weakness with opportunity as it did when buying Miller, and compound the problem by merging it with Molson Coors. Adding low-performing assets to low-performing assets — doubtless at a hefty premium —will plunge it deeper in the North American swamp and guarantee failure.

As to taking SABMiller on in SA with Amstel, Heineken could be careering into a swamp here. On the chart, the South African business unit includes ABI. If we could take it out and look at asset productivity of beer alone, it’s a safe bet that ATO and ROAM will be right off the chart.

SAB can crush anyone who tries to enter this market. However, instead of going to Sun City for a gig costing millions of rands to work its sales and marketing people up into a competitive frenzy, it might be in the company’s interests (and shareholders’ for that matter) to adopt a more “statesmanlike” approach.

An “orderly ” beer war might not be such a bad thing. They don’t have to maul each other like Miller and Bud are doing. Instead, a well orchestrated arrangement (kept top secret, of course) could see all beer sales going up as consumers join in the fray “chug-a-lugging” their favourite brands. It won’t happen though. As Joseph Bower wrote 20 years ago in When Markets Quake: “The willingness of companies to bleed each other is awesome!”

If they do go to war, the company with the highest asset productivity will win. It can bleed for longer. Beer South Africa can bleed for a very long time if it has to.

Competitive ATO is why Miller is doomed to mediocrity in the US and why Heineken is taking such a big risk here — unless it has a sinister bloodletting plot with wider implications that we don’t know about.

So what does all this mean for management? The second characteristic of the long-lived companies that Arie de Geus identified was that no matter how diversified they were, their people felt they belonged.

Case histories showed that a “sense of community” is essential for long-term survival. The managers of living companies commit to people before assets because they know that people — not spreadsheets and pieces of paper—make assets work. Moreover, line managers must initiate the change process, not earnest corporate staff who behave as if they own the assets. They don’t. Line managers do.

Effective managers who believe in growing people and building a community know that you don’t do it in a classroom. You build communities of growing people most rapidly and sustainably when its members are “forced ”, so to speak, to develop it under short-term, concrete, real-life challenges that are important to them.

These challenges always lie at points of overlap along the value stream of activities from supplier through to customers. That’s where you find the largest performance improvement potential to lever up asset productivity and where you can design community building projects that grow members fast, furiously and measurably. The improvement in the number tells you how much they have developed and provides the building blocks for expansion of the process.

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

It’s a wonderful message of opportunity.

Ted Black (jeblack@icon.co.za) writes, coaches and conducts ROAM workshops that help managers design results-driven projects that grow them and their people

Tapping SA’s hidden potential


THE first step in converting a problem into opportunity is to recognise you have one. Recently, strategy consultant Tony Manning did that on these pages by asking: “What if jobs can’t be found?” He implied correctly that if we don’t find them there will be trouble, and we had better be ready for it.

The-Unemployment-Challenge-The best hope for SA would be a privileged, multiracial elite perched atop a simmering cauldron of repressed expectations never to be met. That’s a message of fear. Instead, take the next steps and go for the message of hope: reframe the problem into an opportunity and convert it into a simple, measurable goal.

If SA were a business, what is the single most important characteristic that it shares with all organisations?

Without exception, huge, untapped potential lies dormant and unused. For proof of that, why do people achieve the “impossible” during a crisis, then sink back to normal? The amazing results they achieve are always done with what they have — nothing more.

It means organisations pay for resources that don’t deliver value. A crisis uncovers that hidden potential. It’s why good leaders and effective managers make “impossible” demands from time to time. Until they do, they know that people will merely beaver away at the old ways of doing things. The brains won’t get out of bed in the morning to redesign the system or find new and better ways of working together.

In the private sector productivity is quite high because of competition, but there is still massive opportunity to improve. The power of corporations to set prices allows huge levels of costly incompetence to exist and top management teams to be paid obscene amounts of money for little accomplishment. Proof of that emerges during tough times.

As to governments everywhere, with police, housing, education, health care and defence, the potential is staggering. SA is no different, so let’s tap into it.

In this beautiful country we have three things in abundance — minerals, people and poverty. Our population growth is one of the highest in the world though disease will temper it. Moreover, because we are near the bottom of the productivity league, most South Africans are dirt poor.

However, the normal distribution curve applies — about 10% of our people have superior potential. That means there are more high-potential blacks and browns in the countryside and in the workplace than the entire white population. It will be the same within every business. This raises the question: how many firms have systematically set out to find out who they are and where they work, and have an accelerated development programme in place for them?

As to the productivity issue, there is a convincing socioeconomic supposition: prosperity short-circuits procreation and improves the key productivity measure — gross national product (GNP) per capita. It increases GNP and slows down population growth at the same time—a “double whammy”.

With any business, economic results are governed by the system — its design. Once the business design is outdated, the company declines. When that happens, most managers typically and myopically pursue excellence through such management fads as Six Sigma — a repackaged use of statistical process control tools — balanced scorecards or value-based management. They only get better and better at doing the same old things that no longer work.

It is time for breakthrough and to jump on to a new learning curve.

So what should that breakthrough be for SA? Two ideas come together at this point. One is general. The other is specific to SA. Both come frommanagement guru Peter Drucker:

  • Only managers make resources productive — not nature, governments or laws of the market place.
  • Making the poor productive is the key to the future of this country.

Taking the second point first, the answer to the poverty problem lies within us—not lack of foreign investment as so many argue. The poor do not create poverty nor does unemployment sustain it. The system that surrounds them with its institutions and policies does.

“Economists for the Poor” like Hernando de Soto, Muhammad Yusuf, the founder of Grameen Bank, and our own Norman Reynolds, prove time after time that the poor have skills that remain unutilised, or underutilised.

We tested that last year with a pilot project sponsored by Sasol in Sasolburg’s Zamdela Township to help young people start their own businesses and improve the results of existing businesses.

The participants, 20 men and women, were chosen carefully. Eight started street trading and the rest pursued opportunities in the community at large. Six businesses already existed but the rest were start-ups. They included selling cellphone airtime, cabinet-making, dressmaking, catering, sign writing and photographic and electrical services.

Ignoring the usual training brief, we designed the programme for on-the-job practice and coaching, not theory. A four-day classroom session — the only training in a nine-month programme — ended with a 10-day “breakthrough” project. Then came two 100-day projects.

Numbers tell the story. Over nine months this courageous little group generated R5 in sales for every R1 Sasol put in. Almost all of them are still going and even expanding to employ more people.

The greatest lesson of all, as Yusuf found in Bangladesh and elsewhere, is that people, however poor, can lift themselves out of the quagmire of poverty with very little. They need the ability to borrow small amounts of money and, as De Soto advocates, own their homes.

The truth is that SA, like any business, doesn’t have to look outside for more resources. We have them.We pay for them. We don’t use them. Do we really need foreign investment to kick-start a “breakthrough”? No, there is plenty enough money here, but it sits in Johannesburg in the first-world economy.

So what is the first breakthrough goal to be achieved? Our CEO, President Thabo Mbeki, has demanded his cabinet stand and deliver, and there are some good signs as a result. Now we need a demand to design banks for the poor, or similar mechanisms.

People will own homes, borrow, save and get money circulating in villages and townships (including Soweto — why must it remain a Jo’burg dormitory, which is what the planners wanted?), where it will create trade and build thriving local communities.

That way SA will build up performance power — the most important power of all. As any effective manager knows, productivity creates time and opportunity. What can we value more?

Build a new generation of managers

AS MANAGEMENT guru Peter Drucker points out, only managers make resources productive. In SA we have managers who are quite competent by world standards, but at top levels they still form, in the main, a rather arrogant, patronising, white-male old guard — one that has created and is passing on to a new generation of owners and management some very sophisticated and complex organisations.

However, productivity is a function of simplicity. It means we need to adopt strategies, structures and styles of management that are aligned to the realities that face us, realities like more and more inexperienced—and so marginally competent— managers as firms rush to meet affirmative action and empowerment quotas; more militant workers who have lower skills by world standards and are ever harder to dismiss.

In these conditions management succumbs to a siren call — it makes the poor redundant. It swaps labour for state-ofthe- art capital equipment. On the issue of productivity, you even have someone as influential as SA’s Johann Rupert quoting a deadbeat Republican senator who idiotically attributes America’s economic success to: “You’re fired!”

Automating people out of work is a big step backwards under any management slogan, including “world-class competitiveness”. The ultimate cost will be the loss of SA.

The need is to create simple, focused organisations that make and sell big volumes of standardised products and services out of dedicated, flexible plants and businesses with low capital and production costs of output.

Second, it is to develop a management class, not another bureaucratic one. The way to do it is threefold:

  • Develop existing, experienced, competent managers in a way that enables them to develop protégés fast.
  • Redesign managerial jobs into genuine management tasks inexperienced people can learn relatively quickly.
  • Screen and select those with the aptitude, potential and readiness to become task managers.

Task manager qualification is purely potential and aptitude. The normal distribution curve applies to any company. Ten percent of its people will show high aptitude and potential. If the average company reflects the population demographics of the nation, then there will be more blacks and browns with higher potential than whites in the firm.

Who are they? It behoves us to find them, however badly educated or illiterate they may be. Next, to develop them. We have the tools to provide accelerated learning. There is only one qualification for existing managers: who among them are ready to be mentors?

Finding them is not easy. There are lots of would-be mentors out there now that coaching and mentoring has become the in thing. You can be mentored inside out if you want to be.

The first mentor, conveniently named Mentor, was an old, valued adviser to Odysseus. When he went off to fight the Trojan War, Odysseus entrusted Mentor with his son, Telemachus. He didn’t want a baby-sitter. He wanted someone to impart enough useful knowledge — practical and theoretical — to enable his young boy to meet the future confidently.

Real mentors have certain characteristics — like “mentor” emblazoned across their chests and foreheads. In recent years how many of them have been lost to SA due to boneheaded retrenchment programmes designed to satisfy costcutting and affirmative action targets?

Good mentors have keen eyesight that cuts through confusion and clutter like a searchlight in the night sky. They can focus on what is important for any protégé’s job. That’s why the good ones are hardly ever “baby-sitting” psychological counsellors. They have been there in the heat of battle as line managers.

They can articulate a protégé’s concerns more clearly than he or she can. They don’t need to read personal CVs to figure out what a protégé knows.

Mentors focus on results and on people. They build on strengths and stimulate personal growth. They know what their protégés can do and challenge them to do it. They think it foolish to worry about weakness as they know they have to live with it if they want strengths. Every one of us has an Achilles heel.

Unlike parents, mentors don’t lecture. They know exactly when to shut up. Parents, especially fathers, don’t.

In the end, we choose our mentors. They can’t nominate themselves. Organisations know who they are. However, their contribution has to be 100% voluntary, 100% self-motivated and 100% self-serving: “It will be to my own personal advantage if these task managers are successful,” is the thinking required. “Do-gooding” or managing by the numbers is deadly for any enterprise.

Look for mentors who can offer focused practical advice within a useful ethical framework. Then let them develop managers who will make resources productive. They are worth more than all the minerals we have or a lot of the costly and wasteful “entertrainment” activities and programmes provided by business schools and corporate “universities”.

A well-designed and resourced mentorship programme that focuses on results will lever up productivity enormously in every company. It will also build a new generation of effective managers — not bureaucrats.

Ted Black and Van Hoek consult, coach and write. They have started Banesa Pula, an entrepreneurial development centre for the youth near Hammanskraal.

Think like an owner and win


THE Enron fiasco, ending up in a US court, reminds us first that the “new economy” was just another scam. Reputable financial institutions conspired with ruthless, greedy entrepreneurs and unscrupulous management to peddle it. They had everything to gain and nothing to lose.

Back-to-BasicsSecond, the basic rules of business have not changed one iota since the days of the pharaohs. So, you may ask: “What are these basic rules of business?”

There are a few. However, the only business success imperative is probably the cash-to-cash cycle. Its compounding velocity seems to govern the very viability of a business — its productivity and competitiveness.

The cycle has nothing to do with the fashionable distinction between “tangible” and “intangible” assets. Nor does it drift into “mind-screwing” analogousasset theories that refer to people, intellectual property or brands as assets.

At any rate, when the collapse came, that is what shareholders of Enron, Cisco, Worldcom, Marconi et al, including our own Didata, must have felt. In 2002, even Richemont’s management had to slash about $3,5bn off the value of its “maisons” as it got busy speeding up the company’s neglected cash cycle.

Bruce Henderson, the late founder of Boston Consulting Group, made a typically trenchant observation on this issue: “A business is a cash-compounding machine or it is nothing — and sooner or later will be swept away.”

If it is such a machine (which it may or may not be) then we know what speeds up or slows down compounding. And you don’t need rocket science to compute it. Standard 4 or 5 arithmetic will do just fine.

Simplicity wins. To change an organisation fast, use one measure — not many of them. That’s what Adcorp — a one-time promoter of the “intellectual asset” myth during the scam years — has done to great effect.

A Harvard Business Review article (June 2002) — Lessons from Private Equity Masters — influenced Adcorp later the same year. Normally, there is little or no overlap between “knowing” and “doing” — especially common among senior executives who feel they have the power not to have to learn anything. However, this time not only did the Adcorp team learn, but it acted fast.

Successful private-equity firms routinely achieve eye-popping economic returns from the companies they control. How do they do it? Like a searchlight in the night sky, they focus relentlessly on a simple management agenda. They narrow their aim to expand returns.

They first demand an investment thesis that focuses on opportunity, not problems of the past: “How can you make your business more valuable in the next three to five years? What two or three fundamental changes must you make? What should you prune? Where must you invest to grow?”

Second, use simple measures — not complex ones like “balanced” scorecards, or CFROI, an accounting return measure. They lead to bureaucratic, measurement mania, rarely any meaningful productivity improvement. Watch cash more closely than earnings, and add bite to measures by tying the equity portion of managers’ pay to their own units, not the parent company.

Today, the reality is that corporate management answers to nobody. Under the indulgent gaze of lily-livered boards, executives set their own pay and allocate themselves share options to create a spurious sense of “ownership”. Sadly for shareholders, there is no correlation between these schemes and sustainable economic productivity. They become merely another means for managers to “take” money — not “make” money.

Third, work the balance sheet. Eliminate unproductive capital and treat equity as precious and scarce. Use debt — up to 60% — to gain economic leverage and focus the minds, but match risk with return.

Fourth, make the centre the shareholder. Keep it lean by having only five people for every R1bn managed. That rule of thumb reduces the typical corporate office by 75%. It also means that operating managers don’t have to allocate precious time and resources feeding data “carrots” to bureaucratic “donkeys” who always gobble up as much as you can give them.

The centre’s task is to provide support, advice and to hire and fire operating top management. Its guiding statement of intent is: “Every day we don’t sell a portfolio company, we have made an implicit ‘buy’ decision.”

Two years ago Richard Pike, Adcorp’s MD, put himself in the shoes of the shareholder. Unless a manager thinks like an owner, he cannot act intelligently or with integrity.

His view is: “A profitable company may not generate cash. However, cashgenerative companies tend to be profitable and are assured of survival.”

Today, after walking round his company explaining his simple agenda, not the vision-mission-values stuff, Pike manages a much simpler, more productive and far more valuable business.

Secure in the knowledge that there is always huge, untapped potential lying dormant among people in every company, Pike used the ROAM (return on assets managed) model to clarify operating management’s task.

One demanding, clear, simple, measurable goal always generates excitement, unlocks creativity and drives performance.

For a year, his people focused on the cash-to-cash cycle — in particular, the cash owed by customers. But this is not to say that Pike ignores other measures — far from it.

For Adcorp, there are four key ones within the ROAM model. However, debtors’ days received most intense focus for the period under review.

Today, operating margin is under the microscope.

Adcorp also applied the 80:20 law of focus to weed out underperforming businesses and unprofitable market segments. There were 28 business units in 2002. Now there are 12.

These are the economic effects:

  • ROAM improved from 23% last year to 30,4% and
  • the value of the firm increased from R250m to R620m in two years.

Managing is not easy, and life is far tougher than it was even a few years ago. That means only tough-minded, highly disciplined managers who think like owners will win the day.

Pike and his team made a “breakthrough” last year. They discovered that a simple agenda that leads to concentration and focus on opportunities is the best way to manage.

The top private equity firms are good models to emulate. Adcorp has done that to great effect so far. All that remains is for its people to build on their success and continue converting their simple investment thesis into reality. Black, a writer and executive coach, is an associate of the Da Vinci Institute

Black, a writer and executive coach, is an associate of the Da Vinci Institute.

Beware of squandering equity

AFTER announcing its latest results, Dimension Data now seeks approval for a new share scheme. The company says it “is proud of its history of employee involvement in share ownership”. Whether shareholders are as proud is a moot point.

Didata-&-Share-SchemeReturn on assets managed collapsed from a once heady 25% a few years ago to below zero and now to what management calls a “solid turnaround” of 2%. Will a new share scheme make any difference to the performance graph?

It shows how long it can take the capital markets and seemingly sophisticated investors to wake up as well as giving us some other useful lessons.

With performance improvement, a thriving industry of educators, consultants and evangelists offer “motivational” solutions for incompetence. They range from management education, training and team building to experiences in the wild, pep talks and the use of incentives. None of them works for long.

However, because performance is never good enough there is a constant search for new remedies to lift it. Dr Tom Gilbert wrote a masterful book on the subject of performance management in 1978. Pulling no punches, he argues that the subject of motivation arouses more nonsense, superstition and plain self deception than any other topic.

He argues that there are two aspects to it. First, there is a support system — the quality of expectations, information, facilities, measurement and feedback that management provides — the elements we should focus on but neglect. Second, there are personal motives. The belief is that if you don’t give people what they expect for good performance they will slack off. Results will also decline if they don’t want what you offer them.

With incentives there are two kinds: money and recognition for good work. The most powerful lever of all is money. However, the truth is it has less effect on productivity than the other support factors, especially expectations and information, because it’s the hardest one to grasp. Moreover, the higher you go in the organisation, the more slippery it gets. Why is that?

Because you confront a host of vested interests in incompetence, the issue becomes highly emotional and political. It is about distribution of wealth: who gets rewarded with how much for what?

That’s why top executive pay, coupled with corporate governance, is such a hot topic. Two remedies for improving results are performance bonuses and the use of share options. The problem is that there is no positive correlation between money paid and competence.

The fact is that top executive pay derives from one thing: the value of any firm is linked to its monopolistic position in the market segment it serves. This enables it to create high profits. It also means that many powerful people who control company performance systems are not paid for managerial competence. If they were, many would be out of a job.

That fear is a major barrier to the efficient use of money to influence behaviour. Look how many top teams quickly drop an economic value-added incentive scheme even if they get as far as introducing one. It is too tough for them.

The belief that the “profit motive” is a prime cause of competent performance is widespread. However, the most incompetent performance often results in big profits. The power to set and control prices is the only power corporations need to ensure the profit motive is selffulfilling. Collusion with competitors to develop “orderly market arrangements” is a most effective stratagem. Companies in SA’s telecoms industry are excellent examples of that. There are many others.

When people perform incompetently, and most do for most of the time, they inflate the costs of doing business. Top management in both private and public sectors 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 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.

Share option schemes probably have no effect on managerial performance, yet are the most costly from a shareholder perspective. Management justifies their use with the specious argument that they will make employees think like owners. They are no more than a perk.

If management has only one legitimate purpose — to maximise shareholder value — then a key measure will be the share price.However, using it as the basis for an incentive scheme stimulates behaviour that destroys shareholder value.

Didata is an example of a once brilliant company that did just that. Jeremy Ord and his team chased the share price at a huge cost to everyone but themselves and those shareholders and employees who had the knowledge and sense to pull out in time.

On a positive note, they showed yet again that productivity of the asset base fundamentally drives any firm’s share price and value. Therefore, any incentive scheme should be designed to influence behaviour that results in an improving, sustainable return on assets managed.

Shareholder equity is far too valuable to be squandered on managers who neither think like owners nor understand that business design and asset productivity ultimately drive strategic positioning and the value of the firm.

Get the return on assets managed up systematically and sustainably, and then watch the share price follow.

Black, a consultant, writer and coach, is co-author of Who Moved My Share Price? published by Jonathan Ball.

What moved your favourite share’s price?

Learn about “Roam” – return on assets managed – and you’ll be all the wiser, writes Gaenor Lipson.

Ted Black

SABMILLER SHOCK: Ted Black says the brewer’s asset turnover no longer looks very healthy.

HOW do you measure what a company is worth at present, and therefore how much a share in it should cost? In other words, how do you rate a firm’s financial health in order to get a feeling for its prospects in the future?

The authors of Who Moved My Share Price? made a name for themselves by picking holes in Dimension Data’s operating principles, and — in the minds of many people — predicting the former JSE highflier’s demise.

The book is about the importance of “Roam” — return on assets managed — in determining the value of a company.

The ratio is calculated by comparing two figures. The first is asset turnover, derived by dividing sales by assets. The second is return on sales. To get this figure, divide profit (or earnings before interest and tax) by sales, and convert it into a percentage.

More recently, Ted Black and Andy Andrews have turned their guns on SABMiller. Based on their formula, the brewer fails the test of strength.

What makes Black so sure that it is worth investors taking a long, hard look at their favourite company’s operational history?

Asset turnover is the most important measure in the equation, he says. In the case of SABMiller, “I am not saying they are going under. I am simply pointing out that their asset turnover halved from 1.6 to 0.8 before the Miller acquisition, and Roam plunged,” he says.

“This is despite a very healthy return on sales of 16%. A sharply declining asset turnover is a warning bell and SABMiller’s management had better pay attention to it — as should their shareholders.” Black is critical of SA’s top management, which he says rarely uses the Roam formula.

“Some look at assets versus earnings and others ignore the assets altogether and focus purely on earnings in isolation. This can and has led to ill-advised acquisition strategies. Meanwhile, people lower down in the organisation do the asset managing, but don’t know about Roam.”

Many managers look only at the immediate business information, such as comparisons on a quarterly basis, says Black.

“They do not look at the data trends or the history of the company, the so-called big picture. Therefore, when the company runs into problems, such as poorly thought-out strategies that lead to a decrease in the productivity of assets, management’s response is to lay off workers.”

Black says a key question to ask managers is: “What is the smallest, easiest, least expensive change we can make that gives the largest measure of sustainable improvement?” Roam, he says, allows managers to design projects that can leverage both productivity and their own personal growth.

He and a colleague, Gerard van Hoek, are teaching Roam at Sasol to everyone from senior managers to mechanics, with a focus on projects that make assets more productive. Black regards US personal computer manufacturer Dell as “getting asset management right”. He says: “It has negative working capital ... a stock turnover of 90 per year and they get paid before they pay their suppliers — just like Pick ’n Pay, another company that knows about asset turnover.”

Keep an eye on how assets perform

RETURN on assets managed is a vital measure of a company’s value, say Arjen Lugtenburg, a portfolio manager at Allan Gray, and Rodger Walters of Abvest Associates.

Walters says: “It is one of the ratios I look at in understanding what a company does and how profits are generated.”

He says companies can have a declining Roam for valid reasons, such as the start-up of a new business or division. In this situation, there could be a large outlay of capital before a profit is made.

Another good reason could be a large capital outlay for assets that will last for years, even decades — for example, the stainless steel vats that brewers use, or printing presses that can last up to 20 years if they receive proper care.

However the purchase of an existing business is not a valid reason for a decline in Roam, says Walters: “If Roam declines, it means that the new business does not have sufficient earnings, but has increased the size of the company’s assets.”

He says it is important to know what was paid for the new business and what the competition would have paid.

Lugtenburg says assets that generate relatively high returns come with a relatively higher price tag. This is because the company can grow faster with less new capital. But companies must ensure that they do not overpay, which is what happened with Dimension Data. He says the IT company did not account for its equity properly.

If it had, it would have been apparent that the asset base had enlarged without earnings increasing to the same extent.

“This fact was hidden by the issuing of new shares at a very high multiple.

“This enabled them to access capital at a very low cost.”

Roaming for the right measure

CHARTERED financial analyst Charles Hattingh is a great fan of the “return on assets managed” ratio.

Roam, he says, gives a clearer picture of a company’s health than a commonly used measure, Ebitda — earnings before interest, tax, depreciation and amortisation.

He says Ebitda is “a fad” and adds: “It is a pathetic attempt to arrive at a surrogate for cash flows attributable to the operations of the company.” Here is why:

  • “Earnings can and have been manipulated by management to make headline earnings a share look good.
  • Interest is excluded from this measure, which encourages a company to gear its operations at the expense of increasing financial risk,” says Hattingh. “It also encourages the company to capitalise operating leases, which transfers rental expenses out of operating expenses and into interest and depreciation.
  • Tax is — but should not be — ignored as it is part of cash flow. Accelerated tax allowances can lead to tax being expensed totally out of line with the tax paid. The end result of discounting pre-tax cash flow at a pre-tax rate can be very different to discounting posttax cash flow at a post-tax rate.
  • Depreciation, like tax, is a cash flow, as it includes items such as rental. Capitalise leases and suddenly cash flows increase.
  • “Amortisation would not be a cash flow item if a company never had to replace the asset being amortised.” Against this, Hattingh prefers Roam, which recognises tangible measures such as:
  • Margin (operating profit after tax but before taxed interest, divided by sales); and
  • Operating gearing (sales divided by operating assets).

Written by Gaenor Lipson.

Get real and train people to achieve

Companies should beware of the ‘rain-dance’ approach, write GERARD VAN HOEK and TED BLACK

South Africa’s future depends on managers who can increase productivity. We need them desperately. That’s why companies and government are sitting ducks for improvement gurus, consultants and a host of specialists in leadership and management development.

TALLY-HO: White-water rafting is fun, but does it produce measurable bottom-line results?

TALLY-HO: White-water rafting is fun, but does it produce measurable bottom-line results?

They put people through endless programmes and courses to solve problems, overcome weaknesses, improve relationships and build capability.

It’s a “rain dance” and companies perform it with high hopes. They expect training and workshops to produce, as if by osmosis, improved results.

While some do improve year-on-year, others prance around lecture rooms and bush campfires wasting untold energy and money.

The cash, invested in people, “our most important assets” as annual reports put it, pours out at an ever-faster pace. The return on training “investment”, like rain in the Karoo, rarely comes. Why?

There’s no link to results. The focus is on “motivation” and “knowing”, not “doing”. We squander precious cash resources on lots of learning activity. Without behaviour change, or visible returns, cynicism flourishes.

So what can you do about it? Adopt an approach pioneered by Robert H Schaffer in the US and used successfully all over the world, including South Africa.

Start with a result. Link the learning to bottom-line performance. Instead of using a training situation to learn how to lead, or eliminate politics and conflict in the workplace, organise a well designed attack on a specific, short-term performance improvement goal.

The impact on results and teamwork is fast, visible and measurable. When managers employ new skills to get the results, success reinforces them immediately.

Instead of hoping for education and training somehow to lead to better performance, you achieve improvements in a way that grows people and builds teams. In turn, this sustains a cycle of momentum as one project leads to another.

The business impact approach to leadership development is to get managers to focus on what can be improved, not diagnose what’s wrong. It’s easy to develop a long list of obstacles and to find reasons why things can’t be done.

The challenge is first to convert a problem into an opportunity. Second, it is to carve out a short term goal and achieve it with minimal help. Third, the result must be achievable within the team’s resources and authority.

Go for a result, and use only those new methods and processes that help you achieve the goal.

In a loss-making steel service centre, that’s exactly what happened. The team focused on its bank overdraft for 100 days. They aimed to reduce it by several million Rands.

They didn’t hit target first time around but by day 150 they had a very different company. It generated a return on assets of 30%.

Specific learning points? The project forced them to redesign the business and to tackle many operating problems that leeched out cash and profits.

A cash focus also forced them to think like owners. That’s the only way a manager can act with intelligence or integrity.

No classroom course or business school case study will do that for you.

The education arm of a global IT company set a three-month sales goal to launch some new products. It brought them in 114% above their plan.

It was a wonderful lesson in leadership for the project champion, who acted as change agent, mentor and coach, all in one.

The effects? Two new members of the sales team were integrated far quicker than normal.

Collaboration between regional offices improved. So did the relationship with the field sales team, who found the customers.

Projects like these do more for morale, confidence, team-building and learning than any amount of white-water rafting or abseiling can do.

Our message is: strike off in an exciting new direction. Train for results with a business impact. A new vista of opportunities will open up for you. You’ll grow your people fast, furiously, measurably and productively.

Gerard van Hoek is senior managing partner of GvH & Ass and represents Robert H. Schaffer & Ass (USA) in Southern Africa. Ted Black is an author, independent productivity consultant and associate of Morgan University Alliance, a member of the Adcorp Group.