Tag Archives: Ted Black

ROAMing through Rainbow’s prism

Ted Black and Frank Durand explain why Johann Rupert should have listened to his mum TRENDY theories that treat people as “human capital” or “intellectual property” and “brands” as assets, argue for new business metrics to measure and value talent. They are red herrings. What is important is to harness people’s brains with the numbers we already have.

There are only two critical factors in business. One is to make money. The other is to generate cash.

Most managers and staff don’t understand that their financial rewards and long-term security depend on doing those two things. Moreover, they don’t know how to do it. Imagine what could happen if they did. Without the big picture that the financial numbers give, they just have a job.

Bruce Henderson, the late founder of Boston Consulting Group, cut to the heart of the matter: “A business is a cash compounding machine or it is nothing, and sooner or later will be swept away.”

“Get back to basics” always becomes the management mantra when companies hit bad times. The recent Remgro offer of R16 a share to minorities of RainbowChickens presents us a timely reminder of them.

The bid puts Rainbow’s value-of-the-firm (VOF) measure today at R4,6bn (share price multiplied by issued shares). It hit a year-end low of R230m in 1998. Anyone who bought shares near the time, probably most of today’s minorities, has done very well indeed. But what about Remgro itself? What kind of investment has it been? Furthermore, what lessons can we take from the Rainbow saga? It’s a great story.

The first is that no manager can act intelligently, or with integrity, unless he thinks like an owner all the time. It is a state of mind. No-one tells owners what to do. They work it out for themselves.

Despite all other demands, management has one legitimate purpose. It is to maximise the VOF for its owners — the shareholders.

Fundamentally, the VOF derives from the productivity of the asset base, not the workforce. Managers make a return on assets. Owners make a return on investment.

That is why return on assets managed (ROAM) is still the best measure for operating management and a great lens to use to seek and pinpoint productivity opportunities for people to tackle together.

You cannot be a first-class manager unless you understand finance. The ROAM model helps build that understanding. It requires no more than Grade 6 arithmetic and can be used to teach everyone the “great game of business”.

Ignorance about the rules of the game is widespread — even at the highest levels. The first responsibility of any manager is to educate his or her people in business basics to give them the big picture — never mind specific job skills.

The only valid measures of management intent and results are “resource in: result out” ratios. The ROAM model provides many of them. If used in the right way — to develop people — it triggers innovation, collaboration, teamwork and learning. Improved, sustained productivity follows.

Rainbow1-1

Exhibit 1, above, shows Rainbow’s ROAM performance over 25 years. It sends the message: “All roads lead to ROAM … or ruin!”

Sadly, that message did not re a c h the owner, Johann Rupert, until it was too late. People at the top are too often the last to know when things go badly wrong. The dour people he charged to watch over his investment typified those who Adam Smith described in The Wealth of Nations in 1771: “The directors, being the managers of other people’s money, cannot be expected to watch over it with the same anxious vigilance with which owners frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to detail as beneath them. Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company.”

A 15-year decline resulted in a loss of R150m in 1996 and near bankruptcy for Rainbow. Following a rights issue to rescue the company, a furious Rupert stuck in another R600m, pulled on his gumboots and trudged around his chicken farm to find out what was going on. Did he own a sh*t chicken business or was he in a chickensh*t” business? It looked like both.

Facing the truth seldom comforts us. It is why crises can be so valuable. They force us to confront reality and take action.

The first truth Remgro had to face was that it had made some huge blunders. Strategic planning’s great contribution, if done well, is to trigger managed change — change that exploits proven strengths and maximises opportunities.

However, neither Remgro, nor a reluctant HL&H, which ended up running Rainbow, knew anything about chicken farming. Seduced into a honey trap, they matched opportunity with weakness — the first blunder — and the numbers followed the weakness.

Soon after listing, the company acquired Bonny Bird/Epol from Premier Milling — a monumental bungle. This one doubled up the asset base and created a very different company from the one built by its founder — the late, legendary Stanley Methven.

The move was based on the false premise that high market share results in high ROAM — that it is a cause-effect relationship. It is not. It is a probability, but a most unlikely one when you add nonperforming assets to low-performing assets.

Methven knew this. Despite many approaches from Premier — a milling company that got into chickens by default — he did not want his company to be contaminated by it. The story goes that he even celebrated the end of a short, disastrous foray into feed milling. With his team gathered round him in Hammarsdale, he raised a glass of French Champagne, and said: “If I ever get the urge to buy a feed mill again, shoot me.”

That’s another important lesson. Celebrate the mistakes, savour them, and learn from them.

Over the years, Epol had performed little better than break-even and Bonny Bird made a profit once in its history. Market analysts thought it a great move both for Premier and Rainbow, whose share price doubled. The VOF went to R1,7bn in 1992.

The capital market’s vote of confidence confirmed the 6th Higher Law of Business: “You can sometimes fool the fans, but you never fool the players.”

The first loss followed and the VOF dropped to R848m. However, a small profit a year later in 1994 duped the fans again. They pushed the VOF back to R1,3bn, showing that managers in charge of a sick company can produce a big rise in the share price with second-rate financial performance.

The players — Rainbow’s people — were not fooled. From 1996 to 1999, the company lost nearly R600m, confirming the 9th Higher Law: “If nobody pays attention, people stop caring.”

It was a disaster, and all to get one good brand, Farmer Brown, the only Premier “asset” really worth having.

The move also destroyed HL&H — a once proud, 150-year-old company. The social and economic costs were grave, confirming the 10th Higher Law: “Sh*t rolls downhill.”

With acquisitions, the golden rule is: “Don’t buy a standalone company, especially if you don’t know the business.” You will pay far too much unless you can uncover and release hidden productivity opportunities. It is better to buy a parcel of companies, sell the ones you do not want and get the one you do for a knockdown price.

Corporate managers nearly always pay over the odds. In contrast, successful entrepreneurs bid “low”. Knowing how to allocate capital well, they buy at a discount; sometimes for nothing if the target company is in distress. Seldom do they pay a big premium.

Macsteel, owned by Eric Samson, is a good example. Reputed to be the biggest privately owned steel trading company in the world, it has acquired many companies but Samson has never paid more than net asset value — usually less, or in the end, sometimes nothing.

There are good reasons why corporations pay too much. First, top management uses other people’s money. Second, professional advisers’ commissions and fees are linked to the size of the deal — the bigger the better. Third, executive pay is based on size of company and responsibility, not economic productivity. This brings us to the next measure. It’s a cash one.

Rainbow has been profitable every year since 1999, achieving its highest ROAM since 1982 — 21%. But has the turnaround been good enough to justify owning it?

As Peter Drucker put it: “Until a business returns a profit that is greater than its cost of capital, it operates at a loss. Never mind that it pays taxes as if it had a genuine profit. The enterprise still returns less to the economy than it devours in resources. Until then it does not create wealth; it destroys it.”

Economic profit is a true measure of management competence and it is a tough one. You can manipulate the share price for quite a long time before capital markets catch on, which is why corporate management prefers it to economic profit.

Funding comes from owners, lenders and suppliers. The cash buys assets that operating managers have to manage. None of it comes free.

Rainbow’s interest charge has always been low except in the mid- 1990s when debt reached R500m. Supplier credit is interest free, but not cost free. Inventory takes up space, needs management and generates many hidden costs.

Owners’ cash is also not free. Until you charge for it, you do not know if the firm has made an economic profit or not. It must not be so high as to miss the creation of it, nor must it be too low or the company becomes a cash trap.

If you look at other, better alternatives for investment that Rupert had to give up, it seems reasonable and defensible for him to have “charged” Rainbow management 25% for his money and the risk he took. If he had, then Exhibit 2, below, is an indicator of how much wealth his management destroyed from 1989. It is not a pretty sight.

Rainbow1-2

The calculation is based on Stern Stewart’s EVA™ measure (net operating profit after tax less the actual cost of capital). It took until 2003 to create an economic profit equal to or better than a 25% return on equity. From 1989 to 2003, Rainbow returned R195m to owners for average equity of about R750m. That’s a 26% return in total for a 15-year investment, or only R13m a year—an annual return of less than 2%.

As a self-deprecating Rupert humorously admitted at a shareholder AGM in 1998, his late mother had told him not to buy it. She was right. It was, and probably still is, a disastrous investment if you look at the 20-year opportunity cost.

However, it is rare indeed for a business leader to have the courage and integrity to do what he did. Facing harsh reality and taking full responsibility leads to “breakthrough” and another important lesson.

The corollary to the 9th Higher Law that the stuff rolls downhill is: “Change must start at the top.”

Rupert intervened, picked his own man to run the show, and the turnaround started.

Most organisations have huge potential for improvement but unlike Rainbow, few achieve major breakthroughs. The successful ones have leaders who grasp what has to be achieved — the goal is clear. They also confront their people with the clear belief that it will be done and that they can do it.

Finally, they know that simplicity drives productivity. If you want change you do it with one number.

Most managers “manage by the numbers” but with too many of them. Daily, a torrent of data swamps us. Most of it means little. Moreover, the numbers are random — random within the system.

Before looking at the random numbers, let’s look at the system.

Rainbow’s latest annual report gives a clear picture of the value stream of activities. If it attached asset values to each activity it would be even more interesting and revealing (see Exhibit 3 below). The business model determines if you make money. The key to economic productivity is concentration and focus. It raises two strategic questions: “What assets should we own?” and “How do we control the rest?”

The most toxic of all business designs is unfocused, vertical integration. That is when a company owns everything. Rainbow was highly integrated in 1996 and still is.

To make money, you must be the lowest-cost producer or you must have something no one else has. Unless you have a unique product or service that makes you different, you have to compete on price.

The first strategic decision taken was to have good genetic stock. It affects the cost and quality of the bird on the plate. Your birds must grow faster, resist disease and end up plumper after eating less. Rainbow management had neglected this issue but corrected it successfully.

 

Rainbow2-1

The ROAM model poses two marketing questions to test a business model. They lead to input:output ratios. The first is: “For every rand of assets we have, how many rands of sales do we generate?” (Sales divided by total assets is the measure and is called asset turnover).

Asset turnover is the most important measure of operating management and the least used. For Rainbow, it determines the capital cost of every kilogram of chicken sold — the first competitive productivity barrier for any firm.

The slower your asset turn, the lower your ROAM is likely to be. Exhibit 4, below, shows how management improved asset turnover steadily through to 2002.

Rainbow2-2The first task was to undo much of the Bonny Bird/EPOL acquisition. Plants were closed and farms sold. As asset turnover accelerated from 1,3 in 1996 to 2,4 in 2002, it cranked up ROAM from -10,9% in 1998 to 12,5% in 2002.

Then as management started to reinvest in new plant from 2003, slowing asset turn down, the next ROAM marketing measure becomes more significant: “For every rand in sales, how many cents profit do we make?” This is return on sales (operating profit ÷ sales × 100). It improved steadily from 5,2% in 2002 to its highest level in 18 years— 14,1% last year. However, there are warning signs that today’s management is losing sight of the importance of asset turnover.

Watch out for marketing guys. They generate excitement and growth but have an Achilles heel. Asset productivity is not their strong suit. Because their mission is to please customers, give them the smallest gap and they expand and extend product lines, fill up warehouses with stock, discount it and then shy away from collecting money. This lowers the next ROAM productivity barrier: current asset turnover. It drives the measure that governs every company’s viability — the cash-to-cash cycle.

You must aim to have a lower level of stock and debtors per rand of sales than your competition. In Methven’s day, stock and debtors spun an average of 6,3 times a year — that is about a 58-day cycle.

Under HL&H it fell to an average of 3,9 — about 94 days — but reached a low of 3,5 (104 days) in 1997. Alarmingly, it is back there.

Rainbow2-3Rainbow2-5Exhibits 5 and 6, at right, use physical numbers to show what happened. The first shows sales in kilograms over a three-year period just before the crash started in 1996.

The pattern is typical for many companies. Although it shows random sales performance month on month, market demand was stable and predictable. It probably still is.

Reporting to the board, all the various Rainbow MDs could have truthfully said was: “Some months are better than others.” It would have not gone down well but would have been helpful.

Rainbow management could expect sales of about 3,5 tons of chicken a week for the foreseeable future. However, that is not how the organisation responded. Company plans often do not reflect market reality. Big, hairy, audacious goals set by gung-ho managers out to please their bosses can cause huge instability and distortion of information as it filters through people in the value stream.

Exhibit 6 shows what happened to inventory. It was “out of control”. At the end of this time series with stock leaping up, the company went on to record massive losses.

Not matching intent with reality is a common phenomenon. The dotcom bubble burst for a similar reason only a few years later.

“New economy” companies such as Solectron held $4,7bn inventory because of blue-sky forecasts from the likes of Cisco, Ericsson and Lucent. Cisco eventually “wrote off” $2,5bn inventory, axed 6 000 people and its VOF fell by $400bn.

With Rainbow, the velocity of current asset turnover increased from 3,5 in 1997 to 5,8 in 2002 and has slowed since then. At the 2006 yearend it was at 3,8 and wound down further to its 1997 level of 3,5 at end- September 2006.

To put the importance of competitive asset turn in perspective, compare Rainbow’s performance with Astral, the best-performing feed and poultry firm ( Exhibit 7 below).

Rainbow2-4Astral consistently outperforms Rainbow with an overall asset turn 30% faster on average over seven years; at year-end 2006 it was 60% faster. Astral’s current assets turn has averaged 6,1 for the past two years while Rainbow has slipped to average 4,1 — 50% slower and losing speed.

However, with the next productivity barrier, Rainbow’s cost of sales dropped from 75% to 63% in 2006 — a great achievement, probably due mainly to the low maize price and shrewd buying. Today, it could be the least-cost producer off the farm.

Then there’s the fourth productivity barrier: “How do you differentiate a dead chicken and charge more?” Rainbow’s “innovative solutions” do not seem to be working yet. Cost seems to have more influence on profit than the so-called “highmargin” products that analysts and financial pundits waffle about.

For every rand spent on administration, selling and distribution, Astral generated R8,98 of sales, and output is rising. Last year, every rand of expenses for Rainbow generated R4,62 in sales, but fell from R6,50 the previous year.

In summary, Rainbow lags Astral with these key productivity measures except cost-of-sales. However, this is a message of opportunity. It is no accident that Rainbow’s improved ROAM has generated an economic profit and improved the VOF.

Asset turnover and sales profitability drive ROAM. They are two of the four levers that create economic profit. The others are growth of a productive asset base, and gearing. When management achieves a ROAM result that beats the cost-ofcapital, you can expect the VOF to keep rising.

The “new”, much improved Rainbow has more, huge untapped potential waiting to be released, confirming another higher law from The Great Game of Business: “The more successful you are, the bigger the challenges you have to deal with.”

It is the same with every firm. However, because of fear, we do not educate people with the numbers. We fear they may fall into competitors’ hands. So what if they do?

We fear that employees will misunderstand and use them against management. They probably will if we do not educate them.

Give them the big picture and you appeal to a higher level of thinking. You knock down the barriers of ignorance that keep people apart. When you do that, it leads to higher levels of performance and results on your road to ROAM.

Ted Black (black@icon.co.za ) is an executive coach focusing on converting problems and opportunities into action projects. Frank Durand is a senior lecturer at the Wits Business School in the fields of finance and asset management.

Embedding ‘results DNA’ into leaders

Successfully taking on challenges is the crux of action learning, writes Ted Black

ASK successful executives what contributed most to their success and hardly any will attribute it to a training course or qualification. Almost all will recall a challenging experience they had. They also often talk about a particular person they once worked for and admired.

Results-DNA-LeadersSA’s future success depends on its ability to build a new generation of effective managers — ones who can set challenging goals and have their people achieve results fast. Some are “born” with a “results- DNA factor”. The majority of us need to learn how to manage this way.

As British philosopher Herbert Spencer said: “The great aim of education is not knowledge but action.” Whether it is MBA programmes for young students who lack business knowledge and experience, or corporate programmes for more experienced managers, most educational efforts fail to meet the great aim on both counts. There is much “knowing ” but little “doing”.

This is because there are several flaws in the approach taken by most business schools and management development courses.

The first is that programmes are activity driven. Success is to “inject” people with the right mix of management theory and practice. The second is that unsound management theories lie at the heart of the content. All the change literature takes a backward look at companies. Reasons for success or failure are developed after the fact. The theories are fragmented and programme designers cobble together as many of them as they can.

The third flaw is that the closest students get to applying theories is through “case analysis” and “action learning”. Neither approach is a solution. In case analysis, they review someone else’s experience instead of learning from their own efforts. “Action learning” is more relevant but in most cases it remains an intellectual activity. It can stimulate thinking about issues that concern students and their organisations and leads to recommendations and proposals that may climax in a presentations to top management. However, rarely do the students themselves convert ideas into action that improves workplace productivity.

That is because of the fourth flaw. Programmes lack the most vital learning experience of all — taking on a difficult management challenge and carrying it out successfully. They do not develop on-the-job capacity to manage change, conflict and communication —the core abilities of an effective manager. Most training and development efforts are a rain dance. We spend huge amounts of money, time and effort performing it but, like rain in the Karoo, tangible results rarely follow.

Recognising the need to move from “knowing ” to “doing”, the latest management discipline being widely taught is project management. However, this too is rarely translated into action that changes the way people get things done.

In the world of work, there are fundamentally three kinds of projects. First, we have the “management by objectives” type. A task force, or an individual in a department, focuses on elements of the job or function. Usually there are several initiatives on the go at any time. The theory is that they should all be in harmony with the organisation’s balanced scorecards and cascade down to the lowest levels linking to myriad key performance indicators.

Demand from the top may be: “I want a 10% improvement in productivity this year. Tell me how you’re going to do it with specific goals in each area of responsibility.”

Second , there are capital or major systems projects with detailed budgets, specifications, commissioning and so on. You are not asking the organisation to change with either of these approaches.

The third type of project, the 100-day action management project, does demand change. It has only one objective: a “breakthrough ” in personal growth.

Executive growth is evolutionary. It takes time. However, you can accelerate it through a skilfully managed interaction in a well-designed situation. Unlike other project approaches that chase after numbers, action management projects focus on personal growth as the path to better numbers. They accelerate the development of every person in the project team and their expanded capacity to perform makes a difference in many observable and indefinable ways on the numbers.

Personal growth is a complex and subtle process. With action management projects, the focus is on only five attributes that are especially valuable on the job:

  • An improvement in self-esteem — how highly you value yourself and your ability to contribute;
  • A rise in self-confidence — how able, willing and ready you are to tackle things in new ways. You start making demands for improvement and see failure as a necessary step on the bumpy road to success;
  • Increase in your core competencies — your ability to identify the one or two critical success imperatives for any task and to upgrade its productivity ratios;
  • Enrichment of relationships with people who influence your effectiveness above, below and alongside you. You become more open, understanding and flexible in dealing graciously with differences in style and opinion. Diversity becomes an opportunity, not an obstacle; and
  • An increase in your own economic value. This is testable in the open market. Your personal growth becomes financially rewarding for you and economically valuable to the organisation. This will happen after two or three projects. The experience will pay off in your salary cheque much quicker than any other investment you can ever make in education, training or development.

The challenge is for managers to discover these hidden capabilities in themselves and their people, and to harness them

The underlying presupposition is that every organisation has huge amounts of potential that it pays for but does not realise. Typically, you see it unleashed in emergencies. When people swap stories that involve a disaster (fires, strikes and other “must do” situations) people spontaneously rise to the challenge without complex planning sessions or orders from above. That means every organisation owns and pays for significant capacity that has no economic impact in “normal” times.

The factors that characterise an emergency do not exist in the daily life of most organisations. Yet, in a crisis, there is extreme urgency to achieve a result fast. There are good reasons for that. The challenge excites and stimulates them. The goal is near and clear. People grab responsibility. They collaborate, ignore red tape and experiment. Depending on the nature of the crisis, they have fun doing what must be done.

The exciting thing is that you can tap into this extraordinary reserve of hidden potential without any emergency. The challenge is for managers to discover these hidden capabilities in themselves and their people, and to harness them.

Some companies and educational institutions break the mould. They remove the flaws by turning the standard “training only” model on its head. Matthias Bellmann, once the MD of Siemens Management Learning, and Robert H Schaffer, president of management consultancy Robert H Schaffer & Associates, describe in the Harvard Business Review (June 2001) how they collaborated to redesign the Siemens programme so that managers learned while achieving significant bottom-line benefits.

Teams of participants selected a specific performance goal to tackle in the four months between development seminars. One group addressed the challenge of Siemens’ expansion into central Asia. The goal they chose was to breathe life into a stalled project — to operate a fibre optic linkage that ran through more than 15 countries. After years of delay, they did it on time, enhanced Siemens ’ reputation, and at once started to earn revenues.

Another group reduced telecommunications costs for the company in England and Germany. They set a rapid cycle, breakthrough goal to reduce costs by 30% for one month.

They achieved it and discovered how to redesign operations to make sure the gains were sustainable. This development programme, which started in the late 1990s with about 35 teams, saved the company about R65m in its early stages. Today, more than 500 teams have attacked many tangible goals, and the value of benefits runs into hundreds of millions.

Other organisations as diverse as Cemex in Mexico and a timber company in SA have followed a similar approach. Here, the management development programme started with a breakthrough project to reduce rail costs. It spawned p ro j e c t s that culminated years later with one that redesigned the value stream. The process minted many successful managers and generated productivity impacts well in excess of R50m.

Achieving measurable, economic results provides a high-energy learning experience you cannot create in any other way — certainly not through intellectual insights and debate. So how can you make it happen? It starts best with the chief executive, who should champion the effort with other top leaders.

A demand might be: “Over the next three years from our own ranks, we want to fill at least 50 management positions with people who possess the results-DNA factor.” Leaders then sponsor projects that build better managers on the job while improving the organisation’s economic performance.

ANOTHER option is for HR, working in partnership with line managers, to build 100-day AMPs into the management development curriculum. Similarly, university and graduate management programmes can build a practical, rapid-results emphasis into curriculums. For example, a course on health-care administration could include projects in local hospitals to make real improvements in patient admittance and scheduling, or in back-office areas such as billing and collections.

Rapid-results efforts are not meant to replace other important parts of management training and development, but to expand and enrich them so that they produce far more effective and successful managers. A context of a real-life challenge creates opportunities for organisations to use many development tools “just in time”, and therefore to far greater effect. Coaching and mentoring programmes can be enhanced immeasurably, as can the use of 360º feedback and any other form of concrete skills development.

The most critical business challenge facing SA is to develop man – agers to meet today’s intensified demands and make our resources productive. As leading management consultant Peter Drucker observed: “It is only managers, not nature, or laws of economics, or governments, that make resources productive — only managers.”

The challenge therefore to corporations, government and educational institutions is to adopt a resultsdriven management development approach. Imagine the impact that just 10 000 such high-performing managers could have on the economic vitality of SA in the next few years. It can be done.

Ted Black, writer, consultant and executive coach, is an affiliate of Robert H Schaffer & Associates of the US ( www. rhsa. com).

Tapping SA’s hidden potential

THE UNEMPLOYMENT CHALLENGE

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

BACK TO BASICS

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.

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.