Category: Corporate Governance

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Why we shouldn’t fear failure

“Try again. Fail again. Fail better” – Samuel Beckett

Last week, defending champion Emma Raducanu, bowed out of the US Open after a first-round defeat to an opponent ranked 40th in the world. Making more than 30 unforced errors her performance was a far cry from last year’s “Fairy Tale in New York” that had seen her rise from qualifier to grand slam winner in one magical fortnight. 

Somewhat predictably, the pundits have had a field day, offering little perspective and even less practical advice to a player not yet 20 years old. She has been distracted by fame they say, had too many coaches, been poorly managed and trained the wrong way… all of which may well have some truth.  

But I was struck by Raducanu’s more sanguine assessment of her situation. The defeat was an opportunity to reset, she claimed — a chance to climb back up the rankings, but without the weight of expectations on her back. Implied in her response was the maturity to recognize that it wasn’t realistic to maintain the trajectory of last year’s success.  

I sensed also that, despite her (and our) obvious disappointments, she’d come to understand that failure has much to teach us. Ask any creative artist, and they’ll tell you that they learn more from their mistakes than they do their exhibition pieces. The same principle applies to politicians, economists, entrepreneurs… and for us all in our roles as parents, friends, volunteers —or, in my case, attempts to be the best club tennis player I can be!

This reminds me that in our careers as well as our everyday lives, success, and its counterpart failure, is usually more relative than the flawless expectations we project on our sporting heroes. There’s a world of difference between missing a challenging target and destroying millions of dollars of shareholder value; just as there is between falling short of straight A grades and flunking all your exams. The first response to perceived failure should be to put it into perspective and consider what’s been achieved along the way.

This is why we should remember that despite her recent dip in form, Raducanu remains one of only four teenagers in the World’s top 100, in addition to having beaten tennis hero Serena Williams only weeks before her US Open exit. Her story has inspired thousands of young girls to pick up a racket and unlike many sporting prodigies, she has remained mentally strong under pressures that would buckle most of us. How many of us would give our eye teeth for one-tenth of her talent and prospects?   

It’s folly to chase straight-line success in any field of endeavor.  And it’s equally unwise to remove the possibility of setbacks. If, as an investor, you want maximum certainty then buy government bonds, but in doing so, understand that your returns will be smaller and the projections somewhat unexciting. Alternatively, you could spread your capital across a balanced portfolio, accepting that there’ll be peaks and troughs in the pursuit of growth over time. So too with our careers (and particularly those aspiring to be leaders) where the smart money is not on following a risk-free path. 

In choosing this route, we can also be more of ourselves, making the most of our skills while building our experience. And in line with Raducanu’s comments, we should try to do so without the weight of unrealistic expectations on our backs. Working and living with passion and commitment demands that we face some jeopardy. How diminished our careers would be if they were shaped by timidity, and how sad a life that’s constantly looking over its shoulders. Much better to make decisions we believe in, having faith in our abilities while recognizing that not every choice will work out as we wish.

The helpful reality is that leadership errors seldom expose our flaws as publically as a show court at Flushing Meadows. This doesn’t mean that mistakes don’t matter, or that we shouldn’t care about their consequences. Indeed, it’s the concern to get it right next time that drives us to come back stronger —meaning that failure is far from fatal to our future. In responding, there’s also no shortage of advice on how to build back from our blunders, of working the problem, analyzing our tactics, or the strengths of our team. Frankly, there are whole industries of professionals to help us make better choices.

But I’d suggest all this is peripheral and comes only after the fact. The number one lesson we should take from failure is far from being something to fear, it’s part of a healthy and fulfilling life. And in so being, is essential to our becoming better people, better leaders, or indeed better tennis players.

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Truth, trust and freedom of thought

In the space of a week, three unrelated conversations have given me pause for thought. Actually, that’s an understatement, for the triangulation of the points they raise has troubled me deeply, speaking as it does to the crisis of truth, trust, and freedom of expression that I fear is coming to define our age.  Let me tell you a little of what I mean.

The first was an email from a friend in England in which she lambasted the current contest for the Conservative Party leadership and future Prime Minister of the UK. Her particular anger was the vacuity of the candidates’ promises and their blatant targeting of a mere fraction of the population. It was she said, a “race to the bottom” and not democracy as we know it or, deep down, believe it should be.

The second —and almost mirror image of these concerns —was a long overdue personal call with a former colleague. After catching up on family and putting the world to rights he told me, with a heavy heart, that his company is starting its annual reporting cycle. The next month he said, would be like a slowly deflating balloon, the process gradually sucking the energy of his team as they seek ever more contrived ways to evade the use of everyday language that might come back to bite.  I know how he feels, for I have been there often.

As for the third conversation, I’ll come to that in a moment, for it was with myself and occurred only after I’d been pondering these first two. Meanwhile, the points my friends raised should concern us all, for they go to the heart of what it is to speak truthfully and with sufficient integrity to give us confidence in what’s being said.  

On the one hand, under the veil of a democratic process, we have a political class (and this is not confined to the UK and US) that takes its responsibility for any sort of measurement and accountability with a pinch of salt. Theoretically, their disingenuity can come to roost at the ballot box, but in day-to-day terms, aided by spin doctors, a dysfunctional media, and the short memory of our collective consciousness, they carry on regardless. If they take us for fools, we are to some extent complicit.

At the other extreme, our largest corporations are now answerable to an ever-growing profusion of reporting requirements that are designed to ensure full transparency, but which in practice result in obfuscation and conditionality. Over the course of my career, the tone and content of stakeholder reporting have shifted from an open communication exercise to a cautious compliance process —and in so doing, it has lost its meaning to all but a few accountants and analysts. Read almost any listed company’s statements, and you’ll see what I mean — talk about hiding the wood with the trees!  

But of course, to say as much, in either context is a sort of heresy. 

This brings me to my third conversation, sparked by the horrific attack on the author Salmon Rushdie last week.  If I don’t go into detail here, it’s not only because the assault has been widely reported and rightly condemned, but also that I won’t risk giving any oxygen to those who might seek to nuance our outrage.  

Rather I’ll cut to the central thread, which is that limits to our freedom of speech don’t just impact those with the courage to speak up — in lessening what we hear and consider, they diminish us all. This is why I believe when committing to whatever values we believe in, chief among those should be an acknowledgment of the right of others to challenge — and importantly, to explore — without fear of being labeled an outcast. 

We all know why President Putin tolerates no dissent to his descriptor of Russia’s ‘special operation’ in Ukraine — but are we, I wonder, attentive enough to the verbal straightjacket we increasingly wear at home?  How easily do we make it for colleagues to challenge the prevailing orthodoxy — and how many are reluctant to share concerns for fear of offending political correctness?

The proliferation of so-called ‘safe spaces’ in workplaces and academia is a case in point. Of course, all of us would like to live and work in environments where we can be ourselves and have our opinions respected.  But this mustn’t be at the cost of removing the same right of others. The uncomfortable truth is that opinions, faiths, and values differ —and often in ways that are not entirely reconcilable. When it comes to values and ideas, the only truly safe space is the one in which all can be heard —no matter how nonconformist they may be —  and then adopted, rejected, or even ridiculed on our assessment of their merits. 

To return to my opening remarks, I have thought long and hard if it’s possible to learn from this triangle of concerns. Might we, for example, rebuild trust in our politics by insisting on more stringent measures and accountabilities? In the regulatory sphere, could we find some leeway for plain speaking and best intentions rather than nailing every syllable to the mast? And as for the workplace —and our communities —can we reach common cause in the proposition that being inclusive and sensitive, means also allowing for difference and dissent?

Ever the optimist, I believe that we can; ever the realist; I’m not confident we will. 

This conclusion saddens me, not least because I want always to look forward with hope. But I’m buoyed by the thought that individual actions make a difference and reminded that my friends in speaking and emailing felt much the same. If wider society does not balance these forces then at least I can try, and by setting the best example we can — to my colleagues, families, and those others I connect with — make a small contribution to rebuilding the trust, truth, and freedom of expression that are hallmarks of the values I hold most dear.

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Why Values Must Always Be Open to Fresh Ideas

Winston Churchill is famously credited with saying that ‘democracy is the worst form of government except for all the others… Although often quoted as a humorous aphorism, his deeper point was that despite an inherent inefficiency, the checks and balances of an open society are the best way to secure progress, peace, and prosperity for all. I sometimes wonder if his conviction was a comfort when having led his country through the Second World War, he was promptly voted out of office.

The benefits of an open society were further explored around the same time by the philosopher Karl Popper. As an Austrian of Jewish descent, he had close experience of the dark side of authoritarianism. His core insights were founded on the contrast between the rich battle of opinions that democracies thrive on, and the limiting dogma of societies dominated by a single party, person or cultural creed. Applying the methods of scientific inquiry to politics and government, Popper was a standard-bearer for diversity, freedom, and the meritocracy of ideas.

Today, many of the world’s larger companies and organizations have as much power and influence as nation-states. Indeed, the reach of multinational corporations has long been a cause of concern for governments and international law. Recently, for example, the policies and practices of the technology giants controlling social media have rightly come in for scrutiny, given their role in public debate. It’s no coincidence that the world’s most repressive regimes all seek to limit their availability as a means of stamping out critical thought.

Businesses of course are not democracies in the true sense, and indeed there is a good reason why this is so. The combination of ownership rights and the need for clear direction requires a hybrid model in which a range of views are considered, but without recourse to a vote on every issue. Companies in the democratic West also operate in a wider context of competition and regulatory law that provides a range of checks and balances which are lacking in more centrally controlled economies. Perhaps most importantly, the best businesses recognize that their long-term prosperity lies in being open to fresh ideas and challenges, validated on merit rather than any alignment to an orthodoxy.

All of this explains why I think we should have pause for thought when someone as powerful as Elon Musk makes a bid for Twitter. Is it right that effectively he alone decides whether former President Trump should or be given access, or that one or other view is acceptable or too dominant?  Are we comfortable that the checks and balances I spoke of earlier can continue to work when there is such a disparity of influence and dominance of ownership? Twitter, for all its faults, is unarguably one of the most influential political platforms on Earth. And that’s why I’m queasy about the prospect of it coming under the control of anyone individual, regardless of whether they’re a benign saint or an evil genius.

In recent years I’ve written a lot about values and their critical role in the health of organizations. What’s become clear to me is the essential tension we must hold between being steadfast in our beliefs while remaining open to challenges and ultimately their change. This is why values are best determined by a commitment to ‘inside-out’ thinking, ensuring we listen carefully to the views of those within the organization as well as the best thoughts from beyond. A sure sign that values are not representative or effective in their purpose is when they become overly aligned to one particular viewpoint.

There are no easy solutions to achieving this. In a sense, we will always fail in our pursuit, just as listening and compromise will always be frustrating to those who are certain they are right! In the case of Twitter, I’m at least reassured that it will continue to operate under the competitive pressures that are perhaps our greatest insurance against closed thinking. Meanwhile, as leaders—in business, politics or indeed our daily lives —we must all be torchbearers for Popper’s open society of ideas and opinions. And in doing so, we would do well to remember Churchill, and recognize that the path of innovation and inclusion will often seem like the worst possible way… bar all the rest!

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Does a fish stink from the head?

The phrase ‘a fish stinks from the head’ is a common expression that refers to the criticality of leadership in organizations. Typically, it’s used when strategies are failing and direction is unclear. The implication is that those at the top need to shape up, demonstrating the commitment and behaviors that are required to get back on track. At root, it’s founded on the notion that those in positions of authority are central to success and have a responsibility to lead from the front.

And I agree. Taken as a whole, the expression contains an underlying truth that we do well to remember. But like all aphorisms, it’s also a simplification, and if followed too literally can blind us to other, more subtle, aspects of leadership that are just as vital to maximizing performance.  Not the least of these is listening to the well of talent, experience, care, and attention that’s embedded in those with less senior positions.   

I was reminded of this last week when reading the summary of the report into the holding of parties at the center of UK government during the strict lockdowns of 2020.  At the time I was living in London and can well understand the anger of the British public at the apparent disregard of the rules by their elected leaders. The idea that the lockdown applied only to the ‘little people’ is classic ‘stink from the head’ behavior. 

But it was a line about the fear of speaking up that caught my eye. What the report also highlights, is that not everyone working in Downing Street was happy with the slack attitude of those at the top. One especially relevant passage states:

“Some staff members wanted to raise concerns about behaviors they witnessed at work, but at times felt unable to do so. No member of staff should feel unable to report or challenge poor conduct where they witness it.”

This is bang on the money, and while shocking that it should be the case in central government—where presumably, the vast majority of employees will be highly intelligent and astute individuals—it is not uncommon in many organizations. The result is that their talent and experience, and perhaps most importantly, what I referred to earlier than their ‘care and attention is lost to any assessment of the overall direction of travel. At worst, this can result in tragedies far greater than the fallout of a political scandal.

In the 1990s Korean airlines had one of the worst safety records in the world, despite having well-trained pilots and the same planes as equivalent companies across the globe. Flight recordings of high-profile crashes demonstrated that communication in the cockpit was shaped by a cultural hierarchy that meant subordinates were unwilling to question those in authority.  Even when fuel levels became critically low, co-pilots of the now infamous Avianca 52 fight to JFK airport did not directly challenge or inform the captain who in his tunnel vision had lost sight of these critical details.  The plane crashed just outside New York.

The history of the Korean airways has been well documented, with popular summaries in Malcom Gladwell’s Outliers and Mathew Syed’s, excellent Black Box Thinking. What’s relevant here, is that to solve the crisis, Korean airlines embarked on a program designed to ensure that all on the flight deck had a voice, and were able to speak up when they had concerns. What’s more, their speaking out was to be seen not as a problematic challenge to authority, but a positive contribution to the overall safety and success of the mission. 

In the case of passenger airlines, the need for coordination and collective contribution seems obvious to us now. Indeed, the hierarchical deference of Korea was always much less of a problem in those cultures (such as the US) where there is a lower prevalence of what is sometimes known as ‘power-distance’.  But as the recent report into the UK government—and countless examples of company failures—demonstrates, there’s still a long way to go in ensuring free-flowing communications up and down organizations.

The reality is that large companies are just as complex to steer as an airliner, or for that matter Ten Downing Street or the President’s Office. The need, therefore, to pay attention to the concerns of those closest to the implementation of decisions is absolutely vital.  No leader has all the answers; even the best can become distracted or fixated; their very distance from subordinates can distort perspective and lead to well-meant but wildly misconceived judgments.

This is why it’s equally vital that we have cultures and values which counteract these tendencies. The worst boardrooms are not necessarily those lacking in experience, it’s those that are echo chambers, reinforcing the perspectives of a single leader or an elite few. The history of the last thundered years is one in which the reach of communications has proliferated beyond any recognition, and yet so many of its worst tragedies—from the First World war to the Great Depression to China’s Cultural Revolution, to name but a few—could all have been avoided had subordinates spoken out sooner. 

Of course, those speaking must also listen. Somewhat ironically, given the title of this post, fish do not have ears as such, but they do have intense sensitivity to sound and vibrations around them—in some species, it’s integral to their bones! No doubt UK Premier Boris Johnson wishes that he’d listened more to the concerns of those in his own office – for a politician supposedly in touch with the people, his oversight is astonishing. Whether he’d have paid attention is a question that most of those who sit in judgment on him will now answer for themselves. What’s beyond doubt is that in his laxity he’s lost control, and that regaining it may well be beyond him. 

There are lessons here for us all.

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Thinking The Unthinkable

COVID-19 Pandemic Changes the Landscape

Across Europe and North America, political leaders are beginning to think the unthinkable. Two years ago, the suggestion that we would need medical passes to travel, attend events, or enter a restaurant, would have been shuddered at. Today these measures are commonplace, and the scope of sanctions for those who won’t play ball is getting ever wider. What’s more, the prospect of mandatory vaccination— a line that none of us could have imagined would be crossed—is now considered by many to be both necessary and urgent.

My interest here is not so much in arguing for a particular path, as in exploring how we best find a way through. Whatever our views on the rights and wrongs of the options, we cannot simply shirk the debate—for like the virus, it is already out there. The implications for the role of leaders—and the values they espouse—are therefore profound. 

But first, let me return briefly to the pandemic. 

Body Autonomy has been a Hallmark of Liberal Democracy

There is a long and deeply held tradition in liberal democracies that compulsory medical treatment is a line we do not cross. Citizens it is claimed, have the right to make their own decisions about their bodies, even if they make objectively poor ones. The role of the State is to provide information and even to persuade, but (with a few extreme exceptions) not to compel, either directly or indirectly through the imposition of coercive sanctions.  

And in normal circumstances, most of us would agree.

Citizenship Means Duty

But in times of crisis, the contrary view would home in on that word ‘citizen’. Our societies are collective endeavors and cannot be meaningfully reduced to supposedly independent individuals. Free riders who take of society’s benefits without appropriate contribution are universally disparaged. Furthermore, in the democratic West, there’s an equally long and deeply held tradition that the exercise of our liberty should always be limited to the extent it impinges on the freedom of others. 

And so, we have a values stand-off. On the one hand, there is the sense that there ought to be limitations to the State. On the other, growing anger that the actions of a minority are impacting our collective wellbeing. It’s a classic political and moral dilemma: the idea of medical compulsion is uncomfortable, but so too are the restrictions that everyone must endure because of a resistant minority.

What does all this mean for leadership?

I believe it was right for our governments to first pursue a strategy based on information and persuasion. Good leadership does not seek out conflict for its own sake and if momentum can be achieved without confrontation then so much the better. In this regard, trust in both the messages and the messengers is essential, and sadly, politics being what it is, this has been undermined all too often. 

It seems to me that the values which are typical of most progressive companies would have been excellent creeds for our politicians to have lived by: transparency, togetherness, speed and service to others… these, and many similar standards, will be familiar to anyone with experience of modern organizations.

What if persuasion is not enough?

Over the last few weeks, we have seen countries in Europe and jurisdictions here in the US take increasingly strident lines. Austria will compel vaccinations from early next year while Germany is openly discussing similar measures; in France, the pass sanitaire is becoming essential for all but the most basic of needs. Even in the UK, one of the most reluctant countries in this regard, there is no mention of the need for a national debate. 

And surely here is where leadership has the most crucial role to play. 

Leaders Should Facilitate Discussion

For it is essential, in these circumstances, that leaders proactively facilitate an inclusive discussion, ensuring all sides have the opportunity to speak their truth. This process should not be used to delay decisions or abnegate responsibility for their taking, nor should it be the genesis of a fudge that pleases no one. Rather, it’s about using leadership as means to respectful understanding, which more than anything requires careful listening and consideration—before then acting decisively.  

Roadmap of Rewards

And in that regard, the positive consequences of the action that’s chosen should also be made clear. In leading through divisive issues, we have a responsibility to set out a ‘roadmap of rewards’, showing the milestones ahead and the benefits that will be shared on reaching them. There will always be a resistant few, but our best hope of reaching out to those who are not entirely inflexible is by being transparent about the critical junctions and decision points we face. If progress is not as we had hoped, leaders might reasonably commit to revisit and reconsider in light of those circumstances. 

Leaders Have to Act on Imperfect Information

But a word of warning here. That willingness to reconsider should not be at the expense of a steadfast determination to follow a chosen path. Ultimately, no decision of this sort can be scientifically proven. As leaders, we must at times rely on ‘value judgements’ and the clue to the best of these is in the name. Decisions arrived at with sound reasoning and rooted in commonly held standards and are not guaranteed to succeed, but having made them, we should hold firm until evidence suggests otherwise. 

It’s often said that we are all leaders, and in the context of complex organizations this is undoubtedly true in the sense that we must each take responsibility for our actions. This must not, however, be misinterpreted as permission to act the maverick or undermine policies that have been fairly talked through. Leadership at an individual level is about actively contributing to a collective success even if the strategy is one that you might prefer to be different. If that policy is too far removed from your own values, then it’s time to move on. 

If that is difficult to contemplate, it is but a precursor to some issues we may soon have to face. I sense the next few months are likely to see us in political and moral territories that were unimaginable not so long ago. At times like these, leaders are wise to remember Rudyard Kipling’s poem If, which reminds us to …trust yourself when all men doubt you/ But make allowance for their doubting too…   Whatever paths we chose, I sense, like the crossing of the Rubicon, that there will be no going back. Perhaps more than anything these moments require us to show bravery, by which I mean courage of the sort that seldom wins medals but often wins wars— the sort that listens, considers, and ultimately act in accordance with our values.

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9 Key Characteristics of a Successful Distribution Business

At its core, a successful distribution business functions to add value to the customer, by flawlessly delivering the desired product or set of products at the right point in time, without quality defects and in the most cost-effective fashion. It is imperative that a successful distribution business operates with the costumers top-of-mind.

According to Jozef Opdeweegh, a Miami businessman with over 17 years of experience as CEO, Chairman and Board Member of private and public companies, there are 9 key tenets that make up an ideal distribution business model, that will not only emanate in the highest level of customer satisfaction but will also reward associates for their contribution to the success of the company and shareholders for their confidence in the company’s strategic plan.

1. Quality of operations

The breadth of the product range, fill rate, on-time delivery, competitive pricing, a multi-channel approach, along with extensive and up-to-date product information, are vital in creating an excellent customer experience. In order to satisfy these demands, the logistics operations behind the distribution business need to be of exceptional quality: qualified and well-trained personnel, real-time inventory visibility throughout the cycle, continual optimization of the process flow inside the distribution centers, a relentless focus on continuous improvement/six sigma/lean manufacturing and the automation of put away and pick processes are key focal points to differentiate the business from its competitors. Furthermore, the choice of like-minded transportation and last-mile delivery partners who equally view customer service as their core mission is key to the overall customer experience.

2 . Organic Growth

The key differentiating factor as well as the proof of concept, and one of the main drivers of shareholder wealth creation is the achievement of organic growth exceeding that of the relevant competition. Customer empathy, SKU (Stock Keeping Units) proliferation, relevant information and excellent knowledge about the product range, as well as the overall quality each aspect of the supply chain are indispensable characteristics that define a better distribution business. This type of distribution business will garner outsized customer loyalty and recurring sales.

3. Gross Margin Management

One of the most relevant success factors for a distribution business is the laser-focused management of gross margin, both in percent of sales and in terms of currency. In some instances, the sales force has not be provided with the analytical tools to allow them for the promotion of those products that generate the highest margin potential. This is of particular importance in a landscape with certain SKUs (Stock Keeping Units) that have identical characteristics and can serve the customer requirements with the same effectiveness, which is often the case. Additionally, in their quest for revenue, the sales force may be inclined to engage in price discounting, which harms the margin potential of the sale. Finally, a number of distribution organizations lack the sophistication to keep track of ancillary services that may have been offered to the customers or are reluctant to charge for those services, which further erodes the margin.

The key is to develop the business analytics and IT infrastructure that will allow for the identification and sale of the highest margin product in order to serve customer’s needs at the right price. This also allows for the appropriate charge to the customer for the ancillary services and the delivery method he or she enjoys.

4. Back Office Efficiency

Many distribution businesses maintain a back office that is inert, too large and costly. By virtue of their business model, large distribution businesses operate via geographically dispersed distribution centers. Lack of an integrated ERP (Enterprise Resource Planning) solution and the absence of a standardized operating platform often create a detrimentally decentralized management structure. This leads to a large discrepancy in customer experience, in product and service offerings, and in the quality of operations across geographies. Furthermore, it may lead to an erosion of the leverage the distributor otherwise would be able to exercise on its suppliers. Lastly, it creates duplication in management and support structures – efforts and costs that can easily be avoided. In a successful distribution business, the operating system and the SKU management should be centrally managed, with the execution residing in the different regions, but based on a provided prescriptive playbook.

5. Network Optimization

A large number of distribution businesses operate from a suboptimal set of distribution centers. Often their network consists of a combination of too many facilities and less than optimally located distribution centers from a geographic perspective. This leads to duplicative inventory and inflated working capital requirements. A distribution business needs to constantly assess the size and location of its distribution facilities, so it can live up to its (next day) customer delivery promises from the fewest number of distribution centers. Case studies show huge savings can be generated in the area of network optimization, with a payback that often is less than 12 months, while at the same point in time enhancing the overall customer experience.

6. E-commerce

Since an online sales model does not require brick and mortar, and it does not require a direct sales force and the related costs, the bottom-line profitability of e-commerce sales vastly exceeds the profitability of the same SKU through another sales channel. A successful e-commerce sales effort requires a user-friendly web experience, impactful SEO efforts, detailed product information, breadth and availability of inventory, and on-time delivery of the entire order. It is also essential to have a simple return policy and a great back office to deal with product information, defects, and returns. Online sales may be boosted through the creation of an online user community consisting of customers who have purchased the product and can provide others with first-hand product information and applicability. Most often than not, e-commerce is one of the channels through which sales can be generated, in a multi-channel strategy that also includes direct sales and catalog sales. It is most certainly the most cost-effective and agile sales channel.

7. ERP-Solutions (Enterprise Resource Planning)

A distribution business may handle as many as 1 million distinct SKUs. In order to effectively run the distribution organization, it is imperative the company has real-time global inventory visibility to know exactly where different SKUs are stocked. This level of visibility allows for the avoidance of duplicative inventory, the calculation of appropriate inventory levels in the network through demand forecasting, and the minimization of risk of obsolescence. In many regards, the ERP solution is the engine of the distribution organization and is an invaluable part of network optimization. While implementation of a state-of-the-art ERP solution may be costly and time-consuming, with the cost amounting to as much as the equivalent of one year EBITDA (Earnings Before Interest, Taxes, Appreciation & Amortization), it is hard to imagine a world-class distributor that does not possess such a tool.

8. Customer and Supplier Segmentation

In any distribution business, there are a number of items that are high volume. Conversely, there typically are a number of products that are only sold very occasionally and may have a negative impact on the profitability of the organization. In a similar vein, the average distribution business will spend time, effort and money maintaining relations with suppliers who provide low-demand products. It is important to continually reassess the contribution margin of low-selling items and to cut certain parts of the long tail, both in product and in supplier range.

9. Private Label

A distributor can significantly enhance its gross margins by focusing on the sale of private-label items, or items that have the desired functionality but that are being sourced through contract manufacturing and branded under a proprietary brand name. Certain competing suppliers may react negatively towards competing private-label products. Nevertheless, in the area of more generic SKUs, a distributor should aim at selling its own branded products and ideally, private labels will constitute 15% or more of overall revenue.

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7 Reasons Why Private Equity Acquisition Doesn’t Mesh Existing Leadership

When a private equity fund sells a successful company, the company’s leadership team would seem to be a valuable asset for the new owner. After all, the team built shareholder wealth and it has intimate knowledge of the business. But in many cases, the executive leadership team does not survive the change in ownership, even if its performance was stellar. According to longtime CEO Jozef ”Jos” Opdeweegh, ”Unless the ownership transition is undertaken with great care, it can undermine the continued success of the company and its value.”

Opdeweegh, a veteran of four private-equity company transitions, notes that when a private equity fund initially invests in a company, it is common for the purchase to be based on an investment thesis. ”Such a thesis may be based on premises like turn-around, M&A, organic growth, SG&A reduction, balance sheet optimization or a combination of these elements. The company leadership team executes to that thesis to build shareholder wealth. When the end of the investment horizon approaches, a private equity fund will sell the business to the highest bidder.”

So, what are the issues that can prevent a new owner from meshing with the incumbent leadership team? Below, Opdeweegh explains why, when, and where things tend to go awry.

1. The inability of the leadership team to participate in choosing the new owner

In an auction, which is the typical process used to sell a company to the highest bidder, the executive team is not typically invited to weigh in on the selection of the new owners. According to Opdeweegh, ”This can lead to a dissonant outcome. Oftentimes, a clash of strategic views and corporate cultures occurs.”

2. The new owner’s failure to recognize the importance of the management team

”Some private equity owners view a management team as an end to a means, rather than as a valuable and continuing asset,” cautions Opdeweegh. ”In determining their future strategy, they quite often they will trust the judgment of a less qualified consultant over that of a seasoned management team with a proven track record.” Additionally, notes Opdeweegh, ”Private equity fund leadership often fails to appreciate how challenging it will be to achieve the post-purchase target return, and consequently, they fail to recognize the importance of the management team.”

3. An unbalanced payout to the owner compared to the management team.

Opdeweegh says, ”There is an institutionalized lack of balance in the economics of private equity deals. It is not uncommon to have deals in which an individual private equity partner earns a larger payout than the entire management group.” He goes on to explain that the inequity in compensation illustrates an apparent lack of appreciation for the complex and demanding work of management teams.

4. A clash of corporate cultures

”It is not atypical,” says Opdeweegh, ”for a clash of cultures to arise between a new shareholder group and an existing executive team.” The acquired executive team typically has worked together for an extensive period and has developed a shared set of core values. This set of values, which constitutes the corporate culture, may be very different from the behaviors the new owners wish to instill into their company vision. Says Opdeweegh, ”If values such as fairness, openness, inclusiveness, the speed of decision-making and respect are not aligned, cultural and business issues will surface.”

5. Preconceived notions and impulsive decision-making by new owners

Opdeweegh says that new owners often jump to conclusions when assessing the talent in their acquired business. For instance, during management presentations, they might conclude the CFO is lackluster or the COO is nontraditional. ”A rush to judgment is not only unfair to management,” he warns, ”it can lead to a crisis for the new owners because a forced executive replacement usually triggers an executive team exodus. Such a migration will significantly impact the business with the loss of much institutional knowledge.” Opdeweegh adds that hasty management churn can easily result in a three to four-year setback in revenue, EBITDA trajectory, and performance.

6. Disagreement over the new strategic plan

Speaking from his experience in the business, Opdeweegh explains how a new owner will develop a strategic plan to form the foundation of their investment decision. ”This strategic plan is based on assumptions relating to organic growth rate, diversification across geographies, customer and industry verticals, M&A activity, balance sheet structure, cost of the back-office functions, and other relevant aspects of value creation. The incumbent executive team may view some important aspects of the plan as unattainable or undesirable for shareholders’ wealth creation.” Disagreement about the strategic direction of the company and the key underlying initiatives is another classic reason for a failed relationship between the acquirer and the acquired executive team.

7. Second guessing of management team decisions by the new owner

Even if the new owner and the incumbent management team agree on the strategic plan, the new owner can undermine success by continually second-guessing management decisions. Says Opdeweegh, ”Private equity funds recruit from a pool of the best and brightest professionals, but these individuals have spent their careers building experience in the grueling PE environment and therefore tend to lack concrete corporate leadership experience. Undoubtedly with the best of intentions, these hardened professionals will have an opinion about many facets of the day-to-day, tactical and strategic management of their portfolio companies.” Adds Opdeweegh, ”Consequently, the management team spends an inordinate amount of time communicating or justifying the rationale of certain decisions to the shareholders. The resulting drag on time and morale can cripple efforts to reach target returns.”

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The Importance and Requirement of Standardizing Operational Practices

Large businesses often operate in a number of geographically-dispersed facilities, which typically overlap in terms of the services provided or products produced. Moreover, these businesses regularly serve the same customers out of a number of different facilities, especially if the customers span a large geography. And despite the logistical challenges of managing multiple locations, all customers rightly have high expectations around consistency in terms of quality, customer service, and customer reporting, no matter what facilities are involved in their product or service delivery.

Unfortunately, too many companies still operate in a disjointed environment where either legacy, a false interpretation of the concept of empowerment, or the singular perspective of the individual plant manager determines the organization’s processes and procedures. This approach, however, hinders corporations from achieving their full potential in terms of customer service and return-on-capital-employed.

Universal Operating Structure is Key Success

The implementation of a rigorous and prescriptive universal operating structure is the most effective way to guarantee the highest level of standardization and scalability to deliver the greatest operational efficiencies and best performance against relevant customer KPIs.

Jozef, ‘Jos’, Opdeweegh has been a CEO of large international companies for close to two decades and recognizes the importance of standardizing operational practices for optimal efficiency. In the following, he shares his perspective and insights on the importance and hallmarks of standardized operational procedures.

Aligning Interconnected Facilities

When a company operates a number of geographically-dispersed facilities, they are likely interconnected in one or more of the following ways. They may share a supplier/customer relationship, with one facility producing components that are used further down in the assembly or production process in another company-operated facility. In other cases, such as in the distribution industry, facilities are interconnected as the products are collected and stored, or cross-docked, in various locations. More simply, the organization may serve the same customer out of different facilities.

In the case of interconnected facilities, though important, it is arguably not the average performance of the company against a number of critical customer KPIs that is most relevant. Instead, the variance around the mean, and specifically the negative outliers, is the most relevant component. While these worst performers will mathematically drag down the average performance of the company against relevant KPIs, they will have an even more harmful impact on the customer’s perception of the quality of operations. The quality of the end product is only as good as the weakest link in the chain.

Scalability of the Platform

Since it is a strategic imperative of companies to grow, companies with a dispersed landscape of operating entities will typically increase the number of facilities and its geographic reach over time. In an environment where a consistent operating system is successfully deployed, launching incremental facilities becomes a much easier task. The platform is much more scalable, as the processes and procedures that determine how the operations and support functions inside the new facility will be organized are already largely determined. Some minor tweaking may be required to accommodate a new service offering, a new product design, or different customer requirements, but the core of the proven solution will already be solidified.

Mobility of Human Talent

When a standardized operating system is in place, human talent is much more interchangeable and transferrable. Since the company’s professionals have been trained in a standardized environment, they can easily and efficiently be deployed to fill talent gaps in other operations in the group or to help address quality deficiencies in sister facilities. Additionally, these resources are ideal in helping to launch new facilities in different geographies, or new service or production offerings as knowledge is portable, universally deployable, and highly valuable.

Continuous Improvement

In a standardized operating environment, continuous improvement is a key imperative. Whether the improvement initiative finds its origin in one of the company’s facilities where a colleague has devised a better way of performing a specific task, or in an idea that emanates from a continuous improvement team, once the idea has been tried and tested it should be rolled out and deployed throughout the entire organization. In the standardized environment, nobody can take a shortcut. A bad idea will not be implemented in any location, and a good idea will find its way to all locations.

As such, to provide the best service to customers in the most cost efficient and effective manner, Jos Opdeweegh suggests placing a dedicated focus on the development and implementation of a comprehensive set of processes and procedures from the outset.

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Executives Serve the Organization, not the other way around

inverted pyramid leadership graphic

A successful organization is dependent on several factors, one of the biggest being internal organizational structure. When running a business, big or small, this is one of the first elements needed to function, yet often times it’s overlooked and falls victim to outdated values. 

It’s imperative for executives of a company to reverse how they may naturally be inclined to run their organization and create an organizational structure that is rooted in the customer and employees. 

The outdated hierarchical structure

In a traditional strict hierarchy, decision-making is the sole prerogative of a select group of senior leaders in the organization. It’s an approach that centralizes power and is steeped in the erroneous belief that a happy few leaders are best placed to make the right decisions for the company on a strategic, tactical, and even day-to-day level. 

This pyramidal structure is a very autocratic and even militaristic approach to running an organization, whereby decisions are pushed down on colleagues without the solicitation of input or the willingness to listen to other ideas and approaches. As a consequence, the creativity and the valuable input of those in the organization who are closer to the challenge or the problem that needs to be addressed, gets lost. And over time, the organization numbs down and resigns to the limitations of the hierarchical structure.

Shortfalls of the traditional hierarchy

Beyond being an antiquated organizational structure, hierarchical leadership also unleashes many obstacles and stumbling blocks on a company, further complicating and hamper achievement of key goals. 

Negative impacts on employee morale.

Colleagues prefer to work in an environment that is inclusive, in a structure that values their input and contribution. The workforce of a company consists of individuals with varying backgrounds and experiences whose input enhances the long-term success of the company. People want much more from their professional life than the sheer repetition of a number of narrowly defined tasks, or the execution of top-down instructions without debate or input. A strict hierarchy leaves colleagues with the feeling of being underutilized and undervalued. It negatively impacts the feeling of overall wellbeing and belonging in the extended family that constitutes a successful company.

Employee churn and loss of talent.

Companies that adhere to a strict hierarchy are engaging in paradoxical behavior. On one hand, their human resources department is likely spending a tremendous amount of effort and monetary resources to try to identify and recruit the best possible talent. On the other hand, once the talent has been on-boarded, the organization has little interest in the individual contribution of the valuable new recruits. This will lead to a situation where the high potentials quickly get frustrated with the culture they are forcefully being inundated with and will decide to leave the organization in due time. 

The road to mediocrity.

The combination of a scenario where an organization stymies creativity through centralized top-down decision-making will over time create a workforce that is mediocre in terms of overall quality and core behaviors. The high potentials will leave the organization, frustrated because of their lack of ability to influence to company’s decisions and direction. At the same point in time, the company – through its performance management tools – will decide to part company with the worst performing co-workers. In balance, those who will survive in the long term are those who never challenge the status quo, who are risk adverse and non-inquisitive.

Suboptimal decision making.

Top-down decision making, without regard for the input and knowledge of those colleagues who are much closer to the issue and much more qualified to make or at least contribute to the right decision, is by definition suboptimal. Why would somebody come forward with a novel angle to an issue or an opportunity if that person knows that the sound advice will fall on deaf ears? A number of key considerations and knowledge sources that would greatly enhance the quality of the decision are lost. Therefore, decisions that are made in isolation and pushed down to the mass organization are unbalanced and uninformed.

The shift to the inverted pyramid and servant leadership 

Rather than applying an outdated steep hierarchy, executives should try to come to grips with the reality that the company does not revolve around them, but around its valuable customers and its hard-working colleagues. The leadership team really is in essence an enabler, an instrument to create an environment that guarantees the largest probability of success for the company and its key stakeholders: customers, colleagues, investors, and lenders. 

In organizational structure, which can best be described as “the inverted pyramid”, customer and customer-facing colleagues are viewed as the most important asset of the company. As we go down on the pyramid, we see the executives all the way at the bottom, as an indication of the reality that their primary task is to serve the organization and all of its constituencies. 

Customer-centric values 

In addition to the notion that the leadership works for the organization and its valued colleagues – not the other way around – the inverted pyramid also squarely puts the customers at the center of its purpose. Without the customers, the company has no reason to exist. In this context, it’s important to note that every individual is a salesperson for the organization. Driving consistent core behaviors, a positive attitude, and a high level of engagement with the workforce are the best possible ways for supporting incremental sales. 

When a prospective customer is looking to source business with a new provider, they are not looking for yet another glossy presentation. They want to experience in practice whether what is being portrayed in the sales deck matches the reality on the shop floor. Nothing will convince that prospective buyer more than a visit to a state-of-the-art facility that is already in operation and that is populated with a knowledgeable and enthusiastic workforce that can energetically articulate what processes they are responsible for, and how their hard work fits into the bigger strategic direction of the company.

Implementing a solid organizational structure will create a positive ripple effect that will reverberate throughout a company all the way to its customers. Success cannot happen if there is not a strong inner foundation for employees to be proud of and support, and this all begins by flipping the organizational pyramid.

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Why Companies Make Harmful Decisions

why companies make bad decisions Jos Opdeweegh

In posing that question, I’m not referring to those infamous bad calls like Decca records rejection of The Beatles, or Blockbuster’s rebuff of a joint venture with Netflix. These are human mistakes — and with the benefit of hindsight, we can all of us believe we’d have made a smarter choice.

Rather, what interests me is why, given all the checks and balances, so many companies appear to take carefully thought through decisions that actively harm the interests of their stakeholders?

A Harvard Business Report estimated that up to 90 percent of all mergers and acquisitions fail; similar claims can be made for internal transformation projects, especially in the IT and digital sphere. Whatever way you look at the problem, it seems that despite access to the smartest minds, sophisticated forecasting tools and due diligence warnings, business leaders continue to get it wrong.

Observation has taught me there’s no single explanation. But after twenty years of corporate decision making — and with the scars to prove it — I’ve at least become attentive to some of the warning signs.

What follows are therefore my insights from experience. Interpret them as you wish, for every situation will be different — which leads nicely to my first observation, that gets straight to the root of the problem.

Business Complexity

The unfortunate reality is that many strategic decisions are not as binary as whether or not to award a recording contract — rather, they are multifaceted, involving forecasts of markets, competitors, savings and synergies… And what’s more, many of the situations are particular to circumstance, so references are seldom available or even helpful if they were.

In these sorts of complex situations, we all of us — and organizations are no different — resort to simplified solutions that allow for a quicker way through the maze. Academics call these heuristics — we know them as rules of thumb, best estimates, benchmarking and the like.

The trouble with heuristics, is that although they are to some extent inevitable, we risk addressing a simpler problem than the one we face — and worse, our biases and preferences creep into the proposed solution to issues that have been framed for our convenience rather than the reality of the situation.

One antidote — so far as any is effective — is to be extremely careful when simplifying or estimating significant variables. Any benchmarks we chose and assumptions we make, must also be modeled over a wide range of outcomes. The greatest danger of heuristics is actually a regression to the mean where risks and opportunities are smoothed into a safe bet which, in the event, turns out to be anything but.

Human Impulsiveness

Linked to our tendency to simplify, is a pressure to act — fueled by a deeply ingrained corporate mindset that regards not doing so as a missed opportunity or cultural failing. Organizations increasingly demand that their leaders move at pace, and while this has its benefits, it can also lead to premature decisions that are ahead of the curve.

In transformational projects, the term ‘bleeding edge’ refers to the impact of decisions — typically, those involving the early adoption of technology — which lead to unexpected costs and consequences which harm rather than enhance competitiveness. The underlying reason is that supposed ‘first-mover advantage’ inevitably comes with significantly greater risks. In almost any sizeable market, the lesson of case study after case study is that a little more patience would often have led to a better outcome.

To some extent, this is as much an institutional as an individual problem. I often sense that companies weigh the ‘regret risk’ of missed opportunities more heavily than they do the years of successful delivery. Investors — like sports fans — are both impatient for success and quick to point out the triumphs of others. What they are less good at doing, is recognizing the potential for pitfalls and giving due regard to the judgment of those who avoid them.

There is no cure-all solution to impulsiveness, but it is good practice to ensure decisions can be made over sensible timeframes, to resist the pressure to lead on every front, and to establish agreed expectations for investment and return over time — and then stick to them!

Reward versus Risk

At the heart of the type of decisions we’re discussing is the assessment of risk versus reward.

Of course, no opportunity of any consequence is a certainty — investors, colleagues and customers all understand that. It’s also fair to say that most successful executives need to be less risk averse than say, librarians. But while that’s a good thing, my experience is that risk and reward assessments are often made in a manner which gives undue weight to one over the other.

Think for a moment of all those inspirational quotes you’ve seen at management conferences: Whatever you dream, begin it — for boldness has power and magic! (Goethe); Security is mostly superstition… (Hellen Keller); Do not fear mistakes; there are none!’ (Miles Davis)

Extracts like these can be fine as a means to inspire a sales team or encourage creativity, but their underlying message can — and in my experience often does — contribute to a mindset which lionizes risk taking.

I’m not suggesting that the potted wisdom of Miles Davis is taken too literally by senior executives. But when it comes to major strategic decisions, the notion that boldness equates to virtue remains a powerful force, and a significant hindrance to a full and objective assessment of downside consequences.

The dream of reason

We should also recognize that objectivity is more of an attitude than a destination we ever arrive at. The belief that we can accurately predict the future through analysis and situational modeling alone has been the downfall of many an economist — or for that matter politician.

In practice, we live in a less than rational, often emotional, and certainly disruptive world — companies and organizations can never fully predict the response of others, or indeed, the impact of change on their people and its consequent effect on a multitude of other factors. Which is why softer considerations are just as vital.

Culture and Communications

In analyzing harmful decisions, the diagnosis often points less to the actions we have taken, than the way we went about them.

For example, bringing together two organizations might seem straightforward on paper — but as with personal relationships, there’s more to a good match than aligning compatible skills and qualities. Too many mergers are predicated on the assumption that the mores of one party can be imposed on the other — giving scant regard to the importance of culture, communication and values as drivers of performance.

Successful ventures pay attention to these softer qualities, avoiding the imposition of changes that are diametrically opposed to the past, or rewarding individuals with extended remits for which they have little understanding.

The same cultural empathy should apply to for our search for synergies, sales growth or even colleague engagement — we should not assume that crashing together, or worse, imposing one style on the other, will bring success.

Think Borg and McEnroe — both exceptional tennis players, but not the most compatible doubles pairing.

Imbalance of stakeholders

This understanding of partnership is never more important than in the balance of stakeholder interests. All commercial organizations have at least three key constituencies: their investors, employees and customers. And while all of these will want the company to prosper, they each have subtly different needs and emphasis.

Successful organizations make decisions in a way that ensures all stakeholders take a fair share of the risks and rewards. That means investors accepting there are other calls on cash than paying dividends; employees understanding that job security comes from embracing change, and customers having realistic expectations on price and value despite the leverage they may have.

Conversely, if the interests of one stakeholder group begins to dominate, it can be a green light to harmful decision making. Over the lifecycle of a business, there will, of course, be times of different emphasis — but on the whole, sustainable decisions are founded on meeting the needs of each constituency, while avoiding the ascendancy of any.

And finally…

I could go on with a host of other reasons…

But I’m conscious there’s a limit to the value of observations from experience, and particularly aware that hindsight makes prophets of us all — or in my case, the best Monday morning quarterback to never grace the field.

Perhaps the most important thing, in seeking to understand why so many companies make harmful choices, is to recognize it’s not the corporate entity that makes those decisions at all — it is people!

And as human beings, we are all of us in equal part blessed and susceptible to the paradoxical mix of talents, frailties and hubris that drive our exceptional achievements as well as our greatest mistakes.