Jozef Opdeweegh – How to Sell Your Business at the Most Attractive Valuation

Picture this: Your business has enjoyed an excellent run over the past couple of years. Revenue is following an upward trend, and EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) is keeping pace with your growth.

If a private equity fund owns the business you are running, there is a good chance the owners are contemplating a sale. A sale may be based on considerations such as how long the fund has owned the business and the perceived attractiveness to interested buyers.

On the other hand, if you personally own the business, you may be looking at bringing on fresh equity and operational know-how to expand your success.

Whatever the motives driving change may be, a tremendous amount of incremental value may be unlocked through the way you approach the process of selling your business. The most attractive valuation can be achieved by focusing on a number of key factors during preparation and execution of the sale.

Jozef Opdeweegh, a Miami businessman with over 17 years of experience as CEO, Chairman and Board Member of private and public companies discuss how to sell your business at the most attractive valuation.

7 Key factors for valuation

1. Timing

The right time to sell is when: (1) there are many prospective buyers, (2) there is a significant amount of private equity money (that has yet to be deployed and is actively pursuing new deals), (3) the IPO market is hot (if you are contemplating going public) and (4) the general economic climate is attractive (specifically in relation to the industry vertical(s) your company serves).

2. Business Performance Sustainability

Business performance in the years preceding the sale process is a main driver in maximizing enterprise value. Simply put, a buyer will only be willing to pay a certain multiple on your EBITDA if that buyer is sufficiently convinced the run-rate level of cash flow is sustainable in the future. By way of example, not a single buyer will pay a 10 times multiple of cash flow without conviction that the company will be able to generate that cash-flow level for at least 10 years.

3. Investment Bank Expertise

First, it is important to select an investment bank (or a broker) with a proven track record in your industry. When selecting an investment banker, exercise balanced judgment of your valuation expectation – do not simply pick the banker who promises the highest valuation.

Having access to a competitive set of bidders for your business will likely yield a positive impact on the obtainable valuation. Therefore, it is typically advisable to organize an auction with a broad set of participants.

4. Memorandum and Management Presentation Effectiveness

You will command the highest price if you spend a large amount of time on preparation. You simply need to produce the most comprehensive, compelling and best Information Memorandum and Management Presentation. You, along with your fellow presenters, should excel and be confident in front of an audience. Demonstrate knowledge of every detail related to the business, and be agile and quick in your thinking. Eloquently answer all the questions from the buyers’ community. Be enthusiastic, perseverant and energetic. It is a worthy investment to practice presentation skills with your team.

5. Team Strength and Cohesion

When you are selling your business, you are also selling your management team. It is important the buyers are exposed to the entire senior team at some point during the sale process. The management team should be fully aligned on culture, core behaviors and strategic vision. Any dissonance will be viewed as a weakness, which may negatively impact price. If you are planning on selling your business, avoid making meaningful management changes in the 12-months prior to the sale. A tenured leadership team reflects stability. It also reflects your ability to plan for the long run and to provide the best, most scalable team to a buyer.

6. Strategic Plan Integration

The ability to work well with a new ownership team depends on the business’s strategic plan. The sale process, which typically runs over an extended period, allows for extensive conversation around this topic. Therefore, the level of consensus surrounding the business’s strategic plan (post-ownership change) becomes clear.

If you, as the business owner, are in the position of being able to singlehandedly select the buyer, you can vigorously drive this point home. If you are running a company owned by a PE investor, you typically do not have the luxury of weighing in on the future ownership decision. In the latter scenario, spend sufficient time with the acquirer to demonstrate the merits of your strategic perspective and proposed direction.

7. Cultural Alignment

You and your new shareholders should share the same value set. Disparate perspective on culture and core behaviors will lead to significant future issues with your new shareholders. Often, this is the reason for failed acquisitions. Again, during the sale process, focus on corporate culture to assess alignment to maximize future success.

Jozef Opdeweegh Outlines 7 Key Fixes to Transform a Floundering Business

All kinds of companies – both publicly and privately listed – fail to reach their full potential for a myriad of reasons. Perhaps the business is family owned, but the ownership group is content with generating an adequate level of recurring cash flow, despite underperforming against peer groups. Or, perhaps the business is publicly owned, but the management and the board are not incentivized to explore new avenues of growth and diversification. Rather, they are compensated to remain risk averse.

In both cases, there is the potential to unlock incremental shareholder value. And in the case of public companies, the board and the leadership team may even have a fiduciary obligation to do just that.

It can be empirically argued that for most businesses, there is a direct correlation between the size and level of diversification on one hand and the enterprise value of that organization on the other hand. Additionally, key drivers of shareholders’ wealth creation are cash-flow resilience and the comparative performance in terms of growth and profit margin versus direct competitors.

Common Business Issues & How to Successfully Address Them

No Well-Defined Strategic Plan

If a company does not have a clearly articulated strategic plan and a shared end goal, it is rudderless and its employees are unable to cooperatively work towards a future state.

An effective strategic plan describes what the company should ideally look like in a defined period (typically 5 years), and it sets key milestones.

The strategic plan needs to be simple, focused on no more than 5 key criteria, and it should be universally understood throughout the organization. It is imperative for the leadership to actively go out to its workforce to explain the strategic plan, its merits for all involved, and the importance of the contribution of each employee to the achievement of the end goal.

Lack of Organic Growth

Companies that fail to grow organically will risk a weakening of their position in the marketplace. For many organizations, mediocre performance essentially becomes institutionalized. The sales force lacks the right sales playbook because these companies fail to sufficiently invest in the training and assessment of their sales force, and they have incentive schemes that do not incent the right behaviors.

Key to turning around the revenue trend of an organization is the continuous comparative assessment of salespeople based on objective criteria, combined with (1) tailored sales force training, (2) a redesigned and simple incentive opportunity, and (3) a clear program of relevant KPIs to assess performance quality. In a situation where the sales force as a whole is underperforming and requires upgrading, forced ranking of talent with predetermined levels of attrition and inflow of new talent may offer an effective tool to enhance the overall quality of the sales effort.

Outgrowing the Leadership Talent

As a company grows and becomes more diversified in terms of its product/service offerings and geography, it is certainly not unusual to have to upgrade the leadership team in tandem. The demands on the executive team of a small and geographically concentrated business are vastly different from those imposed on the leadership of a rapidly growing and geographically expanding organization. It is important to ensure the quality of the leadership team is in sync with the ambitions of the company. The recruiting policy must be such that the talent attracted is scalable to lead the company through the 5-year horizon of its strategic plan.

Lack of Aligned Culture and Core Values

Once a company has clearly defined its mission, its vision, and the supporting behaviors through a process of consultation, it is imperative that the leaders of the organization demonstrate those behaviors in their professional and personal lives. Any form of lack of adherence or dissenting behavior should be addressed in a direct conversation. If the individual continues to openly or otherwise fight the agreed-upon core behaviors, the individual should be let go (in a fair and respectful manner). The biggest threat to the strategic plan is to allow festering passive-aggressive behavior – especially at the leadership level. While cultural alignment is extremely important between the associates, it is equally important that this alignment extends to the board and, in the case of a privately owned corporation, the shareholders of the company. Too often a cultural divide, and not the performance of the team and the company, inspires ownership groups or their representatives to make impulsive management changes.

Inconsistent Quality in Operations

The long-term future of a business is negatively impacted if it does not provide world-class levels of quality in its products and services. The company should develop a detailed operating system that is prescriptive in nature and that defines how its facilities and back-office functions should operate across each geography or location. Such a system will guarantee a predictable and excellent customer experience. The operating system should focus heavily on concepts of lean manufacturing, six sigma, continuous flow and first-time-through quality.

Lagging IT Infrastructure and Business Analytics

Any business benefits greatly from a thorough and modern ERP solution that covers the entire spectrum of financial accounting, distribution or supply chain management, manufacturing, human resources and CRM. Businesses also benefit from access to relevant business analytics in each of these areas. While boards are often reluctant to implement a new ERP solution (it can be costly and can cause distracting business interruption), the ERP solution is truly the engine of the business. Not only should a business invest in modern ERP solutions, it should also expect to constantly reinvest in modernization and to upgrade every 10 to 15 years.

SG&A Overhang

A company needs to identify how much it is willing to spend on the sum of support functions, based on a comparison to its peer group and its strategic ambitions. It also needs to institutionalize the notion that SG&A is scalable, up and down, and to think of it as a semi-variable expense. When a company hits a rough patch, the impact on its cash flow – and even its survival – is often defined by its ability to scale down SG&A. Conversely, when a company grows, it should take advantage of the scalability of support function. SG&A-costs, expressed as a percentage of sales, should decrease as the company grows.

Jozef Opdeweegh: Fixing 7 Key Problems of an Underperforming Business

All kinds of companies – both publicly and privately listed – fail to reach their full potential for a myriad of reasons. Perhaps the business is family owned, but the ownership group is content with generating an adequate level of recurring cash flow, despite underperforming against peer groups. Or, perhaps the business is publicly owned, but the management and the board are not incentivized to explore new avenues of growth and diversification. Rather, they are compensated to remain risk averse.

In both cases, there is the potential to unlock incremental shareholder value. And in the case of public companies, the board and the leadership team may even have a fiduciary obligation to do just that.

It can be empirically argued that for most businesses, there is a direct correlation between the size and level of diversification on one hand and the enterprise value of that organization on the other hand. Additionally, key drivers of shareholders’ wealth creation are cash-flow resilience and the comparative performance in terms of growth and profit margin versus direct competitors.

Common Business Issues & How to Successfully Address Them

1. No Well-Defined Strategic Plan

If a company does not have a clearly articulated strategic plan and a shared end goal, it is rudderless and its employees are unable to cooperatively work towards a future state.

An effective strategic plan describes what the company should ideally look like in a defined period (typically 5 years), and it sets key milestones.

The strategic plan needs to be simple, focused on no more than 5 key criteria, and it should be universally understood throughout the organization. It is imperative for the leadership to actively go out to its workforce to explain the strategic plan, its merits for all involved, and the importance of the contribution of each employee to the achievement of the end goal.

2. Lack of Organic Growth

Companies that fail to grow organically will risk a weakening of their position in the marketplace. For many organizations, mediocre performance essentially becomes institutionalized. The sales force lacks the right sales playbook because these companies fail to sufficiently invest in the training and assessment of their sales force, and they have incentive schemes that do not incent the right behaviors.

Key to turning around the revenue trend of an organization is the continuous comparative assessment of salespeople based on objective criteria, combined with (1) tailored sales force training, (2) a redesigned and simple incentive opportunity, and (3) a clear program of relevant KPIs to assess performance quality. In a situation where the sales force as a whole is underperforming and requires upgrading, forced ranking of talent with predetermined levels of attrition and inflow of new talent may offer an effective tool to enhance the overall quality of the sales effort.

3. Outgrowing the Leadership Talent

As a company grows and becomes more diversified in terms of its product/service offerings and geography, it is certainly not unusual to have to upgrade the leadership team in tandem. The demands on the executive team of a small and geographically concentrated business are vastly different from those imposed on the leadership of a rapidly growing and geographically expanding organization. It is important to ensure the quality of the leadership team is in sync with the ambitions of the company. The recruiting policy must be such that the talent attracted is scalable to lead the company through the 5-year horizon of its strategic plan.

4. Lack of Aligned Culture and Core Values

Once a company has clearly defined its mission, its vision, and the supporting behaviors through a process of consultation, it is imperative that the leaders of the organization demonstrate those behaviors in their professional and personal lives. Any form of lack of adherence or dissenting behavior should be addressed in a direct conversation. If the individual continues to openly or otherwise fight the agreed-upon core behaviors, the individual should be let go (in a fair and respectful manner). The biggest threat to the strategic plan is to allow festering passive-aggressive behavior – especially at the leadership level. While cultural alignment is extremely important between the associates, it is equally important that this alignment extends to the board and, in the case of a privately owned corporation, the shareholders of the company. Too often a cultural divide, and not the performance of the team and the company, inspires ownership groups or their representatives to make impulsive management changes.

5. Inconsistent Quality in Operations

The long-term future of a business is negatively impacted if it does not provide world-class levels of quality in its products and services. The company should develop a detailed operating system that is prescriptive in nature and that defines how its facilities and back-office functions should operate across each geography or location. Such a system will guarantee a predictable and excellent customer experience. The operating system should focus heavily on concepts of lean manufacturing, six sigma, continuous flow and first-time-through quality.

6. Lagging IT Infrastructure and Business Analytics

Any business benefits greatly from a thorough and modern ERP solution that covers the entire spectrum of financial accounting, distribution or supply chain management, manufacturing, human resources and CRM. Businesses also benefit from access to relevant business analytics in each of these areas. While boards are often reluctant to implement a new ERP solution (it can be costly and can cause distracting business interruption), the ERP solution is truly the engine of the business. Not only should a business invest in modern ERP solutions, it should also expect to constantly reinvest in modernization and to upgrade every 10 to 15 years.

7. SG&A Overhang

A company needs to identify how much it is willing to spend on the sum of support functions, based on a comparison to its peer group and its strategic ambitions. It also needs to institutionalize the notion that SG&A is scalable, up and down, and to think of it as a semi-variable expense. When a company hits a rough patch, the impact on its cash flow – and even its survival – is often defined by its ability to scale down SG&A. Conversely, when a company grows, it should take advantage of the scalability of support function. SG&A-costs, expressed as a percentage of sales, should decrease as the company grows.


Jozef Opdeweegh

About Jozef:

Jozef Opdeweegh, also known as Jos, has served as CEO for over 17 years of global technology, distribution, and supply chain optimization companies with 5,000 to 20,000 employees, public or privately held. Opdeweegh has extensive board membership experience on 4 continents with related and unrelated companies.

Website – http://jozef-j-opdeweegh.com/
LinkedIn – https://www.linkedin.com/in/jos-jozef-j-opdeweegh-13986b70/
Related Articles: Jozef Opdeweegh- 6 Core Organizational Values and the Importance of Corporate Culture
Jozef Opdeweegh – 9 Key Characteristics of a Successful Distribution Business


Jozef Opdeweegh

Jozef Opdeweegh on the Roles of Analysis and Creativity in Business Innovation

“Trust…but verify.” The phrase famously used by US President Ronald Reagan at the 1986 Reykjavik Summit, serves to illustrate that a counterintuitive tension is often the most effective way to break down barriers that prevent progress. This type of wisdom is now commonplace in business, aided by the growth of technology that gives confidence to efficiency arrangements between established partners.

Drawing inspiration from the ideal of trust, Jozef “Jos” Opdeweegh, a seasoned C-suite executive with over 20 years of experience developing, leading, and growing public and private global companies, shared his insight on what teams can do to foster their relationships and excel in an environment that supports further progress.

As someone with a true passion for talent development and business transformation, Jos Opdeweegh has demonstrated and repeated success in complex business and cultural transformations where strong teamwork mechanisms are essential. His commitment to finding the right balance in his work has been fundamental in the striking success of his career. This balance has come from finding enough room for both innovation and data to grow together and complement as a one…rather than siloed approaches.

“Fresh thinking is essential to human flourishing”, Opdeweegh assured. “Without it, we stagnate, our horizons narrow and in business, our competitors overtake us”. For Opdeweegh, when innovation becomes absent or curtailed by strict guidelines and dogmas, there is more likeliness for the environment to feel enclosed — or immersed in the ‘dark ages’ as he pointed out — and stagnant from new fresh ideas.

But the reality is that when it comes to our own circumstances, creative leaps can be scary, evoking the sequence of “disruption, resistance and uncertainty” which characterized progress in the scientific and industrial revolutions. Today, that same pattern continues, most obviously in the digital sphere, which has supercharged the speed, reach, and risks of creative innovation.

It is a mistake, however, to think of creativity purely in terms of inspirational genius. Opdeweegh has closely observed patterns of creative pioneers and leaders in various industries such as the prominent engineer and inventor, James Dyson, whom he recalls pointing out that “practical progress is seldom made in the manner of Isaac Newton under the apple tree”. Rather, it’s an iterative journey, which sharpens our notions and intuition through a process of trial and error. For Opdeweegh, Dyson’s brilliance isn’t just his creative vision, it’s also his commitment to testing, adjustment, and utilizing data to analyze and solve problems.

Opdeweegh also agrees that achieving progress is often subtly different than reinvention, and it requires a blend of aspirational and logical mindsets.

“Under this model, the creative and analytic approaches work together to make marginal gains with measurable impact by repeating the process time and again,” Opdeweegh noted. “I’ve seen this in practice, and would observe that the most analytical people I’ve worked with are among the best innovators, while almost all creatives I know are deeply analytical in their approach.”

Moreover, Opdeweegh also remarked how Dyson allowed innovation to flourish under an atmosphere of creative tension, where ideas are robustly and competitively challenged, in pursuit of a common goal. For Opdeweegh, he agrees to this proposition after experiencing this firsthand with his teams who have most effectively come up with the most productive ideas when being subject to the same standards.

The relevance for business leaders is that innovation works best when creativity and analytics are integral to, and not isolated from, the day to day realities of the organization.

“Analysis is, therefore, the bedfellow and not the bugaboo of practical creativity,” says Opdeweegh. “By measuring and learning, not only do we sort the wheat from the chaff, we also help the good become great – or more often, just that little bit better.”

Twenty Twenty Vision

Has it really been twenty years since we were celebrating a new Millennium? Depending on your perspective, that milestone might seem like yesterday or an age away — given the pace of change, it can feel like both. Across societies worldwide there’s a cultural tradition of acknowledging significant anniversaries and using these as a time to reflect on the past and set new goals. And so, as we enter the third decade of the century, it’s perhaps an appropriate moment to consider the road we’ve travelled and the forces and challenges that are likely to lie ahead.

From a leadership perspective, looking back on the last twenty years, the landscape is in many respects still recognizable — the basics of balanced analytical judgement, good people skills, team building and empowerment are little different, if probably more nuanced. But the changes wrought by technology, increasing globalization, public sentiment and the sheer improvements to our understanding of how we best work together — have inexorably transformed the way organizations navigate their routes to success.

My chief interest lies in the impact these developments — and many others — will have on the demands of senior leadership in the decade ahead. Of course, cultural trends don’t fit neatly into ten-year cycles, but for the sake of convenience — and with a heavy caveat that ‘futurology’ is out of date the moment it’s voiced- here are my thoughts on some the issues that may most significantly impact the leadership agenda over the next ten years.

Purpose

The idea of organizational purpose has been gaining ground for some time. It’s understood that businesses must make a profit to survive, but beyond this there lies an increasingly powerful sentiment that organizations need to play a clearer and more positive role, not only for their direct stakeholders but also in wider society. The growing B Corp movement , which accredits businesses on social and environmental factors, has to date been seen as somewhat ‘alternative’ — but its core message, which envisions business as a force for good while campaigning for a more balanced assessment of positive impacts than profit alone, is increasingly influencing mainstream thinking. Evidence shows that organizations founded on strong social values have more engaged colleagues, attract talent at less cost and enjoy stronger customer relations and brand reputations. Leadership in the next decade will require greater attention to these issues, not as a requisite of political correctness, but as a means to drive performance.

Sustainability

No organization of size can ignore sustainability in the coming decade. From an environmental perspective, the pressures are literally rapidly warming up — and with them a need for greater vision and bolder solutions. Pressure groups demanding targets that would appear, by conventional standards, to be unachievable and unrealistic, are nonetheless impacting public sentiment and with that shaping the policy and legislative agendas. The challenge for many leaders will be that adopting a ‘road to Damascus’ eco-conversion will be as impractical as continuing to ignore the underlying realities. My expectation is that a combination of technological solutions and ever more stringent legislation (particularly to ensure level playing fields) will help — but, regardless of the detail, it is clear that we will require leaders to step up with urgency and place these issues at the center of our planning.

Transparency

The last two decades have seen an unprecedented increase in the scope of corporate reporting. Financial performance, though remaining pre-eminent, is now only one among many of the measures that organizations must account for: gender diversity, pay ratios, executive incentives, environmental emissions, health & safety… This wider assessment of organizational competence will only increase, as will the transparency of data comparison between organizations.

To some extent, what we have seen is a shift to ‘compliance reporting’, by which organizations have sought to meet the formal requirements but then limited further comment. I sense is that we will see the pendulum swing the other way, with a greater demand for leaders to provide more detailed narratives that are answerable to (and tested by) the ever-increasing transparency of the data. Accountability and transparency go hand in hand, so we should expect leaders to be more answerable to their stakeholders than ever before.

Collectivity

One thing that isn’t going to happen is life becoming simpler. Complexity will necessarily increase as a consequence of the challenges above, and it’s as true as ever that ‘ what got us to here, will not take us to where we need to go’. In this environment, leadership that’s focused on a single individual, however charismatic or talented, will not be sufficient — and even a united senior team is unlikely to deliver the transformational change that some organizations will require. The most successful companies already devolve decision making, but simply segmenting responsibility (by, for example, allocating Values to HR or Efficiencies to Operations) will also not be enough. As complexity increases the role of leadership must shift even further from a focus on decision making and control, to that of engendering a collective ownership of direction and priorities. In short, leadership will increasingly be about demonstrably living the organization’s collective values and goals as much as setting them.

Courage

The average lifespan of a business is shortening — it’s currently somewhere around 10 years — and most of those long-standing companies that continue to thrive do so by continual adaptation if not entire reinvention. We all know that the last decade has hit the retail sector particularly hard but arguably greater and more fundamental challenges lie ahead for others — consider the challenges facing the leaders in say, heavy engineering, hi-tech manufacturing, distribution, combustible engine manufacturing…

For many businesses — be they start-ups or global giants — the next decade is likely to involve some truly critical calls. Leaders will need to listen, to delegate, to set goals — all that we have considered so far — but they must also have courage, since many of the key decisions will require acting on beliefs in the absence of certainty. The word courage has its origins in the old French and Latin words for ‘heart’ or ‘seat of our feelings’ — and in that sense, it is subtly different to bravery or resolve. These qualities will be helpful too, for boldness and determination are how we must put our beliefs into practice, and acting together, they will be as fundamental to success as any analysis or epiphany.

Zest

I was tempted to title this last section ‘fun’, for enjoyment in the task is surely essential in any leader, whatever their era. But in zest I am hinting at something more. For if we bring energy and enthusiasm to the mix — ideally in a manner that’s infectious to others — then what’s daunting becomes exciting; what seems an obstacle becomes an opportunity — and thereby all the more achievable.

Leaders must not fear the challenges of the next ten years — rather, they should see them as a golden chance: unique, inspiring and seminal to our futures. Leadership in this context is a privilege and remembering as much, every time we turn up for our colleagues or ourselves, is a challenge we should all look forward too.

Happy new year — and here’s to a Roaring Twenties!

Disruption As The New Normal

Disruption! There must be few words more likely to provoke unease among executives and investors alike. Almost universally, the term is used in the negative sense by the mainstream; its very mention associated with disturbance, upset and impediment…

Yet its incidence is on the rise, as evidenced by any number of surveys predicting the majority of listed businesses will face market disorder in the next five years — as well as a raft of statistical studies, confirming a grim toll of companies that have already succumbed.

In a business context, disruption is an innovation or intervention which changes a market pattern, creating new value chains that typically undermine the established profitability of incumbents. That’s why it’s so feared by those who might at first appear to be the most able to resist. Over the last twenty years, we’ve all witnessed, and most likely contributed to, the reshaping of once stable industries which proves these concerns are well-founded: the rise of online retail and the demise of many brick-and-mortar giants is an obvious example.

But it would be a mistake to regard the problem as particular to — or exclusively caused by — the digital and technology sectors. That’s because market disruption is ultimately a process, not a ‘thing’ — its defining characteristic is the reimagining of the status quo, with ideas that take root in niche opportunities and later come to challenge the establishment.

And here lies the critical importance of leadership in responding to what is undoubtedly one of the biggest challenges of our time. By seeing disruption in terms of method and mindset, we can regain the initiative and turn a feared externality into a constructive force for good.

The American writer and thinker Robert Pirsig (most famous for Zen and the Art of Motorcycle Maintenance) suggested that all systems evolve their worth in two distinct ways. Firstly, through periods of “static quality”, in which they work to maximize the efficiency and productivity of established processes. And secondly, through occasional periods of “dynamic quality” in which that order is radically disrupted and new norms are established. These step-changes, he claimed, are invariably sparked by the mavericks, shamans and outsiders who see things through a different lens.

The consequences for senior leaders are far from simple to address. How do we best manage these two dynamics, embracing the need for change without destroying the value of what we already have? And how do we balance the need for experience and incremental efficiency, with the innovation and fresh thinking that’s essential for a future we can’t yet see?

It’s important though to recognize that not all disruption is revolutionary, or even of the sort typified by internet start-ups, where not to be first is to be last . Over the next decade, developments such as Big Data, Artificial Intelligence and Environmentalism will move more slowly but, in the long run, they are likely to cause even greater transformations across many more sectors. Consider, for example, the potential impact of 5G and the Internet of Things, not only on manufacturing but on customer experience, data analytics, education, connectivity…

Historically, large organizations have sought to embed and extend that phase of their life-cycle which provides the most stable and durable profits leveraging their dominance to curtail change and deter new market entrants. That’s understandable, but the problem — especially as markets become more dynamic — is that a reluctance to innovate becomes a long-term vulnerability when the barriers to entry fall. The recent rise of app-based or digital banks offering simpler and unstuffy services to younger consumers, are a topical example of how the retail banking industry was caught short — and is now racing to catch up.

Hence encouraging innovation, even in the stable times, is critical to avoiding complacency, and to my mind, one of the most essential values and behaviors for an organization to embrace. It’s often said that new entrants don’t require the same returns or have the same shareholder expectations as established players. That may be true, but innovation is, at least in relative terms, much more costly and existentially risky for those start-ups. For established players to be paralyzed by the desire to protect their maximal profit point, is both ironic and a dereliction of their longer-term duties to shareholders.

Leaders must step up here, making the case for sustainability through change’ and allowing space for their organizational mavericks and shamans. By definition, these will be few, and indeed it can be harmful to have too many at the top table, but listening and more importantly paying attention to more radical perspectives is critical to staying ahead of the disruption curve.

So too is staying agile. Innovation seldom proceeds in giant leaps or eureka like epiphanies. Most times it requires adaptive thinking, which might mean going one way today and another tomorrow. The role of leaders is to create the mindset that drives this forward, showing a willingness to alter direction in the face of new evidence. Humility, listening, and most of all, a meritocratic culture in which the best ideas win, are among the foundations of the constructive disruption that leaders have a responsibility to foster.

As with so many of today’s leadership challenges, I believe the most effective response to the threats and opportunities we face, lies in the values our organizations live by. A vision and reward system that’s based on stasis will neither inspire or sustain — nor will it attract the talent that rightly expects greater trust in the devolved expertise of the organization. One of the hardest judgments calls for all leaders is to know when to cede their expertise and authority to others. When faced with market disruption it is never truer that the skills and qualities which got us to where we are, will not be sufficient for where we need to go.

I don’t want to imply that the solutions are straightforward. The reason for the hard toll of business failures is not only that market leaders have the most to lose. It’s also because the strategic alternatives require imagination, courage and the support of all stakeholders in what is inevitably a less than certain outcome. What’s clear, however, is that a failure to embrace evolving realities, even when those threats may not appear urgent, will ultimately lead to a greater and more harmful disconnect. In the future, we must break with the expectation that equates stability with value, and instead accept that disruption is now part of business as usual.

Jos Opdeweegh: Unlocking Financial Success in a Flat Organization

What is a flat organization?

A flat organization is an organization where the number of layers or levels is kept to the absolute minimum. As a result, the physical separation between the executives and their colleagues is small, and direct interaction between the remaining layers is not only inevitable, but also stimulated and appreciated. In these organizations, the span of control, or a measure of how many people directly report to their leader, is large. Given this unique environment, for leaders to drive success in a flat organization they should focus on the following strategic imperatives.

Stay open to innovation

Any company that wants to outcompete its peers needs to be proactive and nimble. Organizations benefit greatly from the joint and individual creativity of their team members. However, this creativity can only be captured and harvested in an environment that embraces openness and open-mindedness. 

Openness is an indicator of employees’ willingness to share ideas openly and freely with the rest of the organization. Open-mindedness is a measure of the willingness of the organization to assess, absorb, and implement the ideas brought forward by colleagues without prejudice and with an open spirit. Openness and open-mindedness are key ingredients to building a meritocratic organization where the best idea wins regardless of who initiated the idea —  the janitor or the CEO. 

A flat organization is the most, if not the only, appropriate organizational structure to stimulate and reap the benefits of innovative thinking in an environment that is devoid of artificial barriers and unnecessary layers.

Focus on flat

Building a flat organization has both structural and cultural components. The structural component is quite intuitive, as it involves reducing the number of layers in an organization and increasing individual’s span of control. Other structural or mechanical elements include aligning job titles, decreasing the number of job titles, and creating a simplified but equitable compensation structure.

There is an equally important cultural dimension that is more difficult to broach, and is largely dependent on elements such as organization size, average tenure of the workforce, age of the organization and, of course, the reigning culture. 

Unfortunately, coworkers are naturally reserved and guarded in their interactions with leaders. Empirical studies have shown that out of caution, or perhaps self-preservation, colleagues are hesitant to speak up to share their ideas with the organization. This inherent hesitation seems equally pervasive when it comes to bringing forward creative ideas for sustainably improving company operations. 

A flat and open organization has a much better chance at removing these barriers than a steep hierarchy. If an organization is bureaucratic, its leadership autocratic, and its people unempowered, this will most certainly stifle the creativity of the workforce. It is upon the leadership of the organization to break down barriers, to engage the coworkers in open dialogue through town halls and listening sessions, to be authentic and approachable, and to make it abundantly clear that the company needs the innovative talent and ideas of all its employees. 

Why would an organization invest a tremendous amount of effort and money in recruiting talented colleagues, only to allow a culture where these talented individuals are discouraged from speaking up? This constitutes an incredible waste of talent and an unforgivable loss to the company. 

Invest in empowerment

A flat organization, where the artificial barriers between the different layers have been removed, where colleagues feel safe speaking up and sharing ideas, is an organization that will benefit from the collective creativity of its workforce. The outdated notion that the CEO or the leadership team has all the answers is nonsensical. The smartest ideas for improving process or product will typically stem from the folks closest to the challenge, not from a far-removed executive. That is why empowerment is such an important cultural attribute of the flat organization. An empowered individual, somebody who understands that he or she has the knowledge and authority to make the decision, without fear or hesitation, will be stimulated to come up with new and fresh ideas. 

In a very competitive and fast moving environment, a flat and empowered organization will outcompete its peers through the collective creativity of its workforce. It will be more innovative, agile and entrepreneurial than its competitors. These attributes will vastly benefit its financial performance, and equally important, the wellbeing of its coworkers.