Wednesday, July 30, 2003
Fantastic response to the first few posts. Thank you all. With very little encouragement, we can keep this up for months to come, as most of the book is already written.
Tuesday, July 29, 2003
*
B is for:
Branding
Some people consider branding immoral, particularly among consumer brands that focus on creating an image for the public to buy into.
It’s a pretty lame argument.
The fact is, consumers in the West have more money than sense and are amply provided with the necessities of life. If the customer gets pleasure from whatever intangible benefits your product offers, that is as valid a benefit as anything your competitors are offering.
In any case, your company and your products will develop brand identities whether you like it or not. The only question is whether you take control and make the brand work for you.
Building a strong brand is clearly a good idea. How much better to have a brand consumers can trust (even if you are only offering a second-rate product and service) than rely on the hope that they will use their own judgement and try out something new.
And don’t assume that business buyers are immune from this sort of behaviour: in the early days of computers, a key strength of the IBM brand was the knowledge that nobody ever got sacked for buying from Big Blue.
Contrary to popular belief, building a brand does not mean paying a design consultant an exorbitant amount of money to come up with a new logo and corporate colour scheme, and then watching the money roll in. The Inland Revenue has invested significant amounts of money in branding activities, but there is little evidence of people jumping over each other to pay taxes, or recommending the Inland Revenue to their friends.
Building a brand involves identifying the key values in what you are offering, and making sure that everything you do works towards maintaining and strengthening those brand values.
It’s a complicated, far-reaching process – which is why so many managers prefer to just buy a logo and hope.
B is for:
Branding
Some people consider branding immoral, particularly among consumer brands that focus on creating an image for the public to buy into.
It’s a pretty lame argument.
The fact is, consumers in the West have more money than sense and are amply provided with the necessities of life. If the customer gets pleasure from whatever intangible benefits your product offers, that is as valid a benefit as anything your competitors are offering.
In any case, your company and your products will develop brand identities whether you like it or not. The only question is whether you take control and make the brand work for you.
Building a strong brand is clearly a good idea. How much better to have a brand consumers can trust (even if you are only offering a second-rate product and service) than rely on the hope that they will use their own judgement and try out something new.
And don’t assume that business buyers are immune from this sort of behaviour: in the early days of computers, a key strength of the IBM brand was the knowledge that nobody ever got sacked for buying from Big Blue.
Contrary to popular belief, building a brand does not mean paying a design consultant an exorbitant amount of money to come up with a new logo and corporate colour scheme, and then watching the money roll in. The Inland Revenue has invested significant amounts of money in branding activities, but there is little evidence of people jumping over each other to pay taxes, or recommending the Inland Revenue to their friends.
Building a brand involves identifying the key values in what you are offering, and making sure that everything you do works towards maintaining and strengthening those brand values.
It’s a complicated, far-reaching process – which is why so many managers prefer to just buy a logo and hope.
Saturday, July 26, 2003
*
B is for:
Bankers
Why do so many business people complain about their banks? Why does the bad workman blame his tools? The answer to most of the moaning is that managers should try doing the basics right.
Keep your bank informed and spend your time building a healthy business and your bankers may not seem quite as unhelpful as their reputation would suggest.
Banks take a lot of flak, and some of it is obviously justified. But despite their irritating self-righteousness, they are not always as guilty as we like to think.
The case against them is usually based on five complaints:
1. They charge too much.
Well, maybe, and perhaps there is something in the allegations that they operate as a cartel. On the other hand, they do manage to push pieces of paper around for a pretty low price. Just as a benchmark, how much does it cost you to process your paperwork? And they are in business to make money. They need to bank profits in the good times to fund the horrible howlers they make every few years.
2. Their charging structure is ridiculous.
Yes, but at least they tell you in advance what things will cost. Compare that with a builder, a lawyer or a car mechanic, for example.
3. Service is poor.
On the whole, banks are fairly efficient, and the staff are polite. If banks’ systems were as inefficient as those of most companies, there really would be problems.
4. They won’t lend us money.
If you can’t convince them it’s a good idea, why should they? Do you lend your money to anyone who asks? You work full time at your company, and you still keep getting things wrong, so how can you expect a banker to understand what’s going on in the business? They’re not geniuses.
5. They cut up rough when we really need them.
Quite right, too. If you haven’t taken the trouble to work with the bank and present a good case for continued support, why should they throw good money after bad? When you know one of your customers has cashflow problems, do you step in and offer extra credit?
On the whole, most bankers are fairly decent people, providing a pretty good service.*
Using a bank is much like any other outsourcing deal – you negotiate what you want, at a cost-effective price, and try to keep things running smoothly by building a relationship.
* If anyone from the British Bankers Association is reading, can we have our £10 now please?
B is for:
Bankers
Why do so many business people complain about their banks? Why does the bad workman blame his tools? The answer to most of the moaning is that managers should try doing the basics right.
Keep your bank informed and spend your time building a healthy business and your bankers may not seem quite as unhelpful as their reputation would suggest.
Banks take a lot of flak, and some of it is obviously justified. But despite their irritating self-righteousness, they are not always as guilty as we like to think.
The case against them is usually based on five complaints:
1. They charge too much.
Well, maybe, and perhaps there is something in the allegations that they operate as a cartel. On the other hand, they do manage to push pieces of paper around for a pretty low price. Just as a benchmark, how much does it cost you to process your paperwork? And they are in business to make money. They need to bank profits in the good times to fund the horrible howlers they make every few years.
2. Their charging structure is ridiculous.
Yes, but at least they tell you in advance what things will cost. Compare that with a builder, a lawyer or a car mechanic, for example.
3. Service is poor.
On the whole, banks are fairly efficient, and the staff are polite. If banks’ systems were as inefficient as those of most companies, there really would be problems.
4. They won’t lend us money.
If you can’t convince them it’s a good idea, why should they? Do you lend your money to anyone who asks? You work full time at your company, and you still keep getting things wrong, so how can you expect a banker to understand what’s going on in the business? They’re not geniuses.
5. They cut up rough when we really need them.
Quite right, too. If you haven’t taken the trouble to work with the bank and present a good case for continued support, why should they throw good money after bad? When you know one of your customers has cashflow problems, do you step in and offer extra credit?
On the whole, most bankers are fairly decent people, providing a pretty good service.*
Using a bank is much like any other outsourcing deal – you negotiate what you want, at a cost-effective price, and try to keep things running smoothly by building a relationship.
* If anyone from the British Bankers Association is reading, can we have our £10 now please?
Thursday, July 24, 2003
*
A is for:
Assumptions
Managers have to make assumptions. Sometimes an assumption turns out to be wrong. It happens, and there’s no reason why anyone should hold it against you.
What managers don’t have to do is:
· Make unreal assumptions – like planning on the basis that sales will grow by 10 per cent this year, in the face of ample evidence that customers are still reining in spending and new competitors are gaining market share.
· Forget that their assumptions are, at best, educated guesses, and ignore the possibility that things will turn out differently.
· Assume that history will repeat itself, without bothering to investigate how the situation has changed since last time.
· Expect different people (especially customers and competitors) to react in the same way.
Unfortunately, managers, like scientists, spend most of their energy looking for evidence to support their theories, and trying to explain away anything that contradicts them.
It is always hard to predict the future, but it seems likely that managers will carry on making these same old mistakes. At least we can safely assume that won’t change.
A is for:
Assumptions
Managers have to make assumptions. Sometimes an assumption turns out to be wrong. It happens, and there’s no reason why anyone should hold it against you.
What managers don’t have to do is:
· Make unreal assumptions – like planning on the basis that sales will grow by 10 per cent this year, in the face of ample evidence that customers are still reining in spending and new competitors are gaining market share.
· Forget that their assumptions are, at best, educated guesses, and ignore the possibility that things will turn out differently.
· Assume that history will repeat itself, without bothering to investigate how the situation has changed since last time.
· Expect different people (especially customers and competitors) to react in the same way.
Unfortunately, managers, like scientists, spend most of their energy looking for evidence to support their theories, and trying to explain away anything that contradicts them.
It is always hard to predict the future, but it seems likely that managers will carry on making these same old mistakes. At least we can safely assume that won’t change.
Tuesday, July 22, 2003
*
A is for:
Acquisitions
Building a new company, struggling to make those crucial early sales, just scraping together enough cash to keep your creditors at bay …. How exciting!
But spare a thought for those poor souls charged with leading the successful company into the future. They know their markets, they have good products and profits are growing …. How deeply, deeply boring.
No wonder so many directors feel the need to make an acquisition, even though it’s the fastest known way to destroy value.
You have to offer more than the seller thinks his company is worth.
He has all the figures. He understands his employees and customers. He knows his company’s problems and weaknesses.
You are guessing (and paying lawyers and accountants to convince you that your guesses have some basis in reality). The odds are stacked against you – but the urge is too powerful to resist.
Make enough acquisitions and you, too, could be running a struggling company.
So instead of doing the sensible thing and minding your own business, you try to come up with ways of justifying the acquisition. Here are some we prepared earlier.
1. The target company is being offered cheap.
It does happen, but only when the target is being actively offered for sale. Big companies sell off divisions which no longer fit their strategic direction and core competences (i.e. an investment banker has provided some lavish entertainment and ego-massaging, and told the directors that their share options will be worth more). Or managers have dug themselves into such a deep hole that they’d welcome any escape. More often than not, though, you are simply overlooking the key factor that makes the target worth less than you think.
2. You know something they don’t.
This works in the classic management buy-out, where incumbent managers deliberately delay sales and talk down prospects until they can buy the business on the cheap. But unless you have an inside track, it’s pretty unlikely in an acquisition.
3. You can manage the target better than its existing management.
There is no doubt that plenty of businesses could do with better management. The chances that you are that better management? Slim.
4. The acquisition offers synergies.
You know all the hoped-for economies of scale have usually vanished by the time you have given up trying to get the two businesses to co-operate. But synergies … irresistible isn’t it? You might like to try looking for an acquisition that offers a new paradigm as well.
5. Their products and/or customers balance your portfolio.
You’ve been listening to management consultants, haven’t you? Well, don’t.
Feel free to use any or all of these justifications to convince your colleagues, or for boasting to your friends. If you like planning ahead, have a quick look at Excuses, as well, for some suggestions on what to say when it all goes wrong.
A is for:
Acquisitions
Building a new company, struggling to make those crucial early sales, just scraping together enough cash to keep your creditors at bay …. How exciting!
But spare a thought for those poor souls charged with leading the successful company into the future. They know their markets, they have good products and profits are growing …. How deeply, deeply boring.
No wonder so many directors feel the need to make an acquisition, even though it’s the fastest known way to destroy value.
You have to offer more than the seller thinks his company is worth.
He has all the figures. He understands his employees and customers. He knows his company’s problems and weaknesses.
You are guessing (and paying lawyers and accountants to convince you that your guesses have some basis in reality). The odds are stacked against you – but the urge is too powerful to resist.
Make enough acquisitions and you, too, could be running a struggling company.
So instead of doing the sensible thing and minding your own business, you try to come up with ways of justifying the acquisition. Here are some we prepared earlier.
1. The target company is being offered cheap.
It does happen, but only when the target is being actively offered for sale. Big companies sell off divisions which no longer fit their strategic direction and core competences (i.e. an investment banker has provided some lavish entertainment and ego-massaging, and told the directors that their share options will be worth more). Or managers have dug themselves into such a deep hole that they’d welcome any escape. More often than not, though, you are simply overlooking the key factor that makes the target worth less than you think.
2. You know something they don’t.
This works in the classic management buy-out, where incumbent managers deliberately delay sales and talk down prospects until they can buy the business on the cheap. But unless you have an inside track, it’s pretty unlikely in an acquisition.
3. You can manage the target better than its existing management.
There is no doubt that plenty of businesses could do with better management. The chances that you are that better management? Slim.
4. The acquisition offers synergies.
You know all the hoped-for economies of scale have usually vanished by the time you have given up trying to get the two businesses to co-operate. But synergies … irresistible isn’t it? You might like to try looking for an acquisition that offers a new paradigm as well.
5. Their products and/or customers balance your portfolio.
You’ve been listening to management consultants, haven’t you? Well, don’t.
Feel free to use any or all of these justifications to convince your colleagues, or for boasting to your friends. If you like planning ahead, have a quick look at Excuses, as well, for some suggestions on what to say when it all goes wrong.
Sunday, July 20, 2003
Haven't yet found a neat way of handling Chris's acerbic (and often very funny) footnotes, which are really an essential part of the Devil's Dictionary text. But here are the first three, the ones that apply to the Accounting Tricks entry I posted yesterday.
[1] Investment analyst Terry Smith caused a stir back in 1991 when he had the temerity to reveal some of the accounting techniques being used by major British companies in his UBS Phillips & Drew research report, Accounting for Growth, and his subsequent book. A number of finance directors were rather annoyed.
[2] After years of abuse of ‘exceptional’ and ‘extraordinary’ items, rules in this area have been tightened. The response? Many companies now choose to present ‘pro forma’ accounts. These are popular because they show what the accounts could have looked like if they didn’t have to follow any rules at all.
[3] Terry Smith devoted a chapter of his book to pension accounting (though, at the time, the focus was on how companies dealt with pension fund surpluses, rather than deficits). It would be interesting to know how many of the companies currently complaining about having to account for deficits took advantage of earlier opportunities to boost earnings or strengthen the balance sheet with ‘pension holidays’.
See what I mean? You wouldn't want to miss them, would you?
[1] Investment analyst Terry Smith caused a stir back in 1991 when he had the temerity to reveal some of the accounting techniques being used by major British companies in his UBS Phillips & Drew research report, Accounting for Growth, and his subsequent book. A number of finance directors were rather annoyed.
[2] After years of abuse of ‘exceptional’ and ‘extraordinary’ items, rules in this area have been tightened. The response? Many companies now choose to present ‘pro forma’ accounts. These are popular because they show what the accounts could have looked like if they didn’t have to follow any rules at all.
[3] Terry Smith devoted a chapter of his book to pension accounting (though, at the time, the focus was on how companies dealt with pension fund surpluses, rather than deficits). It would be interesting to know how many of the companies currently complaining about having to account for deficits took advantage of earlier opportunities to boost earnings or strengthen the balance sheet with ‘pension holidays’.
See what I mean? You wouldn't want to miss them, would you?
Saturday, July 19, 2003
*
A is for:
Accounting tricks
In all but the simplest businesses, it is easy to gently massage the accounts to boost profits, strengthen the balance sheet, or set aside hidden reserves to call on when the need arises.
Small firms generally restrict themselves to the most basic techniques – recognising income earlier than might be considered prudent, reclassifying expenditure as investment, or just spreading depreciation over unfeasibly long time frames.
Larger companies push the boat out more, using off-balance sheet financing, complex financial instruments, ‘sophisticated’ acquisition accounting and all the joyous possibilities opened up by operating in more than one currency.
A particularly satisfying technique is to hide contingent liabilities deep in the footnotes to the accounts, presumably using the same logic as that of the ostrich when it buries its head in the sand.
At the time of writing, interest in these practical accounting skills has been spurred by the collapse of Enron and WorldCom, but there’s nothing new in all this. [1] Finance directors have often been tempted to ‘smooth’ earnings, or to ensure that they meet stockbrokers’ forecasts (often themselves based on hints dropped by those same finance directors, leading to a curiously circular mechanism for determining and delivering earnings targets).
Nicely inflated financial results can help companies access funds, or lower their borrowing costs. And, of course, directors whose remuneration is tied to share price performance have always had a strong incentive to deliver the highest possible earnings figures.
On the face of it, there may not seem to be all that much wrong with this approach, assuming your accounts remain broadly within the letter of the law (if not the spirit) and you can find an auditor enthusiastic enough to pronounce them ‘true and fair’. But leaving aside any ethical qualms, there are drawbacks.
At the very least, you will be spending time and money playing around with the accounts.
More dangerously, you may come to believe them yourself. And finally, you will end up assessing transactions not on the basis of their business merits, but on how they would affect your accounting position. It is a slippery slope.
Despite these problems, and the current fuss, dubious accounting techniques are not going to go away. Where regulators close one loophole, aggressive accountants will open another. [2]
Even amid the current (no doubt temporary) soul-searching, it is interesting to hear the complaints of finance directors faced with the threat of new regulations on pension accounting.
Regulators are being accused of forcing companies to close final salary schemes and offer money purchase pensions instead. But all these proposals really do is insist that companies recognise the inherent liabilities they are exposed to.
Whether or not the regulations change, the underlying reality won’t. The only question is whether boards of directors – or finance directors themselves – ever understood this. [3]
A is for:
Accounting tricks
In all but the simplest businesses, it is easy to gently massage the accounts to boost profits, strengthen the balance sheet, or set aside hidden reserves to call on when the need arises.
Small firms generally restrict themselves to the most basic techniques – recognising income earlier than might be considered prudent, reclassifying expenditure as investment, or just spreading depreciation over unfeasibly long time frames.
Larger companies push the boat out more, using off-balance sheet financing, complex financial instruments, ‘sophisticated’ acquisition accounting and all the joyous possibilities opened up by operating in more than one currency.
A particularly satisfying technique is to hide contingent liabilities deep in the footnotes to the accounts, presumably using the same logic as that of the ostrich when it buries its head in the sand.
At the time of writing, interest in these practical accounting skills has been spurred by the collapse of Enron and WorldCom, but there’s nothing new in all this. [1] Finance directors have often been tempted to ‘smooth’ earnings, or to ensure that they meet stockbrokers’ forecasts (often themselves based on hints dropped by those same finance directors, leading to a curiously circular mechanism for determining and delivering earnings targets).
Nicely inflated financial results can help companies access funds, or lower their borrowing costs. And, of course, directors whose remuneration is tied to share price performance have always had a strong incentive to deliver the highest possible earnings figures.
On the face of it, there may not seem to be all that much wrong with this approach, assuming your accounts remain broadly within the letter of the law (if not the spirit) and you can find an auditor enthusiastic enough to pronounce them ‘true and fair’. But leaving aside any ethical qualms, there are drawbacks.
At the very least, you will be spending time and money playing around with the accounts.
More dangerously, you may come to believe them yourself. And finally, you will end up assessing transactions not on the basis of their business merits, but on how they would affect your accounting position. It is a slippery slope.
Despite these problems, and the current fuss, dubious accounting techniques are not going to go away. Where regulators close one loophole, aggressive accountants will open another. [2]
Even amid the current (no doubt temporary) soul-searching, it is interesting to hear the complaints of finance directors faced with the threat of new regulations on pension accounting.
Regulators are being accused of forcing companies to close final salary schemes and offer money purchase pensions instead. But all these proposals really do is insist that companies recognise the inherent liabilities they are exposed to.
Whether or not the regulations change, the underlying reality won’t. The only question is whether boards of directors – or finance directors themselves – ever understood this. [3]
