If you think there’s no way your business will ever be a victim of circumstance… YOU’D BE RIGHT… but only if there’s a comma after the word “think”
Try these 2 test case studies – what action would you take?
Question 1. As a leader of an interim assignment with this client, what would you want to do next with the client?
The Interim is a mature senior executive with powerful reputation as a former corporate £500m turnover CEO.
Ignoring whether you would have followed the Interim’s steps and thoughts, and merely observing that it happened this way, what would you do next if you were the Interim or they consulted you as their mentor or boss?
Bill. Age 34. Group Managing Director (MD) leading 1600 employees of a £200m division of a £400m turnover PLC (Public limited Company. ie. a company whose shares are quoted on the stock market). The company was a stockmarket ‘darling’ which had achieved tremendous growth and profit improvement that had taken it from being a small ‘bit player’ to market leadership in a decade. On retirement of the PLC Chief Executive Officer six months ago, Bill was promoted to Group Managing Director of half the business with the 56 year old executive chairman running the other half and supervising Bill for a 2 year ‘probationary’ period that if he was successful, would result in Bill being appointed Chief Executive Officer (CEO) of the whole group with a £500k pa. remuneration package.
In the first meeting with the Interim Bill said :-
‘I need advice how to get rid of my chairman who is sending me crackers. We are hardly on speaking terms. He is a complete ego maniac. He virtually wants to run the company himself and get the credit for its fantastic results. Actually they are due to the CEO who retired 6 months ago but the chairman wants the world to believe its all due to him.
I can never have a productive conversation with him. He always wants “written detail” I tell him we should be talking at strategic level not petty detail but he just keeps going back to the same old conversations about “profit margins and numbers, and ‘wanting notice of meeting topics in advance so he can think about them before we meet! ”
‘I get really cross with him in the board meetings and the executive committee now. I get the executive team on one side before the meetings and tell them to back me up when I disagree with him. I argue and contradict him openly in the hope he will either shut up or resign’
‘Recently I have got so fed up with his negativity that I have stopped telling him what I want to do and have just been getting on with changes without him knowing’
Interim. ‘What type of things have you been doing without his knowledge? Are they matters that the plc board ought to approve?’
‘I suppose the board ought to approve them really but he blocks everything I suggest. Even if it goes to the board and they ask his opinion, he always takes the ‘its too risky’ line and they agree with him. I’ve taken on a new divisional Managing Director without going to the chairman and I’ve just told the executive team to set up a new manufacturing plant so we can launch a new product line’
Interim ‘ How much will that new plant cost?’
‘About £2 million but we’ll get that back from new sales within 2 years. It’s a new product line I have been pushing to do for two years, but the CEO wouldn’t do it either. I’ve been waiting for him to retire to get on with it’
Interim ‘Do you have actual authority from the plc board to spend that much on your own initiative?’
‘No. But it’s petty cash for us out of our normal expenditure of £300 million. It’s the only way to get anything done. By the time they hear about it, I will have the new sales coming in and that will prove the point’
Bill told me of other ambitious plans to change many of the main basic operations of the business, but that he was ‘having to fight very hard to move his Chairman into agreement’. Under questioning, Bill admitted his plans would cost the company circa £20m capital and would radically shift the business focus. Reluctantly he also admitted that if he was wrong, he could undermine the whole success of the business. ‘But all life’s a gamble’ he said shrugging his shoulders, ‘If we don’t adapt we don’t survive. We need to replace our winning lines. We need to change the direction of the business to broaden our base. We can’t ignore threats on the horizon. We need to launch a lot of new products to keep ahead.’
I asked him where he felt there were the threats on the horizon. His reply was vague and unspecific.
‘Well you never know what your competitors are doing until its too late. We are the lead player and they have to try to outsmart us. Sitting on our hands is just asking for trouble’.
I asked him what the trading projections were like for the next three years ahead if he made no changes in the business.
‘We couldn’t fail to make record profits because we have big new long term contracts.’
‘So if you do nothing but run the business efficiently for the next three years, you are guaranteed record profits?’ I asked. ‘But if you make the changes you want, the capital cost of £20m will definitely reduce the profits in the next three years?’
Reluctantly Bill agreed. ‘But we can’t rest on our laurels ‘
‘The next two years are your trial period that will decide if you get the job of CEO. Which do you think is best for you? That profits are at record levels or reduce?’
‘Well record profits would be best for me of course, but that wouldn’t be in the company’s best interests – to ignore future threats and do nothing’
‘Do the board agree with your plans that sacrificing record profits would be in the company’s best interests?’
‘Well no but I never get a full hearing because its clear the chairman does’nt support me’
‘Lets have a look at this from your board’s viewpoint. They have appointed the Chairman as the most senior executive and must have confidence in him. Is that right?
‘Yes but they don’t know how his bloody detailed mind is stopping things getting to the board’
‘So the board have trust in the chairman’s judgement? How long has he been in charge?
‘Who is your boss? The board or the chairman?’
‘If you and your boss disagree about policy and ask the board to decide, whose opinion do you expect the board to take, yours or the chairman’s?’
‘When I’ve tried that, they back him. He never supports me’
‘So, from your board’s viewpoint, they have to decide whether to back their chairman they have trusted for 10 years, or you who they have known for a few months?’
‘Well yes, but he doesn’t want to change anything! And I have a duty to do and say what I think is best for the company not just suck up to the chairman’
‘If you have told your chairman your views and he has rejected them, then you have done your duty to do and say what you think is best for the company haven’t you? And if he tells the board about your ideas and gives his opinion, he has done his duty hasn’t he? And if the board reject them, the board have done their duty haven’t they? But you seem to be saying that if your proposals are still not accepted, you then have a higher duty which is to disobey the plc board or continue to argue to get your own way? To be blunt, isn’t this a bit like you saying to them ‘I don’t care what you think. I’m right and I want my own way?’
Bill smiled ruefully. ‘Some of that may be true but I still think they’re wrong’
‘You’ve fought that battle Bill. Time to accept that your plc board of ten very senior executives with combined 125 years plc experience have made the best decision they can after listening to you with 6 months plc experience. You have had your say and its time now to gracefully get on with delivering what they want not what you want.’
Bill. ‘I see what you say. But I’m not prepared to kowtow to the chairman when I think he is wrong. I’m still going to say and do what I think is right. That’s what I’m paid for’
I realised that at this point Bill was so entrenched in his views that he would not be prepared to accept any contrary ‘advice’.
‘OK. I said. ‘Lets leave that for now and look at the other matters’
These were other topics we discussed. His previous job had been as Managing Director of a division within the group which he had grown from £25m turnover to £100m turnover, taking profits from £1m to £3m pa. He disclosed that he had deliberately built a ‘intellectual; superiority ethos’ in his own division and that the other business divisions had disliked the superior image his team conveyed. His team had believed themselves to be the best in the organisation and considered the other divisions to be inferior – and showed it to them. He believed that creating this type of corporate pride in his division was a healthy thing to do and had helped to contribute to the success they had generated. He wanted to introduce that ethos into the whole plc now. That would mean former competitive divisional colleagues adopting the new ethos or ‘getting out’.
I questioned Bill further to check his logic and the depth of experience he had given to the topics. Was he sure he was right to want to radically change a winning strategy – and that the board was wrong? Also was intellectual superiority really likely to ‘win friends, colleagues and customers’? Or could it be judged as naively arrogant, insensitive and fear based? Did a really secure executive need to risk offending anyone? If strong and assured, would not an executive want to encourage corporate equality and modesty? How long had the Chairman been in the job and what had happened to the business in that period? Had Bill proposed any of his changes to the CEO who had recently retired and if so what had he said?
Reluctantly, Bill agreed that the Chairman, who was age 56, had a superb track record, having previously been Chief Executive of a plc and several other businesses, all of which had been very successful. Bill agreed the company had been incredibly successful with turnover going from £8m to £400m pa in ten years under the chairman’s authority. However Bill claimed the success was more due to the recently retired CEO than to the Chairman. On challenge, Bill agreed, rather shamefacedly, that the CEO had only been in charge for the last 3 years and that the entire strategy for the business had been the Chairman’s brainchild 10 years ago. ‘But he‘s past his sell-by date now’ Bill hastened to add. ‘He’s not up to date with the new challenges the business is facing’. Bill eventually acknowledged that the CEO had also disagreed with Bill’s proposed changes. ‘He told me they were hair brained. But he was just holding his job down until he retired. He didn’t want anything reducing profits before he went’
In further discussion, Bill’s could not produce any convincing evidence (to me) that justified the extreme risk his strategy was proposing; viz, to spend £20m capital, reduce next year’s £20m annual profit to £14m, cut the shareholder’s dividend after 9 successive increases, and change the whole basis of operation and product range to meet an undetermined theoretical future threat.
At this point as Interim what do you think about the situation and what would you do next?
Question: As intended leader of an interim assignment with this client, what would you want to do next with the client?
Note. This is a true case history and the dialogue is close to actual.
Loss making MD
The client is 39 years of age and was appointed MD of a £10m turnover business 16 months ago. When he joined it was losing £500k pa. He was previously Sales and Marketing Director in a competitor and had 10 years in the sector. The sector was in decline because of new alternative products produced completely differently so they cannot compete with them. (For confidentiality reasons the products cannot be mentioned. Here is a parallel. Their product has simply gone out of fashion compared with new alternative options. So whilst many people still use their products, the market will progressively decline. The gulf between their product and manufacturing and competitors is the equivalent of a manufacturer of audio tapes finding sales are dropping because people are getting records via the internet. It is impossible for them to adapt that completely.
Since the MD has joined the business, he has fought valiantly and stabilised sales at the same level. However, they have had to discount prices dramatically because of competitors doing the same. The result is that a loss has grown from £500k to £1m in the year.
There was an alarming drop in business in October with sales continuing to fall every month to now £8m pa. They have been waiting ever since for it to come back, but it continues to decline. All their competitors were in the same situation as far as he could ascertain (reliable sources). He has spoken to his Australian parent company, who say that he need not worry because they are playing the long game and the market will recover.
He had asked the high level Interim Manager to help assess the options and then to lead any changes that they agreed. Interim rate £1200 per day. He concluded his initial briefing with the words ‘But Im inclined not to make any changes right now because HQ will be OK if I play the long game, sit out the present crisis situation and don’t rock the boat with the staff.’
The Interim’s views at the time were that he was likeable and very customer orientated MD. He was well-liked by his team, was intelligent and personable but showed a lot of unease and insecurity. Many of his comments were tentative and unsure.
Here are extracts of an all day conversation that exclude much detail but briefly indicate key areas discussed.
INTERIM “I think you are very tactically aware on what is happening in your marketplace and you have taken a lot of time to analyse areas where you could take action. In your own best interests, I sense you know yourself you must take those steps very rapidly to turn your business into profit”.
You probably know you need to manage a declining business, not a growing one. If annual sales went down to £6m from £10m within six months, what would your overheads have to be to make a profit of say £600k? If you were to set up to achieve that level of overhead now and the decline went to that level, you would be glad you had done so, wouldn’t you? And if on the other hand turnover only went down to £7m, then you would have made a bigger profit, wouldn’t you?
I think that if you went on the job market at the moment, the fact that your sector was in decline would not be taken as an excuse by companies when you had to disclose the loss had doubled in a year. In your own interests, you must stop that immediately and you do not have much time left.
How could you operate the company at a profit of £600k if it was turning over £6m this time next year? “
- I think that’s rather too bold for me considering I don’t really have to be too radical and I would be scared to announce to everyone that I was planning to accept a permanent fall in sales to £6m from £10m 18 months ago. I had thought I could maybe look at some of the other areas to make smaller incremental changes if essential’
INTERIM. What are the other alternatives? .
MD “I had thought of cutting the sales force or closing the Spanish sales office and sell from UK. However, the Spanish will not buy unless it is from a Spanish office, so I can’t do that.”
Interim. ‘What are the sales figures there and what are the costs?
MD;. “Spanish Sales are around £750k pa with £500k pa costs.”
INTERIM: “Is that direct costs or does it include all other charges.”
MD “It does not include HQ costs and cost of materials.”
INTERIM “So overall what has £750k sales cost you?”
MD: “£850k actually I suppose”
INTERIM: “If you were to close down your Spanish sales office, how much would that cut overheads?
MD About £250k- £300k pa. but the Spanish are very nationalistic and will only deal with Spaniards, so, its all or nothing. If I close it down I will lose £750k pa. sales which would be dreadful on top of all the other UK losses in sales’
INTERIM “How many UK salesmen have you got and how much do they cost each?”
MD I don’t know precisely .Their basic is £50k pa. and we have 35.“
INTERIM “Who are the best UK salesmen and how do they compare with the worst?”
MD “I don’t have that information. We are getting systems but we don’t have it at the moment.”
INTERIM “What do you sense is the position then? How do they compare with the Spanish team for example?”
MD “Many of them are probably about the same as the Spanish team and perhaps four or five are doing really well.”
INTERIM “How many calls do they make a week”.
MD “I don’t know that because of our system’s weakness.” “They could do more calls if we took them off some of the warehousing jobs they do but they have always done that so they keep in touch with their own orders and service their customers.”
INTERIM. So you say you could lay off some of the sales staff? How many do you need right now?
- Well I probably need about 10 but it would destroy the company if I were to lay off 25 sale staff most of whom have been with the company for over decade. It’s a really happy place with everyone so friendly that it would be impossible for me to fire them. I think Id lose all credibility in their eyes if I did that. ‘
INTERIM “At the moment you seem to be saying that you are selling products at a straight loss. They actually cost in manufacturing and delivery more than you are selling them for?”
MD “Yes, I guess that is correct.”
INTERIM “Apart from cutting your costs, what else can you do to stop that situation?”
MD “I could put prices up – but” (hurriedly) “sales would just dive because the competitors would just undercut us, so my hands are tied”
MD We pay £150k pa rent on our UK HQ. I can get better premises for £52k pa. and can get out of the lease. But the Group CEO negotiated the lease on the UK premises and it would make him look a fool if I told the board we are overpaying so much’ So I don’t think IO can do anything there.
MD. The Production Director refuses to cut production even though sales are 40% down. So we’ve got a massive inventory which I cant get him to accept needs to be cut. I could move production to the HQ in Europe actually which would save about £350k pa but he wont hear of it and says it would destroy staff morale. Even so he’s very aggressive with the staff and has told them that the product lines are rubbish. He has been with the company for 7 years and earns £75k pa. I could replace him with another director at £50k but I don’t want to appear to be a hirer/firer so soon after I was appointed as MD some months ago and with staff morale so low.’