The Flywheel

Post Offices - Time to redefine the mission

There is a very interesting article in Economist this week about global post offices and their future prospects. The article covers wrenching changes postal industry is going through across the globe and how the majors are planning to deal with these challenges.

As I read the various strategies outlined by post office chiefs, my primary emotion is one of despair. Consider the following facts:

• TNT Mail, the packet-delivery unit of TPG, the Netherlands' national post office, began using a dairy company to carry packages to people's doorsteps. This is not happening in rural Holland, but in UK!
• Japan wants to remove the USO (Universal Service Obligation, which requires that post office serves all areas of the country)
• By 2006, EU will restrict the monopoly of post offices for packages weighing below 50 grams. However, 75% of all packages weigh less than 50 grams, so most of the operators are not unduly concerned.
• France’s La Poste plans to protect itself by acquiring operators in other countries, similar to the strategy followed by GDF and EDF, French utility companies.
• US Post plans to modernize its back-office dramatically by expanding use of automatic sorting etc.

What is common to all these responses? I have one word for you: “knee-jerk”. Similar to rearranging the deck chairs on Titanic, I wonder how many of these operators are aware of the fact that their mission has to be redefined drastically. What exactly is happening in postal industry? Think horse buggies, think steam engines and think telex. While the operators are busy becoming more efficient, they are being marginalized and will soon become irrelevant. What exactly is the reality that postal operators are facing world over? In one of my previous posts, I mentioned that crises happen due to two reasons: structural changes in industry and due to a mismatch between resources available internally and the opportunities available externally.

What is the current reality for postal operators?

• Changes in communications and computing ensured that more and more people are using electronic means to keep in touch, transact and to inform. (One of the best money spinners for the postal operators was the annual dissemination of company reports to shareholders; every year, every company religiously mailed a thick book to every shareholder in the company. Now more and more companies are moving away from physical copies of annual reports to pdfs and other electronic copies) As a result bigger and bigger chunks of customers are dropping off the post business model.
• The globalization imperative has made logistics a high visibility function in all major industries. Now, a majority of big companies have global supply chains which they want to track, monitor and control on a daily basis. In order to do this, they prefer to consolidate all logistics activities either physically by single sourcing or electronically by moving to common standards and technology platforms. This means that the logistics providers should have global capabilities, ability to handle complex IT/IS and supply chain demands and provide high level of reliability. Companies like FedEx and UPS have built a global footprint in terms of handling logistics and are currently way ahead of postal operators. Even more significantly, they are not standing still for the operators to catch up; by innovations like track and trace, RFID, megahubs, they present a moving target to the postal operators. Logistic solution providers like Li & Fung  & the Dabbawallahs of Bombay are even more difficult to dislodge. They have built up a huge network of customer and partner relationships and market expertise that will be hard to acquire let alone match. In fact, the dabbawallahs of Bombay are a phenomenon of organization, reliability and organic improvement. I will put together a post about them some other time.

The net impact of both these trends has made the postal operator marginal at best and irrelevant at worst. In this context, the initiatives mentioned above will have no impact on the structural changes roiling the industry.

So does this mean the postal operators are destined to go the way of telegraph operators and horse buggy manufacturers? Except for the fact that a lot of national pride and government involvement in the business, the road currently taken by the operators will definitely lead to extinction. However, like all companies that face a crisis, postal operators have a choice. The choice between a long, slow deterioration of relevance or a hard, painful transition to critical links in the customers’ daily operations. This journey will have to begin with a rigorous examination of postal operator strengths, their mission in the current reality and finding answer to the most important question they face: Do they have the will to face reality and make this journey?

Here, I will put down what I think are the strengths of postal operators and how these strengths can be matched to opportunities and how this can help them redefine their mission.

What are the strengths of postal operators? What do we imagine when we think of a postman? I have a few images:

• Connector. Brings together people separated widely by distance.
• Community. Ties together groups of people in same region or with same interests.
• Ubiquity. Postmen are present everywhere and every day because of their huge and sprawling infrastructure.

All these images arise out of the USO mission of postal operators. This USO mission has also helped postal operators build-out a sprawling infrastructure to collect content from various places and deliver it. The USO has also made the postman a national symbol and matter of nationhood. Any redefinition of the mission has to be based on this Universal Service Obligation of postal operators. My proposal is that it is time for postal operators to extend the USO to small businesses too. With this redefinition, postal operators have two clear customer segments to focus on: households and small businesses. While the household segment is quite obvious, the small business segment will take some explanation.

The logistics majors like FedEx, UPS have optimized their global footprint to serve big companies effectively and efficiently. The service palette that a FedEx can deploy for a small business like mine is too expensive and too complex to utilize on a regular basis. Today, I cannot afford to import products from Asia or anywhere out of EU because it turns out to be too expensive without a full container load. I am willing to give up some amount of reliability and visibility into shipment, if someone can deliver part loads for me cheaply and fast. My gut feeling is there are a lot of micro and small businesses out there who would love to use national post operators if they can design a service that fits 80% of their needs. In addition, countless studies have shown that micro and small businesses are the growth engines of economies in terms of employment. If I can go so far as to say that encouraging small businesses is a matter of national interest, then it dovetails quite nicely to the USO mission of postal operators. Secondly, the small business segment is currently under served in terms of technology, services and expertise because most of the innovative companies focus on large companies to recoup their investment quickly. Postal operators, by virtue of their experience, infrastructure and resources are very well positioned to offer this service and build a critical mass quickly. I believe that providing this kind of services to small businesses is a disruption waiting for a disrupter.

So how can the operators organize themselves to provide these services to small businesses?

The good news is most of the capabilities and resources required are already in place.

Most of the employees of post office are very well training to handle small packages. Post offices, because of their mission, are optimized to handle fragmented lots effectively. Also, given that they regularly reach far flung households, they will not have any problem in reaching remote small business offices, away from the business district. Add the fact that most small businesses are managed out of home or very close to home, customer relationship management will not be a big issue.

Secondly, they can use the airline model to form alliances across borders to manage shipments effectively across countries. I believe that EU should lead the way in this because logistics and regulations are already integrated to a large extent. Given that most operators are being to forced to modernize anyway by implementation new technology, it is far better that put together a clear and competitive business case for their modernization initiatives.

The challenge postal operators face in executing for this customer segment is in creating an information and performance infrastructure. All those postmen who come in contact with households and businesses everyday, are veritable treasure houses of customer data and knowledge. By tapping into this knowledge base, the operators can get off to a running start in winning small businesses.

Customers as strategic planners - Emerging hypermedia

Thanks to Frank Patrick of Focused Performance, I had the good fortune to run into this post on Nixlog about the emerging market strategy of Apple. The amount of effort that has gone into this work set me thinking. For, in some ways, the effect of such a work is more profound than maybe apparent.

Fact: Apple’s customers are most fanatical, turned on bunch of evangelists in consumer electronics.

Fact: Internet & other enabling technologies can help companies tap into the combined intellect of their customer base.

Conclusion: Distributed strategic planning using hypermedia.

I am using a very rough equivalence between hyperspace and hypermedia. Just as hyperspace is supposed to fold space and reduce distance between 2 points by orders of magnitude, hypermedia is reducing the physical, mental and information distance between customers and companies dramatically. Now, more than ever, companies have the opportunity to tap into metaphor of distributed computing and take it to the next level – distributed planning. By actively seeking, encouraging, evaluating, rewarding and implementing customers’ experience and expertise in growing profitably, companies can take their performance to a whole next level.

What is the key to superior performance? Design multiple, plausible scenarios, figure out how to take new markets, figure out how to penetrate existing markets deeper, come up with new uses & product concepts, design and deploy catchment areas for all these strategic inputs to flow in, employ relevant filters to prioritize ideas and prepare action plans, monitor rigorously the alignment between execution and external environment & use feedback to change course dynamically.

What do companies in order to make this happen? First, I don’t think a public limited company can be the pioneer in this. The entire process is too organic, too messy and too distributed for them to get a handle for their quarterly reports to shareholders. Secondly, companies need a specific person who can act as the facilitator between company’s internal processes and external actors. Somebody who can trigger these strategic conversations, direct the input to specific points inside the company, catalyze actions on these conversations and then feedback the results to external actors. This process facilitator also has to strike the delicate balance between control and empowerment and manage the creative and performance tensions that will inevitably arise in this highly organic process.

While a blog has triggered this, it is not required that blogs will be critical for such a process to emerge. In fact, my intuitive conclusion is that some kind of wiki (like JotSpot?) will be an ideal starting point!

I believe that this concept will require enormous energy and work to realize the full potential. But it is not as far-fetched as it seems. Companies already involve key customers in product design, we already share critical production data with partners and customers, outsourcing of business processes is becoming a reality. From here, it will take but few steps for companies to involve customers in planning. Quite soon, the ability to involving customers in strategy in a deliberative, directed and cohesive manner, will separate the winners from losers in the coming years.

10 things you can do to kick-start a turnaround

How should one begin the process of turning around a company? Is there a checklist that one can refer to (while keeping in mind that the map is not the territory)? Something like this would have been really helpful when I started out 1 year back. Needless to say, this is a dynamic list.  I tried to put this in order of timing so that you will have a clear starting point. You can use this to begin the journey and change it to fit your needs and your context.

1. Freeze all make to stock orders and investment flow until clarity emerges. Focus especially on all fixed discretionary investments.
2. Identify & put together a SWAT team for turnarounds. make sure at least 1 investor or board member is actively involved in the team.
3. Talk to all the critical info nodes in the company to get a feel for the company mindset and culture first hand. Info nodes can usually be identified through a pareto of email senders.
4. Talk to all the senior leaders to get a feel for who can withstand the intensity of coming months. Make sure they are completely in touch with the reality and severity of the situation.
5. Do a Spring Cleaning. Open up all the closets in your firm so you can identify all liabilities, ticking time bombs and hidden treasures very early in the game.
6. List all customers who fired you in the past 6 months and get quality face time with them ASAP.
7. Create a communication strategy that requires you to update the entire team and key partners every week if not directly then through the info nodes.
8. Communicate with all key suppliers and partners to gain support for the transition plan you and your team put together. Be prepared to spend a lot of time explaining why this plan will work and what kind of preliminary results you achieved with the transition plan.
9. Rigorously question and surface all hidden assumptions that make your company tick. For example, the biggest channel in revenues for my company is direct sales of therapy products. These are marketed direct to customer by a team of independent professional sales agents who are paid within 30 days of making a sale. Each agent carries with her 8–10 of our products on a consignment basis and she accounts for them at the end of every week. On average, each agent sells about 3–4 products per week. The customers pay us in 3 ways: through cash, automatic debit and pension linked pay instrument. In late 2003, when the crisis hit us, the sales split was 25% in cash, 60% in automatic debit spread over 12–24 months and balance in pension linked pay instruments. The revenue is shared 55% to my company and 45% to agents. This means that if 100 products are sold in a week, then we get cash for 45 products, which goes to the agents and leaves us to finance all the fixed operating costs, suppliers through other cash. Sounds terrible right? However, when the channel was started, it was primarily a liquidation route for returns and excess stock from our more profitable TV Sales channel. Under the assumption that TV Sales will be healthy and growing, this was a brilliant move since all the stock is paid for, all costs are covered and TV infomercials have assured that the market price for these products is between 5 to 7 times the cost of sourcing. However, the crisis came about because our TV Sales collapsed in late 2003 and without the support from TV, the direct sales became a burden very quickly.
10. Throw away the book on cost accounting. Cost accounting is for tax purposes. For a company in crisis, except for raw material costs, every thing else is fixed in immediate term more so because you do not have the luxury of time or the power to negotiate from a strong position. In such a situation every extra dollar you can make over and above the cost of materials will go a long way in covering your fixed operating costs. So go for every fleeting opportunity that comes your way. However, make sure that you carefully select the products (because you might end up killing these in the process) and only for new customers, negotiating repeat business with tough customers and any opportunity that might give you a fast return.

How to manage a turnaround (part 1 contd)

After finishing the first part of a long post on managing turnarounds, I thought I said everything I had to say on ensuring the survival of the company. But as I read it back and reflect, I realized that I peeled only the first few layers of the onion. I decided to dig deeper and see if we can create a generic approach for managing a turnaround.
How many kinds of turnarounds are there? I can think of two:

1. Crisis due to structural changes. These are crises brought about because the industry structure has changed either due to stronger consumer protection laws,  new and more effective business models or because of migration of profits due to changing demographics. Sometimes the structural changes could be in the enabling conditions that make the industry tick like legal environment, technology eco-systems etc. In other words, the business model is not broken but the enabling conditions be it legal environment or greedy CEOs or technology changes in unrelated industries  have  put the company in a death loop. Examples: DEC, Nokia, IBM, Xerox
2. Crisis due to mismatch between resources & opportunities.  This is where the CEO/Senior Management values and expertise do not align with reality or market expectations. It could also be that the company's expertise and resources are optimized for a specific business opportunity, market that never materializes or scales. Some examples are Iridium, Parmalat,Tyco, Apple during Sculley era (?), Disney

Interestingly, as I was writing this post, I came across this article from WSJ about the troubles at WorldCom. The point of the article is how relationship between the senior leaders of the company deteriorated as growth slowed down. We can easily jump to the conclusion that as the growth slowed down in telecom industry, management at WorldCom was forced to adopt unethical practices and continue presenting a rosy picture. However, the crisis is not caused due to any structural changes in the industry, but because the glory days of WorldCom caused the executives to lose touch with reality. This in turn led them to ignore or disregard all warning signs and continue chasing growth at all costs.

Quite clearly, the nature of the beast will never be clearly visible at first glance. Even after analysis, the situation will be sufficiently muddy for us to reach a definitive conclusion about the nature of turnaround.  Does this mean, that we do not have any rules of thumb to at least get the drift ? From my experience, I can suggest a few; but it is arguable whether they can support the conclusions we can reach:

1. Is the crisis sudden and dramatic? Look for changes in external world that might have caused this.
2. Are the CEO and senior managers enjoying a lavish lifestyle while the rest of team is down in dumps? Look out for resource-opportunity mismatch.
3. Check the status of fixed discretionary costs (FDCs). Are there too many leases, perks and credits? Look out for resource-opportunity mismatch.
4. Check out the competitors. Are you the only one suffering from slow down? or is it part of a general trend?
5. Open and scrutinise all the closets in the company. How many skeletons tumble out? How many of these are neglected customers? How many are contracts not being honored and potential time bombs?
6. Are people inside the company surprised by the crisis? If so, at what level are they? In other words, is the senior management in sync with reality?

These are some of the questions you should ask before reaching any conclusions. Once this is done, then the due diligence phase starts. There are 3 phases to the due diligence. Phase 1 is where we get all the leaders of the company into a conference room and let them talk. Without offering any conclusions or judgments, your role would be to observe, note and file all the things that were said, things that were left unsaid and also the relationship dynamics in the room. Phase 2 is a thorough discussion with key members in company who are not in leadership team. You follow basically the same system as for leadership team. Observe, note, file. Phase 3 is “Spring Cleaning”, in other words, we go through every single document inside the company to figure out what are the potential time bombs, hidden treasures and junk.

Now we are ready to reach some preliminary conclusions about the nature of the crisis and viability of the enterprise as a going concern. Clearly, the task difficult will vary with the kind of crisis we are faced with. In the real world, we will never face a crisis that is purely structural or purely internal. However, in every case, we can reach to the core problem by digging deep and keeping an open mind.

Once the core problem is identified in terms of its nature, we move to the next stage of turnaround:

1. Establish the long term viability of enterprise
2. Establish if this long term viability can be achieved profitably in current context.

Establish long term viability of business. This is the toughest part of the entire turnaround. I am not saying that executing the turnaround is any easy; it is just that figuring out the long term competitive solution needs to be done early when passions runs high, confusion reigns and morale is slipping. It will not be easy to figure out a way forward in this fog and at the same time communicate with enough transparency and intensity that teams are committed to do whatever is required. The critical element in this part is the nature of crisis in the company. If the crisis is brought about because of structural changes in the industry, the task becomes doubly difficult due to lack of expertise, uncertainty about new operating environment and uncertainty about time required and resources required. I believe that where the crisis is due to structural changes in the industry, a turnaround expert brought in from outside cannot be effective. What is required is not expertise in turning companies around, rather a person who thrives in uncertainty and confusion. Turning around companies is essentially a simple task; while the uncertainty of success is high, the uncertainty of way forward is quite manageable. That is why, where structural changes are roiling the industry, we need managers adept at steering company through times of great uncertainty.

Establish if the viability can be achieved profitably. This is the fiduciary duty of the turnaround manager. Even if the long range viability is possible, it makes no sense to embark on the journey if the rate of return is less than the cost of fresh capital required. In such a case, it would be much better to liquidate the company rather than throw good money into a bad industry. Forget about people who say that industries are not bad, its only mindsets and managers who are bad. Unless some of the enabling conditions (technology, legal environment, demographics) change, industries can and will go bad. Yes, we can talking about shaping versus adapting in industries; but if you pile on the higher risk of shaping strategy on top of the uncertainty in a turnaround situation, you really need a cast iron stomach to go through your days. If you do it, great! and good luck to you. Otherwise, you have to scale down the ambitions unless the company’s short term survival is assured before executing a shaping strategy. Probably, we can use some real options based decision guides here…I don’t know. I believe that if you plan to adopt a shaping strategy in a turnaround scenario, you will have to necessarily stage your investment flow so you can get out at minimal cost if things turn sour. This in turn will make your cost of fresh capital that much more difficult to figure out.

Finally, if you believe that your company does have a long range competitive solution and that this can be achieved profitably under severe time pressures, then by all means you should seek fresh capital. If you adopt a shaping growth strategy,  you should seek fresh capital in stages linked to specific milestones in turnaround or events in industry. If you adopt an adapting growth strategy, then get in some industry experts, work with them on business projections and go for fresh investments.

When I started this post, I did not intend it to be this long. As it kept growing, I had to leave out a lot of things that I wanted to say. Maybe, I will do that in another post. On the other hand, if you like what you read so far and want to see a pdf download once I am finished , drop me a comment and I will do my best!

How to Handle a Turnaround (Part 1)

When I began my assignment to turnaround this company in the beginning of last year, I could not find any public source on web about turnarounds. I struggled to figure out key issues that can stimulate my thinking and clarify my actions. Now after 1 year of struggling with saving the company, the job is by no means complete or successful. So I cannot claim to post a definitive How-To on turning around companies in crisis. However, I believe that by sharing my ideas and principles with a wider and knowledgeable audience will help me a lot. I will learn more, crystallize what might be vague notions and also excite somebody more experienced than me to carry the torch forward. Since I have a lot to say on this topic, I want to do this post in 2 maybe 3 parts. So without much further ado, let's begin.

I believe there are 3 dimensions to a successful turnaround:

1. Secure the company's survival in near term
2. Stabilize the company's cash flow
3. Grow the company's cash flow

A turnaround is a simple problem in the sense that the starting point is usually crystal clear: Survive! Even the number of variables or paramteres at our control are limited. For a successful turnaround, there are basically only 2 parameters that we can play with:

1. Financial structure
2. People

That's it. I believe that to successfully come out of any turnaround situation, these are the only levers that we get to play with. I can hear some objections at this point: "what about customers?"; "what about suppliers?". Apart from financial structure and people development, everything else is external to the company. Even financial structure could be constrained if there is too much debt and consequently too much oversight from lending institutions.

These 2 parameters are quite interesting; financial structure is a low quality lever in the sense that any benefits we achieve by manipulating this are short term and quickly dissipated. People development is an extremely high quality, powerful lever. However, it takes time and builds momentum slowly. Thus in order to successfully execute the first stage of the turnaround, secure the short term survival of the company, financial structure is the only tool at hand for the CEO.

The common perception is cash is the most important resource in a turnaround situation. However, I think differently; after leading this company for the past 1 year, I realize now that the resource most in short supply is "time". Typically in a turnaround situation, the company, the people just do not have enough time; enough time to get new orders, enough time to mentor and develop people, enough time to figure out what is going wrong and enough time to fix whatever is wrong.
However, time is a derived resource; we can get more time by getting fresh cash into the system or by freeing up existing cash locked in unproductive assets.
The interesting conflict that we have to resolve very quickly is whether the company has a long range competitive solution and thus worth saving. Unless this is clear, there is very little sense in securing fresh funding from external sources. However, figuring this out usually takes time. And as I mentioned earlier, time is the most scare resource a turnaround situation has. This is where cash locked into unproductive resources comes into play. In order to get the time to figure out if the company has any long term competitive solution, the interim CEO has to apply great amount of rigor and determination in freeing up cash locked into low quality assets. At this point the CEO, together with all key stakeholders can figure out if the company is worth saving and if yes, whether they would need external credit or investors to refinance the company.

So that's it for the 1st part. The next part will deal with the second stage of a successful turnaround aka Stabilizing the Company Cash Flow.