Economic woes should lead to fundamental change

When times are good, few amongst us spend much time asking hard questions about the state of the business.

Oh, most of the executives I talk to think they do, but their questions start from the presumption that things can be improved.

It’s a rare day, indeed, that I hear anyone take the stance that outright replacement, elimination or other surgery is required.

As a result, when times turn harder, the business is encumbered with a number of ball-and-chain situations which make getting through the downturn that much more difficult, and make exploiting the turn to move into new areas of growth that much tougher. Not without reason do I say “companies die two or more recessions before they are acquired or go bankrupt”.

So, since it is obvious that times are again turbulent and earnings turned downward, now is the time to consider what ought to be outright changed rather than improved.

Significant spending, in most companies, goes into IT. Most of this appears locked in: these applications are all essential for the business to operate, right?

Wrong — and companies betray their feelings in this matter whenever we ask about their disaster recovery stance (only a fraction of their IT load is to be recovered).

Generally, firms underestimate their disaster requirements and overestimate the value of their total portfolio. What this says to me is that there’s a potential for restructuring here.

In fact, my field observations over two decades suggest that the typical company could, with a concerted multi-year program of effort, reduce their on-going IT expense by at least 25-30% on an annualized basis. Considering that, in the typical firm, IT now represents 50% of all capital requirements and around 40% of SG&A [sales, general and administrative expense, across the whole enterprise, not just the central IT budget] eating into this number has significant bottom line potential. Far more potential, in most cases (I would submit), than the projects for IT that currently compete for capital.

Harder to get at — but, in the long run, even more important — is whittling away at “bureaucratic barnacles”.

Service organizations such as HR or Finance should be put on a diet by telling them they get a defined amount of money, “now do your job”.

If this forces them to cut out 90% of their constant requests to the line managers in the firm for “reporting and analysis”, then the company is the winner.

Another is the struggling product line or division. Many of these, I have observed, are allowed to persist for historical reasons. They often still produce good cash — but they’re going nowhere. We often put our best performers into these situations, with little success.

Let’s be honest: every product has its day.

75 years ago, giving a woman an electric iron was considered the height of thoughtfulness; today, it’s likely to get the gift thrown at the giver. You can make the best irons going, but the reality is that the market for them in the developed world is saturated — and “the thrill is gone”. They are only replaced if they wear out. Question: how much extra energy should go into that product line?

If the decision is to keep the line, then by all means strip it down to the essentials. Starve it of anything but those essentials going forward. Give it competent people, but not your stars, and especially not your creative types. Only if circumstances start to change should this be reviewed.

If the decision is to abandon the line as not able to earn a sufficient return on the investment made in it keeping it open (these should be your cash cows and therefore produce above your expected annualized cost of equity invested, new capital, etc.), then the next decision is whether to simply recycle the capabilities to other work, to sell the product (manufacturing licence), or to package the product as a division for sale. Some investment to raise the value might well be in order; nothing beyond that.

None of these are easy or comfortable decisions. They are significantly better than across-the-board cuts, company-wide outsourcing or other techniques that I see all too often.

It’s not just enough to invest in “the new” during times like these — there should be a stream of shackles left behind. Time you were at it, before you discover that a competitor has slimmed down with you unawares.

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About passionateobserver

I am a passionate observer of our society, the economy, and politics. Mostly I don't like much of what I see, so I write as a concerned citizen. To the fray, I bring a background in the philosophy of history, a lifetime's reading, a work history in information technology management, consulting and education.
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