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business advice finance Leadership

Building teams with team-based budgeting

Recently, an executive coach was advising a CEO I work with on building teamwork in his company, and encouraged him to do “ra-ra” type activities (group outings, that kind of thing).

That’s meaningless.  While it’s always nice to get people together for a bit of fun, the real way to build teams is to get people working together on actual business problems.

Team-based budgeting is the method I have used for many years to perform the budget process and build teamwork, and it makes a lot more sense than what is often done.

In most companies, budgets are done by each manager turning in a budget to the CFO, the CFO puts it together for the CEO, the CEO cuts out expenses and adds additional revenue, and poof! – the budget is presented to the board.

Not really a workable process.

This brings me to the subject of team-based budgeting.

I’ll start with a story: Many years ago, I started as the president of a software company and found several things wrong with the accounting and finance functions:

– No one had responsibility for a budget.
– The VP of Sales was in a heated deadlock on commissions.
– Forecasting was done on a hope and a prayer.

At the time, the company was small — about $15 million in revenue — and so, at that size, it had largely been run on a sort of “financial dictatorship” by the major investor. Well, considering that this shareholder was dealing with a management team that didn’t really understand finance, his point of view was understandable.

However, it’s important to develop a team-oriented approach to forecasting and budgeting. By implementing this approach, the senior management team started working together smoothly on the finance functions. Better yet, we were able to grow very fast, to nearly $50 million in revenue, without any outside capital. Because we responsibly controlled costs, as a team, we were able to do great things without a lot of money.

What we did was:

– Rework the financials to make them clear and understandable.
– Make the managers responsible and accountable for their budgets.
– Implement team budgeting

Reworking the financials
Of the three financial statements required to run a business (P&L/income statement, cash flow and the balance sheet), the one that managers must have a good grasp of is the P&L. The other two can be worried over by the CEO and the CFO.

And there GAAP accounting can muddy the scene. Revenue recognition, accruals, depreciation and amortization can make it look like a company is bleeding money hand over fist, but when you really look into it, it’s actually doing just fine. Or, a company can look wildly profitable, but is a toxic mess (anyone ever heard of the old Computer Associates?). Reading a modern financial statement, especially for a software company, is a bit of an art in itself.

So first we pivoted the focus onto billings as the topline focus. Billings is what sales guys go for, what they see “on the board”. They closed a deal, and it was for $100k. That’s what they see, and that’s what motivates them, and that’s what you want them to get.

(There are fine nuances to get into here, that aren’t worth cluttering up this article with. In a SaaS environment you typically compensate on MRR/ARR and make that your target and there are cases where you may not compensate on billings. But the bigger point is, get a number that’s real to the sales people.)

So we focused on the topline number, the billings number. This was in contradiction to what the CFO had been doing earlier (paying commissions on recognized revenue, which is unusual).

Now to the expenses: there are expenses that managers have control over, and ones they don’t. They go out and buy something for $10,000, it’s $10,000. It’s not some amount amortized over a period of time.

I wanted the managers to know that if they bought something, it didn’t matter how we would book it from an accounting perspective: they bought it. Business live on cash flow, and the impact of cash decisions is vitally important for managers to understand.

So we focused on fully-burdened EBITDA –  adding back capital expenditures to the EBITDA figure to get an income statement that reflected something closer to actual cash spend, making it easier for everyone to understand.

And then we got in room and budgeted as a team.

Now, depending on your business, you can probably ignore the other pieces of advice here, but this last one is important.

The way you do team based budgeting is to you set the goals in advance of the meeting — a realistic target. Like: “20% operating income, 25% increase in sales.”, and so on.

You then give all the managers enough time to pull their numbers together. Each has a departmental spreadsheet for their own area.

For the sales forecasting side, I would work between the product teams and the sales teams to get our product launch dates figured out, new versions, etc. I would take the teams off-site and we would work through the product planning. (Product planning is a huge driver for revenue, and something to spend quite a bit of time on).

And then we got all of the management team in the same room. We sat with a large-screen projector, and our spreadsheet was built with links where we would have all of their files loaded at the same time. Then, we would go through every manager’s area, and they would have to account for their expenses. As we made changes to each department’s budget, the main P&L forecast was automatically updated, giving a very quick view of the impact of each little change.

Now, peer pressure is a powerful motivator. We’re all on the same team, so when the sales person says “I can’t get sales without more leads”, the marketing person is right there to answer him, and the CEO is right there to work with the team.

When we first loaded that spreadsheet, it was comical, as a first-pass budget always is. Everything was in the red, because sales people sandbag and managers ask for more money than they need. But after a marathon two or three-hour session, we started to get to reality.

The CEO might be driving the process. But the CEO is letting the team work on the heavy lifting of figuring out where to get the money.

After one marathon session, managers are given homework, to go back and figure out ways to get the costs worked down more (or get the sales up). Department heads have individual break-out sessions with other department heads to work on the budget. And then we have another team meeting a week later.

After that, the budget is pretty much a wrap.

Getting to the target number becomes a game. And when you have a game where everyone works together, you have a team.

Key is that the managers own their budget. They are given leeway to execute on their plan, although I still had in place basic cost controls to ensure that costs were still being managed.

Pushing responsibility down into the organization is the way that a company can succeed. And team-based budgeting is as useful step to correctly delegating and managing authority.

Categories
business advice Leadership Uncategorized

The biggest mistake you can make about employees

I’ve done a fair amount of turnaround work. It’s not my favorite work, but it is interesting and challenging.

Now, one thing that’s very easy to do when you go into a bad area is to blame the people. I hear about “bad” employees constantly. And yes, there is often astonishing incompetence that has to get fixed fast. In fact, usually the most important and critical change in a crisis situation is in rapidly evaluating and replacing certain members of management.

But when we look at a broader scene, there’s one observation I wanted to share with you:

  • Good people in a bad system become “bad” people.
  • Bad people in a good system become plainly obvious as bad people.

It seems like such an self-evident statement, but I have routinely worked with executives who categorize, without a lot of understanding, a group of employees as low-quality. Now, a good manager has a fine-tuned sense of what a good employee is and those opinions are useful. But all too often, I’ve seen managers immediately make assessments on employees, based purely on their own opinion.

So when I enter a turnaround scene, one of the first things I look at is the system (or scene, whatever you want to call it), and then look at the people.

I have worked in areas where the organization structure and management was toxic. And, of course, the employees similar looked “toxic”. They get painted with the broad brush. But here’s a truth: the majority of employees are all too happy to work well. What I have found is that only a minority are actually bad/lazy/stupid/incompetent/evil/etc.

I recall at one company we had terrible problems with product releases. The “reason why” that I started hearing were general statements such as “the developers are unwilling to work”, “they are lazy”, and so on. I didn’t buy it. A simple and radical change in the development organization system suddenly highlighted the very, very small minority who were actually bad actors. And the good developers were miraculously wildly productive. They were all good people stuck in a bad system. When you implement a good system, the bad actors become clearly obvious.

If you consider that a majority of your employees are idiots, well, careful — don’t throw stones in a very fragile glass house.

Let’s remember, however, that even good employees in a good system need to be motivated, given clear direction and kept productive. That is the art and science of building great teams and strong organizational structures.

So, I’m not advocating being a pollyanna. But the broader picture is worth remembering: Good system, good people. Bad system, bad people.

Categories
business advice Leadership

Can genius be learned?

UntitledI recently had the pleasure of hanging out with a fellow you’ve probably never heard of: Bob Duggan.

Duggan is quite a character, who is in the proces of netting himself a cool $3.6 billion from the sale of his pharmaceutical company to Abbvie.

It’s not his first fortune. If anyone can claim to have the Midas touch, it’s Duggan, who has had many success in the past. A two-time college drop-out (UCSB and UCLA), he has made his money entirely on his own.

So when he gives advice, people tend to listen.

What fascinated me is that he has implemented a program in his company of training and encouraging “genius characteristics”, discussed here in Investors Business Daily:

“I tell people, ‘You have genius potential’…Some think of genius as innate intelligence, as an inborn characteristic. But the dictionary defines it as an extraordinary intellectual power in creative activity. All of us have that potential.”

…Duggan, 70, believes so deeply in Barrios’ research that he has arranged for employees at Pharmacyclics to take a self-directed program to acquire the 24 genius traits. They might spend about one hour a week learning the characteristics — which include drive, courage and honesty — and complete the course of study over six months.

And that evening, Bob discussed these genius characteristics, based on the work of Alfred Barrios.

These characteristics include:

  • Drive
  • Courage
  • Devotion to goals
  • Knowledge
  • Honesty

…and another 18. You can read them here, in a presentation he made several years ago.

The key argument is that geniuses are made, not born, and that anyone can develop these same characteristics as Einstein or Shakespeare.

It seems to have worked well for Duggan and his now very wealthy team, some of whom have made staggering sums of money with Duggan.

 

Categories
Leadership Press

BlueBell’s wonderful brand is at risk. Because they don’t understand PR.

3/15/15 Important update: It has now been determined that Blue Bell was not responsible for these deaths.  WSJ article here.  And, in that article “Mr. Marler said he thought Blue Bell had responded appropriately once it knew its products were linked to illnesses and deaths.”

My criticisms of Blue Bell are not relevant now; it seems they have done a laudable job of turning this around, and the news cycle has moved on to other things.

Still, below is a good overview in general of dealing with crisis PR. The original post, below:

 
Ah, people don’t read this blog and pay the penalty. If the BlueBell people had read How to Not Get Killed in a Press Interview, or my post on Intuit, they would have understood the dangers of not getting ahead of a potentially vicious news cycle.

BlueBell is dealing with a problem, that if not handled correctly right now, will blow up in their faces.  You see, a few of their “novelty” ice creams have been contaminated with Listeria bacteria, and three people have reportedly died.

Died. As in Dead. RIP. That sort of thing. Now, these were people in a hospital, and were likely older and had compromised immune systems. But they still died.

So here’s BlueBell’s response: a quaint post on their front page:

Untitled

Followed by some bland talk:

For the first time in 108 years, Blue Bell announces a product recall….One of our machines produced a limited amount of frozen snacks with a potential listeria problem….When this was detected all products produced by this machine were withdrawn.  Our Blue Bell team members recovered all involved products in stores and storage…This withdrawal in no way includes our half gallons, quarts, pints, cups, three gallon ice cream or the majority of take-home frozen snack novelties…For more information call 979-836-7977, Monday – Friday 8 a.m. – 5 p.m. CST or click here.

The CEO, Paul Kruse, just isn’t handling it right. Look at the tone of some of his remarks to the press:

“They feel that this one production line we use here is what might have caused the problem,” Kruse said. “It’s a complicated piece of machinery, it’s been down for about a month and a half, and what we’re likely going to do with it is throw it out the window, so to speak.”

Mr. Krus, with all due respect, three people have died, apparently because of your company’s mistake.

Where is the “devastated at this loss”, “we have immediately taken action…”, “we have formed a team to directly work on the problem”, etc., etc.

The playbook here is fairly straightforward. The perfection of crisis PR handling was achieved by Johnson & Johnson chairman James Burke, during the Tylenol poisoning tragedy in the 80s.  The case studies are numerous, but the key is:

  • Immediately come clean on everything you know. No obfuscation or corporate speak. No excuses. Plain, simple English. What happened, why it happened. If you don’t know, the answer is “we are aggressively investing this issue”.
  • Apologize and show genuine sorrow over the deaths. Ignore the lawyers, who are telling you not to admit fault. Your brand is at risk.
  • Immediately and actually handle the problem.  Not just “we’re going to throw out this machinary”. Something is wrong in your quality procedures if this machine was even allowed to continue in operation. Bring a reputable quality inspection team to go through a top-to-bottom review of your factory. That kind of thing. And then communicate this aggressively.
  • Detail the steps you are taking to make sure the problem never occurs again
  • Continue an active communication cycle
  • Fill the vacuum with credible information, through the press and through advertising.  “Our state-of-the-art factory”, pictures of people in clean suits working on ice cream, that sort of thing.

I love BlueBell. In fact, on our Sunday evening family dinners at my house, it’s the standard treat we serve. I wish them well.

But PR screwups like these, not handled correctly, can cause more damage than one would imagine.

Mr. Kruse, get your act together. You’re no longer an ice cream maker. You’re a news maker.