MBAs are wonderful things. They educate you in Mergers and Acquisitions, Finance, Remedial Accounting and a whole lot of other stuff. Sadly, they don’t teach you the two most critical theories in business, maybe because it would put all those revenue-generating MBA programmes out of business.
With these two theories firmly in place, you can navigate your way through just about any crisis.
1. The Mallard Theory
This theory is a key problem solving and data analysis tool.
If it walks like a duck, and it quacks like a duck, you don’t need a PhD in ducks to know that it’s probably a duck!
Sadly, we’ve developed a culture in business that is massively risk-averse – it’s the “zero defect” mentality and it’s a guaranteed one-way trip to doom. The reality is that there’s no such thing as “zero defect” – it’s impossible to achieve that level of perfection without creating a petrified company. If you’re 80 percent confident, go for it!
“A good plan, executed now, is better than a perfect plan executed next week.”
Yes, you will be responsible for some glorious screw-ups, but you will also be responsible for astounding successes and on balance the successes will outweigh the failures, particularly if you take the time to learn from your failures.
2. The Dollarmite Theory
Now we all remember the account that the Commonwealth Bank offers to school kids with some criminally low rate of interest — this is the underpinning for one of the most critical theories for business success.
If you could take the total net worth of your business and invest it in a bank and the interest returned to you (after tax) is more than the free cashflow generated by your business, sell up and get a savings account.
I share these pearls of wisdom because I recently walked through the corporate valley of the shadow of death at the site of a prospective client who ignored these two critical business theories and stuck in the depths of corporate purgatory.
This business ran several divisions in different market sectors — a diversification strategy designed to insulate the business should one sector drop away. Only no one had thought of the possibility that more than one division could tank at the same time.
The company was burning money — bankers were in there so often they had their own office — and looking for a way to structurally address its problems. I was there on the back of a recommendation to look at technology and telecommunications across the group. At the instruction of the bank they had brought in a facilitator to work with the business unit heads and the outside consultants to find ways to streamline the business and improve efficiencies.
Everything was up for grabs and no idea was too stupid.
We were exploring all sorts of options when one of the external consultants, who’d been quiet for a lot of the meeting, piped up and said, “Can we look at the previous three years’ results for the divisions that are showing the bad results?”
The numbers went up on the whiteboard and after a bit of analysis he said, “Before things got tight these divisions were barely profitable.”
Silence, then uproar.
After everyone had calmed down he calmly put the numbers up on the board and compared Profit and Loss to Cash Movements. While these divisions were generating lots of cash, all was good. However, when things started to dry up, the underlying problems in the business became evident. Everyone was looking at top line revenue and, so long as that looked good, the thinking was that the business was healthy. It wasn’t. It was living on a cashflow-fuelled iron lung.
No one wanted to admit the bleeding obvious — that the two divisions that were thought to be the most profitable were actually exploding pustules of red ink camouflaged by an inbound torrent of cash!
Their free cashflow contribution to the business was around 1.1 percent on an invested capital of around $15 million — less than the return on a passbook account, and it had been for several years.
The 1% Spend is written by a prominent Australian I.T. consultant who is choosing to remain anonymous (and candid).
Photo: Jeremy Burgin