Mar 8, 201112:00 AMMad @ Mgmt
with Walter Simson
The business with two brains
Mad @ Mgmt addresses the concerns of middle market companies, including banking, family & succession issues, turnarounds & performance improvement and economic life in general. Walter Simson is founder and Principal of Ventor Consulting a firm dedicated to middle market companies.
One of the best scenes of the movie is a physical comedy tour-de-force as Martin tries to stomp down the street with his left side, and Tomlin's character tries to walk like a lady with the right side. Neither got very far.
In my work I'm seeing a lot of body-snatching conflict, and it's not funny. Companies are essentially running two or more businesses, while using the systems, human resources, and accounting for only one.
I'll give an example.
An old-line distribution company sells meters, pumps, and specialty instruments for the mining industry. But volumes have been declining for years, so the owners set up a service operation that has high margins and good prospects. But the overall company has never shown the sales and profits that reflect the service side. Why? Because the personnel are busy buying, selling, storing, and (eventually) heavily discounting the products for what was the historic identity of the company.
They could never tell how profitable their new business was because they were wedded to the old. However, when the bank stepped in and asked for a review, we got together and effectively drew out two profit and loss statements. One for the legacy business, the other for the firmly established but newer service business.
The service business needed less capital, provided high returns on capital, and was in demand. The distribution side was not covering its cost of capital and was not keeping the customers' interest.
A more famous instance of one business almost overwhelming another was in a company I'll call "Fabled Shoe." Fabled was a men's dress manufacturer/distributor. It saw itself as a fashion house, and every year it would create and sell new lines. When I was introduced to the company, it had a beautiful dress shoe that was designed to be sold to the high-end retailers. It was imported, beautiful, and a little above the station of the typical Fabled buyer.
It was also a loss maker. An old line of business, making pedestrian military dress shoes, was the winner, and the exchange system that sold the shoes was dying for more.
The experiences of reviewing the results of these companies, both while they were in crisis, provided the genesis for what I call "core product/core customer" reviews of operations. Many companies evolve in product development and sales, but find it harder to look back over the products to see if the efforts are paying off.
To do so would mean investing in systems, reporting, and management infrastructure where there is no assumed return on investment, because management seldom assumes that the new venture is going to need detailed accounting. As a matter of fact, managers often recognize that one side of the profit and loss statement needs rebuilding – but they don't have time to get to it.
I recently was introduced to a technology company, a thoroughly 21st century invention, which is facing a similar situation. This company's problem is more urgent than the drip-drip-drip of traditional companies' loss-making legacy businesses. It has a whiz-bang product that it forecasts will be popular for no more than three years. It is urgently trying to come up with a replacement.
You know what I'm going to say next. That's right – no systems to track the product development, customer acquisition, new gizmo revenue. The frantic nature of the search (with unplanned expenditures) could actually be more of a danger to long-term viability than the simple problem of an aging product.
A company with two brains, lurching along, when only one works. Companies are just going to start measuring all their lines of business to gain long-term effectiveness. I have been trying to make this point to a larger audience for years, but it is not exactly a cover story in Sports Illustrated.
Having two brains is a hard concept to communicate.
As Steve Martin says in the movie, "I don't want to share my body with anyone!" And a hardhat sitting nearby says, "Everybody's gonna be real disappointed."
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