As a leader, be careful saying “I didn’t approve that.”
I would use that sentence if you want any (or several) of the following outcomes.
A long line outside your office of things you need to “approve”. No one likes to be undercut by a boss that says “I didn’t approve that.” The best way to avoid that situation is to ask your boss to approve everything.
You want to spend your time in the weeds and find micromanaging small decisions to be rewarding, impactful, and value creating.
Creating an organization that is autocratic and not scalable. See the part above about needing to approve everything and being in the weeds.
Creating a closed and unquestioning culture. Because the words, “X approved this” will be equated to don’t bother questioning this decision, even if it’s unclear if “X” actually approved it or there are other aspects of the decision that should be considered.
To make decision making political. You teach employees that to get to the desired decision, all you need to do is convince “X’ that it is a good decision. No consensus building required. Actually, it is a game best played in private since a group setting might accidentally offer up a counterpoint that would work against your desired outcome.
Demonstrating to your employees that they are not empowered and you don’t trust their judgement. This has the additional benefit of driving employees who like to feel empowered and make decisions out of your business. Yay, talk about win-win.
So, the next your team brings you something you weren’t aware of, I highly encourage you to shout “I didn’t approve that” in an emotional outburst. Sarcasm included at no additional cost…
I took a call from an executive recruiter the other day.
I’ve talked to this recruiter a few times previously. He knows my background a bit (we talk about cycling – which I prefer to talk about vs. ASC 606). Which is more than I can say for quite a few recruiters who reach out to me.
The opportunity was not of interest – mostly due to geography. It was in the technology space. But located in Arkansas. Little Rock to be exact. Bentonville might have made me pause. But, Little Rock. Nope, sorry. But I digress.
During the conversation, the recruiter said something like “the company is looking for a CFO who will work with the Head of Sales. The last CFO saw things a little too black and white.”
That’s a statement that should never be made in public. Certainly not within earshot of an auditor. Even if the CFO was a total asshole. Reading between the lines. The company had a CFO. The CFO and Head of Sales had a disagreement. The CFO is gone.
Not music to my ears.
What might the CFO and Head of Sales have disagreed on?
Recurring revenue model software companies are being valued entirely on a multiple of recurring revenue. And not a small multiple. Very lofty multiples. Could even be double digits. Big double digits. Here’s some insight into my opinion on all that (the NOT talking my book edition).
So, obviously, managers of these businesses are highly incentivized to do everything they can to grow recurring revenue in the short term.
“Money makes people do strange things” – me
That was maybe my best answer to an interview question ever. I suck at interviewing. I offer no advice there.
Based on my own experience, the Head of Sales is highly incentivized to grow revenue. An almost singular goal. The compensation plan for the Head of Sales is likely entirely based on revenue. They probably have some options / MIUs too (see the valuation discussion above).
But, the last time I checked, my Head of Sales is not going to sign the audit attestation letter. So upside based solely on revenue. Very limited downside. What could go wrong?
The CFO wants to ensure the company is in compliance with accounting rules – among other things. Which could be an opposing goal to booking revenue – if you care about not manipulating revenue or committing fraud. As an aside, the CFO likely has a lot of options / MIUs too (ruh, roh).
If I was on the board of that company, I would be…uncomfortable. Yeah, that’s a nice way to put it.
When I was in business school, during our first week orientation dinner event, we did a group exercise.
I forget all the details, but we broke out into groups of five or six. Each person was assigned a role representing a function in a company – marketing, sales, purchasing, inventory management, manufacturing, etc. The leader of the exercise would give the front of each organization the actual sales number for that period. And then each function had to deliver a single forecast to the next function in the organization without communicating or discussing any additional information, ending with the manufacturing function who had to decide how many units to produce. And this was repeated for a number of periods.
The gist of the exercise was that the actual forecast went something like 10,000 units in the first period, 11,000 units in the second period and then 10,000 units for every remaining period.
However, this singular and relatively small change, generally produced wildly fluctuating forecasts throughout each team. I mean laughably huge, seesawing projections for changes in demand that totally disrupted the organization. Some organizations would produce no units in some periods, have stock outs in some periods, or end up with triple the amount of inventory required by the end of the exercise.
I feel like COVID just did that to the world’s economy. And we will be living with wild fluctuations, supply chain disruptions, and asset dislocations for some time.
It was not a conscious decision, but I went to work for a family business. In fact, I really didn’t understand what I was getting myself into. To be clear, it’s not all bad. But different. And complicated. Sometimes messy. Kind of like a family.
Here are three things I learned.
Peter Principle Is In Full Effect:
“The Peter Principle is a concept in management developed by Laurence J. Peter, which observes that people in a hierarchy tend to rise to their “level of incompetence”: employees are promoted based on their success in previous jobs until they reach a level at which they are no longer competent, as skills in one job do not necessarily translate to another.”
Examples of the Peter Principle were all over the place. We would move people around. And, they would fail miserably. And, we would try them in some new role. Repeat.
Just When You Think You Were Out…
One of the primary reasons that the Peter Principle is really common is that leaving is not really an option. You do not really resign from your family. Or get fired from your family.
I have not held a lot of roles, especially compared to some of the resumes that I see with multiple one and two year stints. However, I have never really considered being a “lifer” anywhere. In a family business, a lot of folks are lifers. Maybe it is not their only option, but it is the only one they will consider.
Second (and third, and fourth, etc) chances are common. We had one guy, a family friend, who had been fired multiple times. And rehired.
Also, you will find a lot of people, who will really only have one experience on their “resume”. This is not to say they are not competent. It is just to say, they will only have one perspective. Which can make driving organizational change difficult.
Work and Play Blurred
The lines between work and play were very, very blurry. Or maybe the right way to say that is, the lines between professional and social were complicated. For someone like me, who tries to separate work and life a bit, realize that you will be on the outside. And viewed as a bit unusual for trying to separate the two.
Folks in the organization, who typically would not have the attention of the CEO, went on vacation with the CEO. Or maybe lived with the CEO. Or was married to someone related to the CEO. And that worked outside the family of the CEO. There were lots of relations – same last names, siblings, spouses, cousins, etc. You get the point. It is a very, very complicated organizational chart to navigate.
I am not sure any real people actually visit this site. I am pretty convinced the only visitors are bots. However, the bots seem to like the post on my views on the difference between operating models vs. financial models.
So, here are some more thoughts on operating models in the form of tips for building an operating model that I have refined over the last decade or so. Also, for clarity, my operating model and forecasting process is all Excel based. I realize there are some fancier tools out there, but this process gets the job done at much lower cost than any of those and is extremely versatile.
Budget In the Same Form as Your General Ledger
The first two steps work together, but in many ways, you should start here if you can. Your budget inputs should be in the same form as your general ledger (GL) / enterprise resource planning (ERP) exports. If you did not do this for this year, plan to use this as a template for your budgeting process next year.
I send out budget template packages to all my business leaders to guide their budgeting effort that are based on our ledger exports. The package presents historical data and asks for inputs, by month, for the upcoming year. In many cases, a business unit leader only has a few major line items they need to worry about, outside of headcount driven ones like salary, wages, and benefits.
You can utilize helper sheets to aggregate detailed assumptions:
A little prep work can save everyone a bunch of time and make your life a lot easier going forward. Having your budget and your actuals in the same detailed form will make Actual to Budget comparisons much, much easier.
Utilize Inputs from Your General Ledger / ERP System
Again, step one and two are very much related. I highly recommend driving your historical inputs off of exports from your GL / ERP system. This will make importing data on a monthly basis systematic and mostly a copy and paste exercise. It will also let you know if your Controller added any accounts to the GL that you need to peek at.
The exports should be monthly. And, you will likely need separate worksheets for each department, so that you can have that granularity in the model and related operational reporting.
Summarize Accounts Into Categories for Analysis & Department Reporting
The ledger exports are generally fairly granular, and in my experience, too granular for most of your audience (business users). You can use some higher level categories to summarize these into easier to digest format.
Examples of the operating expense categories I use are:
So, for example, if you see that Software increased over prior month, you can dig in and go find where and which department. For a really detailed review, you might need to go back to the ledger, but you have all the tools to easily get that done.
Use a First Look Report
Once we have our accounting close done, my first step is to review what I call my First Look report. This is a comparison of the month across revenue, cost of goods sold, operating expenses, and other items to:
My Forecast (more on this later)
This is a great way to spot things that need more review, before I actually issue financials out to my team and our investors.
Keep The Census Separate
I use a modular approach in building my operating model. My operating model is actually several linked files:
Financial Model – A working, monthly financial forecast model
Ledger File – feeds the Financial Model for both historicals and forecasted expenses
Census File – fees salary wage and benefits information into the Ledger file
As a banker, I abhorred linked files. As an operator, they become a way of life.
Keeping these separate allows me to share the Financial Model easier. The model file is small. And in the case of the census, there is no confidential or sensitive payroll data.
Generally, I turn off comments on my site. Most comments are spam. However, I am going to leave comments open here. If you have some questions, please post them. And if you would like some help setting up an operating model, drop me a note.
“The sad fact is, almost everyone who gambles, goes broke in the long run.” – Fortune’s Formula, pp. 49
This is meant to be more of a book report, than a review. In particular, I want to highlight three lessons from the book, Fortune’s Formula by William Poundstone, that I found impactful. This also serves as a way for me to recall influential points in the book.
I enjoyed the book, which was an introduction into a few folks I did not know much about – Claude Shannon, Edward Thorp, and John Kelly, Jr. And it covered topics that I always find entertaining – investing, making money, math, and even had a section titled “Entropy.”
However, three topics that did alter my perspective were:
“LTCM goofed by greatly underestimating the chance of a panic in which its trades would become highly correlated. The fund was making hundreds of simultaneous bets. It operated on the assumption that these bets had low correlation.” – pp 294
As I have written previously, the increasing correlations between asset classes in today’s market seem like something folks should be taking into consideration. The same rising tide has caused all boats to float.
“The Kelly bettor cannot be ruined in a single toss.” – pp. 297
“It is that even unlikely events must come to pass eventually. Therefore, anyone who accepts small risks of losing everything will lose everything sooner or later.” – pp .297
“This illustrates the ‘paranoid’ conservatism of Kelly betting. The chance of hundreds of coins simultaneously coming up tails is is of course astronomically small. No matter – the ideal Kelly gambler’s ‘survival motive’ precludes taking any chance of ruin whatsoever.” – pp. 295
The theme of always ensuring you live to fight another day in the Kelly system reminded me of a main theme in Antifragile by Nassim Nicholas Taleb. To paraphrase, if the action undertaken has the risk of ruin or death, then the overall probabilities can be a little pointless. In other words, once you are ruined or dead, the probabilities of future gains are irrelevant.
“This fragility that comes from path dependence is often ignored by businessmen who, trained in static thinking, tend to believe that generating profits is their principal mission, with survival and risk control something to perhaps consider – they miss the strong logical precedence of survival over success.” – Antifragile, pp. 160.
“For true long-term investors, the Kelly criterion is the boundary between aggressive and insane risk-taking. Like most boundaries, it is an invisible line.” – pp. 298
Investment sizing or “bite size”, as well as appropriate levels of diversification, is something I have been spending time on. The entire Kelly system is designed around the appropriate way to size bets based on the ratio of the edge – how much you expect to win – compared to the odds – the public odds.
“A fractional Kelly bet doesn’t sacrifice much return. In case of error it is less likely to push the bettor into insane territory.” – pp. 233
But given where the market seems to be and the increasing correlations, I have been keeping bite size small.
“Risk management is a tough lesson to learn on the job. It can take years for ruinous overbetting to blow up in a trader’s face.” – pp. 303
This would be called “resulting” in the terminology of Thinking In Bets by Annie Duke. Giving too much credit for the outcome, regardless of the process.
“That’s the hard thing about hard things—there is no formula for dealing with them.” – Ben Horowitz
This is meant to be more of a book report, than a review. In particular, I want to highlight three lessons from the book, The Hard Thing About Hard Things by Ben Horowitz, that I found impactful. This also serves as a way for me to recall influential points in the book.
This was another book that I did not know much about going into it. While I am not a CEO, I sit close enough to that seat, that I got a lot out of this book. I have spent a good portion of my career in early and growth stage companies and could appreciate a lot of the author’s experiences as well. The book also gave me some perspective to look back at the CEOs that I have worked closely with and evaluate why some of their behaviors and styles worked and why others fell short.
However, three topics that did alter my perspective were:
Reward Employees for Identifying Problems
“The resulting action item for CEOs: Build a culture that rewards—not punishes—people for getting problems into the open where they can be solved.”
This one kind of flew in the face of a common maxim – “don’t bring up problems without solutions.” The point being that in many cases the employee identifying the problem may not be in a position to provide a solution. Or maybe finding a solution is going to take a broader effort or a larger organizational decision. It makes a lot of sense, especially in the context of a start-up or growth stage business, to reward employees for raising issues. There are going to be lots of challenges and problems. Get them on the table so the organization can solve them.
Hire for Strengths
“Hire for strength rather than lack of weakness.”
“You hired for lack of weakness rather than for strengths. This is especially common when you run a consensus-based hiring process.”
I am really not a big fan of consensus driven hiring processes. For most hires, I think the hiring manager should have a lot of latitude in picking the person she feels best fits her team. This is also where having an HR team in place that understands the team culture and the role can make a lot of difference.
For executive hires, I agree here as well. I think the executive team or portions of the executive team should be consulted, but more on a confirmatory basis. However, this is really the CEO’s job to build the team. It’s ultimately her decision, and her decision alone.
Build A Good Company
“If you do nothing else, be like Bill and build a good company.”
Sometimes I can get a little tone deaf on some of the softer organizational things. This was a good reminder that building a good place to work should be a top priority. This is not to say that I think for one minute that gift cards, swag, snacks, and other “perks” will make a company a good place to work.
At the end of the day, what else are you going to have, if you haven’t built a good company? In my opinion, this is hiring the right kind of people, providing challenging work, rewarding the right kinds of behaviors, minimizing politics and bureaucracy, and having fun.
“Level 5 leaders display a workmanlike diligence – more plow horse than show horse.” – Jim Collins
This is meant to be more of a book report, than a review. In particular, I want to highlight three lessons from the book, Good to Great by Jim Collins, that I found impactful. This also serves as a way for me to recall influential points in the book.
I went into this book with few expectations. I picked up my copy at a second hand shop years ago just because it was a title and author I recognized. Hardcover books are a weakness of mine. The book was written circa 2001, so some of the material is a tad dated. Maybe one of the biggest criticisms is one of the “good to great” examples went out of business since then: Circuit City. However, I still found the main messages mostly timeless.
However, three topics that did alter my perspective were:
First Who…Then What.
“We expected that good-to-great leaders would begin by setting a new vision and strategy. We found instead that they first got the right people on the bus, the wrong people off the bus, and the right people in the right seats – and then they figured out where to drive it.”
I have generally hired for horsepower. A students are generally A students in any setting. I have worked in a couple businesses that are obsessively focused on only hiring A+ players. While this message can be a touch self-serving, I will say having the right people on the team makes a huge difference, and having the wrong people is such a drag. So, spending the time on hiring is extremely important.
A Culture of Discipline.
“When you have disciplined people, you don’t need hierarchy. When you have disciplined thought, you don’t need bureaucracy. When you have disciplined action, you don’t need excessive controls. When you combine a culture of discipline with an ethic of entrepreneurship, you get the magical alchemy of great performance.”
This is something I wrestle with frequently but thought this was a helpful way of thinking about it. I generally have found that good people armed with the right goals and information end up generating outsized accomplishments. My motto has been – hire good people and mostly try not stay out of their way. And, this seems to be a similar thought process. Also, I have never seen dictatorial leadership styles as very scalable or robust. Instead, they tend to generate fear, resentment, and an outsized focus on politics.
Hedgehogs vs. Foxes.
“The key is to understand what your organization can be the best in the world at, and equally important what it cannot be the best at – no what it “wants” to be the best at. The Hedgehog Concept is not a goal, strategy, or intention; it is an understanding.”
“Strategy per se did not separate the good-to-great companies from the comparison companies. Both sets had strategies, and there is no evidence that the good-to-great companies spend more time on strategic planning than the comparison companies.
“No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no wrenching revolution.”
I thought this was illuminating as well and sort of dovetailed with the first point. Do not go looking for some silver bullet strategy. Figure out why you win, and just grind on it. There are no short cuts.