Four rules of management

Unfortunately quite a few businesses that are in fact salvageable end up in liquidation unnecessarily. There are alternatives that can be explored. LOUIS COUTTS

By Louis Coutts

This blog first appeared 3 November 2008

We are heading into heavy winds. For the past few years a lot of businesses have been doing well and growing quickly while generating decent profits. What I have noticed in this period is a gradual lessening of an understanding of the importance of effective management.

In many cases it has been so easy to make money that management took their eye off the ball and allowed systems and processes to develop that may not be sustainable in the cost structures that will be dictated by the dynamics of the stalling economy.

In past downturns, a lot of these businesses have gone from being high flyers to liquidation with a speed that was frightening. Already there are signs that it is happening again.

Making money in a tight economy is the test of a successful business and there will be some businesses that don’t measure up. As Edwards Deming used to say, “survival is not compulsory”.

Unfortunately quite a few businesses that are in fact salvageable will end up in liquidation unnecessarily. The reason is that management will not have the skills to adjust to the new imperatives of a tight market.

Regrettably, the formal process normally taken by businesses that are in financial difficulties is firstly a review by the firm’s accountant, then the appointment of an administrator, which often leads to liquidation.

Despite the slow and so far unsuccessful process of converting management into a profession, there is nevertheless a body of understanding, if not learning, that equips management to deal with financial difficulties – not by messing around with the figures but by re-examining the entire managerial process that necessitates the involvement of other stakeholders such as landlords, suppliers, staff and customers.

By building a process of open dialogue throughout this important network and by digging down deeply into the operations of the business, it is amazing how solutions emerge that do not involve bankruptcy but in fact ensure that when the business comes out the other end of the process, it is stronger, healthier and more competitive than it ever was.

Occasionally, I have had the good fortune to be called in when a business is on the brink of receivership or liquidation, and with the co-operation of these various stakeholders have been able to leverage the relationships to right the ship and restore it to health – even though, on the face of it, the financial situation was hopeless.

This helped me develop my four rules of management to which I have made reference in the past but have not articulated them. They might come in handy as we approach these global headwinds.

The first rule is that we must always communicate.

Now we could write several books on communication, but for the purpose of this brief commentary it is sufficient to say that the most important aspect of communication, strangely enough, is not “telling” but “listening”.

In every business there is a story or are stories going on, often without the knowledge of management. The staff have a story as to how they see the business and its management; the suppliers have a story as to how they see things, as do the customers. Frequently they are anxious to share their story, or at least I have found them anxious to share their story with me.

By establishing this story or theme (which almost always is consistent from suppliers to customers) the causes of the problem (which is rarely the economy) and the solutions (which is rarely financial) are identified.

By communicating with people through listening, it is much easier then to implement change because the changes that emerge from the story are the changes that the stakeholders want. Because you make changes that are wanted by the stakeholders, they are more likely to be owned and embraced by those stakeholders, particularly the staff.

My next rule is that you can only do so much as your resources permit.

Strangely enough, in a turnaround situation where the economy has gone south, the first thing that businesses tend to do is to “downsize”. This may be necessary, but when it comes to needing the resources to turn the business around, we find that the business had “downsized” the people necessary to help in the turnaround.

Another thing that often happens is that during the good times the business has paid the owners a handsome reward out of the profits generated and these rewards have been invested in assets which have depreciated, like a Mercedes Benz, speculative shares and property for which the market has disappeared.

One of the resources that the company badly needs is “cash” and it ain’t there. So, we have to work through what to do with the resources that are at the disposal of the business rather than the resources that aren’t.

My next rule is that 2 + 2 = 4.

There are all these motivational guys who preach that 2 + 2 can be made to equal 5. So far, despite the advances in mathematics, this arithmetical proposition has been demonstrated to be a myth.

It is not possible to generate from any resources more than its potential. It is mathematically and physically impossible. Accordingly, in salvaging a business that has found itself in distress, it is imperative that people realise that day dreaming is not going to help. There is no point in suggesting an expansion of the business to new territories and new markets if the figures don’t add up.

So many difficulties have been incurred by virtue of this dreaming of “going to the next level” without doing the sums. If the sums don’t add up, no amount of dreaming or hypothesising will make them. You can develop the most fantastic refrigerator in the world but you will find it difficult to sell to the Eskimos.

My fourth rule (and without the involvement of stakeholders it won’t apply) is that if you have communicated effectively, worked within your resources and done your sums and things are working, don’t panic – because the likelihood is, given sufficient time, they will.

If we haven’t communicated closely with the bank and developed their confidence about our strategy, it is unlikely they will give you time. This brings us back to my first rule of communication. Looking back on my experiences, I am astounded at the extent of co-operation I received from institutions such as banks and creditors by simply communicating with them effectively.

One thing you will find going through this process is that there will be people in your business with great managerial potential and will emerge in the turnaround as stars. This raises the contemporary issue of salaries to executives and perhaps I will have an opportunity to look at that issue next week.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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