All Posts in Strategy and Tactics

|In: Business Ethics|Last Updated:

Scary news this week.

No, not Ebola, although that’s scary enough. Ebola, while extraordinarily lethal, is, fortunately, not particularly contagious when compared to other viruses.

Not that Ebola should be trivialized. Somewhere between “there’s always something” and panic in the streets is a reasonable reaction. I’m concerned, not that there’s anything I can do about it.

Anyway, the most likely outcome of the Ebola outbreak will be large-scale tragedy that mostly happens to Other People Far Away From Here.

The outcome of this week’s scary news, in contrast, affects us all every day.

The scary news? According to Bloomberg’s Lu Wang and Callie Bost, in the aggregate the companies that make up the S&P 500 are going to spend 95% of their earnings on dividends and stock buy-backs.

By itself, this statistic is less dire, or at a minimum more ambiguous than most analysts make it out to be.

Areas companies “should” spend their money (should being as much a moral as business proposition) such as labor, R&D and preventive maintenance, are pre-tax expenses. Dividends and buy-backs, in contrast, are after-tax expenses and aren’t deductible.

Which means it isn’t really proper to think of these as competing for the same funds. If a company were to reinvest more in its future (pre-tax) that would affect how much money is left in this-year profits to use for buybacks and dividends, but wouldn’t affect what percent of profits get used this way.

It would just make the amount that percentage translates to smaller.

Move along folks. There’s no story here. Or there wouldn’t be were it not for two factors: (1) Executives make spending decisions with an eye to how much will be left to fund buy-backs and dividends; and (2 … and this is the scary one) this year, companies aren’t just returning profits to their shareholders. As reported in Bloomberg, “Cash returned to shareholders exceeded profits in the first quarter for the first time since 2009.”

In short: Investments in what analysts delicately describe as “financial engineering” are up, capital investments are down.

The verdict: If this is the best use for cash the folks running the S&P 500 can come up with, it means they can’t figure out how to use the money to grow their businesses.

Which is, when you come right down to it, pathetic.

Only … for many of KJR’s readers and subscribers, they is we.

Yes, I’m sorry to report that it’s mirror-gazing time again in KJR County, because …

You might recall reading in this space from time to time that part of your job as an IT leader … and part of IT’s job as an organization … is to provide technology leadership.

Now I’m the first to say (or at least, close to the head of the line) this isn’t limited to tactical, hard-dollar, short-term ROI opportunities. The most critical dimension of technology leadership is identifying competitive threats and opportunities and recommending a course of action to deal with them.

The most critical dimension, not the only dimension.

Which leads to this question: When was the last time you or another member of your team sat down, one-on-one, with a business executive or manager to discuss what he/she wants to do differently and better?

There’s little question, some of the buy-back-and-dividends vs capital investment decision-making is pure, lazy opportunism. Buy-backs in particular are a cheap trick to prop up the price of a share of stock and nothing more. Directing cash in this direction when such niggling details as preventive maintenance are underfunded is ridiculously short-sighted, akin to making sure your wine cellar is well-stocked when your car needs its oil changed.

But in here is also an opportunity. Boards of directors approve buy-backs when, as already noted, they don’t have higher-return alternatives for investing the company’s spare cash.

It’s an opportunity because it tells us these boards have cash and need places to invest it, which might mean they’re open to suggestions from the company’s top executives.

Which might mean the company’s top executives are open to suggestions themselves.

The word is “might,” because if a company suffers from a paucity of investment possibilities it also might mean the company culture discourages employees at all levels from looking for and suggesting possibilities for improvement.

Now culture flows from the top, so if your company lacks a culture of innovation the CEO is probably the source of the lack.

But what do you have to lose by trying?

Comments

|In: Project Management|Last Updated:

Congratulations! You’re on the “FitShoes™” project. FitShoes™ will be like Fitbits®, only because the chip is built into the shoe, they won’t interpret gesticulation as jogging a few miles. Even better, they’ll include GPS. They’ll keep track of the route … and therefore will know when the wearer is walking uphill and downhill so they can calculate exertion more accurately.

The theory is that while your company will make some money on the shoes themselves, it will make much more on the intelligence to be gained by knowing customer exercise patterns, both for direct marketing and from strategic intelligence gained from analytics performed on the pooled data.

How to proceed? The first step (NPI) is, of course, a proof of concept. There’s no point pouring R&D dollars into a product like this if the concept doesn’t hold up to the sturm und drang of life here on earth.

So the company forms a cross-functional team, and, recognizing that throwing money at a problem rarely solves anything, keeps its budget lean, letting everyone know that if the initial proof of concept yields promising results, additional funds will be forthcoming.

Armed with a deep understanding of the vision plus a modest budget to play with, the team designs the pilot. They agree that this early in the game, with detailed requirements still to be learned, they’ll use Excel for the database and processing.

The other key agreement: Creating a chip/circuit board to power a prototype FitShoe™ would be far too expensive and time-consuming. Instead, volunteers will keep track of their movements using a smartphone-based spreadsheet template they email to the project team every day for a month.

And …

This “proof” of concept will prove nothing at all. But it resembles many of the so-called proofs of concept I’ve seen over the years. It tests the least-challenging dimensions of an idea, leaving the hard stuff for the actual implementation when there’s enough time and budget.

Also when it’s too late to change direction.

To avoid this trap:

  • Be clear about what concept you’re proving. Or concepts. In our FitShoe™ example, the only concept being proved is that data sent from elsewhere can be used to update a database.
  • Know when more than one concept must be proved. The FitShoe™ depends on several of them: (1) It’s possible to put that much functionality on a chip or small circuit board; (2) that when you do it will be durable enough to withstand the pounding when someone exercises in the shoes; (3) people who wear gesticulation-foolable exercise monitors want more accurate exertion data; and (4) there’s enough to be learned from those who do to warrant the investment.
  • Test concepts independently. If you try to build a scale model that incorporates every key aspect of whatever it is you’re developing, you’ll save a lot of time.

If, that is, everything works according to the initial vision. If it doesn’t, figuring out which concepts are sound and which ones aren’t is a lot harder when they’re all jumbled together.

Prove each concept separately first. Then assemble a working prototype.

  • Test the complexity. In IT, unlike product development, proofs of concept usually revolve around the applicability of some already-proven technology or other to one or more business processes or business process cases. The temptation, parallel to the FitShoe™ parable, is to start with the simplest case on the grounds that this will be the least expensive pilot project, and the one most likely to be successful.

Except that with proofs of concept, “success” means learning something important about what actual use will be like. Just building something that works by avoiding all the nastiness the final product will have to deal with means that when you’ve finished you won’t have learned anything at all.

  • Don’t create an incentive for success. The FitShoe™ project team’s incentive was a more generous budget for the next phase. Bad idea: It’s another version of defining success as building something that works rather than learning something important about what building the final product will take.

In any proof of concept there’s already too much of an incentive, in the form of political pressure. Someone’s name is on this; in too many companies that means if it doesn’t work their name will be on something that’s considered a failure.

Which means that as is the case throughout the world of business leadership, incentives and “holding people accountable,” are just about the worst choices you can make. True success requires, not these, but a culture of honest inquiry instead.

Without this, proof and “proof” will have nothing at all in common.

Comments