Every LBO firm, venture capital firm, and most CEOs recognize and understand the importance of cash. It should always be treated as a scarce asset for. Management capacity is even more scarce but frequently not treated so carefully.
Cash can easily be measured (even though measurement is frequently made less transparent by misused flexibilities available via accrual accounting). Many understand that it needs to be managed with scrutiny and allocated carefully to meet the company’s needs. But management capacity can’t be calculated, and is often squandered. When this precious resource comes up short, frequently the directive is, “just work harder and longer.” Boards and CEO's and general managers cannot see the damage to core business decisions, actions and results caused by management's time wasted on distractions.
Of course management capacity can be stretched in the short term. When crises hit or rapid-fire opportunities emerge, it’s amazing how much elasticity exists. But over the medium or longer term, management capacity is more finite. The wise CEO will keep the management team’s use of its available capacity in balance in several ways; by eliminating distractions, by making timely decisions, and by communicating clearly and decisively to all their constituencies. The latter two will be discussed in the following weeks.
Let's now look at the need to eliminate distractions. What exactly are distractions, though, and how do you ferret them out? Simple: Define a distraction as any subject that continues to consume a significant portion of your day or your management team’s day; and that is a pain in the behind; and that brings no or limited added value when resolved and therefore by definition does not fit into the strategy of the company. Some examples:
· Overhanging lawsuits or pending litigation not directly related to the core business.
· Subsidiary businesses or product lines, typically acquisition related, that are in conflict with the core business strategy.
· Subsidiary businesses whose performance has been and will likely to remain poor and “noisy.”
· Slow-moving sku’s that require individual attention when the occasional order is placed.
· Extra organizational layers that add no value, noted non-performers, average or below-average performers with a bad attitude.
· Scattered locations, typically acquisition oriented, with their own cultural history that makes them difficult to manage.
· Poor contracts or non-strategic business arrangements.
· Peripheral or low-margin product lines.
The solutions are just as simple. Settle the lawsuits. Sell conflicting subsidiary product lines. Shut down poorly performing subsidiary businesses. Eliminate slow-moving skus. Delete extra layers and non-performers. Centralize or shut down scattered locations. Get out of non-strategic contracts.
Pruning product lines frequently opens the door to more major changes. Pruning is counter-intuitive; after all, the products may apparently contribute positive gross profit. However the extra processing, inventory, customer service, inventory management, purchasing, claims, warranties, and other administrative expenses may make them unprofitable at the bottom line. They are likely to clog up the system; preventing a more significant cut to expenses, soaking up the last bit of administrative capacity, and preventing the organization from fully attending to more profitable products.
No matter what distractions you locate, they are all draining because they continuously appear on the day’s docket. They are difficult to ignore and seem to get inordinate attention from the board; they’re just bad news. The longer they last, the more time you and your team spends on them. That means less horsepower for issues that create long-term value.
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