What Kind of Office Will We Return To?

What Kind of Office Will We Return To?

As the Federal Government has gone effectively AWOL, it is up to the States to determine when to open the economy and start letting people go back to work due to the coronavirus. Unfortunately, most States are going their ways, as described by FastCompany and Wired. Former FDA Commissioner Scott Gottlieb told CNBC that employers need to have specific plans in place for how to return workers to the office or shop floor safely. Gottlieb suggested, “In an office, you could split your employees — have half of them work at home, half of them come into the office on alternating days. . . . You should continue to encourage telework where you can.”

Even as things open up, many are following Gottlieb’s advice and teleworking. Amol Sarva, CEO Knotel, says that Uber is planning to get its staff back to their offices in San Francisco, but only 20 percent of personnel allowed in the building on a given day. Google and other large tech companies have announced that their workers should prepare to work remotely through the Fall and possibly the end of the year. But the office won’t disappear, it is here to stay as many challenges come with working from home, and people are social creatures.

 

Working from Home

However, regardless of the States opening up, many employees will not return to the office, or at least not full time. According to an MIT report of Americans who previously commuted to work, 34 percent were working from home by the first week of April. Before lockdown, only 4 percent were working from home. Kate Lister, president of Global Workplace Analytics, predicts that 30 percent of people will work from home multiple days per week within a couple of years.

According to Travis Vance, at Fisher Phillips, “I think some people may never want to go back to an office setting.” Steve King, a partner at Emergent Research, told Recode, “[Remote work] had been proven before this, but a lot of company management and leaders showed great skepticism . . . That skepticism will go away because companies recognize that remote work does work.”

With employees working from home, it was quickly apparent was that the better-prepared companies were those whose employees had already worked from home. Data shows that the most frequent employee expenses in the first half of March were computer monitors, desks, office supplies, mice, and keyboards — a departure from the norm.  According to a recent PWC study, about half of businesses expect productivity to fall during the pandemic due to a lack of remote work capabilities. Also, more formalization and company policies around remote work are necessary for the shift to be successful.

Many employees are finding that their home environments are not well suited to work, and so are spending money to create better home offices. Katie Storey, principal at Storey Design, says “there’s now a real focus on where can we convert a closet or add a room under the steps or where can we reconfigure parts of the house to be more functional work-from-home space.”

 

Initially On Return

Companies are going to have to implement systems that make workers feel safe before they will return. Many companies will adopt quick changes that have limited costs, like:

  • Providing face masks and deeper office cleaning;

  • Adding foot-pulls to the bottom of doors for hands-free access;

  • Developing hand signs or space markers for co-workers to remind others to keep their distance;

  • Seating may be roped off or removed from conference rooms to cut occupancy in half.

  • Doors may be taken off hinges or propped open so employees can avoid touching handles;

  • Signs are likely to point people in one-way traffic flows through hallways to help employees avoid passing each other close by — even if that means taking the long way to the bathroom;

  • Well-spaced desks with large dividers between them. “In the immediate future, “we’ll see physical, hard things that create separation,” according to Cavataio, President and COO of the Cuningham Group;

  • In common areas like meeting rooms and kitchens, expect to see fewer chairs and posted documentation of cleaning reports;

 IBM is eliminating buffets and shared serving tools in its cafeterias and taking out furniture in other spaces to ease social distancing concerns in conference rooms. Lunchtimes could be staggered as employers try to thin crowds in campus cafeterias. “It’s like in school, where you have lunch starting at 10:45 and going until 2 p.m. You’ll see a lot more of that,” says Vance.

 

The Future of the Office

The modern office was initially designed by Frank Lloyd Wright, which emphasized natural light and space between desks. However, we have lost that vision as today’s open offices are used to cram more employees into smaller spaces. For years, the amount of privacy allotted to each person working in an office has steadily decreased as companies of all type adopted the often loathed open office plan. After the 2008 recession as office jobs increased, companies have been packing more and more people into open space offices, a practice known as “densification.” The effect has been a more distracted workforce, and surveys have shown that face-to-face communication declined by 70 percent, while electronic communication increased.

Well, that model is gone!

So what is the future? We’ve already seen a little of the future, as many organizations implemented greetings policy changes before sending employees home. Handshakes are out, and new greetings have emerged. Earlier this year, billboards in Beijing promoted clasping one’s own hands. The UAE and Qatar asked citizens to avoid nose-to-nose greetings, and the French government frowned on greetings with a kiss. It is likely handshakes, and French embrace will not return.

Here are the things we can expect.

 

Design

Offices still need personal space, natural lighting, and quiet enough to concentrate on being fully productive. As Cavataio notes, “Over time, we will start to design differently to create space versus how tight we can get it. Can we get our generous six feet of physical distance and still create a company environment people want to be in, knowing you have safety inherently based in the design?” Rather than desks facing each other or next to each other, workstations may be back to back with more distance between them. Conference rooms may have their seating cut in half. Also, an increase in private spaces and personal offices for individuals may return. Communal areas like kitchens and lobbies will have their seating areas reduced with more space.

Beyond desk arrangements, designers and public health researchers will have to address all spaces people move through offices, i.e., elevators, corridors, hallways, etc. Plans to address COVID, may become a regular feature in office design in the future, i.e.

  • restroom entrances without doors, like in airports;

  • corridors wider than the current five feet;

  • voice-activated elevators or touchless elevator controls;

  • Antimicrobial materials in new construction; and

  • Videoconferencing even within the office to avoid the conference rooms.

While meeting rooms will still be necessary, companies will reconsider what types of meeting rooms they want, and what kinds of meetings will require in-person attendance. Expect new meeting rooms geared towards group projects and collaboration.

In response to a flexible workforce, companies will require adaptive energy systems. Currently, office design accommodates a certain number of employees on any given day. If only half of the employees are now in the space, the energy usage is unlikely to change much, but the rooms may end up being colder than usual.

Expect increased automation and voice technology throughout the office. Voice technology, like Amazon Alexa for Business, could become a new interface and remove the need for physically pushing a button or touching a surface in an office. According to Bret Kinsella, founder & CEO Voicebot.ai, “There is voice tech in warehouses today but very little in office settings. That will absolutely change.”

An example of the future is already here in Bee’ ah new headquarters in Sharjah, UAE. Designed by Zaha Hadid Architects, the building has “contactless pathways,” enabling employees to touch the building with their hands rarely. Office doors open automatically using motion sensors and facial recognition, while lifts – and even a coffee – can be ordered from a smartphone.

Cushman Wakefield, over the past month, has helped 10,000 organizations in China move nearly 1 million people back to work after the country reopened its. Managing 800 million sq. ft. of office building space in China has enabled Cushman & Wakefield to get ahead of the learning curve. According to Despina Katsikakis, of Cushman’s occupier business performance, Cushman used its learnings, World Health Organization data, and medical specialists’ advice to develop a concept called the Six Feet Office. It has already applied inside its Amsterdam headquarters.

CUSHMAN & WAKEFIELD – THE 6 FEET OFFICE CONCEPT CONSISTS OF SIX ELEMENTS:

  • 6 Feet Quick Scan: A concise but thorough analysis of the current working environment in the field of virus safety and any other opportunities for improvement.

  • 6 Feet Rules: A set of simple and clear workable agreements and rules of conduct that put the safety of everyone first.

  • 6 Feet Routing: A visually displayed and unique routing for each office, making traffic flows completely safe.

  • 6 Feet Workstation: An adapted and fully equipped workplace at which the user can work safely.

  • 6 Feet Facility: A trained employee who advises on and operationally ensures an optimally functioning and safe facility environment.

  • 6 Feet Certificate: A certificate stating that measures have been taken to implement a virus-safe working environment.

Some companies are looking into mandating thermal scanners, according to Tom Puthiyamadam, leader of PwC’s U.S. Digital practice. “Not every enterprise is going to command and control mode, but I think right now some of these practices are warranted. I don’t think many employees are going to say no because a lot of [them] are actually scared to come back in,” said Puthiyamadam. Goldman Sachs is leading this as it considers installing infrared body temperature scanners to some offices, and ensuring that, once they are available, virus and antibody testing kits for employees are in offices.

 

Hoteling

Kay Sargent, of HOK, thinks more companies will turn to shared desks, known as “hotelling” or “hot desking.” “Perhaps you divide the workplace in half, and half the office can come in on Monday and Wednesday, half of the office can come in on Tuesday and Thursday,” said Gable Clarke, of the architecture firm SGA. Alternating days would come with alternating desks or non-designated desks. As shared workstations have long been a hotbed of disease transmission, designers expect the disappearance of shared keyboards and for companies to introduce clean desk policies. “Janitorial staff often cannot clean desks with personal items on them, as it’s a liability,” said Armen Vartanian of Okta. “It will likely be more sanitary to have open desks and workstations — equipped with the latest technology — that employees can pick each day and  cleaned afterward.” All nonessential items stored in cabinets and drawers rather than on the desk to ensure proper cleaning and sanitation.

 

Sanitation

First, get ready for the “health cop,” as companies will have to deputize someone to enforce the new social distancing rules. “Enforcement becomes important because it’s human nature to sort of want to congregate together,” said Clarke.

However, sanitation efforts could be tremendous. According to Cavataio, regular offices will look to health care design as every surface; door handles, light switches, countertops, copy machine buttons, AV equipment, coffee makers, and many more, have to be cleaned. Like healthcare, businesses may require:

  • copper fixtures;

  • fabrics that retain fewer germs and cleaned easily;

  • more space in kitchens and bathrooms;

  • as well as more attention paid to how far liquids can splash;

  • UV lighting to disinfect offices at night or meeting rooms in between uses;

  • increased cleaning rotations;

  • virus-killing ultraviolet light to sterilize surfaces;

  •  install air filters; and

  • touch-free technology, such as automatic doors and sinks.

Designers say they are receiving inquiries about disinfecting UV lights and easier to clean materials. Nicole Keeler, of Nelson Worldwide, said companies and building owners are enquiring about easy-to-clean materials. “There’s surfaces that are antimicrobial, just like you would see in a healthcare system or in a laboratory,” which may become a new norm for workstation surfaces, she said.

Many expect upgrades to office HVAC systems to stop the spread of infection, i.e., Purgenix. The International Facility Management Association (IFMA) is working with other specialized groups for cleaning and ventilation systems to create guidelines and protocols for building operators around the world. While proper ventilation is key to preventing the spread of COVID-19, a big trend could be merely opening a window. However, many offices are currently sealed, controlled units requiring a significant renovation. Where filtered air is the only option, high-end office climate control systems may be the best solution. Due to China’s poor air quality, such systems were already popular; however, these systems may have assisted the return of office workers so quickly.

 

Tracing Tools

While there appears to be general resistance to tracing tools issued by the government, companies are free to require them. Such tools would be either a new app or an updated business app that workers already have on their phones, which runs in the background. Using Bluetooth or WiFi signals, they would catalog other co-workers’ phones that come near. When an employee tests positive to COVID, managers would quickly identify and notify any colleagues the employee had been in contact with to help limit a broader outbreak. The advantages are that such tools avoid the lengthy interviewing process of employees, asking them to recall their interactions.

PricewaterhouseCoopers is launching a new contact tracing tool for businesses in early May, and more than 50 clients have shown interest. PWC’s tracing works only on corporate properties, doesn’t collect location data, and can only be accessed by authorized managers. Over the last four to five years, companies have increasingly used motion- or WiFi-detecting sensors installed on ceilings or desks to whether spaces are underutilized. Now they are going to be used for the opposite purpose, are spaces appropriately utilized. Is the right spacing? Are there pinch points where there’s overcrowding? Sensors will be able to tell when people vacate a seat and alert cleaners to clean it again before the next employee uses it.

 

Coworking Spaces

Many large companies were increasingly taking advantage of the flexible terms of coworking space rather than taking on long-term leases. Aside from the pre-COVID collapse of WeWork, the issue now is, “are companies going to want to put their entire team in one place, where they’re closely mingling with other businesses?” While some form of coworking spaces may remain, they will be very different – the bars, hang out areas will all be gone, and the models will revert to move of a “Regus” system.

 

The Commercial Real Estate Market

What will be the impact on the commercial office market? COVID is having a considerable effect, but the net outcome is hard to measure right now. Employees working from home have effectively expanded the supply of office space significantly. As a result, the amount of space needed by companies should fall. However, with the increase in space required for social distancing, more space will be required for each employee. “In short, it is too early to tell if companies will lease less space,” Julie Whelan, head of occupier research for America at CBRE, told Recode. “While they may need less space because some people may conduct some of their work remotely, they may also need more space to provide the social distancing that employees may feel they need to be comfortable.” These two trends may cancel each other out.”

 

Copyright (c) 2020, Marc A. Borrelli

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Leverage, Where is Thy Sting

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Coronavirus is changing the world. Right now, Italy is in shut down, and Europe is heading that way. In the U.S., the states, organizations, and companies are leading and closing schools and universities, canceling or deferring events, and implementing work from home policies. What will the impact be?

Who knows. I believe that the current reported number of cases of 2,174 in the U.S. is far below the actual number as testing has failed. Until testing gets on track and we can see where the virus is, then only can we manage it. As those in business know, Measure What Matters, and if you can’t measure it, you can’t fix it.

Again, I expect that parts of the U.S. or all of it will end up with some form of Italian solution to the virus. If you are not sure what that looks like, I will refer you to Italy’s Nightmare Offers a Chilling Preview of What’s Coming. The effect of that will be devastating for many companies and individuals in the U.S. as revenues and income plummet.

However, once more, the financial industry’s offer of a helping noose will exacerbate the problem. Private Equity has acquired an enormous number of companies in the U.S. over the last two decades. To get the returns that their investors are looking for, they leverage the businesses, often with negative results. Today, however, I expect that the damage to these companies from a slowing economy will put many in breach of their loan covenants. Thus it could lead to a dramatic increase in bankruptcies across the country. These bankruptcies will be a negative feedback loop on an already suffering economy and one that the country will be hard-pressed to handle. Thus I would expect the bail-out requests already forming.

Last year, larger non-finance corporations had a record of $13.5 trillion of outstanding debt, according to an OECD report. A growing portion of that is in the form of riskier bonds, and experts worry an economic crisis spurred by coronavirus could send corporations on cost-cutting sprees or to default. Since the financial crisis, corporations loaded up on debt. According to a Morgan Stanley analyst, currently, estimated one-in-six U.S. companies don’t have the cash flow to cover interest payments. In the last decade, about one-fifth of new bonds issued were below investment-grade.

Investors are shedding riskier assets as they realize the impact of the coronavirus. Energy companies have about $88 billion in bonds due this year, and analysts expect defaults to surpass 2016 levels. Rating agencies are watching particularly vulnerable industries like auto, airlines, and hospitality. S&P put Nashville’s Ryman Hospitality Properties on a credit rating watch after massive cancellations threatened to whack revenue by $40 million.

The Administration’s 2017 tax cuts helped many U.S. companies improve their cash positions; however, companies wasted this largess on the typical “Sugar Highs” of companies – share buyback and increased distributions to private Equity. The result of this is that most of these companies are in no better shape to handle a server downturn than they were before.

As Hemingway said, “How did you go bankrupt?” “Two ways. Gradually, then suddenly.”

Leverage is lovely until it isn’t. The fall out from this will be bigger than expected.

 

Copyright (c) 2020, Marc A. Borrelli

A letter to my Vistage Groups

A letter to my Vistage Groups

I have just sent the following to my Vistage members; however, I think all could benefit from it.

 

Hi all,

The Coronavirus situation is changing by the minute. While I sent out what I would like to do at our meeting, I wanted to give you my thoughts on what is needed now.

 

The Situation

The real situation in the US is unknown due to the lack of testing. At present, we have done about 14k tests, and we have 1,700 cases. What this tells me is that the situation is far worse, and the actual number of cases is far higher. As much as I hate to say it, right now, nothing from the Administration is believable as everything coming out of it is either misleading or evasive. I would listen to Dr. Anthony Fauci of NIH or any other credible public health officials as it pertains to the virus. Concerning the economy, look at the bond market. As a result of the Administration’s behavior, states are taking matters into their own hands as we have seen, and saw with Georgia yesterday.

 

Leadership

This is a time of crisis, and as the leader of the organization, you need to step up and lead. As I said in my newsletter last week, leadership is hard, and it is about those you lead! First, your employees are scared – they don’t know what is happening or how vulnerable they are. I was grocery shopping yesterday, and not only are they out of toilet paper and hand sanitizer, but all the ramen noodles were gone, and so were the beans (all types). So you need to reassure them. That, in my opinion, is being honest – do not lie or minimize the situation, you will lose all credibility but be confident, what the potential impact is on your organization, what steps you take to plan and that you will keep them updated. Also, look for their input for suggestions, you are all in this together. For an excellent example, read Winston Churchill’s speech to the House of Commons, June 4, 1940, after Dunkirk.

 

Have a Plan

Now is the time to plan. You need to determine what you will do at each stage now. At what point do I cut various costs, people, stop operations, etc. It is easier to plan before the full panic hits. Work with your leadership team to think this through. The other members of your Vistage Group and I are always here to help, just reach out!

 

The Impact on You

Given how far behind we are, I expect within two weeks, we could see an Italian solution imposed. If that is the case, I would suggest you read this article to understand what is the implication. Regardless, the economic impact is going to be significant. Things to consider:

  • Work From Home policies, while we may be able to work from home, we need to consider if our clients and suppliers can Work From Home. If they can’t, you won’t be able to work for customers or get what you need from suppliers.

  • Cancellation of events. What impact does this have on you? How does it affect your clients and suppliers? Can you create virtual events for your customers?

  • Cash. How much do you have, how big is your line, and what is your burn rate. What can you do to reduce the burn rate without affecting quality and delivery?

  • Communication. I have talked above about communication with your employees. However, I would communicate with clients and bankers as both hate surprises. With clients, look to see how you can work with them through this and be proactive. Everyone is going to be reducing costs as the economic toll hits. If your customer doesn’t know you or understand the value you bring, you are out.

  • Private Equity (PEGs). Since the 2008 crash private equity has acquired an enormous number of companies in the US, many of these are now your customers. However, as we know and I have written about, PEGs have leveraged all these companies to increase their returns. With a substantial downturn, many of these will not be able to meet their bank covenants, and many may file for bankruptcy. Many of the larger PEG owned companies and public companies have taken on large amounts of junk bond debt and may not survive. Look at your client base and see what vulnerabilities you have.

  • Oil States. The current oil price of WTI Crude is $31.80 which is way below what is required for the fracking industry to be profitable. Given the high capital needs of the fracking industry, I think this is over. For regular oil companies, the price is too low to be profitable for many wells and they will be capped. Thus, oil companies are suffering, so economic pain is coming to all oil field support companies. This will affect all local industries and communities. Thus, if you have clients in Texas, Oklahoma, New Mexico or North Dakota, you may want to consider how stable they are.

  • Small companies. Many small companies may not survive this downturn due to a lack of cash. Look at your client and suppliers to see where vulnerabilities lie.

  • Financing. Hopefully, you aren’t relying on any soon, as I think the market will dry up as everyone waits to see the fallout. Like I said, keep in touch with your banker and don’t surprise them.

  • M&A. I think we can expect M&A activity to fall significantly this year. If that is in your plan as a seller, I would plan alternative scenarios. If you are looking to acquire, there may be some great bargains if you have cash.

  • Supply chains. While we all know of the issues from China, Europe is now shutting down. Understand those effects on your company. Further, the Administration’s ban on European visitors will cause air passenger traffic to fall significantly. As a result, I see the passenger airlines curtailing flights. The effect is that 70% of all trade cargo comes in passenger aircraft. So even if your supplier/customer is operating, the transport of products will be difficult.

I have been talking with a lot of you over the week. As your chair, I am here 24/7 to talk through any ideas you have, or just to listen if you need someone to talk to. It is going to hard, and it is very hard at the top! You can reach me on my cell or by video conference. In any event, I plan to be calling you all regularly to check-in.

Finally, apologies if this ruined your weekend, but better to be prepared than reactionary.

Kind regards,
Marc

 

Copyright (c) 2020, Marc A. Borrelli

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Are you ready for the Talent Crunch?

Companies are gearing up to hire. Unfortunately, many are competing within the same talent pool. Some experts are currently predicting a strong economic recovery starting in May or June. But as the economy booms, there is going to be fierce competition for talent. How will you fare in the looming talent crisis? Your organization should be creating a plan, now, so you can attract the talent you need in the year ahead.

Shareholder Value, What is its Role?

Shareholder Value, What is its Role?

To the shock and horror of many in the business community, top CEOs from the Business Roundtable stated two weeks ago that Shareholder Value is not Everything. These CEOs, including the leaders of Apple and JPMorgan Chase, argued that companies must also invest in employees and deliver value to customers.

The Business Roundtable is trying to redefine the role of business in society — and how an increasingly skeptical public perceives companies. Breaking with decades of the Friedman Doctrine, which holds that a firm’s only responsibility is to its shareholders, the Business Roundtable stated that companies should no longer advance only the interests of shareholders. Instead, companies must also invest in their employees, protect the environment, and deal fairly and ethically with their suppliers.

This shift in corporate ideology comes at a moment of increasing tension in corporate America, as big companies face mounting discontent over income inequality, harmful products, and poor working conditions.

There have been many arguments for and against this stand, i.e., Why Maximizing Shareholder Value Is Finally Dying, Corporations Can Shun Shareholders, But Not Profits, Stakeholder Capitalism Will Fail If It’s Just Talk, and We must Rethink the Purpose of the Corporation.

Personally, however, I think that this is a move in the right direction for the following reasons.

The Friedman Doctrine is backward.

Shareholder value is the result of corporate purpose and Mission and cannot be the purpose and Mission. Simon Senik’s “Start with Why,” in my opinion, best describes how to develop a corporate mission. An example of what happens when a company game up is mission and followed the Friedman Doctrine was Imperial Chemical Industries, who changed its mission from “We aim to be the finest chemical company in the world“ to “We aim to Maximize Shareholder Value“ in the 1990s. Prior to the change, ICI was considered one of the finest companies in Britain, today it no longer exists having been slowly sold off many parts to repay its debt before finally being sold to AkzoNobel in 2008.

 

Few stakeholders within the organization.

If the maximization of shareholder value is the corporate Mission, then there are few within the organization, other than some high-level employees, who have a stake in the Mission. Working to increase the wealth of others is not something most employees get behind. It reminds me of the old joke:

Employee: “Nice new car, boss”

Boss: “Well, if you set yourself targets, work hard, stay focused, next year I’ll be able to buy an even better one.”

Employees are only attracted to the company with this mission by what they will get, i.e., money or career advancement, so there is little commitment to the organization. If the expected benefits aren’t delivered or someone else offers more money, the employees will move on, increasing employee turnover. As a result, with few employees embracing the Mission and no other purpose, nothing is of importance to quality, service, and profits fall, decreasing brand value and shareholder value. Employees who embrace the Mission and are satisfied will serve customers better, increasing brand value. Employee happiness and business success are linked.

 

Few stakeholders outside the organization.

If the employees see no value in the Mission, customers and suppliers don’t. If the Mission is only to make money, customers and suppliers understand the Mission as a goal of extracting more value from them. Thus, they move from commitment to the organization (i.e., putting an Apple sticker on your car) to engaging with the company because there is no better alternative. If the company gets into financial trouble, they are less likely to support it, but rather let it fail. Working with suppliers is a relationship with the power moves back and forth and both parties treat it with care knowing they will be on the receiving end at some point. However, if shareholder value maximization is the only goal of the organization, suppliers abandon that relationship knowing the company has in its behavior.

 

Lack of Investment in Interesting products.

The Friedman Doctrine has led to many companies killing off research centers, which generated great benefits unidentified at the start. Ten years ago, the majority of technology products were offshoots from two places, Xerox Parc and Bell Labs, both of which no longer exist because of the Friedman doctrine. Between share buybacks and dividends, corporate investment in new areas has fallen. Google, SpaceX, and a few other companies have stepped into this space, but it is far more limited, thus limiting the future growth potential for the US.

 

Lack of Training.

Thirty years ago, when I graduated from college, many companies had training programs which took in graduates and trained them over several years. These programs knew that most of the trainees would leave the organization and thus canceled under the Friedman Doctrine. However, I would argue that these programs had three positive results:

  1. Well Trained Employees. A common complaint today is that graduates don’t know anything; however, I would say we didn’t know more, but we benefited from such programs.
  2. Loyalty to the Organization. Employees who moved on had developed a commitment to the organization that had trained them. Over the years they referred work to it and would engage with that company because of the feeling towards it.
  3. The camaraderie with their fellow trainees. Employees who went through the training program built a camaraderie with their fellow cohorts, which lasted a lifetime. I have met many accountants who came through the training programs provided by Arthur Anderson and still talk about their classmates and the connections they made. This camaraderie further built referral networks that benefited those that stayed behind and the training organization.

 

Lack of Integrity.

I recently heard Kirk Lippold‘s definition of integrity, which is:

“Integrity defines leadership. Without uncompromising integrity, failure becomes the natural default to success. It’s not just doing the right thing at the right time for the right reasons, even if no one is looking. That’s ethics. Integrity is doing all those ethical things regardless of the consequences.”

If the Mission is to maximize shareholder value, then I believe the organization develops a modus operandi of maximizing profit as the proxy for shareholder value. Since profit is measured monthly and quarterly, the corporate focus becomes more short term and undertakes anything to cut costs and maximize revenue. Thus, companies lose their integrity, sacrificing what makes them special for money, and losing customer loyalty and brand value. Recent examples of this would be Wells Fargo fake accounts scandal, and the Boeing and the 737 Max. An example of long term brand damage is the Sun Newspaper and Liverpool boycott, and many others. For a an example at what lack integrity can do see The Whistleblower (trailer is below) which based on a true story. Thus to quote Timothy 6:10, “For the love of money is the root of all evil.”

An example of a Mission leading shareholder value is Johnson & Johnson’s response at the time of the Tylenol recall. J&J’s Mission is to “. . . solutions that create a better, healthier world.” Living that Mission, created goodwill and tremendous brand loyalty within the US. A company’s brand is its reputation, and damage done takes a very long time to recover, destroying shareholder value.

Therefore, I think that the Business Roundtable is correct; Shareholder Value cannot be the purpose of the organization. If the company focuses on its Mission and engages its employees, customers, and suppliers, increases in shareholder value should result. Shareholder value should be measured, and companies should see how they are doing, but it is one metric and should not be the purpose. Further, in my opinion, the Friedman doctrine has done untold damage to the US over the years. Private Equity Groups, which own over $2.5 trillion of companies globally, primary focus on Shareholder Value has had mixed, if not harmful, results for their investment companies.

 

© 2019 Marc Borrelli All Rights Reserved

Recent Posts

Boosting Common Sense Decision-Making in Your Organization

Boosting Common Sense Decision-Making in Your Organization

Discover how to enhance decision-making in your organization by focusing on three crucial areas: solving the right problem, gathering all the available information, and understanding the intent. Learn to empower your team, foster a purpose-driven culture, and improve organizational clarity for better decision-making.

Do You Understand Your Costs to Ensure Profitability?

Do You Understand Your Costs to Ensure Profitability?

You can only determine profitability when you know your costs. I’ve discussed before that you should price according to value, not hours. However, you still need to know your costs to understand the minimum pricing and how it is performing. Do you consider each jobs’ profitability when you price new jobs? Do you know what you should be charging to ensure you hit your profit targets? These discussions about a company’s profitability, and what measure drives profit, are critical for your organization.

Sunk Costs Are Just That, Sunk!

Sunk Costs Are Just That, Sunk!

If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.

Do You REALLY Know Your Business Model?

Do You REALLY Know Your Business Model?

Bringing clarity to your organization is a common theme on The Disruption! blog. Defining your business model is a worthwhile exercise for any leadership team. But how do you even begin to bring clarity into your operations? If you’re looking for a place to start, Josh Kaufman’s “Five Parts of Every Business” offers an excellent framework. Kaufman defines five parts of every business model that all flow into the next, breaking it down into Value Creation, Marketing, Sales, Value Delivery, and Finance.

Ideation! Harder Than It Sounds

Ideation! Harder Than It Sounds

Bringing in new ideas, thoughts, understanding, and logic is key as your organization faces the challenges of a changing environment. But when you do an ideation session in your organization… how does it go? For so many organizations, many times, after a few ideas have been thrown out and rejected, the thought process slows down very quickly, and a form of hopelessness takes over. How does your organization have better ideation? I’ve come across a new approach with a few teams lately.

Recruit, Recruit, Recruit!

Recruit, Recruit, Recruit!

An uptick in business has begun this quarter, and companies are rushing to hire to meet this surge in demand. What amazes me is how many are so unprepared to hire. Continual recruiting is key to the survival of a company. It isn’t the same thing as hiring—continuous recruiting is building a pipeline of people that you would hire if you needed to fill a position, or “A players” you would hire if they were available.

We All Need Clarity

We All Need Clarity

If your organization is focused on obscurity over clarity, whether intentionally or not, your “A” player employees are vulnerable. There is a looming talent crunch. As we start to emerge from COVID, demand is increasing, and many are scrambling to fill positions to meet that demand. Headhunters and recruiters are soon going to be calling your key “A” employees. Have you been giving them a reason to stay?

Not Another **** Meeting

Not Another **** Meeting

As Leonard Bernstein put it so well, “To achieve great things, two things are needed: a plan and not quite enough time.” Your meetings can be shorter, more fruitful, and engaging, with better outcomes for the organization, employees, and managers. It’s time to examine your meeting rhythms and how you set meeting agendas. This week, I break down daily, weekly, monthly, quarterly, annual, and individual meeting rhythms, with sample agendas for each.

Is Your Company Scalable?

Is Your Company Scalable?

Let’s start here: Why should your company be scalable at all? If your business is scalable, you have business freedom–freedom with time, money, and options. Many business leaders get stuck in the “owner’s trap”, where you need to do everything yourself. Sound familiar? If you want a scalable business that gives you freedom, you need to be intentional about what you sell, and how.

Are you ready for the Talent Crunch?

Are you ready for the Talent Crunch?

Companies are gearing up to hire. Unfortunately, many are competing within the same talent pool. Some experts are currently predicting a strong economic recovery starting in May or June. But as the economy booms, there is going to be fierce competition for talent. How will you fare in the looming talent crisis? Your organization should be creating a plan, now, so you can attract the talent you need in the year ahead.

What is the hidden risk in your company?

What is the hidden risk in your company?

I was recently talking with a friend who was presenting on “Risks within Your Business” to company directors. This topic made me think of all the companies that I had worked with over the years and what was the most significant unrealized threat they faced within the organization. Upon reflection of all of 2 minutes, I concluded that it was Excel!

Yes, it is Excel! Excel has taken over our corporate environments where it is used by finance, marketing, sales, HR, etc. to do everything from planning, budgeting, forecasting, pricing, reconciliation, and analysis. While Excel is a marvelous tool, which undoubtedly made many of these tasks much more manageable, the problem is that anyone can use it and change a model without anyone else realizing it.

There are three areas of concern:

1. Incorrect models.
Many people within organizations develop Excel models to solve problems that they are currently facing. However, many of these models are built using the improper practices that I’ve highlighted in previous blogs. As a result of these practices, other users of the models are not always aware of the model’s shortcomings but still rely on the output to make significant decisions.

In one case, the model’s author had linked all but two of the assumptions to the assumptions page, thus changing the assumptions all but two of them change within the model. As a result, no one was aware that these two assumptions when “off-line” for the model and were making decisions based on incorrect conclusions. While appearing to be an insignificant problem, the lack of connection of these assumptions led to the approval of some projects because they had positive NPVs and good IRRs, but in reality, were terrible projects with negative returns.

2. Hard-Coded Models.
Many models are built using the corrupt practices I have mentioned before. While I have come across many of these, I cannot meet the example given by my friend Rob Brown in his blog post. To have an organization making decisions with an error in their spreadsheet of the order of magnitude of $200 million that no one was aware of is scary. Do you have one of these in your company? Before you answer “No,” are you sure!

3. “Fixed Models.”
More worrying are those models where there is a good model, but then hard-coded change is made to prevent a #N/A or #DIV/0! result. Unfortunately, no one tells anyone about this change, and it left unnoticed for ages. As a consequence, massive errors can arise.
Recently I was working with a company whose budgeting model had some hardcoded adjustments in formulas to adjust sales, compensation, and other budget items. When reviewing this model with the company’s finance department, there was no explanation of why they made these changes. When asked how good the design was for budgeting, the answer I received was, “Last year was a horrible surprise!” As a result, I wrote CEOs Beware: Problems with Financial Modeling. At last check, the company was still using the model!

Recently I was working with a Fortune 500 company that had a model to drive dashboards for the executive team. Somewhere the data had not all been supplied, and so there was a #DIV/0! result. Rather than fix this, someone had changed some formulae to exclude the offending cells and their related data. However, when entering proper results into the offending cells, the dashboard didn’t update to reflect this. The dashboard continued to exclude these outcomes in the actual and historical averages. Who knows how many ad campaigns and how much marketing spend resulted in improving the results when the results were probably already exceeded expectations.

So what to do?
Companies, departments, etc. should review all their models regularly. This review involves someone checking all the calculations, cell references, and links to ensure that the model is performing as expected. A painful task, but undoubtedly better than to keep walking off the cliff, hoping you can survive the landing.

 

© 2015 Marc Borrelli All Rights Reserved

Recent Posts

Boosting Common Sense Decision-Making in Your Organization

Boosting Common Sense Decision-Making in Your Organization

Discover how to enhance decision-making in your organization by focusing on three crucial areas: solving the right problem, gathering all the available information, and understanding the intent. Learn to empower your team, foster a purpose-driven culture, and improve organizational clarity for better decision-making.

Do You Understand Your Costs to Ensure Profitability?

Do You Understand Your Costs to Ensure Profitability?

You can only determine profitability when you know your costs. I’ve discussed before that you should price according to value, not hours. However, you still need to know your costs to understand the minimum pricing and how it is performing. Do you consider each jobs’ profitability when you price new jobs? Do you know what you should be charging to ensure you hit your profit targets? These discussions about a company’s profitability, and what measure drives profit, are critical for your organization.

Sunk Costs Are Just That, Sunk!

Sunk Costs Are Just That, Sunk!

If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.

Do You REALLY Know Your Business Model?

Do You REALLY Know Your Business Model?

Bringing clarity to your organization is a common theme on The Disruption! blog. Defining your business model is a worthwhile exercise for any leadership team. But how do you even begin to bring clarity into your operations? If you’re looking for a place to start, Josh Kaufman’s “Five Parts of Every Business” offers an excellent framework. Kaufman defines five parts of every business model that all flow into the next, breaking it down into Value Creation, Marketing, Sales, Value Delivery, and Finance.

Ideation! Harder Than It Sounds

Ideation! Harder Than It Sounds

Bringing in new ideas, thoughts, understanding, and logic is key as your organization faces the challenges of a changing environment. But when you do an ideation session in your organization… how does it go? For so many organizations, many times, after a few ideas have been thrown out and rejected, the thought process slows down very quickly, and a form of hopelessness takes over. How does your organization have better ideation? I’ve come across a new approach with a few teams lately.

Recruit, Recruit, Recruit!

Recruit, Recruit, Recruit!

An uptick in business has begun this quarter, and companies are rushing to hire to meet this surge in demand. What amazes me is how many are so unprepared to hire. Continual recruiting is key to the survival of a company. It isn’t the same thing as hiring—continuous recruiting is building a pipeline of people that you would hire if you needed to fill a position, or “A players” you would hire if they were available.

We All Need Clarity

We All Need Clarity

If your organization is focused on obscurity over clarity, whether intentionally or not, your “A” player employees are vulnerable. There is a looming talent crunch. As we start to emerge from COVID, demand is increasing, and many are scrambling to fill positions to meet that demand. Headhunters and recruiters are soon going to be calling your key “A” employees. Have you been giving them a reason to stay?

Not Another **** Meeting

Not Another **** Meeting

As Leonard Bernstein put it so well, “To achieve great things, two things are needed: a plan and not quite enough time.” Your meetings can be shorter, more fruitful, and engaging, with better outcomes for the organization, employees, and managers. It’s time to examine your meeting rhythms and how you set meeting agendas. This week, I break down daily, weekly, monthly, quarterly, annual, and individual meeting rhythms, with sample agendas for each.

Is Your Company Scalable?

Is Your Company Scalable?

Let’s start here: Why should your company be scalable at all? If your business is scalable, you have business freedom–freedom with time, money, and options. Many business leaders get stuck in the “owner’s trap”, where you need to do everything yourself. Sound familiar? If you want a scalable business that gives you freedom, you need to be intentional about what you sell, and how.

Are you ready for the Talent Crunch?

Are you ready for the Talent Crunch?

Companies are gearing up to hire. Unfortunately, many are competing within the same talent pool. Some experts are currently predicting a strong economic recovery starting in May or June. But as the economy booms, there is going to be fierce competition for talent. How will you fare in the looming talent crisis? Your organization should be creating a plan, now, so you can attract the talent you need in the year ahead.

Precision v. Accuracy: How about using a range?

Precision v. Accuracy: How about using a range?

The precision versus accuracy concept was first brought home to me back in the depths of time while I was doing Physics “A” Level in high school and calculating measurement errors in experiments. From this, I learned that no matter how precise one’s measurements were, there is an inherent error in the tool used to measure the results. Taking into account that lack of precision provided more accurate results, which is what we sought.

When I got involved in finance during my time in business school, the measurement tool was the currency, and so precision was deemed to be the smallest currency unit, i.e., a cent. This precision was encouraged by the beautiful computing power of Lotus 1-2-3 and then Excel, which allowed you to do forecasts that were precise to the cent going out years based on a few assumptions. While the precision was there, accuracy was foregone as we built huge models on a few simplistic assumptions.

However, upon leaving business school and entering the real world, my illusions were quickly dashed. After my first week at work, I presented my boss with a ten-year forecasting model that showed profit and loss statements, balance sheets, cash flow statements, and of course, a discounted cash flow valuation. He looked at it and asked how confident I was in my forecasting. As I defended it, he looked at me and asked in a sort of Bayesian way, “Would you bet your bonus on the company making the revenue numbers you have for this year?” (we were a quarter of the way into the year).

“No!” was my quick reply.

“In that case, how can you defend ten years of numbers which all build off that initial number?” he asked. This has lived with me ever since that we quickly get sucked into the precision of our models, but the numbers are so inaccurate.

During my career, I have to see precise projections for sales, projects, costs being bandied around in companies by everyone, including the CFO. Yet few, if any, would bet a modest amount, let alone their bonuses, on those numbers being the final results. Thus we end up with the corporate situation where everyone knows the numbers are wrong but cannot admit it.

However, when working with these same companies and trying to get them to accept the concept of ranges in forecasts and probability distributions, I am regarded as though I had just stated that the earth was flat and supported by elephants. One CFO of a public company looked at me with total distance and asked: “Why would anyone ever need something like that?”.

When I responded that I was seeking more accuracy, albeit with less precision, in financial projections, it was apparent that had I reverted to speaking Fanagalo. Another CFO used precise numbers (down to the dollar when their revenue was over $20 million). None of their forecasts were ever correct, but he could not accept that forecasting to the million was acceptable. I heard that their last results were a huge surprise given the forecasts; however, I was not surprised at all given the forecasting process.

This trade-off of precision in return for greater accuracy continually is rejected by many of the financial professionals that I meet. I have wondered if the cause of this focus on precision encouraged by the accounting profession makes it hard for these professionals to let it go.

Going back to my boss’ logic – if you would not bet on a single number being accurate, would you be prepared to bet on a range? For example, the forecast may say that next years’ revenue will be $10 million, but no one will bet their bonus on it when pushed. So would you be willing to be that it will be between $9 and $11 million or $8 and $12 million? When you reach a range that you would be willing to bet on, it is surely the range to use in the forecasts.

Using ranges like this and applying techniques like Monte Carlo simulations results in far higher accuracy in forecasts and an understanding of the risk profile of the results, i.e., there is a 50% probability that revenue will be between $9 million and $10 million or that profits will range between $0 and $1 million. Furthermore, one can see what items are critical to the final results, what is not. The company can focus on those essential items rather than getting distracted by the noise.

It is best to remember Nils Bohr’s quote, “Prediction is very difficult, especially if it’s about the future.” Therefore, to make the predictions more useful, it is best to forego precision in return for greater accuracy.

 

© 2013 Marc Borrelli All Rights Reserved

Recent Posts

Boosting Common Sense Decision-Making in Your Organization

Boosting Common Sense Decision-Making in Your Organization

Discover how to enhance decision-making in your organization by focusing on three crucial areas: solving the right problem, gathering all the available information, and understanding the intent. Learn to empower your team, foster a purpose-driven culture, and improve organizational clarity for better decision-making.

Do You Understand Your Costs to Ensure Profitability?

Do You Understand Your Costs to Ensure Profitability?

You can only determine profitability when you know your costs. I’ve discussed before that you should price according to value, not hours. However, you still need to know your costs to understand the minimum pricing and how it is performing. Do you consider each jobs’ profitability when you price new jobs? Do you know what you should be charging to ensure you hit your profit targets? These discussions about a company’s profitability, and what measure drives profit, are critical for your organization.

Sunk Costs Are Just That, Sunk!

Sunk Costs Are Just That, Sunk!

If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.

Do You REALLY Know Your Business Model?

Do You REALLY Know Your Business Model?

Bringing clarity to your organization is a common theme on The Disruption! blog. Defining your business model is a worthwhile exercise for any leadership team. But how do you even begin to bring clarity into your operations? If you’re looking for a place to start, Josh Kaufman’s “Five Parts of Every Business” offers an excellent framework. Kaufman defines five parts of every business model that all flow into the next, breaking it down into Value Creation, Marketing, Sales, Value Delivery, and Finance.

Ideation! Harder Than It Sounds

Ideation! Harder Than It Sounds

Bringing in new ideas, thoughts, understanding, and logic is key as your organization faces the challenges of a changing environment. But when you do an ideation session in your organization… how does it go? For so many organizations, many times, after a few ideas have been thrown out and rejected, the thought process slows down very quickly, and a form of hopelessness takes over. How does your organization have better ideation? I’ve come across a new approach with a few teams lately.

Recruit, Recruit, Recruit!

Recruit, Recruit, Recruit!

An uptick in business has begun this quarter, and companies are rushing to hire to meet this surge in demand. What amazes me is how many are so unprepared to hire. Continual recruiting is key to the survival of a company. It isn’t the same thing as hiring—continuous recruiting is building a pipeline of people that you would hire if you needed to fill a position, or “A players” you would hire if they were available.

We All Need Clarity

We All Need Clarity

If your organization is focused on obscurity over clarity, whether intentionally or not, your “A” player employees are vulnerable. There is a looming talent crunch. As we start to emerge from COVID, demand is increasing, and many are scrambling to fill positions to meet that demand. Headhunters and recruiters are soon going to be calling your key “A” employees. Have you been giving them a reason to stay?

Not Another **** Meeting

Not Another **** Meeting

As Leonard Bernstein put it so well, “To achieve great things, two things are needed: a plan and not quite enough time.” Your meetings can be shorter, more fruitful, and engaging, with better outcomes for the organization, employees, and managers. It’s time to examine your meeting rhythms and how you set meeting agendas. This week, I break down daily, weekly, monthly, quarterly, annual, and individual meeting rhythms, with sample agendas for each.

Is Your Company Scalable?

Is Your Company Scalable?

Let’s start here: Why should your company be scalable at all? If your business is scalable, you have business freedom–freedom with time, money, and options. Many business leaders get stuck in the “owner’s trap”, where you need to do everything yourself. Sound familiar? If you want a scalable business that gives you freedom, you need to be intentional about what you sell, and how.

Are you ready for the Talent Crunch?

Are you ready for the Talent Crunch?

Companies are gearing up to hire. Unfortunately, many are competing within the same talent pool. Some experts are currently predicting a strong economic recovery starting in May or June. But as the economy booms, there is going to be fierce competition for talent. How will you fare in the looming talent crisis? Your organization should be creating a plan, now, so you can attract the talent you need in the year ahead.