Hidden Profits Blog

I have spoken to numerous businesses in the past several weeks regarding the systems and processes the company uses and whether they should change or update them.  I hear alot of ‘We are not sure if we can afford to do get a new system or change our process’ or ‘We are not sure it is a good idea to change’.  And of course there is the old adage ‘If it isn’t broke don’t fix it!’. 

The question is ‘How do you know if the system or process is broken or not?’ and ‘What is the cost of not changing?’  In their book ‘Lean Thinking’ James P. Womack and Daniel T. Jones discuss the Toyota approach of ‘kaizen’ – continual incremental change and the need to rid the business of ‘muda’ or waste.  If we honestly look at the business, especially a business with an accounting/manufacturing system that is not current and business processes that have not been revised in several years, there is probably alot of muda or waste. 

What is the cost of the waste?  Extremely High!.  In it’s most innocent form the company hires many more people than are required to perform all the functions necessary to create, market and deliver products or services.  The next level is where the company does not receive critical information to indicate problems that exist in the business and identify solutions to rectify problems.  The most egregious level of waste is when the company can no longer be competitive and looses marketshare and reputation as a result of waste.

You think ‘Oh Lynda that can’t happen today because every company has a computer system and probably a website!’.  Yes it is true that every client and prospect I have spoken to has some sort of computer system and almost all of them have a website. The question is how effective is the accounting system, when was the last time it was updated, are they using the features in the system and are they using other technology that makes the system and processes more effective.

 Let’s look at a few situations where the waste resulting from not changing can really cost a business.

Scenario 1.

A company uses a system that

•  is no longer supported by the software vendor or by the consultant that developed it,
• the hardware it runs on is no longer supported and it cannot process on new hardware
• the system has been modified or the process circumvented so much that the data in the system is no longer reliable.

As a result of this the company cannot  meet product delivery deadlines, their inventory is growing because they do not know what materials are needed for the jobs, they have to write off millions in inventory shortages because they cannot accurately track the inventory usage.  What is the cost to that business for not changing its system?  What is the exposure that company has if the system fails? 

Scenario 2

A company is growing rapidly.  The system and processes they used before are now becoming very cumbersome and they continue to hire people in multiple locations to support the operations. They have acquired other businesses and now support multiple systems.  The financials show that even though the company is growing in revenue the margins are shrinking. Or management feels out of control because they do not have access to critical information.  What is the cost to that business of not reviewing processes and finding ways to automate more functions so they hire less people? What is the cost of not consolidating onto a single corporate system?  If the trend continues the company may become unprofitable or loose momentum.

Scenario 3

A business invested in a new system and implemented it but they did not see any change or very minimal change so they feel they wasted money and time.  They did if they purchased a system that only supported the current processes or if they did not implement lean processes when they implemented the new system.  What is the cost to that company of using a new system to do what they have always done?

You ask  Does this really happen?  I see it every day. ‘Why don’t the companies see this and make the necessary changes?’  Often it is because managers and executives need to do their jobs, they don’t have time to learn all the systems, technology and business practices that are available.  Also, many companies just adapt to the problems, find ways the put band-aids on the problem and then say they don’t have the time or resources to get new systems.

The reality is ‘They can’t afford not to make the changes!’.  Our business and technology environment changes rapidly today.  Businesses that don’t change and don’t become lean will be left in the dust. 

The best way to address  these issues is

1. to have either an outside consultant or an internal team review the company’s process and systems on a regular basis,
2. identify areas that may be improved and the solutions to support the change
3. prioritize each issue
4. allocate time and resources to the projects
5. reward team members for embracing the change.

For more information visit my website and listen to the recordings of our free teleseminars.  www.ljrconsultingservices.com/teleseminar.html

You can also call us for an assessment or inquire about our seminars at 818-709-6583.

In the course of my week, I meet numerous professionals many in the M&A (merger & acquisition) business. In our discussions the topic frequently turns to the due diligence required for a transaction to take place. The purchasing party needs to verify the information the acquisition target has provided so a group of accounting and finance professionals are used to validate the financial status of the company. The financial team works on the numbers, determines how to save cost by consolidating,  and how to grow the business.  In the end they create this fabulous financial model of what the company will look like in the future.

What I find interesting is that all the information they use comes from computer systems.  Today all businesses run at least transactional on some sort of computer system.  Rarely does the due diligence take into account the need for a review and planning for the technology and computer systems.  And what happens all too often is that lack of review and planning of the computer systems and information technology results in the demise of a beautiful financial plan.

What do I mean by IT due diligence. IT due diligence falls into 3 major categories:

1.   A review of technology, systems and processes that currently are used by the acquiring firm.  This is important to understand the ability of the acquiring entity to absorb the acquisition(s).  

2.  A review of the acquisition’s technology.  This would include evaluation of

• Infrastructure (hardware and software) to determine its life, the cost of support and the skills required to support it.
• Contracts for IT to determine legality of all licenses, transferability and cancellation requirements in each contract.
• IT personnel review to determine the key employees required to support the existing IT structure and the skill sets that are transferable to the combined company.

3.  Preparation of a transition plan that would define the technology required for the new company and the tasks, personnel and investment required to complete the transition.

This due diligence should be done before a deal is consummated by experienced IT professionals as the results of this due diligence could have an impact on the final financial deal.

On my last post I described the Profitability Vice. So what are some things that can be done to help the situation. Options come under 2 major areas – reducing key expense areas and becoming more efficient.

As I mentioned in my previous post, there are companies today that will come in to your organization and review major expense areas such as freight, payroll processing, credit card services, insurance etc. The majority of these services are paid based on actual savings.

In this post I want to focus on becoming more efficient. While there is alot of talk about productivity improvements and certainly a tremendous amount of technology available that promises productivity improvements few companies have realized the value of their investments. Why is that? In my experience the primary reason is that businesses rarely make changes in the business processes to improve efficiency. So what can a company do? The first place to focus is on the current ERP (business accounting) system that the company is using. Some of the common issues I have found in clients I have worked with are the following:

1. The company does not use the Purchase Order module of their system and as a result the AP department has numerous manual processes required to approve and pay invoices. When an electronic purchase order system is used with embedded rules, automated workflow and matching of receipts, all the information exists in the system for the AP clerk to enter and pay the invoice without delay.

2. The company has not upgraded their system in several years or has upgraded but not used new features in the system. As a result they do not have access to many of the productivity enhancing features that are available.

3. The company does not integrate technology from their bank, vendors and customers with their systems to streamline work and reduce manual process.

4. The company does not use an integrated system, instead they have modules from a variety of vendors that do not integrate with each other. This results in numerous spreadsheets and manual processes being used to plug this lack of integration.

5. Companies do not use current options to receive business financial data and key indicators online, via email or on handheld devices and rely on paper reports or spreadsheets prepared by financial analysts. his results in numerous manual processes to prepare critical information for management and a lack of critical timely informaiton.

6. Companies do not allow non-financial employees to use the system and enter data. This results in multiple duplicate functions especially when the company has multiple locations.

7.  Companies do not utilize add-on technology such as web-based functions, document imaging, handheld functions, etc. These new technologies provide added ability to eliminate manual processes, reduce time and resources.

If any of these areas sound familiar to you then you have some easy ways to quickly improve efficiency. 

I live in California and of course all the talk on the radio, at water coolers and in homes is the financial mess the state is in and how are they going to address the deficit.  The legislature insists they need to raise taxes to increase revenue and in the last election the public has said no more taxes.  Meanwhile the state keeps spending.  They are caught in what I call ‘The Profitability Vice’. 

The Profitability Vice is where there is upward pressure on cost and downward pressure on prices/revenue.  This happens to businesses also and in this economy it is happening more and more.  If the CEO does not find a way to reduce costs or get an infusion of cash, the company will be in serious financial difficulty if not bankruptcy and liquidation.  Conventional thought says the only option is to cut costs across the board or borrow money.  This is always painful as we are experiencing with the debate in the California legislature.  If they borrrow money the problem is not really solved and future costs go up due to increased interest.  Accross the board cost cutting simply hurts everyone and in the end the cost always come back.

The best option is for the company to become more efficient, therefore enabling the company to make strategic cost reduction.  A company becomes more efficient by streamlining business process and effectively using information technology.  Almost every company in inherently inefficient due to growth and the evolution of technology.  There are numerous options available today  to even smaller businesses that were not available just a few years ago. Assessing the business to identify areas of inefficiency and  solutions to reduce that inefficiency can often reduce manpower and other costs and improve customer service.  I will discuss some of these in future posts.

In addition to improving efficiencies, strategic cost reductions can be made by renegotiating services. Many companies do not regularly review the spend of key services and as they grow this can represent areas of opportunity for cost reduction.   Mid-market companies often pay more for services than larger companies because of the volume or just because they don’t have the manpower to spend time negotiating these items.  There are firms that offer free analysis and renegotiation of key cost areas and are paid only on real savings.

So have an assessment of your business done before you make random cuts and loosen the grip of ‘The Profitability Vice’.

Welcome to my blog.  I am excited to start sharing ideas on how to better use information technology to improve profitability, cash flow within your business.

I will share experiences I have with businesses and I welcome you to share your insights too!

Today too many businesses have invested in information systems and have not obtained the return on investment they expected or should have received.  We will look at what I have seen are some of the reasons for that. 

I look forward to a good dialog

Thanks

Lynda Roth