Archive for August, 2010
At one time or another, most all businesses use consultants to fill the gaps in knowledge or to provide guidance for management. Consultants are good in that you can sample their work with short projects, change to other consultants quickly, and stop using them when a project is completed.
I have a partner in a consulting practice that specializes in the travel industry. Several years ago, we were hired by one of the largest companies in the industry (yet another Fortune 500) to perform a top-to-bottom audit of their processes across 27 facilities, and recommend measures to increase efficiency, increase income and of course, decrease costs while also increasing the quality of service. We were quite confident that our services would yield great, measurable results. The work continued for about eight weeks between the two of us as we visited the 27 locations and worked with employees in departments across all disciplines within each location and at central offices that performed services for all locations.
Finally, at the end of the project, we had identified nineteen specific issues, each of which would, if implemented, accomplish one or more of the goals outlined at the start of the project. The sum of the savings and increases in revenue were worth multi-millions annually, well worth the implementation of most or all of the recommendations.
[Email readers continue here...] On the final day of our assignment, I was responsible for the “reporting out” to the assembled twenty or so executives in the large conference room of this major corporation. I started my presentation, which had been carefully documented in handouts and PowerPoint, with this story…
“I want you to all imagine that it is tomorrow morning, looking back upon today’s reporting of these past months of work by your consultants. Imagine that today I build for you a beautiful sand castle exactly at the water line of the ocean nearby. Tomorrow, we both will visit that beach and look at the water line, and find not a beautiful castle, but just smooth sand, just as it had been the day before building our beautiful sand castle. In other words, I would not be surprised if you accept our report today with enthusiasm, but then in the overwhelming rush of daily business, fail to implement few if any of these recommendations that you so enthusiastically received.”
The story is true and the results were as I predicted. A few of the recommendations were implemented over time, one with great effect and even a national advertising campaign behind it (that you surely saw on TV). But most were just ignored. I imagine that our report sits today on someone’s shelf, filed with others from past and from following months and years.
Unfortunately, it is human nature to enthusiastically ignore to act upon recommendations of third party consultants. There are many, many exceptions, but far more instances of this in the business world. Not all consultants give advice worth taking, of course. But when they do so, it is only as good as that which you implement.
When do you cross the line between honesty and dishonesty in tax planning? Is it ethical to allocate income between periods to take advantage of tax breaks? Can expenses be put off until the next period to increase income, or accelerated into this period by prepayment to decrease net income? Where do you draw the line, assuming no intent to defraud?
First, corporations are usually on an accrual accounting basis, meaning that income and expenses are accounted for as earned, not when the cash is received. (You, on the other hand, account for your individual income on a cash-accounting bases, counting the cash as received or spent, not as of the date of your earning or accrued expense. The difference: If you earn pay due December 31st and it is paid January second, you pay income tax on those earnings in the following year. But the corporation that pays you accrues the expense and takes the deduction in the year in which the income was earned or expense actually incurred.)
[Email readers continue here...] It is perfectly legal to hold delivery of goods until after the start of the next period and take the income next year rather than this. It is a bit murky if you accelerate payment for incomplete services or even for products not yet received into this year to take the deduction from income early. In either an IRS audit or an accounting review or audit, the accelerated costs and payments will show as an accrual – a balance sheet item – that does not change income, just cash and an asset. In other words, for the usual accrual-based business, there are fewer ways to affect the outcome than for a cash-accounting individual. There are lots of caveats here and certainly if the issue is critical to you, an accountant (rarely a bookkeeper) should guide you to the action that is both legal and strategic.
This is a distinction we need to repeat on occasion, especially for new CEO’s looking to pay a low wage for advanced financial analysis, whether with an independent contractor or an employee. Accountants are trained, certified and usually quite experienced in financial analysis, both creating and reviewing data. Bookkeepers are often trained on the job although sometimes more formally, and handle the physical work of accounting for the transactions. To expect a bookkeeper to provide analytical planning is to ask for something they often cannot provide, except in a cursory way.
Why the discussion? Many early stage CEO’s believe they can delegate design and creation of metrics, flash reports, analytical reports and more to their bookkeepers. And at some early stages, a bookkeeper is capable of preparing such information. It does not take long for a growing business and a knowledgeable CEO to quickly outgrow the lack of depth and sophistication such reporting usually offers, looking instead for deeper analytical tools.
[Email readers continue here...] On the other hand, many early stage CEO’s are not trained and ready for such tools even if available. The lesson here is twofold. There is a benefit to using a good accountant to help devise critical reports for a corporation; and CEO’s must quickly become financially savvy in the analysis of financial statements and metrics that measure the health of a business. To fail to have this skill is to reduce the corporation’s capability to discover problems early and take advantage of growth opportunities.
Over the years in business and as a member of over forty boards, I have received good advice from corporate attorneys and on occasion bad advice as well. There is a line that should be drawn in a relationship between corporate attorney and CEO or board. Attorneys are paid to protect the corporation, not to give business advice. Some are experienced enough to provide great business advice. But the law degree they earned does not assure that, even though most CEO’s respect the advice they receive from their attorney highly enough not to doubt the conclusions or the experience behind the conclusions offered.
And since attorneys are paid to protect, often they will give a litany of warnings about what could go wrong when accepting a contract clause they have been trained to challenge. There comes a time when a CEO must decide to reject what may seem like important good advice from the attorney and chance acceptance of terms within a contract that may cause risk, but controllable risk or risk that is so remote as to be worth the acceptance of the business represented by the contract at hand.
[Email readers continue here...] I was chairman of a company that had been offered an investment by a Fortune 500 company making a strategic investment in our business, which was capable of driving new demand to the large company though a series of new web services creating a greater need for the large company’s products. The business terms had been agreed to between the business development officer of the investing company and our board, as both companies turned the details over to their respective attorneys for documentation.
The attorney for the investor was a member of a large, respected law firm in Silicon Valley, and certainly was full of himself as sole legal protector of the rights of his very significant investor. As drafts of the otherwise standard investment agreements passed from him to our attorney and our management, we immediately spotted a significant number of terms we not only had not agreed to but were contrary to the spirit of the investment. The attorney held fast at every challenge, stating that “these terms are standard for our client and cannot be changed.” We appealed to the business development executive, who deferred to the attorney restating that the terms were unchangeable as far as the big company was concerned.
After conferring between our attorney and board, we walked away from what would have been a fine strategic partnership, killed by an attorney who probably understood the client requirements but was unwilling to offer flexible solutions to problem areas. That attorney had made what we considered business decisions on behalf of his client. By the way, we immediately found a willing replacement that had an attorney not quite so full of himself and quickly concluded a similar deal to the acceptance of all. And to this day, I caution my CEO’s not to deal with that Fortune 500 firm because of the experience we had with its attorney. You never know how much far reaching an action can be, given the speed and extent of communication between CEO’s today.
Many of us belong to industry associations and find ourselves at conferences and trade shows with time to spend with competitors. Some of these are old friends; some even former associates. It is natural to want to associate with these people for many reasons, certainly socially. Most CEOs want to obtain information about their competitors in the most subtle and non-obvious ways. And of course, most are willing to trade information to get information.
In my former industry, I became an informal centralized source for knowledge about the revenues of each of the many competitors, with a special skill for asking just the right questions to obtain the information. How many employees does the firm have today? Are you profitable yet? Can you guess what percentage your revenue comes from recurring sources such as maintenance revenues? In return for the answers to these several questions, I was usually able to guess a company’s gross revenues within a few percent and would state my guess to the CEO. His reaction would guide me to increase or decrease my estimate appropriately. He’d be a bit amazed with the quick fancy math work, and I would have yet another piece of the puzzle helping me to gauge the total size of the industry in annual revenues and the growth and size of competitors. All of this was immensely helpful in strategic planning and marketing, even though to this day I do not think those CEOs were aware of the value of the information so easily given. And none of this is especially considered a trade secret, violating the unspoken covenant between competitor CEOs that there is a limit to such exchanges.
[Email readers continue here...] On the other hand, often a sales person or marketing manager would show up at my door with a complete package of a competitor’s materials, including price lists, a proposal with discount percentages clearly shown and a list of feature functionality meant to reinforce the proposal. The source of this information was typically the purchasing decision-maker for a friendly customer or candidate customer. The question is one of ethics, since the competitor certainly did not volunteer any of the information, which would have been the competitor employee’s violation of confidentiality and cause for being fired. What does a CEO do with this wonderful, rich information dropped at his door at no cost or obligation? Few would destroy it and ask all to forget that it was ever in their hands. Most would absorb the information and then admonish those who had seen it to not repeat to anyone that it was in their hands. If you’ve been in business for long enough, you’ve seen your share of this gray market information. My advice is to be very careful, think of the golden rule, never use this information publicly, and certainly never reproduce it, let alone disseminate it internally.
As to sharing information to get information, CEOs and executives are bound by a duty to their corporations not to share trade secrets with anyone who has not signed a confidentiality agreement, including consultants to the company. For CEOs on the corporate board, it is a large part of the “duty of care”, a legal requirement of board members to protect the assets of the corporation first and foremost, one of those assets being the trade secrets of the corporation.