Why did you do that?

Those of you who have been reading the business news this week will be able to guess who the latest Business Bloop award goes to. Yes it's Serco for their incredibly crass and doomed attempt to screw rebates out of their suppliers as a means of offsetting potential loss of margin resulting from renegotiation of their contracts with the government.

Not only was this bound to rebound on them in the form of damning PR, but anyone with half a brain should have worked out that this would seriously embarrass and consequently upset their main customer - the government. And so it has proved with Serco now having to publicly apologise and withdraw the demands. We are not going to add further to what has already been written and said about this. What we are more interested in is why did this happen and what lessons can the rest of us learn?

What is even more perplexing it that it is Serco that should do this. They have shown themselves to be an innovative and resourceful business with an ability to handle change successfully. This has been the foundation of their growth and success. Their Chief Executive, Christopher Hyman is a religious man who has incorporated his beliefs into the Serco ethos since becoming CEO six years ago. Attempting to screw your suppliers in this bullying and unimaginative way is more the behaviour of a uncaring business that has run out of ideas. So why should they decide to do something that is on the face of it completely out of character?

This is a phenomenon that can even affect organisations that have hitherto been regarded as outstanding examples of excellence. Just at the point when it appears a business can do no wrong, it goes and does just that. Being excellent is no guarantee of staying excellent. This happened at Toyota where of all things their product quality failed with consequences that we all know about. What appears to happen is that they lose touch with what it is that has enabled them to achieve their previously high standards, in particular how the way they think and behave has been such a vital factor.

This can be a consequence of growth that has involved a substantial expansion of the workforce at all levels. This brings in different thinking and behaviour which weakens the core ethos of the organisation. It also diminishes the conscious awareness amongst the leadership of the importance of this for its ongoing success.

However it is caused what happens is that a business that was previously in an "excellent" condition slips into a "comfortable" condition. Assumptions about still being excellent (Toyota) or making out of character decisions (Serco) are characteristic of this weakening in the Competitive Strength condition

The consequences are significant. If you have got a really good reputation to lose then when you lose it the damage can be enormous and potentially fatal even for the very best. Serco's shares dropping 27% is just one manifestation of this. Serco's leadership needs to look very hard to find the root cause that produced this disastrous and totally out of character decision. It is not something that can be easily reversed once the cultural change has taken hold. The rest of us need to learn the lesson from Serco's and Toyota's experience.

Business Bloop Award is brought to you by Steve Goodman and Tony Ericson of Business Breakthrough Coaching. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish regular articles using a recent business/financial topic to highlight different perspectives and conclusions to those obtained by conventional thinking and techniques. You can read the other three blogs at "Exceeding Expectations," "You're having a laugh ... seriously?" and "Capitalism or ... Common Sense".

The accountant that went bust

When considering candidates for our next Business Bloop Award our attention has been drawn to the recent article in the Daily Telegraph by Philip Aldrick and Hella Ebrahimi on Vantis, the accountancy firm that actually managed to go bust. We are grateful for the insights this provides.

Whilst it is not unknown for accountants, lawyers and the like to fail it is rare and actually difficult to do. “In this business you should be able to make money and cover your costs. If you are not managing that you are making some pretty fundamental mistakes” (quote from Chief Exec of a rival accountancy firm).

Vantis was the creation of accountant Paul Jackson notable for his heavy moustache and long curly hair. You would have thought this was enough warning in itself for anyone not to get involved. In 2002 he merged 4 small accountancy firms, floated them on Aim for £26.6m and installed himself as Chief Exec. Over 5 years he expanded rapidly by buying up small regional firms and rebranding them as Vantis. At the same time however working capital and costs rose driving up debt to peak at 54m in 2008.

To actually end up with working capital, costs and debts rising when your strategy is to buy up and consolidate other businesses shows that this business was never under any sort of control nor was there any plan for it to be so. The expansion and Jackson’s claim that this would create a lucrative opportunity to sell advisory services alongside traditional accounting work was all the strategy consisted of.

The only real “consolidation” was the rebranding. It is expected that many of the small firms bought by Vantis will now be bought by their managements, with up to 90% of staff retained. In other words they will revert to the small regional firms they had been and in reality still are. The processes needed to grow and manage an accounting and advisory business, as opposed to a loose collection of accounting practices, were inadequate or non-existent.

So it is POOR PROCESS once again producing the inevitable poor and in this case disastrous result. Vantis’ “aggressive” tax advice to the rich and famous resulting in two major HMRC investigations and their appointment and subsequent removal as liquidator of Stanford International Bank are simply symptoms of underlying inadequate processes. And all of this stems directly from the deep seated managerial and behavioural values of the leadership of the business.

So you may think we are going to give our Business Bloop Award to Mr. Jackson and Vantis; not so. Instead we are awarding it to the banks that lent them the money, which include RBS and Lloyds and who will be lucky if they recover £1 in £5! When will these people learn how to assess lending propositions not on WHAT the money is for and WHAT the security appears to be, but on HOW the purpose for which the loan is made will be achieved and HOW the risks are to be managed? Not sometime soon I’m afraid, unless somebody somewhere in a bank reads this blog and thinks “maybe there is another way”.

For more on process thinking go to :http://www.changeworld.co.uk/gettingresults.html

Business Bloop of the Month Award is brought to you by Steve Goodman & Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish regular articles using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs at“Exceeding Expectations", "You're having a laugh ... Seriously?, "Capitalism or ... Common Sense .

Prudential - wins Bloop Award Stars!

Well I never! Not in all my days!

Who might have imagined that, within 18 days of winning our illustrious award, the unbelievably highly paid Mr Thiam, together with his team of the finest intellects in The City, would have managed to pull off not one but two more howlers.

On the 25th May, it was reported that AIA’s chief executive, Mark Wilson, had told friends and industry executives that he intended to quit if the deal completed. Press reports said Mr Wilson would leave because the combination of AIA and the Pru’s Asian business was “unworkable”. Two senior executives, AIA’s finance director, Steve Roder, and its legal head, Peter Cashin, have already quit the company. So Mr Thiam plans to spend billions of other peoples' money, and to put at risk the funds for which he already holds the stewardship responsibility (how close is that to his attention, we wonder?), to acquire a business from which the leadership and local operational management knowledge will be absent. So here is someone else, as well as the FSA, that Mr Thiam has failed to persuade to come on side. This is definitely worth our first ever award of a Bloop Star.

But, hardly have we put the newspaper down, when we learn that a significant number of the shareholders have expressed serious reservations about the financial feasibility of the proposed acquisition - and there is now doubt as to whether Mr Thiam will be able to get the 75% shareholder support he must win to go ahead. The usual excuses are being trotted out by the financial analyst experts (who had clustered around, hands out for their millions of commissions, to help Mr Thiam concoct the offer) - the markets have changed, the economy, blah, blah - ignoring the fundamental lack of resilience within the proposed deal. Now, say the experts, the price to AIA must be reduced, so the US Government must lean on the AIA management to accept a lower price, and then the deal will be OK again. Now we have yet another group, as well as the FSA and the AIA management, that Mr Thiam has failed to persuade to come on side. This is definitely worth our first ever award of a Bloop Star SQUARED.

It appears that this whole deal is so flimsy and fragile that the smallest unexpected external variation is enough to put it at risk. And if the construction process is so lacking in basic robustness, what confidence can anyone have in the resulting structure? Dodgy builder equals shoddy house. The comparisons with the RBS grab for ABN Amro catastrophe, and (has anyone spotted this even more scary similarity?) the Lloyds TSB/HBOS wrap up, are compelling. Any Comparative Competitive Strength advantage (see our related blogs here too) for this venture is not visible - precisely the opposite seems probable. This is an origami house built of tissue paper - what will happen when the first shower falls?

So the Business Bloop Star and Star SQUARED awards go to Tidjane Thiam and the lesson to the rest of us is:

POOR PROCESS ALWAYS PRODUCES POOR RESULTS

For more on process thinking go to :http://www.changeworld.co.uk/gettingresults.html

Business Bloop of the Month Award is brought to you by Steve Goodman & Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish regular articles using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs at“Exceeding Expectations", "You're having a laugh ... Seriously?, "Capitalism or ... Common Sense .

Prudential – what went wrong with the rights.

Our Business Bloop award this month goes to Tidjane Thiam Chief Executive of Prudential for his most recent “dropped ball incident” in his proposed takeover of AIA.

The deal is one of the biggest ever ($35.5bn) coupled with a record rights issue ($21bn). At 6.00pm on May 6^th Thiam squeezed one of the largest (and most expensive!) group of senior execs, advisors, lawyers and bankers into the Pru’s boardroom in the history of the game of sardines to set the price for the issue.

Then came the bombshell. At 7.30pm the FSA called saying they needed at least another 24 hours to clear the Pru’s plans for the capital it must hold to safeguard it against market shocks. For a further 3 hours Thiam and his Chairman tried to persuade the FSA to back down (what should you do when in a hole?). By 10.00pm with the FSA still not budging they took the only decision they could to abandon the rights issue and prospectus.

So as bloops go this was a mega and very public one. It has not only jeopardised the whole deal but it may be the end of Thiam’s career. Much has and will be said and written about what went wrong – is Thiam really up to making this deal work – did they really listen to the FSA’s concerns – surely they could see that a big cross border deal like this would go under the microscope – why such a tight timetable for such an enormous and high risk undertaking? All are valid questions but they do not answer the only question that matters. Why did it all go wrong?

The answer is - and you will only read this here – POOR PROCESS. Poor process will always deliver a poor result, except when it delivers a disastrous result.

Thiam’s proposal to buy AIA was a game breaking, bold and audacious idea. But that’s all it was, an idea, just one step beyond not having thought of it at all. To turn an idea, however good, into an effective reality that delivers the results you want needs a robust and sound process and this is what Thiam did not have.

He failed to assess his own and the Pru’s current reality in relation to the idea and consequently made poor decisions about how to take it forward. The tight timetable is just one example. Consequently planning was inadequate which in turn meant that who they needed on board, what they would want and how they could be persuaded was largely overlooked.

But why the poor process? The answer and again, you will only read this here, is that it stems directly from the deep seated managerial and behavioural values of the leadership of the business. These are always the main determinant of outcomes for any organisation. Thiam’s focus was and still is almost entirely on the idea and on driving it forward. This skewed the process around this one element and created a flawed process. This was compounded by the personal prestige and massive financial rewards involved. With all those juicy fees and commissions on offer which of the many advisors involved was going to tell Thiam he was getting it wrong?

So by the time he got to implementation disaster was pretty much built in and it was just a question of which wheel fell of first and when. Fortunately for the Pru’s shareholders it fell off before they stumped up $21bn.

So where does it go from here? Thiam and his colleagues are telling investors that the deal is still on but unless something changes expect more disasters, before and after. One factor that might concentrate minds is that if the Pru does not complete by August 31^st it must pay AIA $104m per month until it is. Plenty of time yet, well we shall see.

So the Business Bloop award goes to Tidjane Thiam and the lesson to the rest of us is:

POOR PROCESS ALWAYS PRODUCES POOR RESULTS

For more on process thinking go to : http://www.changeworld.co.uk/gettingresults.html

Business Bloop of the Month Award is brought to you by Steve Goodman & Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish regular articles using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs at “Exceeding Expectations", "You're having a laugh ... Seriously?, "Capitalism or ... Common Sense .