I know this title may seem arrogant. But after thirty-five years of being honored to work for and with numerous CEOs in a host of industries, I have five questions that in one hour can tell me and you how your firm is doing and what needs to be worked on next.
How can I possibly make this assertion? The reason is while every for-profit firm is unique; there are bedrock similarities that encompass them all. This is because every firm takes inputs from suppliers, puts them through a transformation process and produces outputs. In today’s world, you must have an efficient supply chain, the transformation process needs to be very fast with little or no re-work that produces outputs that have agreed to quality levels. And the outputs as products and services need to be valued by customers so that they willingly pay the price points needed to generate enough free cash flow to sustain the business.
Here are my questions in a mock interview:
Question #1: How many key initiatives are currently in play this year? Examples include new products or services, major cost reduction, merger or acquisition, installing a new comprehensive ERP system, quality improvement and many more. Key initiatives are projects large and impactful enough to directly affect the market value of your firm. How are those initiatives doing? Are they on target or are they stalled? If they or some of them are stalled, what is causing this? How many initiatives have you terminated this year?
If you say you are working on twenty or more key initiatives, this is way too many. Your firm’s ability to prioritize key initiatives may be faulty. On average you should be working on no more than five or six key initiatives. And if you have terminated more than three key initiatives this year, your firm’s ability to recognize new profitable opportunities needs improvement.
Question #2: In the typical year, how many key initiatives are in play? In that same typical year, how many key initiatives are completed as per the original business plan for those initiatives? Note allowing a slip, even if approved by the customer, is not counted as complete as per the original business plan for that initiative.
Dividing the first sub-question by the second sub-question yields your firm’s “dynamic cycle time” for any key initiative. Say your answer to sub-question #1 is twenty-five and the answer to the second sub-question is five. The quotient is five and this means it takes five years to complete any one key initiative! This is way too long in today’s world. Your dynamic cycle time needs to be nine months or less.
Question #3: How many key people have left your firm in the last year to a competitor or elsewhere that you did not want to leave?
If you have had more than two key defections in the last year, your firm’s ability to generate sustainable profitable revenue growth needs improvement. Sustainable and profitable revenue growth is a proxy for good strategy and execution.
Question #4: In the last three years, how many “blockbuster” products or services have you offered that have so delighted customers that they produce the lion’s share of free cash flow for further rounds of internally generated investment?
If your answer is less than three, your firm’s ability to innovate needs improvement.
Question #5: What is the average annual ratio per year over the last five years of your firm’s revenue to total employee compensation costs? Dividing Revenue by Total Compensation cost yields a high level picture of the Productivity of your firm’s people. Is this trending up or down over the past five year period?
If this ratio is not at least 2.5 you are either not generating enough revenue or you have too many people, or both.
The answers to these five questions are all I need to know about your firm for a first conversation. I can have a picture of the culture of your firm, how satisfied your people are, and if your firm is poised for more profitable growth or is likely headed for trouble.
How The Five Questions Relate to Each Other
Let’s delve into the interactions among the answers to these five questions. Question 1 informs your firm’s ability to prioritize and stick to it. Flip flopping with too many “hot lot” and “hurry-up” initiatives speaks to lack of discipline in your firm. Question 2 follows with more information about the degree of initiative overload in your firm. How do you get your dynamic cycle time to no more than nine months? Prioritize to the top five initiatives in the numerator of the formula and remove subject matter, process, structure, and culture barriers to have more initiatives be completed as per the original business plan. (I will publish an article on these four kinds of barriers shortly). If the numerator is five initiatives and you complete seven initiatives in the typical year (because some were started prior to the typical one year), your dynamic cycle time to complete any one initiative is 8.6 months. Finish the top five and then launch new ones. Don’t get bogged down in initiative overload. Question 3 is clear. Too many key people defecting means key knowledge and relationships are leaving the firm. We know how costly it is to replace those people. Question 4 informs your firm’s ability to innovate and grow. If you are not growing you are dying. And Question 5 asks is your firm very productive for obvious reasons. You spike productivity by increasing revenue and or not replacing people when normal attrition, like retirements, occurs.
What is the assessment of your firm from the questions and answers? If your answers are not to your liking, what are you prepared to do about them?
This article is part of a series on what causes a firm’s value to increase
Bill Bigler is founder of Bill Bigler Associates and can be reached at firstname.lastname@example.org or www.billbigler.com.