Monthly Archives: April 2009

$441,000 — That’s What Each Incident of Fraud Costs You!

According to a recent article in Industry Week on how you could reduce misconduct by making ethics everyone’s business, fraud costs organizations, on average, 7% of their annual revenue. Furthermore, a single incident of fraud in the manufacturing sector costs an average of $441,000 — a number that is higher than the financial services industry and the highest of any sector with a high incidence of fraud. In today’s economic climate, that’s 7% you can’t afford to lose.

That’s why you should take aggressive methods to combat fraud, and start by setting a positive, anti-fraud, tone at the top that makes ethics everyone’s business. Take a six sigma approach and deploy an anonymous company-wide reporting mechanism that allows every employee to report potential misconduct at any time without fear of reproach. And get an outside review by a fraud expert who can help you identify where fraud is most likely to occur in your supply chain and what steps you can take to prevent it. It will likely cost you a lot less than a single incidence of fraud would cost you.

What Do You Mean You Need Cash? Your Company Is Full Of It!

I was intrigued as to what direction an article titled Need Cash? Look Inside Your Company would take, found in the new edition of the Harvard Business Review, as I know that most companies can find plenty of cash if they just look for it and take the appropriate action. After all, most companies are spending at least 10%, 20%, or 30% more than they need to be … and if they put the right emphasis on strategic sourcing, e-Procurement, contract management, and spend analysis … many companies could find millions without scratching the surface.

The problem is, as the article points out, that the boom years have made your average business careless with capital. But cash is king again … and if you’re not taking a hard look at your cash management strategies, you could be filing for bankruptcy instead of thriving. So where do you start? Well, if you’re in supply chain, you start with sourcing … but if you’re in finance, apparently you start by managing your working capital and freeing up the capital you have needlessly tied up in receivables and inventory. To this end, the HBR article outlined six mistakes that, if avoided, will help in this regard.

  1. Managing to the Income Statement
    Throw those profitability performance measures out the window … it’s about the balance statement. If you measure against contribution to reported profits, then purchasing will be incentivized to buy more inventory than you need to secure a discount … but inventory ties up capital and has holding costs, which will likely cost more than you’ll save from the discount!
  2. Rewarding the Sales Force for Growth Alone
    This encourages sales to book sales at any cost. They’ll grant long payment delays, insist on larger than necessary finished-goods inventories, but then be unwilling to chase down late payments.
  3. Overemphasizing Production Quality
    While quality is important, an undue emphasis can cost more than it saves. Quality Control slows down production and locks up capital in work-in-process inventory. If we’re talking food production, given the recent fiascos, undue emphasis might be justified. But if we’re talking mp3 players, attempting to reducing defects from 50 PPM to 5 PPM might cost more than it saves from just recycling the extra 45 defective products.
  4. Tying Receivables to Payables
    Generally, your customers are not your suppliers, your suppliers are not your customers, and the two are completely different financial concepts. Relative bargaining power, the nature of competition, industry structure, and switching costs will ultimately determine the terms that a company can dictate to its customers or must accept from its suppliers.
  5. Applying Current and Quick Ratios
    Although popular with bankers, who want to ensure companies have enough money to repay their loans in the event of distress, they are inappropriate for management as they encourage companies to manage according to a “death scenario”, which means they are good IF you want to go out of business.
  6. Benchmarking Competitors
    Although it might sound good to benchmark against your competitors, it tends to lead to complacency when the scoreboard indicates a company’s metrics are above what it believes to be the industry norm.

Don’t Pontificate, Innovate! … After All, Lean Was Forged in Tough Economic Times

Supply Chain Digest recently ran a great piece by Jim Womack, the founder of the Lean Enterprise Institute who points out that while this may be the worst recession some of us can remember, recessions are part of the natural cycle (and severe recessions do happen every two to three decades and they are, in fact, an incredible opportunity for success). Those who rise to the challenge and get lean and innovative will emerge from the recession victorious, while those who don’t … well, we won’t have to worry about them much longer, will we?

In his article on how lean thinking was forged in similar economic times, Jim notes that as the Japanese economy entered a steep recession back in 1950, the Toyota Motor Company ran out of cash, which was tied up in inventory for products that customers no longer wanted. Under the control of bankers, the company was split into separate firms, dividing the sales and marketing functions from the product development and production functions. This created a crisis which could have put the company out of business. Instead, the leaders of the production function developed what was to become the Toyota Production System.

Starting with a few simple ideas — minimize lead time (to free up cash), remove waste (to reduce costs and enhance quality), and take action now — the founders of Lean (Taiichi Ohno, Kikuo Suzumura, and Eiji Toyoda) used their scientific discipline to understand the current state, document improvements they believed would improve matters, implement those improvements, measure the results, and use these findings to continually refine the process. Over time, these improvements were refined and assembled into the Toyota Production System, mainly to explain it to suppliers. But these improvements, which led to the great company Toyota is today, were made when the company was struggling for its very survival … proving that true winners — who won’t be too busy coming up with excuses as to why they can’t develop, deliver, and market — are born during periods of chaotic markets and falling demand.

Shared Legal Services: Risk vs. Reward

The Shared Services & Outsourcing Network recently ran a great article by Leland Forst of The Amherst Group Ltd on mitigating risk when implementing legal shared services that I see as a must read for anyone considering the consolidation of their legal function into a shared service organization.

Most organizations outsource traditional back office functions like Human Resources, Office Management, Accounts Payable, and even invoice management because a specialist organization, that can leverage expertise and shared services, can often do these tactically-focussed functions better, faster, and cheaper when the right processes and controls are in place. Well, unless your primary revenue stream is litigation or IP licensing, these days, legal is also a back office function and one that should be considered as eligible for a shared-services outsourcing model because, as the author points, out, it can:

  • provide lower fees through economies of scale,
  • provide volume leverage to negotiate lower hourly rates with external experts,
  • allow you to scale up or down as required without expensive recruiting or severance costs,
  • provide you access to more subject matter expertise,
  • improve case management,
  • provide alternative methods of dispute resolution (such as negotiation, mediation, and arbitration) with a large pool of personnel, and
  • provide you access to better legal service management systems at a significantly reduced cost.

Especially when you focus on outsourcing your discretionary, and leverageable, legal services. While the following governance services are non-discretionary for most large corporations, and not good candidates for outsourcing (as you often need to keep these functions within your control to insure regulatory compliance and/or trade secret protection):

  • corporate annual meeting preparation and board resolutions,
  • political action committee management, and
  • mergers, acquisitions, divestitures, and joint venture legal support

The following discretionary, and leverageable, law services are great candidates for a shared services organization:

  • litigation / arbitration that is being considered,
  • trademarks, copyrights, and patents are being pursued, and
  • anti-trust/competition scenarios that are perceived.

As the author points out, as long as any risks are properly identified, and dealt with up-front, this model can prove very profitable for some organizations. So if your firm spends a lot on legal, internally or externally, take the bell off that sacred cow, determine whether or not your really getting value for money in the current model, identify any confidentiality requirements or situations which would require a quick response, define key performance metrics, and go to the market. You might just save your organization a few million in the process.

Do Your Contracts Enhance Trust or Destroy Trust?

A recent article in the Harvard Business Review notes that good contracts are designed to reinforce trust and reduce risk but that there can be a fine line between a good contract and a bad contract which destroys trust and, ultimately, increases risk. A contract that is too detailed or rigid, or one that sends mixed signals, can exacerbate the problems it was intended to preclude as it can restrict creativity and even prevent the display of good intentions.

For example, if the contract specifies a rigid resolution process that requires that all issue reports need to be reviewed by a team before being classified as either errors or enhancement requests, at which point they will be placed a queue for resolution, and the bug is actually preventing the client from getting work done, instead of insuring that the client’s requests are addressed in a fair and equitable manner, the contract is preventing development from making what might be a quick fix. Instead of engendering goodwill by attempting to insure every request from a client is considered, you’ve created ire by preventing a developer from getting a client running again quickly.

The reality is that most negotiators want to overestimate the level of certainty and underestimate the likelihood of future divergences from the situation they perceive during negotiations. As a result, fewer contingencies are included and terms are finalized sooner than they should be. A good contract defines a good dispute resolution process and leaves room for renegotiation later if circumstances change. Something to think about before being too hasty to dot every i and cross every t in your next negotiation.