What is the Role of the COO?

Recently, I came across an article (see the reference below) that supports the idea that in general, the role of the COO is misunderstood. The authors of the article contend that the role of the COO depended largely on the CEO and posited 7 different potential roles for a COO (or any operating executive) depending on the CEO and his skills, abilities and personality.

I found this interesting, as a colleague had posited a different idea, that the Role of the COO was dependent on the nature of the business and in particular, on the ultimate responsibility of the COO for the overall operations of the company. The member pointed out that while the COO often had direct reports that were in charge of different aspects of operations, since the COO was ultimately responsible for those operations, that fact would shape the role of the COO.

The basic theory of the article mentioned above is that there are 7 potential roles for the COO:

1. To implement the CEO’s strategy;
2. To lead a particular initiative, such as a turnaround;
3. To mentor a young, inexperienced CEO;
4. To complement the strengths or make up for the weaknesses of the CEO;
5. To provide a partner to the CEO;
6. To test out a possible successor;
7. To stave off the defection of a highly valuable executive, particularly to a rival.

Since the premise of the article is that the role of the COO depends on the CEO, it should not be surprising that that only role 1 and 2 above seem to relate directly to operating a company. The article itself points out that many of the COOs and other operating executives that they interviewed did not always focus on the day to day operations of the company, but often had other significant tasks to pursue.

On the other hand, as my colleague pointed out, the type of business and the operational realities would also seem to weigh heavily on what the COO must undertake in his or her role. The day to day operations of a manufacturer, distributor or service company differ greatly. The size of a company would have a major impact on what a COO is doing on a daily basis. In a smaller company, the COO is more likely to be a, dare I say “hands on” manager than in a larger.

In either case, Bennett and Miles do point out that in their research, the success of the COO depends to an extraordinary degree on how well the CEO and the COO develop a sense of trust, using the metaphor of “having each others back”. The relationship of mutual trust is often difficult to attain for various reasons both internal to the relationship as well as what the authors refer to as “Those seeking to drive wedges” between the two.

Personally, I believe that both the authors of this article and my colleague have uncovered different aspects of the COO’s role in the modern corporation. On the one hand, the relationship of trust between the CEO and the COO is vital to the COO’s success, but we cannot minimize the how the nature of the responsibilities of the COO will also color the role to a great extent. We will look at both aspects of the COO’s role in future postings.

In the meantime, I would be very interested to hear from the COO’s and other Operating Executives in the audience: what is your experience in your role as Chief Operating Officer?

Second in Command, The Misunderstood Role of the Chief Operating Officer, Nathan Bennett and Stephen A. Miles, Harvard Business Review, May 2006.

Not Another Meeting!

I shudder to think of how many meetings I have attended during the last decade. Late in the afternoon, when I review my schedule for the next day I am tempted to ask the question, “Am I working tomorrow or going to meetings?” Many of the meetings I have attended in recent years included people on multiple continents and varying time zones. I have come to believe that the meeting may very well be the bane of modern business.

On the other hand, I must profess guilt at having been the instigator of many of those meetings. Running a business in a collaborative manner demands meetings. If this is to be so, it is imperative that meetings be well run and productive. Here are 4 tips that will help improve your meetings.

Have an objective: An old saying says it all, “If you don’t know where you are going, that’s likely where you will end up!” In order to avoid meetings that wander all over the place and never really come to a conclusion, have a clear objective for your meeting. Be sure that every person coming to the meeting knows the objective, and is prepared in advance to achieve the objective.

Have an agenda: A meeting without an objective will go nowhere. A meeting without an agenda will meander along the way, whether or not there is an objective. An agenda of precise topics that meeting attendees are prepared to take up will help maintain the group’s focus and promote productive conversations. Meeting attendees should be expected to be well prepared in advance. Nothing kills a meeting quicker than a group that is not prepared.

Have a timetable: The meeting should have a set beginning time and ending time, and these should be adhered to. Start the meeting at the appointed time, no matter how many attendees are missing. End the meeting on time as well. Attendees will lose any enthusiasm they may have for the meeting if they know in advance that the meeting will drag on forever. Attendees should have an idea of how long they may speak to any topic so that a “run-on” participant does not hijack the meeting. In addition, don’t be afraid to end a meeting early if all the work has been accomplished.

Have a moderator: It is often difficult to chair a meeting and be an active participant at the same time. Consider having a neutral moderator whose purpose is to keep to the agenda, direct traffic among participants and generally keep order. In small companies, it may be hard to find the extra person who is not actively involved the subject at hand, but for the more important meetings it can be a great help. For mission critical meetings, you may even want to consider hiring a moderator from outside the company. Of course, it then becomes essential to brief the moderator in advance of the session.

Small Business and the Unemployed

For several years I have been presenting seminars at Career Place in Barrington, Illinois, working with numerous unemployed. Many of these people had developed a one-page handout that contained highlights of their qualifications and experience. Often, a list of targeted companies was also on the one-pager.

The problem is that most of the companies targeted on these handouts were Fortune 500 and other large companies. Unfortunately, many of the large companies have not been doing a lot of hiring lately. I counseled these people to look at small businesses, because when you consider companies with $500 million annually in revenue and less, there are several thousand in the greater Chicagoland area. I am sure that this is true in many other metropolitan areas as well.

For the unemployed there are two questions to ask: why seek out small business and how to do so?

Why the unemployed should seek out small business.

Most entrepreneurs that start businesses have great experience…in something other than business. The entrepreneur focuses on doing whatever is necessary to get the business going. In particular they are focused on their customers, how to find them and how to get the customers to buy.

During startup, entrepreneurs are usually less interested in business practices than in their fundamental expertise. And for them, this is the correct attitude to start with. However, if the entrepreneur’s idea gets traction and the business starts to grow, there are a host of business pitfalls that need to be avoided. In the past, I have written articles on the importance of tracking cash flow, in particular incoming cash as a basic and often ignored process. In other cases, entrepreneurs have never done a “break even” analysis that would show them whether or not they are profitable.

Many unemployed have the skills necessary to help these small businesses grow and thrive. On the other hand, often small business owners don’t even know what they need. There have been times when I was discussing different aspects of business with entrepreneurs only to have them discover that I had information and skills they needed; they just didn’t know that they needed them!

In other cases, small businesses are seeking the proper people to help them, but the positions they are trying to fill don’t show up on Monster or in ads. This brings us to the second question.

How to find and reach out to small businesses.

Since many small businesses do not know what help they actually need, or have limited resources to find people, it is up to the unemployed (or employed looking for a change) to find the small business and reach out to them.

There are many resources on the Internet and in libraries that can aid the research. A good example is the Business Affiliations Database from Lexis Nexis, available in many libraries. You are able to search for companies by many different variables. First, to find the kind of company that you would like to work for determine the SIC or NAIC codes (industry classifications) using an online database, easily found in a search for NAIC or SIC. Once you find the classification of the company’s industry, you can use that as part of you search. In addition, you can search by company revenues and geographic area.
Now you have a list of companies to approach, but what to do next? Corporate Affiliations will list, for most companies, the owners and officers.

My suggestion is to write a letter to a person at the company explaining that you are interested in possibly working in their industry and are conducting research. Who should you choose to write to? That will take a bit of creativity, but here is an example: supposing that you are an experienced marketing person, and you notice that the company does not have a marketing director listed. Your best bet is to contact the person that would most likely have a marketing director reporting to them, perhaps the CEO or COO. Then write your letter.

Several days after your letter has been sent, follow up with a phone call requesting a short meeting (15 to 20 minutes) where you could ask questions and conduct your research. If you find a gate-keeper, try to enlist their help; explain the research that you are doing and ask for their help in setting up an appointment. Be sure never to say you are looking for a job.

Once you have an appointment scheduled, be prepared not only to ask good questions, based on industry research that you will do before the appointment, but also be ready to talk about what you do and how it is applied. Often, you will be surprised at the interest the person you are meeting will have in what you do. Even more so, you will frequently be directed to other people to contact, both within the company as well as at other companies.

Small businesses need a variety of experienced business professionals in order to thrive. Use the information in this article to take the initiative and find a niche for yourself in small business.

2011 in review

The WordPress.com stats helper monkeys prepared a 2011 annual report for this blog.

Here’s an excerpt:

The concert hall at the Syndey Opera House holds 2,700 people. This blog was viewed about 9,200 times in 2011. If it were a concert at Sydney Opera House, it would take about 3 sold-out performances for that many people to see it.

Click here to see the complete report.

We Have a Strategy…Now What?

In a recent Blog posting (A Simple Strategy), I outlined a simple but effective process for creating a Strategy Map for an organization. Many organizations use different processes to create a strategy and that is a good thing. However, simply creating a strategy is not enough; the strategy must be successfully executed as well. A new strategy does not permeate an organization by osmosis! There are two key steps to implementing strategy: first, create a prioritized list of strategic projects and second, plan and execute each project. Here are some tips on how to do that.

Create a list of prioritized projects: There are many ways to create a prioritized list. When working with a client, I prefer to use a brainstorming technique to start. First, the organization’s planning group reviews the Core Competencies, along with their related Value Drivers, Must Haves, Must Do’s and Metrics (see A Simple Strategy). The group should be made up of people from different areas and levels of the organization in order to get a comprehensive perspective.

Next, the group lists up as many ideas for strategic projects as possible, with no discussion or judgments made. Once the group has finished with furnishing new ideas, discussions begin. Often, as the discussion takes place, a consensus will form around the projects that seem to be of the highest priority. If no clear consensus emerges, the group may use a weighted vote to get a better idea of priorities.

In the end, the group must have a list of clearly prioritized projects, each project having its own priority level. You cannot have 2 projects with the same priority, as it leads to much confusion and conflict over resources. Once the list is complete, strategic project planning may begin.

Strategic Project Planning: Project Planning should normally be done by the entire project team, if possible. However, creating a Project Charter answering key questions about the project may be done by the project manager and a smaller group. It is possible that this work can be done effectively by the same group that created the prioritized list of strategic projects. The key questions fall into five areas: Organization and Authority, Strategic Alignment, Deliverables, Metrics and Project Impact (For a copy of the Strategic Project Charter Checklist, click here).

Organization and Authority: Who is the project manager and what is the project Manager’s authority? Who does the project manager consult if a decision is not within his/her authority?

Strategic Alignment: Who are the stakeholders? How does the project align with the organizations Core Competencies and Value Drivers?

Deliverables: What is the work to be done? How will it be done?

Metrics: What is success? How will the Value Driver Metrics be applied to measure success?

Project Impact: What resources are required to execute the project? How will the project impact company resources and operations?

My next posting will be a Case Study on Strategy and Execution from one of my clients.

Business Agility

Once a company has the processes in place to drive their strategy to the lowest level of the organization, they must also have a way to acknowledge and react to changes in the business environment that can change strategy. In addition to defining the Business Action Framework, Michael Hugos has done groundbreaking work on Business Agility. The truly agile business is ready to respond quickly to whatever circumstances the economy throws at them. Hugos avers that if a business has the three basic systems of business agility: Awareness, Balance and Agility, that business will be able to focus and respond successfully to whatever the marketplace brings forth.

According to Hugos, there are three basic systems that form “loops” within a business that are the basis for agile operations. As mentioned above, those loops are Awareness, Balance and Agility. The important concept here is that the three loops are interconnected, each one providing feedback to the other loops, without which the system would not work.

The first loop, Awareness, places a strategic focus on the marketplace right now, gathering information about what is happening with customers, clients and the marketplace in general. The information in the Awareness loop may come from outward looking systems, such as market research. However, inputs can also be found in business systems such as ERP and CRM. Data mining or Business Intelligence software can be helpful.

Information gathered by the Awareness loop becomes input for the Balance loop that has two purposes. First, the balance loop reviews all processes to standardize as much as possible. In particular, business agility relies on standard processes that can be automated to as great a degree as possible, allowing energy to be focused on the non-standard.

The second purpose of the Balance loop is to identify inputs from the Awareness loop that are non-standard. Any input that does not fit into an existing process is considered non-standard. The non-standard is what represents opportunity for the agile business.

The third loop, Agility, receives input from the Balance loop and performs analysis to understand emerging opportunities and threats. In particular, the Balance loop plays a key role in the ongoing implementation of strategy. When an opportunity or threat is identified, the Agility loop actively addresses what is different, and creates new processes to put in place to take advantage of change.

In addition, the Balance loop also plays a crucial role in the ongoing, incremental revision of strategy to meet the challenges that emerge. Strategy should not be a “once a year” activity. A vibrant, successful strategy must be transformed constantly if the business is to remain truly agile.

This week’s post is basedon an excerpt from the second edition of my book, Project Management Accounting.

Competitive Advantage: Are You Focused on What is Important?

Competitive advantage is what all businesses are seeking: it allows your business to charge higher prices for your products and services or to get more customers. Everyone is seeking competitive advantage in their market.

Gaining and maintaining competitive advantage requires that your business be focused on the proper things; that is simple, but not always easy. There are really only two areas of business focus in order to establish competitive advantage: first, you must be competitive in your industry and secondly your business must differentiate itself from the competition. Sounds like a contradiction to me! Let’s take a closer look at each.

In order to be competitive in your industry your business must do “industry basics” well. For example, if you are Starbucks, you can have the nicest storefront possible, with great music and a cool ambiance. But, if your coffee is not at the right temperature, or tastes bad, you will not be able to compete in your market. For a coffee shop, temperature and taste are basics and the company must focus on them in the right way.

In what might seem to be contradictory, it is also true that you should not exceed your industry basics in the name of competition. That practice can be costly and self-defeating. Take the example of a distribution company that competes in a market where 5 day delivery of goods is the standard and customers do not expect more. If a company were to spend time and money on next day delivery, they would be wasting money creating differentiation that their customers don’t want. Doing so puts the focus in the wrong place and could actually hurt the business.

In many cases, businesses do not always focus on the right places to understand industry basics. For example, a business’ financial results, in comparison with the industry median for that result is often a good place to see where your business stands in your industry.

A software development company might look at their software production cost (Cost of Sales); they may not be competing on price, but if their production costs are significantly higher than others in the market, they will have a hard time competing. Proper focus here will keep them competitive in their industry.

Differentiation, on the other hand, is not about industry basics. It is about how your business can do something differently to distinguish itself in the industry. Of course, what you do differently must also be something that your market wants!

Let’s look at distribution again. Supposing that the company that tried to differentiate with quick delivery took some time to talk to their customers that are retail operations. Perhaps they might discover that their customers spend time breaking down the goods they receive from the distribution company into smaller lots for reshipping. The distribution company might be able to save their customers time and effort by packaging their goods in such a way that the customers would have minimal repackaging to do.

At times, it might be possible to turn an industry standard on it’s’ head in order to gain competitive advantage. Prior to Starbucks, most of the coffee industry was centered on fast food coffee chains such as donut shops. Fast was the operating word. Starbucks created a product that included not just upgraded coffee, but an entire experience.

The company wanted people to stay longer, not leave quickly. Starbucks achieved tremendous success with that strategy; only recently have they made moves that have harmed them (but that’s the topic of another Blog).

The name of the game in competitive advantage is to stay focused on the right things for your industry!

A Simple Strategy

Whether your company is a Fortune or a $50 million operation, in order to be successful, you must operate from a simple strategy. Now, let’s not confuse the word simple with easy; at times simple is very difficult to achieve. Yet, if a strategy is not simple enough that every employee of a company can not only understand the strategy, but knows how the strategy guides their day to day activities, it will be difficult.

According to Dr. Chuck Bamford the end result of strategy development need not be more complex than a one page map containing five key elements: Value Drivers, descriptions of Stakeholder Experience, Critical Success Factors, Must Do’s and Metrics. The map also includes a Mission Statement based on the strategy elements. In this article, I would like to give a brief illustration of each element.

To illustrate I will use the example of a well known company, Starbucks. Although Starbuck’s performance has not been stellar the last couple of years, no one can deny that in building the Starbuck’s brand the company succeeded brilliantly. Starbuck’s Mission Statement is, “To inspire and nurture the human spirit— one person, one cup, and one neighborhood at a time”. What follows is my own decomposition of their Mission Statement to illustrate the strategy elements.

Value Driver

A Value Driver is a short statement that expresses how a company will create value for their client. The statement is based on the resource capabilities that the company possesses and utilizes for their client. A possible Value Driver that could serve as one piece of the foundation of Starbuck’s Mission Statement might be, “Feeling at home”.

Stakeholder Experience

The Stakeholder Experience consists of a series of statements that represents the stakeholders’ view of the value driver in action. The statements are what the company hopes to hear from their stakeholder to confirm that the value driver is correct, and also if the company is executing on the value driver. Some examples of statements that Starbuck’s might seek are: “At my Starbuck’s, they know what I want before I ask” and “The Starbuck’s staff are like my friends”.

Critical Success Factors

Critical Success Factors are the first crucial link between strategy and operations; the company must get the factors right in order for the Stakeholder Experience to happen. Critical Success Factors for the Stakeholder Experience described above might be, “Staff Knowledgeable about products”, “Staff Knowledgeable about customers” and “Staff well trained on drinks, able to engage customer”.

We should note, at this point, that when a strategy map is developed for a company, the first three elements that we have outlined above are the same for every employee of the company, from the CEO on down. In contrast, the next two elements may change for different functions within the company.

Must Do’s

Must Do’s are the activities that each function within a company must perform in order to create the Stakeholder Experience. These could vary depending on the function. For example, in order to have employees who are able to prepare drinks quickly and correctly, the training department must create effective training programs.

In order to motivate employees, Human Resources must hire the right kind of people and put in place a structure that will motivate. At Starbuck’s “baristas” must be outgoing and friendly and know their clients well. Starbuck’s also has different levels of certification; have you ever noticed the different color aprons on Starbuck’s employees?

Metrics

The final element, Metrics, does not change for different functions within the company. The collected metrics are studied to see how well the company is performing and give the company the ability to change operations quickly if performance is not where it should be. For example, metrics that could support the “Feeling at Home” Value driver might be to conduct a count in different Starbuck’s that determined how many customers came through in a period of time, and of those customers, how often did the employees know what the customer wanted before they even ordered.

A simple strategy is clear, easy to understand and creates direct links between operations and strategy. If you would like more information on creating strategy, I highly recommend Dr. Chuck Bamford’s book, A Small Business Approach that was published in 2010.

It’s Cash That Counts

I was working with an entrepreneur in startup mode recently, and was once again reminded of the difference between profits and cash. Particularly in startups, but also in more mature companies that achieve a breakthrough of some sort, mistaking profits reported on an income and expense statement with cash in the bank could be a crucial error. How do people make this mistake?

They do so by not taking into account the timing of cash flows. Remember, an income and expense sheet is reporting sales and expenses as they are booked for accounting reasons, but the cash flows that accompany the sales often do not happen at the same time.

For example, unless they are in retail, most companies do work on a credit basis (when retail accepts a credit card payment, they deposit slips like cash, so there is no extended term). You may not think about that way, but terms like Net 30 or Net 60 are nothing more than extending credit to your clients. In other words, your company is financing your customers’ purchases. The longer that it takes to be paid by your customer, the larger the debt that you finance.

Every company has a cash cycle, and depending on the business that you are in, there are more or less components to that cash cycle. Let’s take a company that distributes materials to other businesses. Here is a view of their cash cycle:

1. Purchase materials on credit terms (Net 30, 60, etc.) from suppliers
2. Hold in inventory
3.Repackage and sell to customers on credit terms (Net, 30, 60, etc)
4. Paid by customers
5. Pay suppliers

Now, this is a simplified cash cycle, but you get the idea. Obviously, if your customers are slow to pay you and you must pay your suppliers, you could be in for a shortfall of cash. Actually, one of the greatest risks to a startup or small company that is trying to grow is running out of cash while the business is expanding quickly. We should also note that there are other expenses (salaries, benefits, office space or utilities) that must be paid even if your customers are not quick paying you.

That brings us to the concept of Working Capital. Working Capital is the amount of cash that your company needs to have available in order to keep the cash cycle going or better put, to keep the company going. Working Capital is usually tracked in a type of spreadsheet known as a Capital Balance Sheet (which is a bit different than a Balance Sheet).

In a regular balance sheet, capital is kept above and debt below. In a capital balance sheet, a certain portion of debt is brought above. Here is the outline of a how to calculate Working Capital in a simple capital balance sheet:

Receivables (what your customers owe you)
+ Inventory
+ Current Assets
- Payables (what you owe your suppliers)
= Working Capital

Working capital represents the cash that a company needs to keep on hand to operate with receivables, inventory and payables. Receivables represent the cash that you have invested in materials and financing your clients. Payables are what your suppliers have invested in your company.

If the company sells $10,000 worth of materials in a month, 50% at Net 30 and 50% at Net 60, it means that they will not collect any cash for at least 30 days (if the customer pays on time!), and some of it not for 60. Even so, after expenses they might show a net profit of $1,500. There’s the rub, the net profit is not cash in the bank! If the company has bills to pay this month (or salaries) they must use the cash flow from previous sales to pay.

A startup company, in particular, will have problems if as they grow they do not have adequate cash in the bank to pay for expenses while waiting for cash to flow from sales. Often, a portion of the original investment capital in a new company is put aside for Working Capital; other means of having working capital at the ready could include a line of credit.

This is precisely what is meant by being adequately capitalized. Working with investors, bankers and others, the company’s executives must ensure that they have the cash in the bank to operate or they will literally be “out of business”!

Strategy, Finance and Project Management

I have heard it said on many occasions, “But we don’t do any projects!” Of course, the company executive who has said this really means it. And, in a certain sense, he is correct. His company more than likely does no client projects. The reality is that if the company has a strategy, and renews that strategy periodically, then the company has projects. The fundamentally projects are about change, any change. And the reality is that without proper project management that links together strategy and finance, many attempts at renewing strategy are futile.

Proper project initiation and planning asks a series of fundamental questions that set a performance baseline that can be integrated into pro forma financial statements. Once integrated, the pro forma statements enable a company to review a range of possible financial outcomes in order to decide whether or not the project meets the company’s criteria for being undertaken. The baseline also permits the company to make intelligent decisions at markers along the way, called Phase Gates, as to whether or not the project should continue.

Here are questions that will help a company get the project right the first time around:

What is the project; what will it deliver? Fundamental question – often ignored. This is like taking off on a trip without ever determining where you are going. Now, the answer to the question may not be readily apparent when it is first asked. The company may have an idea of the business objective that they want delivered by the project, without understanding exactly how it will be accomplished. A crucial part of planning is determining, in more detail, what the end objective will be?

Who are the stakeholders? As with the first question, this one is frequently unanswered, in particular with strategic projects. As I mentioned in a previous blog posting, A Simple Strategy, identifying each of strategic stakeholder and what their stake is can be the difference between success and failure. Stakeholders can be both internal and external to the company, but most often it is employee stakeholders that are missed.

What is success and how is it defined? You would think that this is a question that would never be missed. Not so! When defining success for a strategy project, each area of the company needs to have their particular element define, and how that element is linked to success measures. The link needs to be concrete and measurable.

What is the work, who will do it and how much is there to do? Defining the actual work to be done to a level of detail that guides competent team members is foundational. This work will lead to the creation of a project schedule, cash flow statement and budget. Of course, the previous questions set the stage for these last three, whose answers become the baseline mentioned above.

Once all of the information about schedule, budget and cash flow are integrated into forward looking pro forma financial statements, the company has information for good decision making.