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Downturn as catalyst for transformational change

24/02/2009

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Bill Ralston blogs on the speculation about job and cost cuts at TVNZ. The title of the post encapsulates his viewpoint – TVNZ cost cuts will trim the meat, not the fat.

Sadly, Adam thinks Ralston is probably correct in his assumption.

Based on the information given in Ralston’s post, which Adam has not verified, it would appear that TVNZ has a bloated administration.

Unfortunately unless those carrying out cost cutting  are led from the top with strong executive oversight it is all too often the case that the bureaucracy and overhead remains, whilst the productive side is cut.

It requires a very firm executive hand to ensure that costs are cut from the non-productives and from senior ranks as well as junior. Yet it would appear that TVNZ may well need transformational change rather than cost cutting as such.

Ralston writes:-

Interestingly while TVNZ has 80+ top leaders it only requires 50 of them to work out what has gone horribly wrong.

The answer doesn’t need 50 brains to work out. The place is top heavy. It always has been. The last I heard nearly half its $100 million or more overheads are “non-productive” overheads, i.e. clerical, administrative and support staff.

TVNZ managers seem unable to understand that the people who make television programmes, buy television programmes, put television programmes to air, sell and market television programmes are the productive base of the company. The majority of the rest are effectively a drag on the company’s cost structure that no private sector commercial organization would tolerate.

As anyone who worked for TVNZ over the past 20 years will tell you, the nature of the coming round of cuts is entirely predictable because the process has occurred with monotonous regularity every few years.

Teams will be set up within TVNZ to address areas where budget cuts can be made. These teams will largely be comprised and led by people from the non-productive side of the company, because they have the most time available to do it. The people from the operational side of the company are too busy making, transmitting and selling television programmes.

Those teams of people from the non-productive side of the company surprisingly fail to see any merit in reducing their own budgets and therefore turn their attention elsewhere.

Regrettably the scenario postulated by Ralston is likely to be all too true. Unfortunately this is not confined to TVNZ, nor to the SOE/Public sector. It happens as well in the commercial sector.

What is interesting in this regard is how the governance function was and is being discharged in organisations such as TVNZ.

Adam fears therefore that the opportunity to achieve a transformational step change within TVNZ and other NZ organisations may well be lost. Organisation leaders and boards must improve their performance and lead from the front in all aspects, else it is likely that many will suffer much more severely than they need to.Indeed, it is probable that the last 9 years of poor quality government spending in many years will exacerbate the problems for many.

This led Adam to reflect upon an excellent article by Donald Sull in the Financial Times in their Managing in a downturn series.

Sull observes:-

In a downturn, most managers fixate on the abundant bad news: demand is down, prices are falling, credit is scarce, and lay-offs are likely. Obsessing over threats obscures a surprising but crucial truth about downturns: the worst of times for the economy as a whole can be the best of times for individual firms to create value for the long term.

He says that for well managed companies a downturn is an opportunity. The downturn creates a motivation for change that sweeps resistance aside.

As he writes:

A downturn provides a ready-made external rationale to justify painful decisions that would appear extreme in better times. Finally, an economic crisis provides managers with air cover to make decisions that incur short-term financial pain for long-term gain, such as pruning products, “firing” unprofitable customers or exiting money-losing businesses. Investors, boards and bosses are typically more forgiving of short-term dips in sales and earnings during a downturn, when all competitors are suffering, than they are during a boom, when everyone else is thriving.

What Adam finds concerning is that the four principles identified:-

Cost Discipline

Taking hard decisions

Change Acceleration

Seizing opportunities

are ones which should be followed in good times as well as bad.

Adam will return to this article again, but given where this post commenced, will consider the first of the four principles.

Sull writes in respect of Cost Discipline:-

During the boom years, many managers thought their objective was to increase revenues through innovation. It is not. Companies exist to create economic value, which is the difference between revenues and the opportunity cost of all inputs (including capital). Good managers keep their hands on both levers at all times, looking for growth opportunities during downturns while maintaining cost discipline when the good times roll.

Unfortunately, best practice is not common practice. Many companies veer between periods of undisciplined growth and brutal cost cutting. During a boom, they press on the gas pedal to increase revenues. When the economic cycle turns, however, they slam on the brakes, abandon growth and focus on slashing expenses to free cash flow. Once the economy picks up again, they abandon their new-found cost discipline to pursue revenue growth.

This stop-go approach is a mistake.

In his career Adam has observed this cycle on a number of occasions. He considers that it is undoubtedly prevalent in a number of NZ organisations. He further suspects that the state sector especially over the last 9 years has not been as focused on this area as much as it should have been.

Sull makes a number of other useful observations in this area.

He concluded his comments on costs with these remarks:-

To instil ongoing cost discipline, managers should ask themselves a few questions. What processes do we have in place to systematically identify and eliminate waste? Could we improve these procedures? Are there promising best practices in parts of our organisation that we could disseminate more widely?

Now there is no rocket science in what Professor Sull is saying. Really great companies/organisations  apply this approach all the time.

To Adam’s mind the issue comes back to overall governance, leadership from the top and the values instilled within the organisation. To achieve greatness and best practice requires unremitting focus and a culture which recognises the importance of creating value.

Bill Ralston’s post would seem to suggest that this is lacking at TVNZ.

Adam would suggest that it is lacking elsewhere as well. Indeed in the context of the Jobs Summit, Adam would suggest that Professor Sull’s article should be part of required reading for attendees and for those involved in follow-up activity.

At TVNZ and elsewhere in the NZ economy, Adam would suggest that this recession, downturn or whatever you want to call it provides a major catalyst for transformational change. This opportunity should be grasped and acted upon.

4 Comments
  1. 25/02/2009 04:53

    send that to John Key and the jobs summit. It is absolutely brilliant.

    Obama and the US Congress would also benefit from reading it.

    Like

  2. 25/02/2009 03:52

    I agree with you Steve, many people have the problem of not thinking to the long term and here every smart person will see thats the right think to do.

    Like

  3. 24/02/2009 20:46

    Adam, totally agree that we have a great catalyst for change. It may not be comfortable or easy for many people, but those that recognise it will benefit in the long term. The business models and management practices that evolve from the current state will form the foundations for the Business leaders of tomorrow.

    http://thinkinghow.com/innovation-in-a-down-economy/

    Like

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