The Formula & Five-Day Plan Giving Organisations Hope

This is a time in history that will reward organisations that can adapt on the fly, and punish organisations that fail to see the need to transform their operations in the face of a pandemic that is currently pushing a number of societal norms to the fullest extent. I’ve recently come across a playbook from a well-known business academic, charting a course for organisations with a low or negative cash-flow to navigate the coming weeks and months.

The author in question is Steve Blank, a Silicon Valley entrepreneur renowned and recognised for developing the theory behind the lean start-up model that has become the bedrock philosophy for organisations starting out without much of a management system in place. He’s a particularly respected source of information on the topic, so let’s talk through some of his quotes and put them into the context of your organisation. Blank says that there’s a simple formula that determines a company’s survival, and that formula goes as follows.

Survival = (speed of your understanding of the situation) x (the magnitude of the pivots/cuts/lifeboat choices you make) x (the speed of your time to make those changes)

The author reminds the reader that the word or function of ‘speed’ is used twice in the equation, reiterating the importance of throwing out time-consuming focus groups, drawn-out management decision making and committees. “Even with imperfect information, the future of your company depends on your ability to make rapid decisions and start acting,” he writes. Otherwise, an organisation risks letting the current macro-geopolitical, health and market factors make the decision for you, and this may well end up with an extremely unfavourable result for your organisation. “With millions of people out of work in the next few weeks,” he writes, “discretionary purchases like furniture, fashion, and lifestyle will take a hit. But other businesses like law firms, contracting firms and real estate firms, will take hits, too. The ripple effects won’t be obvious at first. Your customers will no longer be your customers. Your revenue plans are no longer valid. To understand the state of things, you need to rapidly assess your internal and external environments going forward,” Blank writes.

“Your customers will no longer be your customers. Your revenue plans are no longer valid. To understand the state of things, you need to rapidly assess your internal and external environments going forward.”

The first stage of the process is to undertake an analysis of the macroeconomic factors that are relevant to you. Analyse the state of the economy, the unemployment figures, the state of your current target market- are they out of business? Are they in a position to purchase? Finally, consider whether the recent shake-up in the market has provided them with any new opportunities to leverage in the market. Finally, consider a forecasted ‘recovery date’ as Blank states, however, this is impossible and purely speculation at this point, but it’s a good exercise to begin planning your organisation’s restart technique, anyway.

Now, it’s time to turn to the internal assessment of your organisation. Blank writes that it’s essential to look at your operating numbers, as well as the liquidity and likely cash-zero date under your worst-case scenario, as well as your accounts payable and receivable, sales pipeline and the forecast, marketing spend, payroll costs and other variable costs you might incur.

Day One of the plan is where your organisations prepares these assessments. How does it looks today? “What do you believe the world will look like for each of the next five quarters? For companies burning cash, such as startups, how much cash do you have? What’s your monthly cash burn at your new low revenue level? How many months of cash do you have? Cut costs to stay alive for 24 months,” he writes. The author and I have a different approach to exactly who should be undertaking this analysis, with Blank writing that you should “set up a war room and work with your CFO and C-level staff together until it’s done… don’t outsource this to your staff,” while I believe that you’ll get a much more accurate and personable idea of the data when you get some different members of your staff involved in the process. I can empathise with his position, however, and most likely your organisation could be so strained, that allocating their time to this could be a waste of resources.

Day Two is the time to “iterate the assessment with your investors/board” and other key stakeholders if you don’t have either of the above; this advice shouldn’t be for multi-billion-dollar corporations, after all. In essence, this is a time to present the results of your analysis, which will inform your decision making from that point in. Decisions should be pointed, in fact, they need to be pointed at this stage. Blank states that this planning should be made up of three parts: “pivots to your business model, changes to your operating plan, and saving initiatives for the recovery.” He also writes that “the plan must also take into account that this crisis has exposed how vulnerable companies are to a single source of supply,” and the plans that your organisation makes from here should involve some contingencies if the singe-source means that your organisation will suffer in the wake of a disruption.

Days Three & Four are going to be consumed with preparing a new, refreshed & agile business model, as well as updating your operating plan. Blank states from the outset that this should be consumed by considerations of potential pivots for your organisation. “Are there now new customers, new services, and new channels to pursue? Which parts of your business model can now serve the new normal- remote work, social cohesion over distance, telemedicine, home delivery?” Next up, you move to your operational plan, and consider which cost-cutting measures would be most impactful to your organisation. “What are your ‘lifeboat choices’ - which layoffs to make; whether to renegotiate payables, rents, or leases; how to trade off cash management versus revenue growth? How can you shift to focus on customer retention versus acquisition,” Blank writes. “Your head of HR is now head of layoffs… before layoffs, cut all salaries by 20%. Cut C-Level salaries by 30%. Award equity to employees equal to the value of their reduced salaries,” he writes.

“Your CFO now becomes the head of cash management,” Blank adds, “draw down all debt commitments. Ask existing and new lenders for additional funding. Call all large vendors and ask for lower prices. If appropriate, offer to sign a longer agreement in exchange for lower cash payments in 2020 and 2021. Nothing is more important than assuring the company can continue to pay its employees,” he states. “As you make these plans, remember: there will be a morning after. What changes in your industry will be permanent? If you have sufficient cash reserves, what initiatives do you want to keep in the lifeboat that may give you the ability to take advantage of these changes, to recover and grow quickly, or to launch new products?”

Day Five of the plan is time to get feedback. Feedback from the board - if applicable - or feedback from your staff members that have been directly impacted by changes to the organisation. The author mentions high-level board members that might be sitting on multiple seats in other organisations, so you could potentially gain from the “new ideas from other companies in their portfolio, so be open to additional suggestions.” More modestly-sized organisations, however, I think you should still be taking the time out and using this as an opportunity to communicate with your staff members all the changes taking place, and how these changes could possibly be adapted or improved in the near future. After all, no plan is absolutely perfect, especially in a time of crisis where panic is driving markets into disarray and uncertainty is providing a bitter undertone to a lot of the decisions being made.

While there’s not necessarily anything completely new or ground breaking in his article, Blank does outline the basics that are inherent in a quality management system like ISO 9001, or any of the standards. They ask you and the management team to be consistently planning out your strategic objectives as wider forces impact your organisation. This is the time to be extremely proactive about your planning, because like the author states, there will be a ‘morning after’ when the fog begins to dissipate and there are well positioned aspects of the market that you can capitalise on.

In the meantime, however, you should remain focussed on plotting out your organisation’s ability to remain agile, and see what tomorrow brings.

Thanks for your time, and I’ll see you in the next piece.

Kobi Simmat- Director & CEO of the Best Practice Group.

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