Saturday, October 20, 2007

The art and science of business decision making

As is perhaps obvious to our regular readers, we have recently been spending a lot of time thinking about intergenerational issues. Among the issues that have demanded our attention is the management of a business when more than one generation is involved.

The assumption of power by one generation from its predecessor is the stuff of Sophocles, Freud, and the family across the street. It is also one of the most critical transition issues that faces any business which hopes to succeed beyond the life of its founder. If the transition is managed well, the business can thrive through it and into the future. If it is not managed well, both the transition period and the future can be extremely difficult.

The transition comes to every business, but it can be especially complex in a successful family business, where parent-child issues may mix with educational issues to make decision making, and all of the communications surrounding it, more than a little tumultuous.

As we have mentioned before, one of the best things a successful family business can do to support its future is to insist that the children who want to be involved in the business get outside training and experience. Not only does this approach encourage the development of real competencies, but the perspective it provides on the greater economic environment can be invaluable to the business as it moves into an ever-changing future.

However, this same education and other outside experience can create, or exacerbate, tensions between the generations. Not only are the two generations likely to have different perspectives based in their different experiences – for example, the older may value the importance of face-to-face network building for marketing purposes, while the younger may be more interested in internet-based viral marketing – but these perspectives may also be accompanied by fundamental differences in the ways the two generations approach decision making.

The founder has probably been very successful making pragmatic decisions, based on his or her own perceptions and a nearly intuitive assessment process. The younger generation, on the other hand, has probably learned analytical tools based on theories that are completely unfamiliar to the entrepreneur.

Conversations in which one party argues from experience and instinct while the other argues from analysis based in assumptions and relationships that may be counter-intuitive can be frustrating. However, well conducted, these conversations can be among the most creative and productive that any business has.

The great motivating process in science has long been the inductive development of theories that can then be deductively tested and refined. The same can be done in business: an idea that “feels” like a good one to the intuitive participants can be tested and re-worked so that implementation can be more successful than anyone might have imagined. Careful discussion and testing can also avert an implementation that might be less effective than hoped.

The critical issue in these discussions is to remember that intuition and reason, experience and analysis should be viewed as additive, not mutually exclusive. While we could argue that the onus for ensuring this kind of productive discussion falls on the younger generation as a simple matter of respect, we could equally argue that the greater experience of the older generation makes it their responsibility.

However, our own experience suggests that these conversations are most useful when all parties take seriously their responsibility to contribute, understand, and appreciate all perspectives in the decision making process. When everyone remembers that both generations are able to focus on the shared goal of the long-term good of the business, the process of testing intuition with analysis, and theory with practical reality, the conclusions can be far more robust and chances of success, much higher.

Saturday, October 13, 2007

Letting children fail

The very funny pilot of ABC’s new dramedy “Dirty Sexy Money” was chock full of storylines to be but had a single triumphal moment: the pink suitcase parade of the patriarch’s younger daughter as she defiantly set off on her own. She was depressed by the knowledge that her father had bought her yet one more illusory success, and she believed she could not have a life unless her successes and failures were her own.

Early into the second episode of the season, we learned that she aspires to a freedom she doesn’t really understand. As her avowedly self-indulgent twin reminded her, she may have run away from home, but she was living in an expensive hotel suite financed by her father.

How does a successful parent help his or her children not only aspire to successful independence, but also to understand what that means?

In our last post we talked about helping children identify and develop the skills they will need to success. The program we suggested was hardly simple, but it lacked one crucial element: creating the opportunity for each child to succeed also means allowing each child to fail.

Let’s clarify a little: We are not suggesting that failure is inherently good. Successes –particularly successes that are acknowledged and applauded – are necessary for the development of self-confidence and independence.

But children who come from successful families often think success is a given, and are like the small child who hears the word “hot” and thinks it means ‘hot like a summer day when you can go swimming.’ Not until she puts her finger on the stove and discovers the real pain of that kind of heat does she understand that “hot” is something different from a general atmosphere.

Worse, children who grow up in very successful families may not understand that the way they behave has real impact on the people and world around them. If they are treated by others simply because of who they are, they learn very little about the effect they can have, and how manage their relationships to achieve positive results.

But perhaps most importantly, since we all do fail at something eventually, none of us can really develop self confidence until we have also experienced a failure and both survived and recovered from it. Choices made to avoid failure are very different from choices made to achieve success – and very few of us learn to do the latter until we have proven to ourselves that we can, indeed, ‘pick ourselves up, wipe ourselves off, and start all over again.’

The failures don’t have to be big or dire. But they do have to be real.

We have one client who gave each of his children an annual sum to pay for their college years. When one son ran out of money before paying his third quarter tuition, he had to get a job and make weekly payments on the market-rate loan his father offered as an alternative to dropping out. He paid off the outstanding loan when he got the next year’s allowance, and developed a budget that ensured he could pay all of the year’s expenses. This son had a much different relationship with money from then on and, interestingly, so did his brothers.

To have impact, not all failures have to happen. But they have to be really possible – and to matter to the child.

Another client was most concerned that her children learn about the effort that goes into achievement and the relationship between accomplishment and rewards. Her youngest child was a good but lazy swimmer, preferring to play in the pool to actual swimming. The child also wanted to go on a special outing with her scout troop at the end of the summer. Our client promised her daughter that she could go on the outing if she had been able to swim an entire mile by the end of the first session of her swimming camp. The child was a determined little girl and by the end of the camp session had not only completed the mile but was invited to join the swim team. She never became a star athlete, but she did go on her coveted outing, and she always remembered that she had earned her place on the camp’s team.

No parent can make any child succeed. At best, parents’ efforts, money, reputation can help. At worst, though, those same things can deprive the child of any real desire or drive. By allowing the child both to savor the rewards of achievement and to experience and survive failure, a parent can help a child to learn to move through the world with confidence and independence.

Tuesday, October 02, 2007

It’s not in the genes

Family traditions are not passed on genetically. Some kinds of motor skills and information processing are affected by biology, but whether and how a child develops them and learns to apply them are very much affected by the factors of upbringing. Too often families with successful elders limit the development of the children by assuming that they will follow the “family path” and that the children will have both the necessary skills and the necessary interest to do so successfully.

Nature does not always respond as we might hope to our assumptions. Therefore, the long-term success of any family enterprise is better served if each child is allowed to – perhaps even required to – discover his or her own skills and interests. Each can then get the training and the experience needed to develop those skills. The child can then work at the family’s business if and when qualified, or be provided assistance in finding productive ways to use other skills and interests.

This proposal is importantly two sided: If a child is interested in the business in which the family is involved, the family must set an early expectation that the development of those skills necessary to be successful in the business is the investment the child must make before getting help into the business. If the child does not have an interest in the business, there must be a similarly clear expectation that the child is required to identify other interests and will be supported in developing skills relevant to competently pursuing those interests.

The kinds of help and support parents may provide a child who wants to pursue a new path are likely to be different from the help they can offer a child who follows the family traditions. Nevertheless, this help and support can be crucial if the child is to pursue new interests seriously. They should also carry the same requirement of investment from the child as does help with an enterprise the family knows.

The children of successful parents who share their parents’ interests and skills have ready role models for their pursuits, and a strong mentor relationship may even develop between the generations. However, children of successful and often busy parents who do not share the parents’ interests and skills may have neither role models nor the bases for commanding the parents’ attention.

It is, therefore, the parents’ active participation in helping the child whose interest differ from family traditions that allows such a child to value those talents and develop them successfully. All too often a child who is not thus encouraged by family elders will try to build a life on imitating whatever parental characteristics are most visible to him or her – even when they are stepping stones to self-destruction.

In our experience, it is as big a mistake not to attend closely to the development of a child who is not suited to following the family path as it is to demand that such a child pursue the family’s traditional ventures. We have seen as many family disasters arise from the underdevelopment of children not actively involved in the family enterprise as we have seen business disasters from the involvement of insufficiently trained children in the business – and family disasters are ultimately as bad for business as business disasters are for the welfare of the family.

Friday, May 11, 2007

Is it strategy yet?

Do you remember the wonderful old TV commercial for instant chicken noodle soup? The one in which the adorable little kid, with the big shining eyes, says to the mom, “Is it soup yet?” I suppose we were meant to be reminded that soup was so delicious that it was hard for the kid to wait even the 10 minutes it had to cook. But did it ever really become soup? The list of ingredients on the package reminds us that it was nothing more than a stew of chicken flavored chemicals – barely a distant cousin to the kind of chicken soup that came from Granny’s kitchen where the chicken was allowed to stew all day in a pot with celery, onions, and carrots!

Strategic planning is all too often approached as if it were instant soup: We know we need a plan so let’s sit down and write one up.

The resulting document may be a list of important action items, a statement of intentions, or a description of the way the organization hopes it is seen by outsiders. But it is rarely a useful Strategic Plan, steeped in the deeply held values of the organization.

In a very early post, we noted that virtually every organization has a strategy, even if the organization has never articulated it. It is the implicit commitments that drive all of its members actions, and choices, and processes. It may or may not be productive; it may or may not take best advantage of the organization’s resources; it may or may not help it accomplish what it means to accomplish. But it’s there, underlying everything that happens.

The reason to undertake a formal strategic review and planning process is to bring all of these implicit guides to light, to examine them, and to make deliberate choices about which to keep and which to change.
The choice to engage in such a process often comes about because there is a sense that things could be better – a sense that some change may be needed if the organization is going to be its very best.

No change comes to any organization over night. There is no button to push, no rule to be written, that will enable it to be essentially different on Wednesday than it was on Tuesday – or even in July than it was in June.

Like any complex organism, an organization generally maintains an equilibrium – a set of habits that allow it to function with a minimum of effort. Aspects of this equilibrium state will often be immediately apparent to outsiders: Some people in the organization will almost always allow others to speak before they say anything; some may insist on having final control of certain kinds of assignments; almost everyone will use references and a jargon that will be completely understood by others in the organization but indecipherable or misunderstood by anyone who doesn’t live there.

Many of these habits will be completely hidden to the people in the organization. Their invisibility can make it difficult for the people who share them to examine them and assess their value. Even when the habits have ceased to be useful, and even get in the way of achieving the organization’s goals, they are just part of the air the organization breathes. In effect, when a hot idea threatens the comfortable intellectual climate of the organization, certain behaviors will kick in to cool it down and protect the equilibrium.

We all know the story about the frog and the boiling water: if you drop a frog into the water when it’s boiling, the frog will leap out. If you put the frog in the pot when the water is cool, however, the frog will heat with the water and never notice the changes.
Creating a real plan for an organization – a plan that is imbued by the best of the organization’s values and ideals, and permeates the organization’s culture and daily activities – is a lot like making a really good frog soup: It needs to be done in a way that doesn’t feel abrupt and allows all of the flavors to steep and mingle.

Although the plan itself is a useful outcome of the process, the learning that takes place during the process often has far greater permanent value. And if there were such a thing as Instant Learning, no one would ever make the same mistake twice!

Friday, March 16, 2007

If you mean it, write it down -- carefully

If you watch television, read a newspaper, or even only occasionally pass a magazine rack, you have probably heard something about the recent Anna Nicole Smith trial in Florida. Although the issues there were where Ms. Smith should be buried and who had the right to decide, the lesson we should all learn from it is an important one:

If there is something you want to do or have done after you die – or if there is someone specific you want to make those decisions on your behalf – record it now, in a legally binding document.
This is an especially important issue for anyone whose primary asset is an operating business. In many cases, lack of clear and consistent legal direction has not only ruined a business but deprived a family from the income they need to maintain their lifestyle. It can also result in family battles that make the Smith case look tame.

Where have you written who is to be in charge if you can’t be? Do all of your documents say the same thing? Do all of your estate plans support the directions given in those documents?
Let’s look at the sad case of John and Janet Jones to see how important these questions can be. He founded, and they own, a very successful company.

The good news is that they have kept up with changing technology and have been very adept at meeting the changing needs of their historical customers while also continuing to develop new customers. The better news is that they have been able to develop a second generation of managers. When Janet retired from running the administrative aspects of the business, they hired a very professional CFO who is not only extremely competent but well liked and trusted by the family. In addition, the Jones’ daughter Genevieve is an extremely skilled and creative executive who has learned the business – from both the operating and marketing perspective – inside and out.

The bad news is that John has always assumed that he would be around to oversee the installation of Genevieve as CEO. He has also always assumed his family knew, and would act on, his intentions so that his simple will was written with an eye to making sure everyone is provided for equally.

When John’s car was hit by a drunk driver and he died as a result of the accident, the family and the business were thrown into turmoil. Since all of the company stock was in John’s name, the ownership of the company became part of John’s estate. Because John wanted to make sure that his estate would be overseen by someone younger than he who was a competent administrator and also who had time to handles estate matters while Genevieve ran the business, he had named his older son Jim as executor.

John had not taken into account that, though Jim was an excellent accountant with an excellent job, he lacked creativity and day-to-day operating skills. Jim and Genevieve had also been rivals since Jim had noticed that his little sister was the “apple of Dad’s eye” at the dinner table and in the business. During the long probate process, Jim had final say on all decisions and overruled Genevieve on many of her best ideas. The firm, which had always been so progressive, began to fall behind and lose customers.

When the probate was finally settled, the firm’s stock was finally distributed to John’s heirs: Jim, Genevieve and their younger brother Jared each receive one-third of the voting stock in the company, while Janet received 100% of the non-voting 8 ½% cumulative preferred stock. Although Genevieve tried to run the company well, her brothers out-voted her on nearly every important decision. Revenues declined, Janet’s income declined, and soon there was nothing left to reinvest in the company’s operations. In less than 5 years the family was forced to sell the company, John and Janet’s life work, for a fire sale price.

Good planning and the execution of supporting documents could have avoided the long probate, ensured Genevieve had the control needed to run the company effectively, and provided good cash inheritances for each of John’s children not working in the company, and Janet who has shared in the creation and development of the asset.

We do not advocate that anyone try to exercise inhibitory control from beyond the grave. However, the failure to structure an effective transition that will allow an operating asset to continue to function effectively after the owner’s death or disability almost always creates the opportunity for significant damage both to the asset and to the family it is intended to support.

Friday, February 16, 2007

The value of Boards

If you read our postings carefully, you might be inclined to accuse us of having a world view that could be summed up as “On the one hand . . . . and on the other. . . .” You would be right, but we wouldn’t really take it as a criticism. As we have said in several contexts, strategic planning is often about finding balance in complex situations – and you can’t do that unless you look carefully at one side and then the other, and the other, and the other, etc.

In an earlier posting we talked about the value of multiple perspectives in planning. We talked about inviting executive teams to bring their expertise and the perspectives of their constituencies to the process of planning and problem solving. This kind of active executive participation in the process of planning is one way to invite multiple views.

But when an organization is facing significant long-term issues or just very thorny near-term issues, even active executive participation in the planning process may not be enough. The executives are generally responsible for decisions that have been made in the past, and which they may feel they have to defend. In addition, the employee executives often have long experience with the organization or the industry it is part of, and may not have the kind of perspective that comes from being a less familiar “outsider.”

The Board can provide a different set of perspectives. The independence of Board members should allow them to speak openly to the organization’s senior executives and to each other. In addition, their expertise, developed in a variety of venues, should allow them to see the issues facing the organization differently from the way they are viewed by its own executives.

Whether the Board is structured as a Board of Directors with legal responsibility for the organization or as a less formal Board of Advisors, its greatest value to the organization will achieved if each member is willing to engage actively in policy discussions and bring to the discussion the full measure of his or her expertise. Each member will, of course, also need to bear in mind that his or her own experience may not be entirely germane to the organization’s situation. For example, it is generally not helpful if a financial executive from a for-profit organization insists that the profit implications of an option under discussion by a non-profit organization are the only important implications. However, it is no more useful for that Board member to refrain from insisting that sound financial analysis be taken it into account as alternatives are considered.

Similarly, in building a Board, it is important to include members who will bring a wide array of knowledge, experiences, and perspectives. A Board entirely comprised of people with similar experiences – whether those similar experiences are in finance, or marketing, or law, or anything else – will generally fail even to see (much less know how to assess) issues that may be readily apparent to someone with a different set of experiences and expertise.
No matter what an organization’s activities and goals may be, neither its executive staff nor its Board hold a monopoly on astute perceptions and good ideas. To make a plan that comes close to achieving strategic balance among the many issues faced by the organization, it is critical to make the most of all of the insights available to a broad variety of the organization’s experienced, committed constituents.