The Money Machine
Contact: Mike Volker, Tel:(604)644-1926
"Always invest in a company that any fool can run because someday
one will!", Warren Buffet.
It's productive to talk about products, markets, and finance. However, this assumes that we can actually make or deliver the product or service
of our dreams. Let's now draw our attention to the "Operations" side of
our business. Look at it another way - this is our "Machine", i.e. the
machinery which produces the deliverables of our company. It defines what needs
to be done and how it gets done.
I like to think of a business or company as a machine or system in the
sense that there are various inputs, control loops, and outputs. In any
profit-oriented enterprise, there are behind-the-scenes activities that
the business work. There are many activities that all need to be planned,
managed and coordinated. Products need to be designed, produced, shipped,
invoiced, paid for, and then serviced and supported. Someone has to make
sure that the customers, employees, suppliers and shareholders are all
looked after. Companies that look surprisingly simple may only look like
that because of the "systems and procedures" which are in place - and which
are working - but which may not be readily apparent.
As a student, I recall working at Bell Canada where I was both impressed
and intimidated by the "Bell System Practices" - detailed operations manuals
on how to actually do various tasks within the company - be it a credit
check or splicing a cable.
These are often referred to as "Standard Operating Procedures". These documented
guidelines are an attempt to ensure consistency in how things are done within an
Companies need (even though it does sound a bit bureaucratic) documented
procedures to ensure that jobs get done consistently regardless of who
performs the work. How is a returned product handled? How are sales inquiries
handled? Who makes sure that the garbage is taken out?
The Macdonalds Example
Is Macdonalds really a restaurant? I like to think of Macdonalds as a money
machine. In one end go the raw ingredients, people, facilities, etc and
out the other end comes a steady flow of cash. This is a well designed
transfer function. Why? Because it works! Right down to the innovative
french fry scoop and the timers and controls on the cooking processes to
the uniforms and mannerisms of the staff, this machine was not designed
without significant thought. Yet, at the same time Macdonalds has been
very innovative - in its products and in the way it delivers them.
I like the way that Michael Gerber, author of the E-Myth talks about
the operations of a company. He identifies three important activities:
innovation, quantification orchestration. Innovation is pervasive
and applies to all aspects of a company. It is what keeps companies competitive,
fresh and vital. Innovation in customer service, accounting, and production
is as important as product or service innovation. Quantification is essential
in measuring performance. Six Sigma companies like General Electric base
their success on improving quality to a level of perfection made possible
only by quantification of many aspects of its operations. Measuring and
adjusting to achieve desired results is key to meeting business goals.
Orchestration entails execution and management, i.e. making sure that the
tasks get done according to the company's standards.
This is the challenge that faces you in your business - making sure
that the company "works".
The ultimate test of this is: will it work without you? Are the people and the
systems in place that you can disappear - for days or months - and the company
will still be there (and be in good shape) when you return?
The Soul of the Machine
You may be thinking that the machine analogy sounds a bit impersonal. Are
we reducing our workers to being just like robots without feelings? How
much autonomy are we giving our people? How do we encourage teamwork, innovation,
and creativity? Some people excel by writing rules and policies. Others
excel by breaking rules and policies. Tom Peters, a silicon valley management
guru in his acclaimed book, "In Search of Excellence", talks about loose-tight
relationships. By this he means that companies need to have both controls
in place while at the same time offering considerable freedoms to encourage
productivity. One job of management is to cultivate an appropriate culture
for the organization and to strike a balance between too much and not enough
freedom. One way of fostering such an environment is to give employees
a relatively free reign while at the same time holding them accountable
for their actions. For example, instead of having to get several approvals
in order to buy a new test instrument, let an employee make the decision
on her own knowing that she has to justify such a purchase.
The Operation as a Cost Centre
Yes, it is here where you spend your money. The challenge is to spend it
wisely and efficiently to produce a product which meets your prescribed
specifications and quality standards. Every dollar you save here falls
directly to the bottom line. Should you make or buy? Should you contract
work out? These are the sorts of questions you have to deal with.
Do you invest in overhead, e.g. equipment and facilities, or should
you operate as a "virtual company" and subcontract much of the work. Not
only can production be farmed out, but design work, bookkeeping, and so
forth can also be done by others.
Where to Begin?
How are your competitors doing it? How can you do it better? Or, let's
start with a clean slate and be innovative. In some businesses, especially
those which are cost-driven, the real competitive strength or advantage
lies within the operating details of the organization. Perhaps the best
place to begin is with people - having experienced, qualified people
- not just to get the job done, but to figure out the best way of getting
the job done. This part of the business should not be underestimated (it
In reality, many companies evolve. It may not be practical to define
every operational detail at the outset. There may not be sufficient funding
to set up the company in the ideal way.
A good way to approach this is to have experienced functional managers.
For example, a VP Finance will look after financial procedures - billing,
credit, etc. A production manager will fuss with inventory, production
scheduling and so forth.
It is a good idea to start with a plan as early as possible. Think of it
as though you are designing the money machine. The financial aspects of
this have to be an integral part of your financial plan and all costs of
the operations - original setup and on-going - have to be rolled into the
financial spreadsheets. Start the planning by giving some thought to the
"who" part. That is, who will do what?
The Operations Manual
Ultimately, like Macdonalds, your business will need an operations manual(s).
I recall from my student co-op days at Bell Canada, the numerous volumes
titled, "Bell System Practices", which basically spelled out how to do
certain things. It is important for companies to have standardized procedures
for performing certain functions, e.g. how to process a sales order, how
to handle a warranty return, what quality standard is acceptable, how is
payroll to be handled, etc, etc. Even the smallest of companies will have
a certain element of bureacracy. Of course, if well designed, you will
have a marvellously well-functioning bureaucracy and not a "buroid" which
so many inefficient bureaucracies really become! But more important that
putting down all these details at early stages of development, it is more
important to define the corporate structure and accountabilities and then
allow the management team to implement the details.
This is the organization chart. Who reports to whom? This starts with understanding
the key functions which need to be performed. Early on, one person may
wear two or three hats, being both CEO and CFO, for example. With each
position a job description is necessary. Titles are fine, but what do they
mean? The really tough part in business is finding the right people.
"Corporate governance" is becoming more and more important. We often think
of this in the context of public companies but it is also very important
for private companies. it all begins with having a responsible board
of directors. The Board will then appoint the officers and management
fo the company. Remember that, regardless of ownership, the buck really
does stop with the Board of Directors!
Copyright 1996-2005 Michael C. Volker
Last Update: 050707
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