“I don’t read very well. So I don’t think I think very well either.” Galinda smiled. “I dress to kill, though.”
─ Gregory Maguire, Wicked
I want to offer you a deal that will double your net worth. And all that’s required of you is to make a decision, something you do every day. There is however a catch: there is a 30% risk that you will lose everything. Everything. How simple is that; you make a decision and accept the possibility that you may lose everything.
I don’t know about you but I’m not real crazy about the possibility of losing everything I’ve worked so hard to acquire. Do I really need to risk losing everything I’ve already created? I think most of us would graciously runaway from this wonderful opportunity. Posing the offer so directly creates a tremendous advantage; the possibility of losing everything is made obvious. My offer alerts you right from the start that there is risk. Unfortunately, most business decisions don’t announce risk so transparently and in many cases the risk is very effectively disguised. This leads to business owners and executives making seemingly simple decisions that unnecessarily put the business at risk oftentimes with no hint of doing so.
The topic of risk management is extremely complex and a topic I will return to in future issues. At this time I am going to focus on Business Infrastructure; employed effectively, the first line of defense against unacceptable risk. I intend to divide infrastructure into its components, People, Things and Rules, discussed individually over the course of the next three issues of The Business Odyssey.
I use the term business infrastructure frequently. Business infrastructure is essential to business success, financial performance and effective decision making. Business infrastructure is also the heart and soul of business maturity. The term business infrastructure is confusing and means different things to different people. Its meaning varies widely and usually depends on perspective; reminding me of the parable about the six blind men describing an elephant. The parable tells of each blind-man’s individual perception, while each description was true, none revealed anything to suggest that the object was an elephant. So rather than starting off describing parts, I am going to describe the elephant – or in this case – describe the meaning of business infrastructure.
Business infrastructure is an organized assemblage of people, things and rules that working together produce specific business outcomes.
Business infrastructure exists to satisfy one of two purposes: to serve and to protect. Businesses rely on infrastructure, sometimes unknowingly, to ensure that the multitude of tasks, some visible and some invisible, are accomplished correctly so that the business can provide its customers the satisfaction expected. In this sense business infrastructure exists to serve the business in its pursuit of creating customer satisfaction, providing a return on invested capital and distinguishing itself from competitors. Separately business infrastructure also exists to protect the business from unintended or undesirable consequences.
Managing human resources is a useful example to illustrate infrastructure’s ability To Protect and To Serve. Companies reaching a certain number of employees and need a dedicated manager of human resources to oversee complex administrative and compliance demands. Generally speaking, the HR Manager ensures a correct payroll, transparent benefits information, standards of conduct, and other regulatory compliance. The compliance requirements pertaining to employees is a nightmare and gladly delegated to someone. This is a simplified description illustrating the obligations the human resources infrastructure is expected to satisfy. I suspect most senior executives recognize the appeal of delegating those responsibilities. My example highlights the To Protect half of the infrastructure equation. The responsibility of the human resources infrastructure is to protect the business from the consequences associated with non-compliance. This, not uncommonly, ignores the To Serve contributions.
To Serve contributions are perhaps a little less obvious. How does Human Resources Serve the business, in addition to protecting the business? Human resources can be critically valuable recruiting and retaining the best people.
A recent client engagement included helping the company recruit a controller to replace the CFO who had recently departed. Senior executives were primarily focused on spending less. The old sage “pennywise dollar foolish” rings familiar. The Company’s compliance culture inclined the HR manager to concentrate his time writing an “acceptable” job description, posting an advertisement, screening resumes and scheduling interviews. Completely absent was a dialog devoted to the position’s contribution to present and future performance. Simply said, executive managers knew a title and price, but had no clue what the person they were attempting to hire should do. The HR infrastructure could have fostered the dialog, crafted alternative job descriptions, analyzed salary data and summarized the qualifications of candidates so executives could better understand the decision they were trying to make. As an aside, this all happened but was led by an experienced outside consultant (me) rather than organically by the HR infrastructure.
The manager of human resources need not be an expert in the specific functional requirements but rather possess the ability to understand what is required to recruit and retain the best people. This of course will only happen when the senior executives recognize the business infrastructure’s ability to contribute to the business.
There is no ready-made business infrastructure template that fully satisfies the needs of an individual business. In the next few issues I intend to dissect business infrastructure into its three interdependent components: 1) People; 2) Things; and 3) Rules. The business’s infrastructure is like other business assets – capable of contributing to satisfying customers and rewarding capital providers.
In the third issue of The Business Odyssey I introduced the Fundamental Business Purpose. My premise asserts that every business must convert revenues and capital into customer satisfaction and a return on invested capital. As you may recall I illustrated this Purpose by using the analogy of an internal combustion engine. The difference between a lawn mower and a formula one race car engine is not function it is the intention the engine’s design seeks to satisfy and this is reflected in its infrastructure. Same with businesses; the difference is in the infrastructure.
Infrastructure’s contributions to business performance may take many different forms. It may be direct such as the packaging Intuit Real Estate Services used when it shipped loan documents. Alternatively, it may be less obvious such as General Electric’s disciplined application of financial measures in decision making. My hope is that business leaders will think differently about business infrastructure and be inspired to challenge their infrastructure investment to contribute in new and imaginative ways.
Returning to my irresistible opportunity to lose everything. I observed that many executives make outwardly routine choices that expose their business to serious or even catastrophic losses. The most common example is the decision so often made to trade diligence for expedience. It is not uncommon in my experience to discover business infrastructure’s part in decision making routinely dismissed or disregarded. Business infrastructure is begrudgingly incorporated as a business grows primarily as a means for business executives to free-up time for other matters (principally making money) and to ensure tax compliance. Most middle-market business leaders I’ve worked with assume that all the tedious infrastructure tasks are satisfied and the less time devoted to thinking about business infrastructure the better. There is a certain appeal to this management stratagem if not for the one minor problem that ultimately it produces dangerous results.
In the issue of The Business Odyssey to follow I will discuss the people component of business infrastructure. This forthcoming issue is titled Bureaucracy – Success’s Adversary or Savior? When the ultimate goal is producing customer satisfaction and a return on invested capital there are countless hidden tasks that need to be performed correctly. Hardly surprising most of these are taken for granted, we don’t think about them we just expect them to be accomplished producing the right outcome and doing so at the right time. These tasks are accomplished because of people. These are the folks wearing the green eyeshades that are charged with saying no; or least that’s what we’ve been led to think.
Bureaucracy is a convenient, albeit most often pejorative, label describing the organization responsible for ensuring all the grubby back-office work is performed correctly and timely. This term, bureaucracy, unfortunately has a reputation, deservedly in many cases, of being a ridge and unyielding organization placing more importance on pushing paper than producing results. Labels, while convenient, are oftentimes misleading. Highlighting bureaucracy will hopefully encourage executives to re-focus their attention on the outcomes and values infrastructure offers by looking beyond common and misleading labels. I also want to dispel the myth that bureaucracy conflicts with entrepreneurialism. Diving deeper into the meaning of bureaucracy may provide a fresh approach to business infrastructure that produces superior financial and operating performance.
There are three components to business infrastructure: People, Things and Rules. Things take on many different forms but can include tools, software systems, information, machines, locations, or the like. The issue following people will focus on infrastructure things entitled “Things – The Levers of Business.” My intention is limited to exposing the idea that a business probably has a lot of idle assets that can and should be put to additional productive uses.The final installment in this series on business infrastructure will be “Rules – Success Needs a Playbook.” Smart, motivated and well-meaning people are essential to a successful business. Business success however depends on people doing the right thing at the right time. And that should not be left to chance or carelessly delegated. Rules, as I’m using the term, means well thought-out procedures and protocols that describe how specific circumstances are to be resolved. Rules also ––––clearly identify responsibilities and authorities. Clear and well understood rules improve the efficiency and effectiveness of dealing with routine tasks. Moreover, it allows executives to sleep better knowing that their time and energy is only required when some exceptional or unexpected event arises. Exploring why rules are important and how they manifest to produce a well-functioning business infrastructure will be the subject of this upcoming issue.
Collectively, businesses need not only a solid foundation, satisfying the Fundamental Business Purpose, but also sturdy framing in the form of business infrastructure. Mature, sustainable and profitable businesses use their business infrastructure to serve underlying business intentions and to protect the value that has already been created.