Business Management zone

The FD's Diary - Maybe, just maybe

The FD's facing a uncertainty

April 28 - The customer had second thoughts. Apparently they circulated our planned installation dates (well, my planned installation dates) and questions did arise about why they weren't in the order they had supplied. There was apparently a sort of logic on their part to the ordering which had much to do with the convenience of their regional managers who have to sign off the installations within an agreed period of finishing the work rather than any operational logic other than avoiding hassle.

Now someone on this site suggested we offer them a part of our savings from changing the order, so I did. I didn't actually suggest the degree of our saving; I just said (since Ops made me discuss the issue since he claimed it was a contractual, not an operational one) that we could offer a fixed price discount (which was about 20% of our savings) if they'd go with this schedule which suited us and we'd do the same on each subsequent month if they'd do the same, and the guy I was talking to bought the idea immediately. He could take hassle from his regional managers for a price discount.

Maybe we are there.

Maybe I'd better get back to the memo to the shareholders.

Although maybe I don't need to. We might be near to being efficient on this soon. Maybe.

There's not much certainty around here right now.

* * *

April 26 ' Sleeping on the issue didn't resolve the doubts Ops and his manager had about asking the customer if we could change the order of site installation to improve our productivity. They still sat on their hands like a pair of dithering twits (if I'm honest). This really annoyed me. I know the theory is the customer's always right ' but in the last couple of weeks we've also learned (the hard way) that the supplier knows a thing or two and we should listen to them.

So in the end I simply did a month's schedule from the list I've got of what is planned and tried to organise it as efficiently as possible and then asked if we could propose this list to the customer. I stressed, we're not asking them to change anything, we're proposing this list of installation dates.

That, somehow, seemed more acceptable to them and it duly got sent yesterday morning. Guess what? They've said it looks OK bar one or two where they think there are conflicts with other operational issues their end. That's OK. I can live with that to keep them happy. But it's a lot better than it was.

I have to admit I do feel like screaming with frustration on occasion. Why is it because we're smaller than the people we're supplying that we have no back bone? What could we achieve if we were a bit more confident is what I'm beginning to ask.

* * *

April 24 - I worked hard to put a positive gloss on my draft mail to the shareholders telling them of the profit consequences of our contract.

And then I decided we hadn't gone as far as we might to improve things. So, I went to see Ops and asked if I might speak with his contract manager again (because I'm being a good and compliant person and am not upsetting him by going round his back this time - which I think he noted and was pleased about). I also explained to him what I was worried about. It's simple. The installation schedule appears to make no sense. The teams are being sent hither and thither like the proverbial flies, but the result is that the ratio of time actually worked (i.e. installing kit) to time spent traveling is poor. When the quote assumed high degrees of efficiency this makes no sense.

Ops was not familiar with the reasoning for the installation schedule, so this time we both got the manager in. Apparently the schedule was not planned, at least by us. It came off a list sent by the customer. And neither the manager or Ops could recall discussing why the list was ordered as it was. So I asked what seemed like an obvious question, which was whether we had any latitude to change the ordering on the list, within reason.

As I pointed out, if we follow the list on the first phase we seem to be sending a team to East Anglia to do just one job every three days or so. They could do two in a day, maybe 5 in two days if they stayed over night (although Ops thinks I'm optimistic there). But a virtual doubling of productivity would make enormous inroads into our deficit.

So I asked if we could get the customer to agree a revised schedule and suggested one for a month or so, so that all sites would be done pretty close to the timing the customer had in mind but with us doubling up site visits and reducing journey time wherever possible. I think we could be at least 25% more efficient as a result.

Ops and the manager were really reluctant to do this. It seems they're really worried about upsetting the customer, but I'm baffled as to why we can't ask. But I'm being tactful and said could we meet again tomorrow when they've had a chance to think on it. You never know, they might agree.

In the meantime the shareholders are staying in the dark, just in case.

* * *

April 21 ' Well back to normal in come ways. Ops and I had Friday lunch together.

We discussed the problems we've faced, realistically. This has been our first big bust up, which in some ways is not bad going (how many marriages take this long to get to that point ' and we see more of each other than many couples do?). We're keen not to repeat it.

We also have had to face the fact that whatever spec changes can save they're not enough to deal with the over-optimistic efficiency assumptions in the price the client has been offered. We are not going to lose on this job (which is a relief) but we are going to dedicate a lot of resources to it on something less than full margin, and that's not going to help us achieve the result we need.

We had to agree what to do about that. Reluctantly Ops has agreed we have no choice but tell the shareholders. It's my job to craft the memo, but I've insisted we sign it jointly. This is a material change in our budget expectation under the terms of our shareholder agreement. We have to report it. I can hear the proverbial flying already.

Before we do that though we feel we have to have proposals to make about how to avoid this. One comes from a comment on this site. The reality is that Ops and I run this company. The other directors take rewards and input criticism. But that may not be entirely healthy. We have no third party to turn to when stress arises. We can't ask for another director ' the dynamic of the board would not allow an odd number or change in membership, but there's a real need for us to have someone to talk to when issues arise. We're going to have to think about this.

The other issue is that Ops has to comply with systems. He is part of the problem, and I had (carefully) to tell him so. I think quite a lot of recent problems come down to the fact that he gives the impression systems are for others, and s they have been less respected than they might be. This stresses the need to go back to look at the system review I started after the stock problem. Another thing for the to do list'.

* * *

April 20 ' Do you remember when reconciling the P35 with what you'd paid in the year was a nightmare?

I felt so smug when it all tied up without problem this year. Of course IT helps, but so does discipline. And I gave full praise to #3 and #5 who pretty much look after this.

Mind you, there are till the P11Ds to do.

* * *

April 19 ' Amazing what a break does. As the saga of the fortnight preceding Easter showed, Ops and I had got a bit tense about things. A few days off and I managed to get some stuff in perspective.

First of all, I had to admit I'd just been wrong about wireless solutions. The SIM based one was as good, and cheaper and more efficient. So I said so when I got back.

My swallowing pride helped Ops agree he'd flunked the contract pricing process. Badly.

And he'd also over-specced the kit. Badly.

So, lots of mistakes had been made. On that we agreed.

And when it came down to it, and we talked this through at length last night ' it was because we both jumped to conclusions. Put simply, our research had been poor. No time had been allocated to it. Not enough budget had been given to it. When we had asked the right people we hadn't believed the answer (our supplier was pretty much right all along, if we're both honest) and when we'd asked the wrong people they'd given us duff advice.

There's got to be a moral in here. I guess it's that we need two things. One is time to think. Two is we need a budget for research. Doing this on the hoof is not good enough.

But I'm glad that we talked about it.

Now I still have to finish that spreadsheet, but at least #3 is back.

* * *

April 13 ' Ops and I met with the main client contact. There's good reason. Some sites are meant to be installed soon. So, we wanted to agree some contractual issues and the change to the power supply.

Since our IT people have not come back to us on costings or technical stuff, we decided to just mention power supplies for now.

The daft thing was it went through on the nod. We told them it was a better solution with less disruption and mess. Great they said. And that was that.

Which was enough for me. I'm taking the Easter weekend off.

* * *

April 12. Furious call from the ex-CEO. He wants his accounts, not that there's evidence that he ever reads them. Well, sorry I said, but I just can't do them this week. So, you'll have to wait.

It's not good enough he said, blah de blah de blah. And I just listened (which is disconcerting, I've always found) and then quietly said that I couldn't do them because I was trying to increase profits instead, and in my view that was more important.

This perplexed him. Accountants are a cost in his opinion. How could I be adding profit? Well, I explained when Ops and I started the detailed planning for the installation we realised some changes could save us money potentially so we were now working to see if they would. But, he wanted to know, what had that to do with me. So I explained that sometimes when an accountant looks at something in costing terms they can see things that don't make sense from any other perspective, and in this case it had looked like we might have been over-speccing some things we were now looking to change. Since I'd seen the possibility we were working together on it.

As usual, he sounded dubious. But minutes after he rang off Ops told me he'd rung him, and seemed pleased we'd been finding savings. How much, of course, he'd asked. Well, we'll have to wait and see Ops had said (thankfully). But at least this was team work again.

* * *

April 11. The IT people have been. We can set up a wireless network and pretty much ring fence it from interfering with the client's systems without much problem. All it needs is access to an email driver, and this could be established for its own use. But they wonder whether a client would agree. So do I. It could be cheaper over time if they did, and more flexible (probably). But there's only one way to find out. That's to be sure of our facts and then see the client.

This time Ops was fully involved. I think he's buying in reluctantly to the changes I'm driving through. Give it a day or two and he'll think the idea was his all along I suspect. But the last week has felt like I've used the full force of my personality to drive through a change. I've done that here before when the shareholders had to go. But it's not easy. I don't want to do it often. Mind you, I don't like losing money either.

* * *

April 10. I had to spend a day in the office. I have an accounts department which has been headed for the last week by a team member just back from having a miscarriage and another working during her university vacation. But I have to say, they're holding the fort.

However, no one is paying any attention to the March accounts as #3 is on holiday and I'm distracted. So I had to make a decision, and cancelled any thought of preparing them until #3 is back. I mailed all the directors to say so, explaining staff shortages and the need to devote myself to contractual arrangements on the new project. I thought that would not let on to the shareholders that we're having problems as yet. After all, we may solve them.

Ops stormed in to see me though. Why wasn't I getting on and doing my job rather than trying to do his, he demanded. I asked where he was on Friday. He said he was on sales calls.

So I sat him down, got a coffee and explained what I'd learned. Then I made clear that if I was right and we could simplify the power supply enormously (with the client's consent, which I think is likely as it involves much less disruption for them, which is the sales point) then a lot of the costing problem goes away because it's cheaper to buy, cheaper and easier to install and we're back towards an even keel.

I've got to admit that this helped. I think he's really worried I'm trying to land him in this one. He knows he blew it, and is desperate to avoid the blame. I'm getting him off the hook, but I can't tell him that. He just has to know it, and I'll just have to let him take the credit. It's the only way I can see of getting this relationship working again.

Once we were talking again, at least in a fashion, he agreed to discuss with me the contract he's negotiated for the SMS communications tool which drives the alert system. And I admit, I think he's scored on this one. It is ridiculously cheap. How low will companies go for marginal sales on mobile systems? And given that all we need is SMS, the technology is so cheap it is daft. I'm having my doubts whether we can beat that with anything else now, he's done so well. So I said so. In which case he agreed we should also look at a network just in case. So he called in our own IT people for tomorrow morning to see what they think, at least for starters.

I'll be pleased if we can build on this.

And now, it's back to the spreadsheets. I still want to know this can work.

* * *

April 7. Fascinating day. Spent most of it at the product manufacturers who were key to our re-designed process. I had three essential questions:

All seemed to me to be glaringly obvious questions. As far as I can see (1) and (2) could have a significant impact on installation cost as a supply straight from a plug will be much cheaper than from a new wired in mains supply and with no cleaning of the supply at that. External transformers are also as cheap as chips. And we are already planning rechargeable battery back up in the kit either way, so even if someone pulls a plug we're not going to see the system keel over since it will be programmed to tell us that in any event.

As for the wireless bit - if we can piggy back a wireless network just for this purpose onto the client's system then I am presuming that we can get them to set up an email alert to us. That's an assumption, I know, but if it can work then I guess that is massively cheaper than alternative communication systems, at least in the long run (even if they are also cheaper than people turning up weekly, as we do now).

As I mentioned, I expected Ops at this meeting. He did not show. That's something I'll just have to worry about later. For now I learned three things:

1) We specified the need for a clean power supply. The supplier does not think it necessary. The kit is not that sensitive. It is over-specced in the suppliers opinion.

2) We specified the integral transformer. Apparently we insisted that this made it more reliable for outside work. The manufacturer has doubts on that score. Changing it would be easy, and make it cheaper.

3) From their point of view the internal chip is already designed to undertake a limited range of actions. It can as readily be told to trigger an email in the event of the pre-defined problem events occurring as an SMS, which is what it will do now. There is almost no re-design required.

But, with regard to the last point they have an extremely good question. Will the client allow us to hitch onto their IT for transmission of the email? It would be hassle to have to locate our own server on their site for such a limited range of tasks. I guess I'll have to address that next.

But next, it's Ops I have to deal with.

* * *

April 6. A new PAYE year, and I'm just hoping #5 is doing all I've asked of her (and which she assures me she is, which inspires little confidence right now). I'll just have to believe her as I continue to give time to the problem contract.

Ops arrived at 10.30. Our relationship is really strained. His opening shot on seeing me to accuse me of undermining him by talking to the Divisional Manager. At this point I lost my cool. I'm not proud of it, but there comes a point where someone treads too hard on your toes and you react. He stood too hard at that moment and I made clear that he was 'out of order'. Thankfully, I then managed to turn my back and walk away.

Fifteen minutes later I asked him to come to see me and he refused, saying he was too busy. At that point I had to play my trump. I said unless he was going to co-operate with me immediately I was calling an emergency board meeting, over his head. He decided he could make it ten minutes later. What I didn't tell him is the board meeting is almost bound to happen anyway, this issue is far too big to sweep under the carpet.

Having got him to come to me, which I felt psychologically important I suggest we got out of the building to discuss issues. People cannot afford to see us in disagreement.

We spent three hours bashing out issues. What Ops cannot accept is that he's made a complete mess of the costing of this. What baffles me is why he left agreed systems so far behind. But I'm beginning to wonder whether the fact that others are not following systems is because they're getting a steer from Ops that these things don't matter. I can't find another explanation for the pattern that's emerging, and it's logical. There weren't that many systems when I got here and the ex-CEO (who is Ops role model) did what he liked, as owner. I think Ops has been doing much the same and I'm only now realising. The result is a culture clash. I'm not sure how to resolve this and didn't try to. In the end I simply explained what I thought the outcomes might be, making clear that unless we can find ways out of this our budget for this year is blown apart, and that the result for last year might have to include provision for losses which would hit his bonus hard. Nothing like making these things personal to have an impact!

Rather than labour the point, I moved on to design. But, again, I got less than I expected. I have a funny feeling Ops has given this less thought than I expected. He can't explain why technically the power supply has to be as it is, which seems costly at every level when a simple external 12 or 9 volt transformer might do the job in many cases (and if the resulting low volt supply can then be slotted through a wall in a tiny hole have no external safety issues when located outside). Nor does he know why wireless networking wasn't thought about, but his IT knowledge is sketchy at best, even when compared with mine.

I think he sensed my dissatisfaction and the strain was apparent. I asked him what he planned to do, and he said he was leaving the costing issue to me. So I asked if he thought that the product was the best we could do, or should we seek to innovate again to save cost and enhance it. He thought not. So I told him whatever he thought I was going to call the manufacturer who'd designed the kit for us and seek to explore options. He was emphatic that I must not. I told him I was going to, whatever he thought, and it was my duty to do so. Having taken the precaution of having their number with me, I rang them in front of him. That's my first meeting tomorrow. I've invited Ops to join me. I'll see what happens. But I have a feeling we won't be going together.

* * *

April 5 - Model building has begun. The divisional manage had done his sums. It turned out that he already had a summary of all the sites that had to be worked on and when, how much kit was required at each site and which, if any were unusual. This was invaluable. Reviewing it together we could, within an hour or so, suggest there were really 4 types of site, differentiated by complexity, and three broad locational bands, differentiated by distance from base. In combination these factors could suggest the time and resources required to install. He then went away to allocate these by anticipated timing of the work as I also want a cash flow out of this.

Throughout this Ops was nowhere to be seen. He was booked out with clients all day. I have to admit I was annoyed. I could find no evidence of when the meetings were arranged.

So, I moved on to read the project specs in detail. To get this in persepctive I must tell you a little more about what we do, and leave you to do some guesswork as we have to remain anonymous.

Our kit is pretty essential on client sites. And it must work. The issue is that this has to be monitored regularly, hence the maintenance work we do by regular site inspections. These, overall, cost more than the actual kit itself, but that's life. What our new equipment does is add a self testing component to the kit so it can alert when the kit needs attention and effectively call out an engineer. The problem with that though is that this (I'm told) needs a stable power supply to ensure the communications kit, based on basic telecoms equipment works because batteries (apparently) can't cover the power supply, although they can provide a back up. It's this self monitoring kit, rather than visual inspection monitoring that we have been trialing. And it's worked.

But although I got quite involved in all this when we were doing the changeover and we were dealing with the problems with our Belgian supplier some time back, it's struck me that life has moved on even since the latest versions were brought into use.

Having to re-read the spec I'm baffled as to why the power supply is located where it is, in the kit itself and therefore requiring a 240 volt supply to the kit, which can on occasion be outside, only to be transformed to 12 volts for use. I'm also therefore baffled why if we can use a battery back up we need a clean power supply. And candidly I'm baffled why we're now using a telecoms solution. I cannot help but think that wireless networking must offer a better solution, but I don't know how yet.

So whilst I've been starting to build the (inevitable) spreadsheets to model the contract in the detail I now require I'm also asking questions about the whole contract. But at the end of the day I need to talk to Ops. And he's not here. I've left messages on his phone. He'd better be in tomorrow.

* * *

April 4 ' Yesterday was another long day. I learned a lot, and feel no better.

We have given an undertaking to supply to the client that is I think contractually binding. The only way out is if we can find a good reason to offer what they will perceive to be a better (but for us cheaper) system, about which I can assure you I'm thinking.

And even if lawyers could get us out, I think we're stuffed in goodwill terms. The customer put this issue out to tender. The market knows we won it. If we fail we cause the customer and ourselves problems which are bound to haunt on us. So we have to do it. This is useful to know in a way, because it eliminated one possibility from consideration.

I can't blame sales for the costing either. This seems to have come from the operational side. In fact it seems to have been almost entirely the work of Ops.

He remains unhelpful. It seems like he's in a straightforward sulk. I've sought to reassure him because I need him on board, but he still does not seem to get the fact that what's worrying me are the wholly artificial margins in the pricing because the levels of efficiency assumed and the margins included are just wholly unrealistic. I'm baffled as to why. He just seems to think that a big chunk of new business requiring a high degree of management can be priced marginally without impact on overall profit. It seems that he thinks that this project will draw no resources from elsewhere when in fact it looks like it's going to absorb them quite heavily. It already is!

So the best I could eventually do was go round him and talk to the divisional manager with responsibility for installing much of the kit we've contracted to supply and ask to discuss the whole project from bottom up with him.

We did this for three hours. Now my head is swimming. He seemed quite pleased to talk; it's clear he's been quite worried about this and felt he hadn't got the resources he needed, and really appreciated the time to talk it through. The plus of that is he's gone away wanting to get me data to show what is really required on a site by site basis.

And then I spent last night musing on the whole project and what to do about it. I don't know as yet, apart from the fact that I really do want to model it from bottom up to see that the cost implication is. When I know that I'll have a basis for making further decisions, I think.

But I still have the question? Do I model at marginal cost, allowing for reasonable waste and efficiency tolerances, and then attribute actual overhead allocations, or do I model at absorbed cost rates? I think the former is better now we're in this mess.

* * *

2 April - It was a long Friday. And I guess a significant one, on which I need to reflect.

For me I suddenly found I was the driver of an operational review about what was happening here. This was fairly new to me. Suddenly Ops was having to account to me for his actions because something appeared to have gone seriously wrong. This is quite different from sharing opinion as has been our habit. In the face of error he was defensive and I found I had to treat him as an employee. Having to extract information from him was an unusual experience. If I have to reflect on anything at some time it's the implication of this on our relationship.

But what has happened? And what are the consequences? These are the immediate concerns. What happened is we made a complete mess of quoting this job. That's a kind interpretation.

For individual small jobs we have a pretty standard templates for quoting which makes sure sales people stay within what we believe the be acceptable parameters. These work (well, right now the best I can say is I think they do). But it seems that when we came to quote for this major new rollout of fairly untried kit Ops and the sales team seemed to leave all that behind them. They started from scratch. As a result all that we learned in putting together those costing templates seems to have been completely ignored.

By the way, and before anyone points out the obvious, let me put my hand up before we go any further. I have to note I have some responsibility for the failings in this process. I didn't get involved in the quoting process. I could blame distractions during what was meant to be paternity leave. It's an excuse. But I kick myself for not asking more. I trusted people to follow systems, and yet again I seem to have been too trusting. This is becoming an unfortunate pattern.

That said, I would have guessed that if people here were going to develop a quote they'd have worked from the bottom up and then looked for economies arising from the bulk of the work. After all, at the end of the day people will have to go out and actually install this stuff on real sites. So I can't see how you start anywhere else but on the site. I would have accepted that whilst each site was different they could have been grouped e.g. into four or five different types with a few odd exceptions (e.g. the client's regional offices). Over 300 sites this would have been fair. I would not have assumed a homogonous site as we did. And we did that because we worked 'top down'. The project was seen as one contract installing 300 sites, not as 300 site installation sunder one contract which might give some cost savings. I think that was a disastrous departure from reality.

So too was the use of marginal costs as if this was entirely incremental business. I accept that we always expect a lower margin on installation than we do on maintenance. We accept the low installation margin to win the maintenance, of course. But we have overhead loaded costs in use because we do have to cover overheads, and the installation business is expected to make a contribution. Indeed, the accounts are designed around what we call 'contribution' because gross profit is such a meaningless term to most people. But we seem to forgotten that too.

The process used seemed to look at the company as if it was created solely for this project and as if it had no other work and no other costs. So, it seems to have been assumed that everything is done on a marginal basis e.g. labour has been priced starting at pay rates assuming no waste and minimal mark up for NIC and just about enough ( I think ) to cover holiday and some processing cost. There seems to be no waste allowance. And van time has been allocated on the same basis as if we have vehicles which simply drive a set number of miles per job at a rate per mile for fuel. Again, other miles e.g. to get to the start point for the day appear to have been forgotten, as is wastage. A day rate plus miles as we usually use seems to have gone by the wayside.

Materials were supposedly then added at an average site rate, bar it seems those materials needed to link the kit to the mains - which is significant but in terms of the other issues as it turns out, which is in itself worrying.

These were totted up (multiply X, being the total per average site by 300, it seems) with a profit added. The profit is not broken down. It seems to be the required contribution which due to size of the contract is less than the usual rate on the accounts or that used in costing. But no allowance has been made as far as I can see for supervision time, warehouse time, payroll support time (and we may need new people) and on and on.

All I can say so far is that I have a strong gut instinct that the pricing is horribly out. But now I have to work out by how much that might be so.

What I also fear is that we have little chance of re-negotiating this, miracles apart. Since I'm not expecting any of those I'm calling in everyone involved in turn tomorrow. I'm starting with sales to find out where we are with contracts. Then I'm having Ops in to check that my findings are right. Then I'm going to have some of the divisional guys in to ask what time this will really take to do and get some legwork on the ground covered. Then I'm going to hope a plan begins to fall out of that lot.

And in the meantime #3 is on holiday. Why now of all times? Still, she deserves one, I guess. But I could do with her here. AJ is not the person to lead the department whilst I have this to deal with.

At times like this I realise why I am paid more than them.

* * *

In March the FD's new financial year seemed to go from bad to worse with staff and then commercial crises dominating the month.

For previous installments of the FD

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