Founder and blogger Tax Research UK
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The role accountants play in troubleshooting

Richard Murphy unleashes his inner-troubleshooter and helps a struggling UK business return to its former glory. 

21st Feb 2020
Founder and blogger Tax Research UK
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Red ladder to goal

One aspect I enjoy is being asked to look in on businesses every now and again to offer an opinion on what might be going right or wrong.

For those old enough to recall, this is a role not far removed from the one the former ICI boss John Harvey-Jones once had in the BBC television series Troubleshooter.

Troubleshooting in action

I visited one such business recently. It's grown a lot in a competitive area, and although the market has been tough it has maintained its revenues despite market conditions that have seen others succumb to pressure.

Despite that (and I would not have been there otherwise) things were not going to plan. A good top line does not always result in a healthy bottom line, after all. Given that I had not visited this business for a number of years I was curious to see what the difference was.

I quickly came to some conclusions. The product is as good as ever. The public are still willing to buy it. The product positioning, which is also good, means there has not been the price pressure that I might have expected in this sector.  And, there has even been some steady expansion. Those were all the good points.

Why the business is struggling

What were the bad ones? Management was willing to suggest several problems. They said they'd lost control of labour costs. And gross margins on materials (yes, it's that old fashioned type of business that actually makes things) were a percentage point or two down as well. Some overheads also very obviously reflected a misreading of market situations.

What was very clearly happening was the 'management' was running ahead of itself with its ambitions. New 'toys', equipment, systems and facilities were all acquired as if they were a much bigger entity than they actually are, as if there was a growth momentum in existence that 'management' thought it had seen but no one else had.

Thankfully, there was some awareness of this. Cutting back on spending was in hand. Some of the damage could be curtailed.

But this was not going to be enough to turn the business around to what it was. What was missing was something quite different, and here I really do not think 'management' could see what they had done.

How the management got things wrong

The business had been built on the basis of recruiting some really good people to do key tasks and giving them the incentive (financial and in some cases share-based rewards) to encourage those in line management to make sure margins were delivered. Whatever could be done with overhead reorganisation could not, in this case, reproduce the missing margins.

The two issues were related though. Many of the new 'toys' were expensive exercises in centralising control. As the business had grown, the core management team had lost confidence in its ability to control a growing team. Incentives had changed and discretion had been removed from line managers.

Some issues that had devolved to them had become subject to central control and standardisation, in ways that were not working. Quite simply, the line managers had stopped managing because they were not given enough discretion to do so: from arranging shift patterns to making short term decisions on scheduling and many other matters where previously their on the spot knowledge had kept productivity high in ways that no standardised system could deliver.

The cost of that loss of flexibility, when added to management’s new toys, had eliminated the bottom line almost in its entirety.

What needs to be addressed?

The question was, what to do about it? The change in approach partly reflected the old management team's lack of confidence in itself as the business grew and its new recruits' over-confidence in the ability of tech to deliver what they thought line managers could not. There was more than a technical issue to address here: there was a clash of culture that needed resolution.

The question I had to address was the extent to which I was willing to draw attention to this issue. I knew this business had worked. I had every reason to think it could still work. I had reason to doubt whether the team now in place was capable of delivering that. My job was to say just that.

Three areas to improve

Was I being the typical consultant who stated what those present already knew? I do not know. But I pointed out three things to soften the blow.

The first was some praise: this team had delivered profit. It still delivered sales. This was good news.

Secondly, it had not lost enough of the line management for the old skills to have been lost. There was a chance to revive the knowledge that had previously made the business really hum.

And third, the management team were already disenchanted with many of the 'toys', including some unnecessarily complex tech, they had invested in when what was really required in this business were more soft skills and not more IT.

So, they had all the foundations for change in place. But was the team as it now stood really willing to trust people to deliver again? I said they must. I have no idea what the response to that will be, as yet. But quite a lot of jobs and the wellbeing of the management depend, in my opinion, on them doing so. I will watch and wait and see what happens.

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Hallerud at Easter
22nd Feb 2020 18:37

Maybe refocusing management decision making on shorter payback periods re capex might be usefully introduced to temper their new toy acquisitions, especially if capital rationing in place.

I have pretty much moved all our development spending to mainly focus on time period until capex recovered by either extra income or reduced costs- even such trivial things as changing light fittings and the savings on both bulb replacement cost/interval and lower electricity consumption benefit from such an approach, similar re developing further or existing letting space.

How long before we recover the expenditure is now probably the number one decision making tool we use; fast returns allow more projects to be undertaken with the same pot of cash and faster compounding of revenue and profit growth; or as the Romans might say, SPQR, Small Profits Quick Returns.

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