Why do they still do this ? - when it has been well-documented and well-proven for many decades – even for centuries - that so to do can mean inevitable corporate failure / suicide 

A relevant case study

The Background - A significant up-market wine importing and distribution business which had been growing steadily for approx. ten years and with a turnover of approx. £10m, and with approx. 20 staff including ten Sales people had not over that whole period made any significant Pre-Tax Net profits, and in fact had made mostly minor losses in most years, albeit that the business had provided the Founder / Chairman with an extremely comfortable life and lifestyle, and a quite magnificent Pension Scheme !

However the said Chairman, who had been quite clearly the initial sole driving force behind the business, was acting nowadays as a sort of rather hands-off Non Executive Chairman and in the process was neglecting the many and various key General Management issues of the internal day-to-day running of the business, (an accusation which he of course refuted), and the business as a result was now suffering considerable internal chaos – and very marked net profitability problems – and thence cash flow problems - and thence danger

The said Founder / Chairman who had done an amazing job in starting and building this significant enterprise, found himself being badgered endlessly by his FD, and by the staff and by the ten Sales people to return to an active central General Management / CEO / MD role in the business, but he was extremely reluctant so to do, and continued to avoid even entering into the relevant debates. Nor would he contemplate the appointment of an MD, nor even of a General Manager 

The problem - When it came to matters of the day-to-day General Management of the business, the said Chairman had for some years enjoyed that which can only be described as a Blind Spot, convincing himself that no replacement for him was needed or desired, and that he could and would continue to lead the company, but in a very light touch and semi-detached manner, and in a manner which we professionals would describe as a Non Executive Chairman role, but that is a term which he rejected consistently and absolutely     

His contention was quite simply that if the business was hitting its steadily-rising sales turnover target figures each and every year, which it was, then therefore everything would be / should in his view be absolutely hunky-dory, given that his Fixed Overheads were under control, which they were largely, effectively

However, the Net Profitability issues would just not go away in the medium / longer term, and hardly surprisingly so in the circumstances of there being effectively no CEO/MD, nor General Manager in place, nor in fact any senior executive hands-on running and controlling all of the key internal processes of the business

At the point at which OMSG Non Exec Group were asked to assist, the firm was beginning to have some difficulty in paying its monthly salaries, and similarly in paying its key supplier invoices monthly

The analyses - It took little time for the appointed OMSG Group Non Exec, working in close consultation with the FD, the staff and with the Chairman to establish firmly and to confirm that the failing Net Profitability and Nil General Management inputs were indeed the key underlying issues, and which were warranting careful and thoughtful yet speedy attention. He also confirmed after investigation that there were indeed no hidden problems of any significance with the Fixed Overheads

There was though total chaos elsewhere, with, just these few initial examples coming immediately to mind –

• Ludicrously inadequate product costing and pricing MO’s, with no costs at all included anywhere for distribution, nor for storage costs, nor for financing costs
• No science whatsoever in the pricing processes
• No formal corporate budgeting processes
• Ten stockholding points around the UK when just one such, or possibly 1.5, would have been more than adequate
• Stock control being pretty well totally absent, with massive overstocking everywhere, and yet also incredibly frequent Out of Stock situations
• Sale on Consignment arrangements littering the landscape
• Sale or Return arrangements ditto

And many, many more ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

The action - The Chairman appreciated, albeit with massive nudging from the OMSG Group Non Exec, and probably for the first time, that the situation of his Chairing that which was in fact a CEO/MD-less business was indeed entirely unsustainable in the medium and longer term, and that if he the Chairman was not going to re-enter the hands-on day-to-day General Management fold, which he assured all that he was not, then an appropriately-qualified CEO/MD had to be appointed and speedily in order to put into place primarily the wholly-inadequate GP Margins as an immediate and urgent priority – and for the new CEO to then move on to actually increasing further and significantly so the Sales Turnover, (but at all times with the full corrected GP Margins) - and without permitting any increase in the Fixed Overheads beyond his own cost of employment

It was agreed also by all concerned that the advertising for and the recruitment of the said CEO/MD would be controlled primarily by the OMSG Group Non Exec, and not by the Chairman 

The outcome – Two years later, the lost Net profitability has been speedily acquired and the business is growing very strongly its top line once again beyond that recovery phase, and Net Profitability has jumped to £950k per annum in just twelve months, and to an expected £1.5m in Year Two  

The moral of this story / case study - Having a strong-minded, independent detached objective and highly-experienced and expertised OMSG Group Non Exec on board right from the start from many years earlier could and would have made all the difference to the Chairman - and to the staff and the Sales people - and to their business - and to their peace of mind !  - this in order to be able to be analysing regularly /monthly and quarterly with them - and clearly and speedily - the detailed nuts and bolts of all of the perceived problems and opportunities within their business

And, to be discussing and examining with them - and validating and proving appropriately - the relevant and workable alternative strategies and tactics with which to deal successfully with those problems and opportunities

And for the said OMSG Group Non Exec to be willing to commit to stay with and support the client firm and all of its people throughout the whole of the three or four years involved, (if of course that were to be their wish), and to be planning with them and then supporting them through the various implementation stages of the changes which had been jointly discussed and agreed, and to then be working with them to be growing the business once again strongly and safely for the medium and long term

And, ,,,,,,,,,,,,,,,   to provide the business owners with a massive Return on Investment on the outlay of fees to OMSG Group for the services of the said Non Exec - of some 32 times in Year One alone  !

And, Yes, we would say all of that wouldn’t we ! - but it is all true, nonetheless

More next month, on another topical issue for SME businesses

June 2011