Leading an organization through positive change, or a country for that matter, has many common threads. In this article, I wish to cover one of the major inhibitors that exist when leading change and that is limiting the examination of all options available and therefore, changing these areas. I will build my case with current examples of what not to do that are occurring within our current political environment.

In today’s news, I watch not only the changes being forwarded by the Obama administration, but of equal importance to me is to watch how changes are presented and initiated to see if there is a chance of success. In these observations, I find that in most cases, their approaches to implementing real, meaningful change – as what was touted in the election process – will fall substantially short of delivering any consequential improvements. The reason for this is that the President continually stakes out sacred areas that are off limits to change, and in many cases, these sacred areas were a major contributor to the problems in the first place. I will provide two case examples below to build my case for one of the two points I will address in this article.

Case One – Restructuring General Motors

In this situation, rather than let General Motors file a normal bankruptcy and restructure, the Obama administration stepped into the middle of the process to protect a core constituency, the labor unions. In the case of the General Motors, one of their weaknesses is that their labor costs are not competitive, primarily because of the inflexible work rules and high legacy costs of the UAW. If the normal bankruptcy had been allowed, the business leaders could have been in a position to deal with the union to force meaningful changes in these problem areas and help position General Motors to be at a better cost position against other major automakers. President Obama purposely kept this from occurring.

In a related issue, the Obama administration structured the bailout to protect the unions again by putting the secured creditors into a secondary position to the unions, which are an unsecured creditor, and this is a contravention of longstanding bankruptcy law. If the courts do not reverse this approach, it may be difficult to find investors from the private sector that will put themselves at risk in these refinancing ventures with the government. In addition, there are numerous other politically expedient or politically correct decisions that will undoubtedly limit the success of this business restructuring, potentially leading to the ultimate failure of the business.

Case Two – Restructuring the Health Care Industry

This week, President Obama presented his new health care program to a group of doctors. In this forum, he was asked if he would implement restrictions in jury awards in medical malpractice law suits, one of the major concerns of doctors. In response, he stated that he would not change this, in effect, protecting another loyal constituency, the trial attorneys. In the case of health care, few would deny that excessive payouts on malpractice and drug-related lawsuits are driving huge increases in malpractice insurance and the cost of developing new drugs and technology. Again, President Obama staked out another sacred area that is off limits to change, and these constraints will substantially limit the positive gains or options that could be possible.

Given the cases above, it is plain to see that if there are not substantial changes in these two administration positions, then meaningful change will probably not occur in these instances. Although few businesses would purposely use the US government as a benchmark for excellent business processes or strategies, unfortunately, their leadership behaviors often match those shown above.

Practical Application for the Business Leader

What are the lessons that business leaders can apply from this real world example? In our experience, business leaders often are remiss in two common problem areas, typically in limiting the scope of the analysis and business fix, as was shown in the cases above,  as well as being too trusting of their current financial data, which can often measure the consequences but not the causes of the problem. The intent of this article is to provide business leaders with new insights into how to improve this assessment and problem solving process. This new approach will avoid the methods shown earlier where the single-minded or biased approach to the problem correction process sub-optimizes the benefits of any changes.

 Separate the Problem from Personality and Personal Bias.

In our experience, we find that this area is one of the major issues that keep a company from moving ahead and is typified in the two political cases shown above.  In these situations, the leader is protecting an individual or department based on personal feelings and bias and avoiding looking objectively at the performance problems. As I have stated in many earlier articles, most problems originate from people, primarily based on their inability to setup or effectively manage the correct processes. It is critical that the leader put aside the judgment bias of personal relationships, years of service, or other factors and evaluate the causes of the problems. Once this objective analysis is done, the business leader can then determine if they can help the individual or department become successful or if they need to take more drastic steps to allow positive change.

Look at All Cost Drivers and Measurements of a Business

This is a consistent theme in most of our projects in that the financial data is not finite enough or does not accurately reflect the financial reality of the business. Also, in our reviews of cost problems in businesses, we found that the cost trouble may have shown up in one area, typically manufacturing or operations costs, but the cost drivers could have come out of a variety of other factors or departments in the business, complicating the problem solving process. Some examples of the drivers of these problems are shown below:

1. Inaccurate Product Costing – In this situation, product costing errors, created by a variety of issues, cause business decisions to be made with incomplete or inaccurate cost data, leading to poor strategic and tactical decisions. Fallout of this problem is that these inaccuracies will create the illusion of material and labor variances that show up in manufacturing and operations.
2. Inaccurate tracking of Quality Costs – In this area, the business may not be adequately tracking or measuring the impact of product returns, repairs or warranty costs, which can be substantial in driving material and labor variances.
3. Inaccurate allocation of Overhead Costs – This is a major problem in many businesses where overheads spread over too many general areas instead of allocating them appropriately by using an Activity-Based approach. On June 1, 2009, we presented an article titled ‘Business Turnaround Basics – How Poor Product Costing Can Lead to Bankruptcy‘ and it covers this topic in great detail and the link is at the bottom of this article.
4. Inaccurate tracking of Customer Support Costs – Product or customer support staffing and behaviors can drive high direct and indirect costs. Being able to break these out and allocate these costs to the driving products can provide better information for fixing the problems.
5. Financial Accounting Inaccuracies – These problems occur where Finance has not created an accurate and timely process for product costing and inventory valuation.
6. Customer Service Policies – These issues can stem from how returned goods and credits are managed as well as how “policy credits” are issued to satisfy dealer and customer complaints. Both areas can easily be out of control with little cause and effect visibility.

Wrapping it Up

What can be taken home from this article? I believe that a business leader must do two things when looking at leading changes in an organization. The first is to insure that there are not areas that are off limits to review because of either bias or protectionism. I believe that in any situation requiring changes in business processes, products or strategies, that the business leader must allow all options to be considered and the costs and benefits of taking action on each issue is objectively evaluated.

The second is to not bias the review of a problem by assuming that the financial data shown is entirely accurate. In all areas of cost analysis, it is best for the business leader to not take financial numbers at face value but to dig into how the numbers are generated to insure that the measurement processes themselves are valid. In situations where certain products or markets have substantially different margins or cost behaviors, then these should be broken out in a segmented financial analysis so their abnormal cost behaviors can be tied to the cost driver itself, forcing management to fix the issues.

If these two recommendations are followed, I can guarantee that the business leader will be much more successful in identifying and leading positive changes within the organization.

https://www.bottomlinefix.com/blog-post/business-turnaround-basics-%e2%80%93-how-poor-product-costing-can-lead-to-bankruptcy/