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Responding to Crisis: Part Two
In retrospect, too often, we can see that a potential crisis has been building over an extended period. The warning signs were there; the rats started fleeing the sinking ship. The smouldering had been noticed. The red flags had been raised. Whatever metaphor you want to use, few crises come out of nowhere. Avoiding a situation is often about seeing trends and identifying that there will be a crisis if you continue in the direction you expect.
Costs Outpace Revenue
One of the things I’ve often seen with early-stage businesses is that you see this exponential revenue growth. As you respond to that exponential growth, you commit to an exponential growth of costs, but sooner or later, the revenue will start to fall off. The rate of growth will begin to slow. Too often, leadership has a false sense of security that it will always get better. It will continue to improve, and you will over-commit to costs that are not sustainable when revenue growth starts to slow down. Costs are locked in for a more extended period. For example, when you get a lease on a new building, you’re typically locked in for a long-term commitment. When you hire somebody, the costs of that hire take a while to flow through into the benefits of that hire. When you open a new overseas office, there’s a significant investment before you start getting payback. Look at the trends. I experienced this firsthand with the business incubator and technology product consultancy Generics Group in the 1980s. Beginning in a single building on the Cambridge Science Park, their meteoric growth took them to three more significant buildings on the campus and representative offices on three continents. When the Bank of England raised interest rates to 15%, private equity and investment in product development collapsed. Generics Group was substantially restructured and relocated to a cheaper site outside Cambridge.
Failure of Strategy Change
Companies can be seduced into a radical change of business strategy, which has financial implications that are entirely predictable but are often ignored in the enthusiasm for a bright new future in line with the latest business fashion. The General Electric Company (GEC) was a prominent British industrial conglomerate involved in consumer and defence electronics, communications, and engineering. It grew to employ over 250,000 and made profits of over £1 billion per year at its peak in the 1990s. Lord Weinstock ran the conglomerate with an iron discipline and a rigorous review of all capital expenditure. On his retirement in 1996, the new MD, George Simpson, pursued a risky strategy of acquiring new dot-com opportunities while divesting traditional cash-generative engineering businesses. By July 2001, the residual entity Marconi plc faced bankruptcy and eventually ceased trading in October 2006. The crisis was entirely avoidable. In effect, Simpson sought to create a venture capital fund out of an engineering conglomerate without the expertise, culture or disciplines of a VC fund while ignoring an entirely predictable investor bubble.
Consultancy to SAAS
However, other strategy shifts can have equally avoidable crises. Much of my experience is with technology and consulting businesses. A classic recipe for crisis is to seek to transition a consultancy business into a product business without adequate capital. Consultancy businesses must be managed with tight, quarter-by-quarter discipline, balancing fee rates, utilisation, and practice development (investment in the future). Financing is typically based on overdrafts, invoice factoring or short-term loans. A software product business requires increasingly expensive long-term equity funding in product development and marketing. Niaive leaders of consultancy businesses seek to fund a product business with profits from the consulting business or non-chargeable work by consultants. This undermines the growth of the consultancy and is inevitably inadequate to fund a successful product business. A downward spiral ensues where the leader cannibalises the consultancy, generating smaller profits that further exacerbate the lack of investment in the product business. Avoidable crisis ensues.
Willful Blindness
There is another source of avoidable crisis: willful blindness. Margaret Heffernan popularised this term in her book Wilful Blindness, which examined several avoidable organisational governance failures. Perhaps the most dramatic crisis that was utterly avoidable was the explosion of the NASA shuttle on the launch pad because a small part had failed. What had happened to allow that? Was it that nobody knew that that part was vulnerable? Was it that nobody knew there was a risk that it would explode? No. It was a well-understood problem that the part would fail if the temperature were wrong overnight on the launch pad. Yet, as that issue was brought to the right people’s attention, you got to a point in the escalation that people did not want to know. It was more important to them to get that launch away than to deal with an issue that could have led to the explosion of the whole space shuttle. When the space shuttle did explode, the space shuttle never flew again—an entirely avoidable crisis.
Another example is the BP Deepwater Horizon disaster in April 2010. A similar incident had occurred on a BP rig in the Caspian Sea. Several safety incidents related to the catastrophic fire on an oil rig in the Gulf of Mexico were well known. Concerns were raised about how safety was being compromised for profit. Business managers were undermining the engineers. Unnecessary risks were being taken simply for financial expediency. BP had acquired two large American businesses, and the BP engineering culture, which had kept things safe for years and years, was at odds with the profit-first culture of the new acquisitions. The trends developed over time—the willful blindness to the warning signs that these disasters could happen propagated to the organisation’s top. Additionally, the BP CEO didn’t deal with the crisis effectively when it occurred. He felt other people could deal with it. All the information available should have meant that the issues had been addressed before the crisis occurred and an effective crisis management plan was in place.
How do You Avoid Crisis?
What are the kinds of things in your organisation that are warning signs? What things in your environment have changed? What emerging trends could collide? What concerns within your front-line or leadership teams need to be addressed? Ignore these issues, and a crisis will eventually occur.
Charles McLachlan is the founder of FuturePerfect and on a mission to transform the future of work and business. The Portfolio Executive programme is a new initiative to help executives build a sustainable and impactful second-half-career. Creating an alternative future takes imagination, design, organisation and many other thinking skills. Charles is happy to lend them to you.