CHAPTER 1

Lies? Deceit? Deception?

A friend works for a software company that focuses on budgeting. One day, we were having a conversation where we compared notes regarding how his company’s software handles cash versus how my Business Domain Management or BDM model handles cash. During the conversation, he mentioned that one of his clients, a very large well-known company, was going to reduce costs by $1 billion. One. Billion. Dollars. Sounds pretty impressive! I asked him if he was sure about that number and his response was an enthusiastic, “Yes!”

Let’s think about this. What would it take to save $1 billion? If we tried to save it in one year using staff reductions alone, that would involve getting rid of 10 thousand people each making $100 thousand per year. Even that wouldn’t cover it, since there would likely be a severance package, which would mean the total salary would not be saved. A quick check showed the company had 135 thousand people working for it in 2020. The company has many retail locations suggesting that most of the 135 thousand would not be making $100 thousand. Another alternative would be to get rid of 20 thousand people making $50 thousand per year. That would allow for a much wider net to be cast, of course, but that’s still a significant number of people. Will this company have the appetite to make such cuts, or is it all hype?

When it comes to value and saving money, there are a substantial number of lies, cases of deceit, and acts of deception to wade through to find true answers. Consider the following three scenarios.

Scenario 1

A customer of mine was approached by another consulting firm operating as a software vendor. The vendor promised $20 million in savings from their solution. My client sold large technology infrastructures that their customers, in turn, used to provide services to their clients. The vendor offered what is called a configurator as their solution. The configurator would allow my customer’s clients to design, or configure, their own infrastructure rather than have my customer’s engineers do the configuration for them. The vendor’s argument was, if the customers do the configuring instead of our clients’ engineers, the savings opportunity would be $20 million. My client asked if this were true.

The first thing we wondered was, “Would the customers even use the configurator?” So, we asked them. None of their largest customers would use it. Their customers felt they needed the expertise of the engineers to manage risks and factors their own engineers may not be in the position to understand. For this to be successful, the customers would have to cooperate. If the vendor is promising $20 million in savings, for a 4:1 cash ROI, the company would sell their solution for $4 million. If true, my client was paying $4 million, let’s say, for a solution that wasn’t going to be used by their customers. Next, we asked the client whether they were willing to part with $20 million worth of engineers. That would be 200 engineers at $100 thousand each. The answer was a resounding “No.” With no one willing to use the software and with the company choosing to avoid labor reductions, one must question the real cash value of the solution.

The software vendor, and their overstated value, had been exposed.

Scenario 2

The next scenario involved a company I worked for. I was asked to come in and validate a $50M value proposition to support a substantial software implementation and the associated consulting work. The software implementation and consulting were going to cost north of $20 million. After analyzing their numbers, $50 million was not only wrong, it was off by an order of magnitude! $5 million would have been extraordinarily generous. To achieve $50 million in cash, the company would have to reduce spend by $50 million. When the company was asked about whether they had the appetite to reduce their workforce by 500 people making $100K per year, again, the answer was, “No.” Hence, another hyper value-opportunity was identified before a potentially disastrous situation involving investing a significant amount of money without the desired savings being realized or realizable.

Scenario 3

This scenario involved another software vendor attempting to sell their software to another customer of mine.

Imagine you’re the executive who pulled the trigger on any one of these scenarios, where there was a significant promise of value that, without looking into it, was not possible. How would it affect your company? Your job or career?

What’s common among all of these scenarios? First, the vendors, including my employer, each offered substantial value propositions; numbers that would more than cover the price of an expensive software purchase and the associated consulting. Second, the calculation of the value proposition was incorrect in each case if the objectives were to generate cash savings to offset the cash investment in the solution. An example of the technique used to calculate such value propositions is this; the average person in this position makes $100 thousand per year. If we make them 10 percent more efficient with our solution, we will save $10 thousand. With 20 of them working here, we will save $200 thousand. This may be considered a pretty robust value proposition. However, if the now more efficient people are still working there, you’ve not spent $200 thousand less.

Improvement Projects

Each scenario was a potential improvement project. Improvement projects are designed to improve the performance of companies in multiple ways: improving financially, operationally, or improving or fixing compliance-related issues. In most cases, the objective is to have the improvement projects generate more in savings than it cost the company to realize the savings. If we were going to spend $1 million on an improvement project, we generally want the benefit to be well north of $1 million.

Although notionally correct, it’s not always practical. Sometimes there is no financial value that can be placed on a project. Take compliance. What dollar value do you put on a project that helps an executive avoid prison, for example? Of course, one can calculate fines that were avoided by the company, but if your company is delisted from the stock exchange, how do you put a number on that? Second, sometimes business processes just need to be improved. Newer technology, faster and better quality information, and updating to new industry standards can all be good things whether there is a cash value proposition tied to it or not. Sometimes, one must bite the bullet, invest, and realize the value the project delivers, whether it’s financial or not. Additionally, not all projects should be forced to require a cash return. Improvement projects are often generally good for the company. Requiring a financial return can sometimes lead to the creation of bogus value propositions. If an improvement opportunity is going to cost $1 million, we’d better find $6 million for a 5:1 ROI if that’s our company’s stated requirement. So, what do people do? They try to capture each and every source of value they can find, whether it is legitimate or not.

One department at a university wanted to create a maintenance depot for the vehicles it was responsible for. The department managed many, but not all the university’s vehicles. Considering only the vehicles that fell under the director’s purview, the savings opportunities were not large enough. So, what did she do? She decided to include every area that is remotely tied to, or related to hers, and that also needed vehicles serviced. She expanded the scope of what her opportunity could reasonably cover by including areas where she had discussed her solution with those responsible for vehicles other than hers. Discussing, however, does not mean they had committed to using, or even supporting her solution.

The latter is a dangerous and highly questionable business practice. It is dangerous because of benefit value inflation and, as a result, value is overpromised.¹ This can lead to investments in improvement opportunities that may otherwise be avoided. When leaders make decisions that involve committing significant resources, especially financial resources, they should be privy to the true value opportunity their investment should create or enable. This means there should be clear definitions or descriptions of the operational-, financial-, and compliance-based value that can result from the project. If the true cash savings is $50 million, great! If, instead, the true value is less than $5 million, leaders should know this because it might impact the decision calculus substantially. This will allow them to make decisions based on sound, objective data, and information. Creating fictitious value where it doesn’t exist may cause companies to invest in projects that will not create the returns promised or, potentially worse, cause leaders to invest in these projects rather than projects that are more strategically important or more financially viable and desirable. Imagine working in a cash-strapped company and leadership chose and spent $1 million on a project that promised $2 million and delivered a total of $500 thousand cash for a loss of $500 thousand in cash versus your project, which would have required the company to spend $200 thousand on a project that both promised and would generate $300 thousand in cash.

This book was written to address these issues. Primarily, how do we determine whether an improvement project will, in fact, be cash-wise profitable? We will see that there are two types of profit: accounting profit and cash profit. There is a difference, and this difference is significant as we will see throughout this book. The only focus of this book is on generating cash profit. With cash profit, we’re talking about making money, not as defined on accounting statements and by managerial accountants, but instead, by looking at the only way a company’s cash can be affected; the rates cash enters and leaves the organization.

We will see that it is the loose application of accounting-based techniques and assumptions that lead to the lies, deceit, and deception. The lies, deceit, and deception are tied to the false promises of value, which often stem from how we look at, interpret, and use accounting information. We will understand how the deceit occurs and how to keep it from happening in our organizations. This, in turn, will eliminate the creation of impossibly large value propositions and will create ammunition for those in your firm to see through the substantial, but artificial value propositions offered by consultants and others trying to sell products and services to your firm. This will result in investments that are more tactically and strategically valuable to your firm.

In addition to this there are two other key issues that the book will cover. First, is the importance of project prioritization in the contexts of project type and the strategic importance, or salience, of the process being considered for improvement. Some projects cannot deliver financial benefits based on the project type and what the project is designed to deliver. Additionally, some processes stand out, or are more strategically salient than others. We will want to understand how to identify processes that are more strategically salient to ensure they are strongly considered for improvement, especially when there is limited time and money. This combination will give us a prioritization schema that considers the combination of process salience and the type of project, which will be discussed in detail in Chapter 5.

The second, which is the area we will focus on overall, will be the implementation phase of improvement projects. For many companies, the effort is placed on defining the project and the cost–benefit analysis, or CBA. However, the implementation is where the rubber meets the road. We will find that, in most cases, implementing the project is only the beginning of the cash value realization process. To receive financial value, often, there will need to be management action—steps that will change the organization in a way that will help the company realize the cash benefits from the improvement. Go back to the configurator example. Management action would involve actually cutting engineers to achieve the $20 million. For the $50 million project customer to have to get rid of people and facilities, for them to realize the $50 million saving. Software solutions, themselves, will not sell your facilities or lay off your team.

In order, we will begin by discussing the process of selecting, validating, and implementing projects. We will then dive deeply into these areas and demonstrate how, when these three work together, companies can ensure their improvement projects will generate cash for the organization. Before that, however, we will spend time focusing on cash by creating a baseline understanding of cash and what affects it. The next chapter will help us think through the idea of what it takes to create cash value through the use of improvement projects.

Key Takeaways

¹ R.T. Lee. November/December, 2015. How we overstate ROI on improvement projects. Cost Management, pp. 16–20.