How do owners respond to ‘friction points’?
Success as a concept is subjective. However, globally we generally understand it as the timely achievement of objectives while maintaining financial viability.
Thanks largely to the technological revolution, fewer barriers to entering the business market has enabled the growing number of registered businesses. What remains constant is businesses that succeed in the long term have developed, invested in and implemented well-defined systems that underpin their business operations. Creating effective systems is vitally important to attain consistent and measurable results and therefore are the building blocks of any business. Without effective systems: those businesses would struggle to effectively grow and sustain.
Information compiled by the Australian Securities and Investments Commission (ASIC) from liquidators’ statutory reports, identified 'poor strategic management’ as a contributing factor in 45.6% of all corporate liquidations in 2016. As liquidators, when we cite poor strategic management what we are actually identifying is ‘friction points’ within the company that needed to be acknowledged and acted on; however, the company did not have the necessary systems in place to:
- identify those friction points
- provide the relevant and timely information necessary for decision makers to enable an outcome that would assure or, at least, better prepare it for future sustainability.
We often hear company directors excuse their lack of structured systems because of their relative small size or because they seem too costly. However, this simply reiterates their failure in 'strategic leadership’ and demonstrates an inability to plan, monitor and assess the company’s objectives relevant to their position within the external environment.
Many factors contribute to a business to grow without adequate, sustainable systems including:
- poor or no advice
- rapid rise in demand for product and/or service
- the wrong people in key roles.
Poor or no advice
Many business owners wait too long to seek advice or they seek advice from the wrong people, which is usually driven by a lack of understanding. They may not recognise their position and therefore keep operating on good faith or friends’ advice, or relying on other business owners’ anecdotal experience or unregulated advisers’ advice.
Rapid rise in demand for product and/or service
A rapid rise in demand for a company’s products or services should be an opportunity for the business to flourish; however all too often it can be the catalyst for business failure because the opportunity is mismanaged, capacity to meet demand fails, and resource allocation is ineffective.
The wrong people in key roles
As a business grows, so does its need for constant review of its staff resources. With growth and business diversity, more specialised and qualified staff is often required, however what can happen, especially in small business, is a practice that sees people recruited and promoted based on emotional enrolment and longevity: not skill and ability. This leads to the wrong people in key roles making decisions without the skill or ability to understand economic needs and business demands.
In 2016, ASIC reported that 65.5% of all corporate failures involved companies with less than five employees. This identifies a clear need to develop appropriate systems and processes from a business’s inception. From hiring and training to financial, marketing, product development, customer relations and technology—every business regardless of size or age—should have formally documented systems and processes for each function and department.
All business owners must regularly review their operational systems to ensure they are adequate and sustainable, meaning they:
- meet the user and customer needs
- reduce operating costs
- increase efficiency
- eliminate duplication, conflicting, and unnecessary services/tasks
- define consistent methods to handle business activities to its core objective
- improve the flow of data and information to various levels within the business
- provide management with timely information.
The systems within a business provide its people with a path to productivity and profit.
For advisers to support a client’s business growth and success, it is imperative to explain the need for clients to self-evaluate and to deploy their business activities with more clarity and robust planning.
Advisers can support their clients in strategic management by helping to identify friction points, developing systems that address potential friction points, and providing a clearer path to navigate the business forward in line with its core objective.
In an ever-changing business environment, systems support a business’s agility to meet demands and adapt effectively and therefore are a constant priority. When considering systems in your business or your clients’ business remember:
- Systems must be constantly developed from day one of business operations and reviewed regularly.
- Systems should support the business to identify and respond to friction points in a timely manner.
- Systems should ensure business’ operations and outputs are aligned with the business’s core values and objective.