Best Practices, Really?

A business following “best practices” or trying to match industry “benchmarks” is a good thing, right? I mean, why wouldn’t you compare yourself to others, make sure that you are doing things like everyone else in your industry? That lets you know you are on the right track. Seriously?

I recently left an industry that was full of best practices and benchmarking and all kinds of other comparisons to others in the industry. I think the feeling is that as long as you are at least as good as others in the industry then you must be doing it right.

There are several problems with this line of thinking. Here are a few of them:

  1. You really don’t have all the information on how the other company does things. They may have a different cost structure, they may classify things differently, or they may just not be accurate in the way they account for things.
  2. When you look at best practices you are setting a benchmark that says to your team: “if we hit this, then we are doing good”. Unfortunately, this may set the bar for your company too low and your team may quit seeking ways to be better, faster, or more in tune with your customers.

The only reason to look at best practice is to come up with a better practice. Don’t do it like they do. Do it better.

I am not saying that you shouldn’t be in tune with what is going on in your industry. But, “benchmarks” are what is left after those not good enough to get into the game get up off the bench, and “best practices” are what you are left to remember after you lost a game in which you were never a competitor. “Man, we had some really good practices”. Don’t let happen in your business

Instead of worrying about best practices and benchmarks try the following:

  1. Establish a baseline(s) where you are currently. These baselines can be Profitability (it better be one), Revenue, Production efficiency, etc.
  2. Identify the key dynamics that have gotten you there, or are keeping you there. These may be things like a declining market share, cost increases due to a finite supply of raw materials, excessive downtime, the city won’t let you expand, exceptional (or poor) customer service, better (or inferior) products, etc. This is NOT an exercise in discovering what is happening, you already know that, or you should. This is an exercise in discovering why it is happening and separating excuses from real dynamics that are impacting your business. You may be surprised to find out what these really are. You are after the root cause.
  3. Working with your team, and this is the key, set SMART goals (for the business as well as the individual components of your business) based on your discussions on how to overcome these dynamics. If you want  $1 million in EBITDA at the end of the year, and you were at, let’s say $100,00 last year, you better be able to uncover what has to change to make that a real possibility.  Break down these things that have to change into short-term (within the next month), medium-term (with two-six months) and long-term (seven-ten months). If you are wondering why there is nothing after the tenth month it is because if you have to do something that late in the year to make a difference you are in serious jeopardy of missing your mark.

When creating the action plan for your team, after you have determined what has to change, make sure you work with your team by asking the following types of questions: “what do we need to change to get our production efficiency to this number? What can we do in the next ninety days that will impact our collections enough to get to this number? We have to achieve this sales level by July, what is it that we need to do to get us to that number and still maintain our pricing levels?

You will notice that you are not just telling your team what you want to happen. You are having a very frank discussion about what is expected, and what needs to happen to meet those expectations, and if, those expectations need to be modified in terms of duration or quantitatively. The first answer is sometimes that “it can’t be done”, or “sure, we can do it but it is going to cost a lot, or it will be too hard, or…”. Don’t let that be the last answer. Sometimes, you have to apply kid logic. Just keep asking why after every answer until you get an answer that makes sense. Ok, as a kid you never got there, you just got “because I said so”. I am presuming no one on your team will try that approach.

 

 

 

 

 

Author: Patrick Cowan, CFO

I have over thirty years experience in Finance, Accounting, HR, and Business Management. Most of this has been at the Senior Management and Executive Level. I believe that small ideas can be big winners if the right dynamics are applied.

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