Transition points

What is it that makes a fast growing business sustainable?

Having worked with many businesses in different sectors and with all types of capital structures, we can honestly say that the answer is not obvious. What we can say is that key to a company’s continued success is its ability to recognise and respond to its Transition Point.

 

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Transcript

Hi, I'm Peter Williams, I'm a financial journalist, joining me is Peter Charles.

PETER W: Peter, you see companies at every stage of the business life cycle, and you have developed this concept of transition points.� Can you tell me what that's about?

PETER C: Well, first of all because all of the work that we do is in the finance function, we find ourselves in very small companies and very large companies, and some of the issues are the same, and some of them are quite different. So let's talk a little about it.� If we talk about some of the smaller companies, one of the things small companies have enormous difficulty getting is good advice. If your sort of sub a million turnover getting good advice is very, very difficult indeed. So those companies can quite often just continue to work the way that the entrepreneur worked at the beginning. So you can find a company that's grown from maybe it's first million, took it ten years and now it's a 5, 10, 15 million pound company, and you find that the back office structures and the way that it operates are exactly the same as it was when it was a much smaller company.� Equally, you can get much bigger companies, I'm thinking of a recent client, actually that was a turnaround client, but what they had done was be very cash rich and they'd wisely used their cash, they'd invested it in buying good companies across a range of areas that they understood, but what they hadn't done, they hadn't integrated those companies into a single company, and so really it was just a selection of companies run by the entrepreneurs who were there in the first place.� The same thing can happen to much bigger companies as well, and what is the point at which I have to change doing something. So that transition point is actually quite difficult to recognise, and probably quite a lot of our business goes to companies that have either recognised the transition point too late or they've recognised that transition point too early. An example might be, I'm working with a client at the moment that has spent tens of millions of pounds putting in new computer systems, bringing itself up to date over the last three years, in terms of the way it puts its computer systems together, so it has recognised that its back office systems weren't good enough for the things that it was trying to do, but at the same time as that it decided to outsource huge chunks of its business out to very reputable outsourcers overseas and what it didn't then do was to make sure that the people left knew how to operate the resulting machine. So, they made their transition point too roughly, too fast and too many things happened in a big way. So, what my team are now doing is some very simple stuff around showing them how to use the new tools they've bought. We're showing them, this is how we use an outsource provider.� This is how you get reports out of your brand new system, because what they've been doing is the people who are left there partly because from that particular transition was pushed in from the top, the people who are left there are operating the new ways of working in the same way as they were operating the old ways of working, and therefore not getting any power out of the new ways of working at all. The analogy I often tell when I'm trying to describe to them what I'm trying to get them to be able to do, is that they used to have actually quite a light frame steel bicycle, so it was very, very old fashioned, it was 30 years old but they knew how to operate it and it was the best of its day. So they were zipping over the hills on this bicycle with no problem at all.� Someone has gone and bought them a very sophisticated electronic bicycle which will pull them up the hills, and recharge its batteries as they fly down the hills, but no one has shown them the on switch, so they are dragging this enormously heavy bicycle over the hills in the old way and getting very tired.� So what I'm trying to do is show them they can use the existing tools in a different way.

PETER W: Do companies recognise these transition points?� Are they forced on them by external events, or is it some crisis almost that companies invent for themselves?

PETER C: In this particular case� the company had a crisis, there was a change of senior leadership.� Senior leadership came in said, we used to operate this way in my old company, and I'm going to force this company to change over the next five years. So that was the crisis point there. I've seen it in other companies, very similar things, we're going to use programmes to try and transition the company from being almost strung together cottage low cost cottage industry with a back office in every branch, and I'm going to jump from that to a big centralised, all singing, all dancing call centre.� Well actually you can't transition that far that fast.� The reality is that most companies would benefit from looking at themselves and wondering whether or� not they've arrived at a transition point, because the kind of light touch they could have, the kind of advice they could have, the kind of people they could bring in to help them or, indeed, they could just do it under their own steam if they are capable of standing back and saying the thing I was doing yesterday, does it still work? Am I continuing to be lucky?� If what I'm doing suddenly goes right, I'm probably doing it right. If I get three things go wrong it doesn't matter how unlucky it feels, I'm probably doing something wrong.� So what they need to do is stand back a little bit, and say am I starting to be unlucky. I just lost that contract, was that unlucky or am I doing something wrong? Or, now as a company I'm still being lucky, then actually don't worry about it, don't worry about the transition point. When your luck seems to go that's the time to say actually maybe something's changed, maybe the market has changed, maybe I've just become too big for my way of operating.

PETER W: It's quite hard though, that standing back process isn't it?

PETER C: It's very, very hard.� I think another example I can think of, the managing director had a desire to grow the business. It was private equity finance.� It was a spin out of a spin out. A venerable, old� British manufacturing company.� They'd invented the product they were manufacturing, and they were still manufacturing that product in the UK, and the new managing director who is primarily a salesman and therefore not necessarily steeped in the product they were manufacturing saw an opportunity for an enormous market elsewhere that had only two companies in it, and he said all I need is a tiny share of this enormous market. So every piece of spare working capital that they had, every bit of spare cash was pushed into investing in this new market. The old market, they were manufacturing in metal, and the new market they had to manufacture in plastic.� The basic technology of what they were trying to do was the same, but one was plastic and one was metal. One could be dirty and the other could be clean. In the end it nearly killed his company, because he recognised the company needed a transition, it needed to get out of this older product, but he couldn't see that actually making a very traditional diversification mistake producing new products for new customers. That's a traditional mistake and companies make it over and over again, and they don't need me to tell them that. They can read that in any book, but the hard part is to stand back and have a look.� They were lucky actually, because their auditors looked at them and said there's something going wrong here, the auditors then introduced us and actually we had a very light team, just a couple of us went in for a small number of weeks and just wrote� up a couple of reports. One on the working capital, two on the cash flow management and then a tiny, tiny bit of actually guys are you sure you're doing the right thing on the diversification. It was a very, very light touch.� As a result of that, they saw they were doing the wrong thing and got they'd themselves in a muddle on their balloon payments to the bank.� They were able to refinance, happily before the financial crisis, and therefore actually they're sitting pretty. I've still got them on Dun and Bradstreet.� Once every six months I get a little email saying positive news on client such and such, which is rather nice.

PETER W: OK, so what should a company do if it thinks it's approaching a transition point?� What are the kind of key indicators, and how should it deal with it?

PETER C: The first key indicator is what was working yesterday is no longer working today. Or it's starting to no longer work.� I think in the end, the perfect thing to do, what I don't want to do, every single time we have this conversation, I'm going to say what you need is good advice from blah, blah, blah, me in other words or us. So that's not really the issue.� If you can and if you catch it in time and you see it coming in time, actually take a holiday for two weeks, go away for three weeks, look back at what you were doing, and if you can do that and if you can see in from the outside then actually that's the best way of dealing with those kinds of transition points. If you can't do that, then bring in a fresh brain, bring a friend, bring someone else who's knowledgeable, or look very, very carefully for good advice, for somebody who can see in from the outside and just understand and see differently and see it as you would if you'd taken that holiday and returned to your business later.

PETER W: Peter Charles, thank you.