by Gene Kim
CHAPTER 25
• Tuesday, October 14
The next morning at 7:50 a.m., I’m heading toward Dick’s office. As I round the corner, I see John already chatting amiably with Dick’s assistant. My jaw drops. John’s physical appearance has completely changed.
He’s obviously showered and cleaned up. He’s also shaved his head and appears to have lost fifteen pounds. He’s wearing what I can only describe as a European styled shirt and a vest. Unlike the slightly baggy shirts he usually wears, the pink shirt he’s wearing fits tightly on him. Combined with the vest, he looks like a…fashion model? London clubber? Las Vegas card dealer?
With the shaved head, his calm friendly smile and perfect posture, he looks like some sort of enlightened monk.
Most significantly, I notice that his three-ring binder is nowhere to be seen. Instead, he’s carrying only a pristine black and white lab notebook and a pen.
“Good morning, Bill,” John says with beatific calm.
“Hi,” I finally say. “Uh, you’re looking better than the last time I saw you.”
He just smiles, and then says something quietly to Dick’s assistant that makes her clap her hands over mouth and laugh loudly. She then gets up, walks over to Dick’s door and gestures both of us to follow her, saying, “Let’s see if we can start your meeting a little early. It’ll give you more time with him.”
I’m walking into Dick’s office, trailing behind John.
“Nice haircut,” Dick says to John with a smile, pointing at his own bald head. Then in a business-like tone, he says, “So what can I do for you? I have a commitment at 8:30, so let’s not waste time.”
John opens his notebook to the first page, which is completely blank. “Thanks for taking the time to meet with us on such short notice. I promise you that we won’t waste your time. And to make sure I don’t have any incorrect or preconceived notions, could you start by telling us what exactly you do here at Parts Unlimited? What is your exact role?”
My eyes widen in horror at John’s question. This is what gets asked on Bring Your Kid To Work Day but not by company executives.
I quickly look over to gauge Dick’s reaction. He looks surprised for a moment, but then blandly replies, “Interesting question.”
He pauses briefly and then seems to just play along. “I started here at Parts Unlimited fifteen years ago as cfo, which, back then, was defined in a pretty traditional way. I was primarily responsible for managing the financial risks of the organization and leading the financial planning and operations processes. Even back then, we had a huge number of regulatory compliance issues, which I also owned.
“Shortly after Steve became ceo, he told me that we needed a senior executive to own planning and operations across the entire organization and then gave those responsibilities to me. To help ensure that the company achieves our goals, I set up the objectives and measurements program for the entire management team. I wanted to keep all our managers accountable, ensure that they have the skills necessary to succeed, and help make sure that complex initiatives always have the right stakeholders involved and so forth.”
John looks up from furiously taking notes on the first page in his new notebook. “I’ve heard many people call you the ‘de facto coo’ around here, and that you’re basically Steve’s right-hand man.”
Dick considers his comments for a moment, before saying, “My official title doesn’t have ‘operations’ anywhere in it, but it’s the part of my job that I love most. When a company is as big as we are, with so many business processes, so many managers and workers, almost everything is complex. As smart as Steve is, even he needs help making sure the company strategy and goals are realistic and making an objective assessment of what we’re actually capable of.”
With a very small smile, he adds, “Want to hear something funny? People say that I’m more approachable than Steve! Steve’s incredibly charismatic, and let’s face it, I’m an asshole. But when people have concerns, they don’t want to have their minds changed. They want someone to listen to them and help make sure Steve gets the message.”
I find myself leaning forward. I’m surprised to hear Dick giving John, and therefore me, such candid and informative answers.
“What differentiates a good day from a bad day for you?” John continues.
Momentarily taken aback, Dick laughs loudly. “I’ll tell you what a good day feels like. It feels like the end of the year when we’re beating the pants off the competition—when we haven’t closed the books yet, but everyone knows that it’s going to be a monster quarter. All the sales people would have hit quota, and the ones on top would have hit their accelerators. A good day feels like my staff panicking about the size of the commission checks we’re going to be writing them.
“I’m not worried, because those big commission checks would mean the company is making money,” he says, smiling even more broadly. “Steve would be excited to announce to Wall Street and the analysts how well the company is performing—all made possible because we had a winning strategy, and also because we had the right plan and the ability to operate and execute. It means that we got all the parts of this organization to click as a team and win.
“That’s a fun day for me. We can plan and plan until the cows come home, but until we execute and achieve the goals, it’s academic,” he says. Then his smile disappears. “Of course, we haven’t had a day like that in over four years…
“A bad day is like the one we had two weeks ago,” he says, now looking frustrated and even angry. “We can’t close the quarter because of some it failure, we can’t seem to execute on our most critical project to close the gap with the competition, we keep losing customers, the auditors are making noises about some restatement project, and the board of directors is debating whether to fire all of us because we’re such screwups.”
Dick shakes his head, with a wan, tired smile, “In those moments, you wonder whether the problem is the economy, our strategy, our management team, you it guys, or, quite frankly, maybe the entire problem is me. Those are the days I just want to retire.”
John looks down at his notes and then asks, “What are your goals, objectives, and measurements for this year?”
Dick gets up from the sitting area to walk to his desk, saying, “Here, I’ll show you.”
He picks up a thin, black three-ring binder that was open on his desk, sits back down across from us, and shows us the open binder. “Here are two slides I look at every day.”
CFO GOALS
Health of company
Revenue
Market share
Average order size
Profitability
Return on assets
Health of Finance
Order to cash cycle
Accounts receivable
Accurate and timely financial reporting
Borrowing costs
“These are the company goals and the objectives I’ve set for finance,” he explains. “I’ve learned that while the finance goals are important, they’re not the most important. Finance can hit all our objectives, and the company still can fail. After all, the best accounts receivables team on the planet can’t save us if we’re in the wrong market with the wrong product strategy with an r&d team that can’t deliver.”
Startled, I realize he’s talking about Erik’s First Way. He’s talking about systems thinking, always confirming that the entire organization achieves its goal, not just one part of it.
As I’m pondering this, Dick then points to the second slide, saying, “So that’s what’s on the second slide, which shows what I believe are the more important company goals. I look at this slide every day.”
Are we competitive?
Understanding customer needs and wants: Do we know what to build?
Product portfolio: Do we have the right products?
r&d effectiveness: Can we build it effectively?
Time to market: Can we ship it soon enough to matter?
Sales pipelin
e: Can we convert products to interested prospects?
Are we effective?
Customer on-time delivery: Are customers getting what we promised them?
Customer retention: Are we gaining or losing customers?
Sales forecast accuracy: Can we factor this into our sales planning process?
John and I lean forward to study the slide. Usually company managers like me only see our departmental objectives. This slide shows the bigger picture.
As I’m thinking, John points at the slide and asks, “Which of these measurements are most at risk?”
Dick laughs humorlessly. “All of them! From a product portfolio perspective, the competition is killing us and taking market share away from us each day. We’re $20 million and years into Project Phoenix, and we’re still not competitive in the market yet. On the retailing and manufacturing side of the business, customer satisfaction is dropping, and we’re losing customers, despite Sales’ promise that we can win them back somehow.”
John underlines some of his notes. “Can we have a copy of this? Bill and I would like to study this further and make sure our teams understand this, so we can ensure that everything we do helps advance these goals.”
Dick thinks for a moment. “Sure. Can’t hurt, I suppose. I’ll have my assistant give you both a copy on your way out.”
“One more thing,” John says. “For each of these initiatives and measurements, who are the managers held responsible and accountable?”
Dick looks at John appraisingly, as do I. I’ve never seen this side of John before, either.
Dick says, “My assistant will get you the spreadsheet with those names on it, as well.”
John thanks him and then looks at his watch. “We’re almost out of time. This has been really terrific. Thank you for taking the time to tell us about your daily life. Is there anything that either of us can do for you?”
“Sure,” he replies. “Stay focused and get Phoenix working. Without it, we are stuck in the mud.”
I frown. I look at the second slide again. I feel like Phoenix is not what Dick should be asking me to focus on.
Unable to articulate why, I merely say, “Yes, sir. We’ll surely have some good news to share by the end of the month.” I’m not entirely sure what that good news will be, but I’ve learned that when dealing with senior officers, there’s a time and a place for telling bad news. This is neither of them.
“Good,” he says, giving us a tight-lipped smile.
We exchange parting pleasantries and head out of his office.
As the elevator doors open, John says to me, “You know, I think there’s something very similar about us dodging the sox-404 audit bullet and what’s on Dick’s second slide,” he says. “I can’t quite put my finger on it, but I think there’s something here that we need to understand better.”
“You’re right,” I say. “I don’t think Dick realizes how much his measurements depend on it. He asked me about Phoenix, but he should have asked me about all the objectives.”
We both step into the elevator. I continue, “Are you available later today to meet? Let’s see if we can connect all these dots. I suspect that we’re sitting on the missing link that might explain both why the company keeps missing its goals as well as why it keeps being undervalued.”
“Absolutely,” he says excitedly.
I can barely contain my sense of excitement. John’s crazy meeting with Dick seems to have revealed something genuinely important.
I believe with utter certainty that whatever we’re trying to figure out is critical to the First Way. He talked about the need to understand the true business context that it resides in.
I’m pretty sure no one has linked Dick’s top measurements to the prerequisite it objectives.
No wonder Dick just has a vague sense that it is screwing up—it’s a dull, throbbing ache that he can’t localize. Our next step is obvious: We must make those pains very specific and visible to convince Dick that it is capable of not just screwing up less often but helping all of the business win.
This is too important and urgent to struggle blindly in the dark, and I need to call Erik for advice. Standing in the lobby of Building 2, I speed-dial him.
“Yeah?” I hear him answer.
I say, “Good morning, Erik. I’ve just had a remarkable meeting with Dick. Do you have some time to help me think this through?”
When he grunts, “Yes,” I describe to him the meeting and how it came about and my certainty that it has uncovered something critical.
“Well, good for Jimmy. Or maybe I should call him ‘John.’ He finally got his head far enough out of his ass to begin to see,” I hear Erik say as he laughs, not unkindly. “As part of the First Way, you must gain a true understanding of the business system that it operates in. W. Edwards Deming called this ‘appreciation for the system.’ When it comes to it, you face two difficulties: On the one hand, in Dick’s second slide, you now see that there are organizational commitments that it is responsible for helping uphold and protect that no one has verbalized precisely yet. On the other hand, John has discovered that some it controls he holds near and dear aren’t needed, because other parts of the organization are adequately mitigating those risks.
“This is all about scoping what really matters inside of it. And like when Mr. Sphere told everyone in Flatland, you must leave the realm of it to discover where the business relies on it to achieve its goals.” I hear him continue, “Your mission is twofold: You must find where you’ve under-scoped it—where certain portions of the processes and technology you manage actively jeopardizes the achievement of business goals—as codified by Dick’s measurements. And secondly, John must find where he’s over-scoped it, such as all those sox-404 it controls that weren’t necessary to detect material errors in the financial statements.
“You may think that we’re mixing apples and oranges, but I assure you that we are not,” he continues. “Some of the wisest auditors say that there are only three internal control objectives: to gain assurance for reliability of financial reporting, compliance with laws and regulations, and efficiency and effectiveness of operations. That’s it. What you and John are talking about are just different slides of what is called the ‘coso Cube.’”
I force myself to keep listening, furiously taking notes so I can Google these terms later.
I hear him continue, “Here’s what you and John need to do: Go talk to the business process owners for the objectives on Dick’s second slide. Find out what their exact roles are, what business processes underpin their goals, and then get from them the top list of things that jeopardize those goals.
“You must understand the value chains required to achieve each of Dick’s goals, including the ones that aren’t so visible, like those in it. For instance, if you were a cross-country freight shipping company that delivers packages using a fleet of one hundred trucks, one of your corporate goals would be customer satisfaction and on-time delivery.”
I hear him continue, “Everybody knows that one factor jeopardizing on-time delivery is vehicle breakdowns. A key causal factor for vehicle breakdowns is failure to change the oil. So, to mitigate that risk, you’d create an sla for vehicle operations to change the oil every five thousand miles.”
Obviously enjoying himself, he keeps explaining, “Our organizational key performance indicator (kpi) is on-time delivery. So to achieve it, you would create a new forward-looking kpi of, say, the percentage of vehicles that have had their required oil changes performed.
“After all, if only fifty percent of our vehicles are complying with the required maintenance policies, it’s a good bet that in the near future, our on-time delivery kpis are going to take a dive, when trucks start getting stranded on the side of the road, along with all the packages they’re carrying.
“People think that just because it doesn’t use motor oil and carry physical packages that it doesn’t need preventive maintenance,” Erik says, chuckling to himself. “That somehow, beca
use the work and the cargo that it carries are invisible, you just need to sprinkle more magic dust on the computers to get them running again.
“Metaphors like oil changes help people make that connection. Preventive oil changes and vehicle maintenance policies are like preventive vendor patches and change management policies. By showing how it risks jeopardize business performance measures, you can start making better business decisions.
“Okay, one last thing before I go,” he says. “Make sure John fulfills his mission. He must talk with the finance side of the sox-404 audit team. He must learn exactly how the business managed to dodge the last audit bullet and what the actual control environment looks like and where reliance is really placed. And he must then explain it to you.
“You’ll be ready for your meeting with Dick when you’ve built out the value chains, linking his objectives to how it jeopardizes it. Assembling concrete examples of how it issues have jeopardized those goals in the past. Make sure you’re prepared.”
And with that, he says, “In fact, feel free to invite me to that meeting. I want to see Dick’s face when you present what you learn,” and he hangs up the phone.
CHAPTER 26
• Friday, October 17
When Patty enters the conference room, she gasps loudly when she sees John’s transformed appearance. “Oh my God, John. You look fantastic!”
Surprisingly, when Wes arrives, he doesn’t seem to notice anything different.
When everyone is here, I quickly share what I had learned from Erik. We decide that Patty and I will start the business process-owner interviews for “understanding customer needs and wants,” “product portfolio,” “time to market,” and “sales pipeline,” while John will research the business sox-404 control environment, as directed by Erik.
It’s Friday and we’re scheduled to interview Ron Johnson, the vp of Manufacturing Sales. I worked with him years ago as part of the acquisition integration project and am surprised he’s in town. He’s usually out and about, traveling the world, helping to negotiate deals and save troubled accounts. He has a well-deserved reputation as one of the most fun people in the company to travel with. The size of his expense reports proves it.