Financial estimating with zero data - what a business

I've recently had the pleasure of attending a series of seminars about angel investing.

First a shout out to the National Defense University and its associated Foundation for setting up outreach to bring an under-served population (military veterans) to the attention of the investor community. I agree with NDU that the veterans' reliability and creativity, especially under stressful situations, makes them great potential partners, and looking at the correlation between huge business successes and military service it certainly makes sense to look beyond MIT, Stanford and Caltech once in a while.

What does this have to do with governance?

○ It's good to work with people who understand the word "integrity".  But still you need to make sure the documentation is straight nonetheless.

○ Unlike Shark Tank and the true venture capital phase of a business, the angels don't expect to be handed an already thriving business. They supplement whatever factual data may be available with their knowledge of their special market areas, with the sense of how the would-be entrepreneur will be as a partner (see previous bullet) and a strong helping of gut feel.  Don't use this as an excuse to shirk your due diligence. Angels are using their own money and a lot of domain expertise and there IS no better data (they will indeed do due diligence!). If you are in the PM business you have a fiduciary responsibility to someone - the taxpayer or shareholders, or at least the executives who must make the decision.

What makes this work is a solid concept of the operation. If you really understand what problem you are trying to solve, and more or less how the solution will solve it, then you'll be able to develop a fairly coherent narrative of how the business (or project) will evolve and from there you can probably start putting some number ranges around it.  Surely the average project with much better defined situations should be able to do at least as well.

Free the Z-word !

Maybe my vocabulary is too salty but I can think of nominees for *-words in a whole lot of slots in the alphabet, but today we have a new one for you.

Let's meet our friend the Z-word.    Zero-sum.  This is the basis for all of our "management" disciplines.  About the time that "win-win" became trendy, zero-sum got dismissed as the relic of antiquated thinking.  I am not so sure that this is a binary choice (there's some geek-speak for you), and even if they are mutually exclusive, there are times in the life of every leader (well, every manager anyway) when there just is not enough pixie dust to go around.

Zero-sum does not mean forcing an artificial conflict.  We really do have a finite amount of time and money. Failing to illuminate the constraints simply sets us up for even more destructive conflicts later on when the resources really are inadequate and we have already made a lot of promises about (and spent a lot of money on) a half-dozen initiatives that are all now stalled.

How does this work?

• Everything that is to be decided must start from a level at which everything is included.  Everything you approve for execution must fit within the grand total.  No special cases, no players to be named later.  It is OK to maintain a global reserve as long as it is specifically called out as such.  If there are special cases that will not be considered, fine, but then they need to be supported with their own resources rather than dipping into the common pool later on after bypassing all due diligence reviews.
• Break the total down into subordinate buckets using whatever word your organization will accept ("program" is the idea, but it may already be taken) from the perspective of capability, not organizationally, unless those are the same. Appoint managers for each bucket and let them propose what they need to accomplish their missions.  At this point it is often wise to provide rough guidance on appropriate size ranges for those buckets.
• Allow the managers to devise and explain the detailed trade-offs within their programs to achieve the desired capabilities (or as much as possible) with the available resources.  Everything at a more detailed level must conform to the constraints imposed at the next higher level.
• Each program must specify the (more or less stable) operating costs to keep doing what you are doing now.  These are usually 60-75% of the total.  Benchmark those costs against other organizations to identify fat.  Now the program has money left over for enhancements and new initiatives
• Make largely subjective decisions as to how to allocate total resources against these different desired capabilities
• Continue this process down through the programs, allowing the program managers to drive allocation decisions internally, as long as they remain accountable to deliver what was approved.

Notice that this approach provides an incentive to pull down the cost of operations since it is through those actual reductions that the "cool stuff" can be funded.  I have seen this simple approach yield substantial (15-20%) reductions in previously sacrosanct steady-state funds.

What this approach really accomplishes is to force those difficult conversations up to the appropriate level. Anything is possible as long as [almost] everything else is given up to accommodate it.  Several times I have seen an organization's leaders agree to give one initiative the lions's share of the funding for a year or so - and the sacrificing leaders exert a great deal of pressure to make sure that the initiative delivers!  It is the zero-sum concept that makes it work.

Syria and Sausages

This is a non-political post but it makes use of current events to make a point.  The event is the sudden and complete reversal of US foreign policy regarding Syria as a result of the seizure of a single and possibly facetious remark by the Secretary of State.  Ironically, the situation forms an interesting segue from last week's blog post suggesting that effective governance is less about which way a decision goes than it is about making clear what the decision was and is.

• Don't make the sausage in public.  If the executives cannot really commit to a decision once it is made, then let it wait, or it will face passive resistance from the outset - often inspired by those same executives.

• Address and welcome obvious questions before the decision is made. That way, an executive's unrehearsed remarks are already informed with regard to reasonable questions. "Have you considered any alternatives?" is a pretty obvious question in regard to almost any decision.

• Executives are always on stage, everywhere, every minute.  You knew this; so did Obama and Kerry. It just goes to show how easy it can be to forget.  Never miss a golden opportunity to remain silent.

All too often, decision processes are viewed as just another procedural hurdle.  Presenters seek to get the answer they want, and they avoid mentioning any potentially adverse information.  Putting the issues on the table early allows those issues to be considered and dealt with; then we are prepared when the question does arise or when the risk event does occur.   Nonetheless it is human nature, and even more so among the compulsively competitive rising stars who are trying to get their ideas implemented, to believe that what is good for them is good for the organization.  Many such strivers view any questioning as a personal affront aimed at undermining, rather than improving, their initiatives.  The unsung heroes are the chiefs of staff and the secretariat who must work out what the important issues and questions are, and make sure that these matters are actively included in the eventual decision.

Having said that, it is not necessary to grind the sausage in the store window.  Executives mostly get to that level precisely because they prefer not to confront anyone directly, least of all their peers, and certainly not openly.  The issues involved in any complex decision cannot be discussed and resolved in a 30 minute slot at a board meeting.  Beyond actual conflicting issues, there is also (like it or not) often horse-trading of resources associated with many high-level decisions; that will seldom be included in the record of decision!  For the most part, these matters will be resolved in multiple meetings before the actual board meeting, which will therefore take on the appearance of a rubber-stamp because everyone has already agreed beforehand.  That makes it easy to document what the decision was, but not as easy to document that the critical issues were considered or how they were resolved.