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Implementation: Big Data & Analytics Bottleneck

Implementation

“In five years, inside the enterprise, analytics is just going to be called ‘management.’”

 –        David Wagner, “Five Intuitive Predictions About Analytics”

In recent years the explosion of big data and analytics tools has been truly inspiring.  Companies and academics are now able to mine data sets that are mind bogglingly large.  This wealth of data has proven to be a goldmine as data scientists hunt for previously unrecognized relationships, and seek to optimize everything from the most promising routes of inquiry for drug development, to the pricing of consumer goods, to best practices for maintenance of industrial machinery.  Machine learning algorithms, making use of these large stores of data, are powering rapid advancements in artificial intelligence.  Nevertheless, this multi billion dollar market has, at its heart, a fatal flaw: data by itself is useless, and insights without an action plan are nearly so.  Absent change management expertise and leadership, the promise of big data will never be realized across the broad swath of organizations that might otherwise benefit from it.

As big data and data analytics tools progress through the hype cycle, disillusionment is setting in as company leaders struggle to realize the massive potential of these capabilities across massive organizations.  And it is here that big data runs into a fundamental challenge: analysis may scale, but actionable insights do not seem to, and insights alone do not guarantee successful implementation.

Savvy companies, recognizing this fact, are seeking to embed data scientists into their management teams.  This is a step in the right direction, but it is unlikely to be sufficient for companies with extensive physical operations and well-established business processes.  For these companies, data-driven insights that suggest a compelling benefit to be gained from a reorganization of the business are worse than useless: they are a cruel promise of a gain that cannot be achieved, yet another example of technology’s reach exceeding its grasp.

What is needed is data savvy change management, spearheaded by leadership with the ability to foster a data-driven culture while also building a capability for change and reinvention into the very DNA of established companies.  The promise of big data will, in the end, be realized or not based on the availability of a relatively scarce resource: accomplished change agent leadership.

About the Author

David Johnson Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on change management, strategy, and value maximization.  In his nearly 20 years as a change agent, David has served as an advisor, board member, interim manager, investor and operator at organizations ranging in size from pre-revenue startups to Fortune 500 organizations.  He can be reached at david@abraxasgp.com.

Failure to Recognize the Obvious

This article originally appeared in Business Insider

Article Date: 7/3/11

I had a chance to see “Page One” this weekend, the documentary on the troubles facing the New York Times.  Many have opined on the issues facing the New York Times, notably Henry Blodget here at Business Insider, but this documentary illustrated for me how well and truly screwed NYT may be.

A turnaround situation requires, more than anything else, honesty about the nature of the problem and at least a sense of what success looks like.  With revenues down over 24 percent from FY 2008 – LTM, the situation at NYT is clearly a turnaround situation.  And yet, over the course of a very well executed if muddled documentary, I was left with the strong impression that too few of NYT’s own people have a sense of how this ends, other than hoping that each round of layoffs will be the last, or patting themselves on the back for the admittedly impressive breadth and depth of their news coverage.

Death is Not the End

It was interesting in watching “Page One” to hear the vitriolic comments of NYT employees regarding a January 2009 Atlantic article written by Michael Hirschorn.  In the article, Hirschorn outlines the serious financial troubles facing NYT and suggests that the world might soon find the company consigned to the dustbin of history.  Hirschorn’s boldest prediction, that NYT could fail in 2009, has clearly been proven false, but on rereading the piece I am struck by just how much of his analysis remains relevant.

Hirschorn makes a number of fantastic points, notably:

“journalistic outlets will discover that the Web allows (okay, forces) them to concentrate on developing expertise in a narrower set of issues and interests, while helping journalists from other places and publications find new audiences.”

“over the long run, a world in which journalism is no longer weighed down by the need to fold an omnibus news product into a larger lifestyle-tastic package might turn out to be one in which actual reportage could make the case for why it matters, and why it might even be worth paying for. The best journalists will survive, and eventually thrive.”

Facing Up to the Challenge

As a public company valued at not quite 5.4x LTM EBITDA, the markets are telling NYT that something needs to change.  A quick look at the numbers suggests that the low-hanging fruit has already been consumed (see exhibits on key financial ratios, there is just not much left there) and it is time for serious discussion of the types of unpalatable options that make executives nauseous but have a tendency to save struggling companies.

·       Say Goodbye to the Past: Man, the 70s were great for the major papers.  NYT had the Pentagon Papers, Washington Post had Watergate, and journalism was on the march.  A lot has changed and it is time to get over it.

·       You Are Not a Public Trust; You are a Corporate Governance Basket Case: I am not a shareholder in NYT, but to hear Bill Keller, the Executive Editor at the time of Page One’s filming, explain that all options had been considered; including running the company as a nonprofit, made my blood run cold.  This is a publicly traded company, and regardless of the dual-class structure every investor who is not a Sulzberger has a reasonable expectation that management is focusing on turning this ship around, not turning it into a megalithic non-profit dedicated to the idea of its own greatness.

·       Adopt a Bold Strategy and Hunker Down: This is not a call to buy something.  Rather, divest everything that is non-core, put together a clear-eyed view of where this company will be in five years, and then execute.  The people at NYT are an erudite lot: think Fabian strategy, think the Siege of Constantinople in 626, think Stamford Bridge.

Revolution is Not a Tea Party, and Neither is Business

Same Zell got kicked around briefly in “Page One”, and I think somewhat unfairly, when a clip was shown of him at a meeting with Tribube employees exhorting them to change the company.  Yes, Tribune became a fabulous mess, but Zell was right: in the end a company must be able to afford its cost structure, or else reduce it.  This basic law of business does not include a special dispensation for newspapers with foreign offices and numerous Pulitzer Prize winners.

The Change Agents We Need

The leader of men in warfare can show himself to his followers only through a mask, a mask that he must make for himself, but a mask made in such form as will mark him to men of his time and place as the leader they want and need.

― John Keegan

The middle market has seen considerable change in recent years, and these changes have led to an evolving shift in how capital providers view distressed situations among their portfolio companies. Increasingly, capital providers (including banks, commercial finance companies, subordinated debt lenders, private equity firms and fundless sponsors) are seeking out versatile professionals able to serve as Chief Restructuring Officers in order to manage a distress situation from the inside, and steer a troubled company to an optimal outcome.  In many middle market companies a CRO will often find him/herself to be the lone advisor on-site, and as such these professionals must embrace the role of change agent.

The emerging generation of CROs will need to possess the following traits:

1) Focus on Substance over Form.  Too often distressed situations devolve as a result of an overly restrictive view of form success will take.  An experienced CRO will recognize that a sale of the company, refinancing, or balance sheet restructuring are all likely to generate superior value to a liquidation, and as a result will pursue a flexible strategy to position stakeholders for the highest value outcomes while not excluding the possibility of lower-value (but still viable) solutions.

2) Strong Communication Skills.  A distressed situation is always a tenuous balancing act, with multiple constituencies angling for position.  Skilled CROs understand the need for clear and consistent communication to all stakeholders, both within the company and without.  Inevitably certain constituencies will receive more or less information, but the messaging should be clear and the focus should be on executing toward an identified goal.

3) Comfort with both Strategy and Tactics.  In the middle market the day of the armchair CRO is coming to an end.  Small and midsize companies experiencing distress can no longer afford to have turnaround advisors dictate broad strategy while the company internally struggles with execution issues.  Today’s distressed situations call for advisors able and willing to first develop a viable strategy and then take a central tactical role (i.e. leading the charge) in executing that strategy.

The role of Chief Restructuring Officer is becoming increasingly central in driving distressed situations to a successful conclusion.  However, changes in the capital provider universe as well as an increase in the general tempo of distressed situations has given rise to a need for a more versatile, independent type of CRO than those who previously served the market.  Increasingly stakeholders must look not only for a CRO, but for a CRO with the right mix of skills, in order to steer a distressed company to a successful outcome.

Fisker Automotive: A Beautiful Mess

This article originally appeared in Business Insider

How can anybody learn anything from an artwork when the piece of art only reflects the vanity of the artist and not reality?

― Lou Reed

Fisker Automotive recently filed for chapter 11 bankruptcy protection and announced plans to sell itself to recently formed holding company Hybrid Technology, following that company’s purchase of a defaulted Fisker loan from the U.S. Energy Department.  Of the startup automakers granted loans by the Energy Department, Fisker Automotive was approved for the largest amount ($529 million).  Tesla Automotive has repaid the $465 million in loans it received.  Though it received approval for a $529 million loan, Fisker received only $192 million (the company repaid only $53 million of that total).

Co-founded by Ashton Martin designer Henrik Fisker, Fisker Automotive set out to create something beautiful and lucrative.  By all accounts the company was wildly successful at the former, and shockingly unsuccessful at the latter. Fisker Atlantic

The Fisker Atlantic

Privco Chief Executive Sam Hamadeh summed up the challenges of an aesthetically driven company with too much capital and too little discipline when he noted the Fisker was at one point spending $900,000 per vehicle produced, and then selling those vehicles for $70,000.

Hamadeh went on to note:

Fisker Automotive may well go down as the most tragic venture capital-backed debacle in recent history,” Hamadeh said in a statement. “The sheer scale of investment capital and government loan money — over $1.3 billion in all — was squandered so rapidly and with so little to show for it that the wreckage is breathtaking. Bankruptcy will be the end of Fisker, but for the taxpayers, venture capital firms, individual investors, and Fisker’s suppliers, it will all be too little too late.

The writing has been on the wall for some time regarding Fisker.  The company laid off 75% of its staff in April as it sought to preserve its dwindling cash and assess its options.  At the time of its announcement, Fisker, which had raised an estimated $1.3 billion from investors, had cash on hand of less than $30 million.

In the end, the company failed to produce the most beautiful of all outcomes for investors: a return.

Eike Batista

This article originally appeared in Business Insider

How flattering to the pride of man to think that the stars on their courses watch over him, and typify, by their movements and aspects, the joys or the sorrows that await him! He, in less proportion to the universe than the all-but invisible insects that feed in myriads on a summer’s leaf are to this great globe itself, fondly imagines that eternal worlds were chiefly created to prognosticate his fate.

–          Extraordinary Popular Delusions and the Madness of Crowds

Eike Battista is not having a good year.  In fact, it might be fair to say that the Brazilian entrepreneur is having perhaps one of the most horrendous years of wealth destruction on record.  In little more than a year Batista’s fortune has plummeted by over $30 billion, his support among Brazilian politicians has evaporated, and his creditors have gone from enthusiastically backing his endeavors to nervously eyeing their collateral.

For those unfamiliar with the new poster boy for emerging markets euphoria gone horribly wrong, look no further than the recent Bloomberg Businessweek article by authors Juan Pablo Spinetto, Peter Millard, and Ken Wells.  Their reporting details all the usual elements in these situations, with a few interesting wrinkles:

  • The Batista empire benefited from a compelling story that investors desperately wanted to believe.  With a network of companies focused on natural resources and based in Brazil, Batista had a need for capital at exactly the point in time when institutional investors were looking for investment opportunities emerging markets.
  • OGX, an energy exploration and production company founded by Batista in 2007, bid aggressively (in some cases offering bids double that of its competitors) for offshore oil leases.
  • Batitsa had the dangerous combination of being a famously hands-off manager who was nevertheless relentlessly optimistic about his ventures.  Over time his direct reports came to avoid bringing him bad news, which may have only speeded the decline of Batista’s empire.

The focus of Eike Batista these days is on preserving some value, as he struggles to restructure the debt of his various companies.  News that mining company MMX had reached an agreement to sell a controlling stake in a Brazilian iron-ore port sent the stock up 8 percent for the day, though investors have still suffered a 76 percent decline in 2013.  This marks only the latest in a series of transactions aimed at preserving something of the Batista empire, though the heavy debt burden of these companies suggests that preserving any equity value may be a lost cause (see articles here and here).

About the Author

David Johnson (@TurnaroundDavid) is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services.  He can be reached at 312-505-7238 or at david@acm-partners.com.

Against Corporate “Hero Ball”

This article also appeared in Business Insider

May 26, 2013

Your plan should foresee and provide for a next step in case of success or failure, or partial success.  Your dispositions should be such as to allow this exploitation or adaption in the shortest possible time.

– B.H. Liddell Hart, Strategy

My partner and I speak with the owners of dozens of small and mid-sized companies every year, and work very closely with some of them, often during the most challenging periods of their professional lives.  Read more

Overcome by Change

This article originally appeared in Business Insider

November 25, 2011

By David Johnson, ACM Partners

I recently came across a pair of articles that deeply explored the failure of two companies to respond to the challenges facing their industries. The industries in question, booksellers and newspapers, have received a great deal of attention over the past year, but in diving into the history of both industries, and seeing how two companies (Borders and The San Jose Mercury News) failed to adjust as the ground shifted under their feet, valuable insight can be gained.

Recounting victory is fun.  If the victory is one’s own the experience can range from a guilty indulgence to a searching investigation of how things managed to work out so well.  If the victory is another’s the pleasing narrative arc of challenges met and overcome offers an interesting story with a happy ending.  Failure contains lessons too, and too often we shy away from those lessons because the prospect of reviewing our own or others’ missteps is too uncomfortable, the story of challenges overcoming the challenged too grim.  The trouble with focusing on victory is that it ignores the oftentimes far more valuable lessons of failure.

The stories of Borders and The San Jose Mercury News are wonderful illustrations of the wrenching changes facing the bookseller and newspaper industries, and aptly demonstrate the difficulties of maintaining dominance in a shifting competitive environment.  These are stories of failure, but we can still profit from understanding the roots of these failures.

Booksellers

The story of Borders is rich in irony and full of slap-your-forehead strategic missteps (though to be fair, such things are far more clear in retrospect).  Founded in 1971 by Louis and Tom Borders who, having failed to interest existing book sellers in their system for tracking inventory and sales, decided to build a better bookseller themselves, Borders ushered in a revolution in book retailing.  By the 1990s the large format stores of Borders and competitor Barnes & Noble had proven their dominance, and the two companies had a combined 40 percent of the bookselling market.

Once it had achieved dominance, Borders embarked on an epic series of missteps:

  • Aggressive expansion of its retail footprint saddled the company with long-term leases that would later prove a decisive factor in its bankruptcy.
  • The company focused on having a superior selection to competitor Barnes & Noble, ignoring the fact that customers were neither aware of, nor, when made aware, impressed by that fact.
  • Lack of control over its internet sales channel was a crippling strategic misstep.  In 2001 Borders negotiated a deal to allow Amazon to control its online business, and it was not until 2008 that the company would have its own website.
  • Sales trends overall were incredibly worrisome.  Between 1997 and 2009 sales per square foot declined nearly 34% (from 1997 $261 to $173).
  • An increased focus on stocking more CDs and DVDs immediately preceded a plunge in sales of those items as consumers gravitated to digital delivery systems.
  • The 2004 acquisition of stationery company Paperchase only added exposure to another challenging retail niche.
  • E-reader Kobo was insufficiently supported and never gained traction.
  • Valuable cash ($600 million) was wasted on a stock buyback program begun in 2005.

The endgame for Borders over the last few years was ugly.  Starved of cash and saddled with long-term leases for stores that were too big and in sub-par locations, when the company finally filed for bankruptcy it was too late.  Creditors came to the conclusion that the best option for maximizing their recovery would be a total liquidation.

The industry interestingly now appears to be returning to its roots.  While Barnes & Noble remains a player, anyone who has visited one of the stores recently must have noted the changing feel of the place; it is beginning to resemble a toy store that also sells books.  Meanwhile small local stores are coming back, filling in the niches and seeking to learn from the mistakes of one of the industry’s former goliaths.

Newspapers

For generations the newspaper industry thrived in spite of a key fact: the source of its wealth was not the focus of its management, and certainly not the focus of its most talented employees.  Students of business history will note that such fundamental disconnects between how a company sees itself and how its customers see it is a chronic challenge of monopolists.  And make no mistake, prior to the rise of the internet newspapers were local monopolies, with all the outsized profitability and resistance to change that word implies.

Fueled by the impressive profit margins impressive margins many newspapers indulged the journalistic ambitions of their management teams by investing in expanded newsrooms.  When new services (Craigslist, Monster, eBay, etc) forced the disaggregation of news and classified ads, the industry discovered to its horror that the cost structure of its vaunted newsrooms was unsustainable.

It did not have to be this way.

Management at the San Jose Mercury News saw the future coming, and came tantalizingly close to crafting a strategy that may have allowed newspapers to not only survive, but thrive in a changing world.  The Mercury News was at the forefront in its industry in experimenting with internet initiatives in the early 90s.  Sadly an inherent conservatism and deep belief in the enduring centrality of newspapers limited innovation and as a result forfeited a brighter future.

The counterfactuals in the story of the San Jose Mercury News are compelling:

  • Located at the epicenter of dot-com mania, business reporters had exposure to many of the companies that would set the stage for the toppling of the newspaper industry.
  • The paper was among the first to break stories online.
  • Experience with early adopters of its online offerings indicated a willingness to pay premium prices for niche information (archives, legal documents, etc).
  • The company gained an early understanding of the fundamental ways the internet would change the news cycle, and was in the vanguard of breaking news online, including pictures of the aftermath of the April 1995 Oklahoma City bombing.
  • An August 1996 series went viral, demonstrating for all the immense impact of breaking a story and the traffic that could come with it.

Despite an admirable effort at innovation, the San Jose Mercury News and its owner Knight Ridder clung too long to the past.  Many of the lessons learned by the Mercury News’ internet efforts could, if acted on, have given the organization a change to thrive in the changing times, rather than struggle for survival.

Unlike Borders the San Jose Mercury News is still in existence.  The company is no longer what it was in its late 90s heyday, when it chronicled the creative ferment that would soon overwhelm its industry.  But just as its survival is in some ways a success, the fact that a news organization lauded for its willingness to experiment with technology so badly failed to enact the changes that might have allowed it to thrive instead of merely survive is an indictment on those managers who, seeing change coming, fought to preserve a receding past rather than to win the oncoming future.

Conclusion

The advantages of size and scale are increasingly fleeting in our global and highly networked economy.  Borders and The San Jose Mercury News were dominant forces in their industries little more than a decade ago, and now one is gone and the other a shadow of its former self.  Companies that fail to embrace change and reorganize themselves accordingly will, regardless of their prior success, be swept away.  Ultimately the benefits of studying failure are that we might learn from it, and seek to prevent similar failures in our own organizations.

The Least Bad Outcome

This article originally appeared in Business Insider

October 1, 2011

By David Johnson, ACM Partners

The range of options available for addressing a problem is directly correlated to the amount of time available.  As the amount of time available to address a problem shrinks, so does the universe of options.  Eventually, the options all start to look painful.  Followers of Eastman Kodak are currently learning this lesson in corporate turnaround dynamics.

News that Kodak is looking to shop a portfolio of 1,100 patents (with the help of Lazard) had excited investors.  The $2.4 – $3 billion an IP sale would fetch would be a welcome cash infusion for a company with cumulative operating losses of $1.2 billion over the last three years.

But the market is fickle, and when Kodak drew down its $160 million revolving line of credit earlier this week, sentiment turned strongly negative.  Moody’s downgraded the company’s bond ratings to Caa2 from Caa1 (way to be ahead of the curve, guys).  Alarmed at Kodak’s cash burn, Scott Dinsdale of KDP Investment Advisors noted: “They could run out of cash in early 2012”.

Taking a look at Kodak’s financials, I think that analysis is fair.  It does not take much of a leap, given a continuation of the company’s recent poor performance, to see Kodak having burned through its current cash balance of $957 million by this time next year, if not sooner.

Given this situation, Bloomberg notes that Kodak may need to file a chapter 11 bankruptcy in order to ensure that bidders for its intellectual property are not liable for a fraudulent conveyance claim.  With the patents now for sale expected to yield several times the current market cap of the company, and additional patents that may offer further opportunities to reap some return on years of R&D (Kodak holds a total of 7,600 patents), any roadblocks to the sale of intellectual property clearly must be dealt with.

This is a sad development for a company that has seen change coming for a long time, but has been unable to make the necessary adjustments.  A 1995 Fortune article highlighted issues facing Kodak that are depressingly familiar today: managing a mature business in decline, building a business around digital imaging, right-sizing the cost structure.  The difference is that in 1995 Kodak had many more options than it does today.  After spending so much time searching for the optimal strategy, it may be that Kodak will have to settle for the least bad option of a chapter 11 filing and the sale of IP that it was never able to fully utilize.

The Base of the Pyramid

This article originally appeared in Business Insider and TMA Midwest Blog

January 21, 2011

By David Johnson, ACM Partners

There is a palpable sense of impatience in the business press when discussing our tepid recovery.  People are anxious to start up the music and resume the party and are seemingly resentful of those who point out that however much we might wish to be done with the Great Recession it is not done with us.

One area that has been receiving too little attention is the wide divergence in outlook between large (national and multi-national) companies and those in the middle market (here defined as companies with less than 500 employees; the two sides of that divide having an approximately equal number of U.S. employees as of 2008).  Companies in the S&P 500 are enjoying historically high levels of profitability (often driven by robust sales to emerging market countries) and sitting on a veritable mountain of cash.  Meanwhile, middle market companies are hard pressed to find growth domestically and many lack the financial and managerial strength necessary to exploit growth opportunities in emerging markets.

The divergence between the upper and middle markets is not limited to growth prospects:

  • Operations: Larger companies have aggressively taken advantage of globalization to remake their organizations in the past 15 years.  They have seized on labor force arbitrage opportunities, remade their supply chains and outsourced non-core business functions.  Companies in the middle market are woefully behind the curve, and as a result have both higher costs and lower operational flexibility.  Taking full advantage of globalization to remake operations is not solely a matter of finding the lowest cost.  Issues such as order lead times, strength of native labor pool, legal environment, etc must be taken into account as well.
  • Commodities: While commodity prices received considerable attention in 2011 the reality is that broad macro factor point to upward-trending prices and considerable volatility as the new normal.  For middle market companies this will necessitate considerable effort to preserve gross margins, in particular the adoption of hedging strategies and a revamped approach to purchasing.
  • Systems: All the buzz around Big Data tends to obscure the fact that many companies have yet to implement ‘small data” initiatives such as KPI dashboards and other simple yet highly effective business intelligence tools.  I have been on numerous client engagements at companies with sales up to $1 billion that have lacked the ability to identify their most profitable product or sales channel.

The opportunities inherent in the U.S. middle market are enormous, but many of the bullish pronouncements in the general business press ignore the challenges these companies face.  Many are considerably behind their larger competitors in enjoying the fruits of globalization.  The path to profitability and growth for this sector of the economy will be a focus on basics.  Rationalizing SKUs, firing bas customers, identifying and increasing investment in high-return sales channels and shutting under-performing locations/divisions are the kind of unsexy blocking and tackling operations that will drive middle market profitability through the current decade.