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A year and a half with a big four consulting firm: A key takeaway

Summer: hiking in the high Caucasuses

Summer: hiking in the high Caucasus

It was the summer of 2013, the temperature was 40 degrees and I was sweltering in my rented first floor flat in the Vera district of Tbilisi, Republic of Georgia. Looking out across the dusty courtyard to the vibrant green of the mulberry tree I wished that I could be transported back to my weekend getaway where I’d escaped the suffocating heat, dust and fumes of Tbilisi by going hiking in the high Caucasus just 2 hours to the north of Tbilisi. Life was far from dull.

Gergeti "Sameba" church, Stepantsminda, Georgia

Gergeti “Sameba” church, Stepantsminda, Georgia

Now it was back to work. I was collecting data on commercial real estate opportunities in and around Tbilisi. I’d found a local contact who was interested in a Joint Venture, so it was now a matter of narrowing down a suitable brown field site to build a new European standard warehouse. The alternative on the cards was to renovate an existing soviet concrete shell. Early research on the demand side looked promising, in particular my talks with local representatives of European/ US companies for this type of product. However, as with any investment in emerging markets, the in-country politics were the storm clouds of the investment barometer. Indeed, my local partners’ enthusiasm for the project wavered in line with the daily political intrigues of the nation.

Soviet concrete era warehouse ripe for refurbishment

Soviet era concrete warehouse ripe for refurbishment

As I once again returned to my spreadsheet mapping the commercial rents in different areas of Tbilisi, I received an email from Deloitte Consulting in Zurich inviting me to another interview. Fortunately, this coincided with a week back home in Zurich to visit my girlfriend. Needless to say, two hours after attending this interview I was offered a job as a Senior Consultant in the Strategy and Operations team of the Zurich practice.

Brownfield site on the outskirts of Tbilisi

Brownfield site on the outskirts of Tbilisi

On my return to Tbilisi, I spoke to my local partners about the opportunity offered to me in Zurich. I needed to bring my negotiations to a swift conclusion: go or no-go. They were extremely impressed by the cachet of the Deloitte name (it does have a substantial presence in the Georgian market). I was somewhat surprised by just how impressed they were and this one was of the factors that led me to come and work for a big four consulting firm. I wanted part of that cachet.

Working at Deloitte Consulting

Working at Deloitte Consulting

Was it the right decision? I have no idea. However, I am pleased with my decision. I have now spent a year and half in consulting and I am still learning new skills every day. Importantly, for future projects whether in emerging markets or elsewhere, I can clearly see my progress in putting together winning proposals. Now, if I returned to Georgia tomorrow to re-ignite my warehousing project I would do things differently. I’d manage my project better, in particular my stakeholders.

A key takeaway from my life in consulting is that consultants are there to give structure to the great ideas of our clients. No, we don’t necessarily have all the answers, but what we can do is provide robust frameworks and clear structure to successfully realise ideas that would otherwise remain on paper.

Investing in Georgia: An Emerging Economy?

Dawn over Tbilisi, Georgia

Sunrise over Tbilisi, Georgia

At the age of 12 my father bought my sister and me some shares in an investment trust called Aberdeen New Dawn. I remember the excitement of being given the prospectus and reading how the trust was investing in growth companies throughout Asia. The investment did well and fuelled my interest in overseas investing. Later, I read James Clavell’s novels Noble House and Taipan, tracing the fortunes of companies trading in the Far East. For me, the idea of investing in Emerging Markets has always appealed.

georgia map

I’ve recently returned from my second trip to the Republic of Georgia. This is the country where according to Greek legend Jason and the Argonauts found the golden fleece. Sitting in a strategic location, Georgia forms the bridging point between Europe and Asia – in fact it was on the ancient silk route. Still today, it is a major transit point for goods to the neighbouring countries of Azerbaijan, Armenia, Iran, Turkey, Russia and beyond across the Caspian Sea to Turkmenistan.

Georgia has natural resources of oil, gas, gold and valuable minerals such as manganese. Since independence from the USSR in 1989, the economy has taken a while to rebalance and the two wars with Russia over South Ossetia and Abkhazia did not help. However, despite these conflicts, the country has enjoyed high levels of GDP growth (see below). The economy has bounced back from the recession of  2009 -2.75%. Moreover, foreign investment is consistently on the rise (see below).

FDI Georgia. Source: National Bank of Georgia Inflation Report Q2, 2012

FDI Georgia. Source: National Bank of Georgia Inflation Report Q2, 2012

Georgia GDP Growth (OSCE, 2012)

Georgia GDP Growth (OSCE, 2012)

I’ve previously invested in Georgian oil. However, oil investments require large capex and more wells tend to be dusters than winners. On my latest visit I was asked to consider investing in tight oil plays USD1m for each well and if successful payback in 6 months. Horizontal wells, if successful, should yield 3.5 months payback. Unfortunately, with my limited means and with oil already in my portfolio, I declined the offer. However, please get in touch if you would like to know more.

Currently my risk appetite is lower so I asked my Georgia hosts where they saw other interesting investment opportunities. Two areas of investment were suggested (1) fixed term USD 12 month deposits of USD300,000 to 10,000,000 with Georgian banks attract interest rates of between 7%-8%. (2) Investing in infrastructure with an estimated return of 20% per annum.

I’m looking into both of these investments at the moment. Fascinatingly an ROI of 20% doesn’t attract local investors as the local real lending interest rates are in the region of 18% – 20%. If it is possible to borrow money internationally at low interest rates, we may just have a winner!

Real Lending Interest Rates average 2000-2011 (Source World Bank taken from http://www.iset.ge/blog/?p=1100)

Real Lending Interest Rates average 2000-2011 (Source World Bank taken from http://www.iset.ge/blog/?p=1100)

Best wishes to you all for a Happy and Prosperous 2013.

Further Reading:

The ISET Policy Institute:
http://www.iset.ge

National Bank of Georgia inflation report: http://www.nbg.ge/uploads/publications/inflationreport/2012/inflacia_2012_q2_eng_9_nov.pdf

European Bank for Reconstruction and Development (Georgia page):
http://www.ebrd.com/pages/country/georgia.shtml
 

What is an MBA?

I’ve had two interesting discussions over the past few weeks, the first was with a human resources professional at a blue chip company and the second was with a managing consultant at a big four consulting firm.

On both these occasions I found myself explaining in detail, what is an MBA. I was surprised by this. However, since then I have started asking people about their understanding of this degree and the more people I ask, the more it seems that most people have heard of this degree but few people understand the components of an MBA. I’ve therefore taken the opportunity to present the components of an MBA in a clear visual format in order to give a better understanding of this degree.

Here it is. If you have any questions I’d be delighted to answer them.

What is an MBA? This is based on my MBA at the University of Southampton, UK.

Mind-maps: Structuring Idea Generation

Achievements mind-mapped using Mindomo software

Inspiration can be found in unexpected places. Personally, I think I have some of my best ideas in whilst out running. I once heard that Richard Branson finds inspiration whilst taking a bath containing the secret ingredient of Badedas “Horse Chestnut” bubble bath.

Unfortunately, if we were to go for a quick jog or worse still, undress and take a bubble bath at the office, our colleagues might be a little shocked! Besides which, we might like to take a more structured approach towards idea generation which we could incorporate with the rest of our team. One approach we can use is called a mind-map.

This is a fun process and works particularly well with teams. Get out a large sheet of paper (A4 will do) and some pens. At the centre write your inspiration word or words. From this central “thought point” you write down your ideas and connect them to the centre point with a line. You then write-down subsequent ideas, which stem from your previous idea. Your diagram grows organically with each new idea out from the centre. Pictured below is a hand-drawn mind-map. I drew this to structure my thoughts around my successes in my last job. I used “Achievements” as my starting point.

A mind-map drawn the old fashioned way with pen and paper

Working with pen and paper is fine, but not so great when presenting to the board or for a report. The mind-map at the start of the article is an updated version written using the Mindomo software. It’s free and easy to use. Give it a go.

In conclusion, Mind-maps are a visual way of mapping your thoughts and also a neat way of presenting a holistic view of a given topic.

References:

http://www.mindomo.com/

How to present a strategy visually: try a “Strategy Canvas”

Getting buy-in for a new strategy is difficult. Often we present vast swathes of data, colourful graphs and pages of text to convince our audience of how brilliant our strategy is and to show how much hard work we have done. To communicate strategy effectively however, it simply needs to be clear and concise. So, how can we best present a clear strategy and communicate it to an audience?

Strategy Canvas for Southampton MBA Strategy Project (Bally Shoes case study).

A well-known phrase in the UK is, “a picture paints a thousand words”. In this regard, one of my favourite ways to communicate a strategy is using a strategy canvas. Steven Yeo, COO of HPS Pharmacies in Australia, and fellow MBAer, introduced it to me. We were taking part in the European Summer School of Advanced Management (ESSAM), in Aarhus, Denmark. Steven suggested that we present our new strategy to our client, CBMI, in the form of strategy canvas. I’d never heard of this approach at the time. However, every time I’ve presented a strategy canvas since, it has proved to be a winning formula. Hence I’d like to share it with you.

ESSAM G14 Consulting Team (L-R Steven Yeo, Phil Hatcher, William Ellis, Ivan Christiansen, James Burrows) 

The concept was developed by Kim and Mauborgne (2002) and published in the Harvard Business Review under the title, “Charting Your Company’s Future”. The study focused on helping a team of senior executives from a struggling firm develop a new strategy. The new strategy resulted in an increase of overall revenues of over 30%.

Drawing a Canvas

So how did they do it? Firstly, Kim and Mauborgne, gathered the senior executives together and showed them how to draw a strategy canvas. They were asked to select the most important value drivers for the firm, or “factors of competition”, placing these criteria on the x-axis. On the y-axis was a scale “high or low” denoting how much the firm invests or provides (in terms of price) in this area. Once the criteria had been selected, the strategy canvas depicting the firm’s existing strategy was drawn.

Add Competing Strategies

Next, on the same canvas, the senior executives were asked to draw the strategies of competing financial services firms. The completed canvas showed in simple graphic form how their company’s offer differentiated, or was similar to, their competitors.

Get Customer Feedback

Kim and Mauborgne’s next step for the senior executives was to ask customers which of the criteria (x-axis) on the canvas were important to them. This gave insight into the areas which a new “customer focused” strategy should concentrate. Combining the two sets of data enabled the senior executive team to create a new strategy that was both customer focused and differentiated.

Create Differentiated Strategy & Communicate it

Having created the new strategy, and a strategy canvas to go with it, the senior executive team then used the canvas to communicate the idea to the rest of the firm. The strategy canvas was widely circulated, pinned on notice boards etc and became a reference point on which investment decisions were made.

Strategy Canvas (Kim and Mauborgne, 2002). This example from their paper shows the old and new strategy devised by the team.

I’ve used an approach similar to this many times. I find it a great way of presenting a strategy in a simple format. Kim and Mauborgne’s 4 step process of how you can create a strategy canvas is presented below. Following this I’ve shown you the strategy canvases of two case studies in which I’ve used this technique.

Kim and Mauborgne (2002) 4 step process:

1. “Visual Awakening” – shows your current strategy in relation to your competitors
2. “Visual Exploration” – ask your customers what is important for them, explore new products and services, which factors can you change?
3. “Visual Strategy Fair” – Get feedback on potential strategies from customers past, present and competitors if needed. Using this feedback you create your new strategy.
4. “Visual Communication” – show a before and after profile on the same graph to show your audience where change is occurring. Any changes in the business have to fit into this new profile.

Case Study 1: CBMI (ESSAM consultancy project)

Strategy canvas for CBMI (dark blue line) presented by G14 Consulting at ESSAM 2010.

We presented a “visual awakening” strategy canvas to the team at CBMI (dark blue line). Our aim in this consultancy project was to look at ways of creating additional income streams for the business. Our canvas showed how CBMI and competitor innovation networks had different business models and offered diverse customer value propositions. CBET (green line), a Canadian entity, exhibited best practice networking amongst the analysed group and arguably provided a source of value that enabled CBET to charge its members and therefore provide incremental income. The canvas clearly showed CBMI in which areas it could improve.

Case Study 2: Bally Shoes (Southampton University MBA Strategy Presentation)

Strategy Canvas for Bally Shoes Case Study: Southampton MBA Strategy Project.

A further example when I’ve used a strategy canvas was for an MBA project based on an IMD case study of Bally shoes. Here we presented our findings on the strengths and weaknesses of the shoe retailer in relation to its competitors. The strategy canvas enabled us to present the relative strengths of Bally (red line) in the areas of Distribution & Retail and Quality. However it also enabled us to highlight the company’s relative weakness in the area of Style, Marketing & Comms, Supply Chain and Customer Service.

In conclusion, this is a flexible way of presenting strategy and showing the conclusions of many data sets in a simple picture. I recommend Kim and Mauborgne’s paper: it’s a good read and presents additional simple tips on creating winning strategies. Next time you present a strategy, consider using a strategy canvas. I’d be interested to hear how you get on.

Further Reading:

Kim, W. & Mauborgne, R. (2002) “Charting Your Company’s Future”, Harvard Business Review, June.

Kaplan, R. & Norton, D. (2000) “Having Trouble with your strategy?  Then map it” Harvard Business Review, September.

Demographics: Defining Your Ideal Customer

I’ve recently returned from the Channel Islands. They are famous for being centres of offshore finance, but also beautiful places for a holiday. I visited the islands to help present 3 concepts by Inaperfectworld for the re-design of a hotel restaurant. I’m not a designer but I am keenly aware that an investment such as this needs to fit the overall strategy for the hotel, be customer focused and provide a return on investment for the sponsor. The hotel owners told us their aim for the new restaurant was to increase revenue by 51%, roughly £5 per head.

Inaperfectworld designers Rob Wilson and Emma Sjorgren in Guernsey

So, lets take a look at the steps we took to build a business case for our re-design.

Step 1: Scanning the business environment (looking for themes and trends)

We began our research by scanning the business environment; looking at successful hotels and restaurants around the world. This was good for generating ideas for the design team. Here we not only looked for inspiration in designs that we liked, but also in emerging themes, for instance, what are the public and industry professionals (e.g. restaurant critics) talking about? A good first step is searching the web and scanning social media. We were specifically looking for trends both at a local and at an international level. An interesting emerging theme we found was “eating ingredients sourced within the restaurant postcode”.

Step 2: Analyze the competition and look for feedback

Next, we drew up a list of the restaurants that were the natural competitors to “our” restaurant and analyzed their client offering. These were predominantly hotel restaurants and restaurants on the island; the choice of eatery on offer to the local population. We were particularly keen to appeal to this customer group as the local populace are key customers of the hotel in the “shoulder months” or quiet months between holiday seasons. We asked ourselves what did these do well and why were they popular. At this stage too, we started to look internally at the restaurant’s current offering. Unfortunately, we weren’t given permission to interview the staff in the hotel or to get feedback from existing customers -a great free source of information. However, now you can find reviews online and so we scanned Tripadvisor/Booking.com and local media. If you get the chance to interview staff, you’re in luck as the opinions of the staff in any organisation are particularly valuable. Staff get feedback from the customers every day and importantly too, they will have to work in the new space. A nice bonus is that by interviewing them and asking for their feedback you are already working on getting their buy-in to your project.

Step 3: Pricing Strategy

An important point in any strategy is focusing on pricing. In this example we looked at the restaurant’s pricing on food and wine compared to our list of local competitors. It offered a £25, three course menu which compared well with the competition. Overall however, the prices, particularly the A La Carte menu were high. Consequently we felt that trying to increase revenues through raising the prices of the food in the restaurant or by reducing overheads were likely to be self-defeating strategies.

Step 4: Define who is the current customer and who is your preferred customer?

By this stage you are starting to build up a good picture of the external and internal environment. Now comes the most important point. Ask yourself, who is the current restaurant customer and who is the preferred customer? Unfortunately again we couldn’t source this information. However, we made an estimate of the restaurant’s current demographic as being roughly 60% corporate and 40% leisure split 50/50 local and international. As our analysis had revealed little scope for movement on the pricing of the food, we thought we would take a look at the area of drinks and how we might be able to increase the spend for this customer base. Moreover, perhaps within our defined customer base there was a lucrative niche.

Step 5: Collating & Analyzing Data

To find out more about the spending habits of our UK and local customers we looked at some government statistics. Governments collect all kinds of data and mostly it is available on-line for free. In the UK this data is provided by the Office of National Statistics and in Guernsey by the Commerce and Employment Department. We found three surveys of particular interest: the first was the “household expenditure survey” for the UK, a similar survey for Guernsey and a third National Health Service (NHS) survey on drinking habits in the UK.

The UK and Guernsey governments’ “household expenditure survey” shows the spending habits of the population broken down into categories such as age, sex, earnings, marital status etc. From this data you can start to construct a clearer picture of your preferred customer from within your existing customer base, in other words; who are your most most valuable customers!

The first point that we noticed about Guernsey from the data compared to the UK was that household incomes exhibit a positive skew towards high earning households. In other words, a higher proportion of the population have a larger disposable income than the average UK household.

Income Distributions exhibit positive skew

Drilling down into the data and combining these household surveys with the NHS data, you form a picture of specific alcohol consumption too. Here we found out that the average Guernseyman had a 57% higher weekly spend on alcohol compared to a person in the UK. Even more interesting was that the surveys segmented spending on alcohol into different categories, of wine, beer, liquors and fortified wines. The spend per head was broken down by income group and by age.

Income Distributions by Quintile (GSY Household Survey, 2006)

An interesting fact to emerge was that the higher earning the household, the more they spent on “wine out with a meal” and they also spent more on alcohol in general. Check out the much larger red coloured bars, denoting wines drunk out, in Quintiles 4 and 5 in the diagram below.

GSY data “wine consumption out with a meal” (GSY Household Survey, 2006)

Weekly Expenditure on Alcohol by Income Quintiles (Guernsey Household Survey, 2006)

Step 6: Build the Ideal Customer Profile

By slowly going through the data and analyzing it, a picture starts to emerge of the most valuable customer to the new restaurant. The facts that seemed most relevant were: spend by age identified that the age group 35 to 64 and earning over £1,000 per week were most likely to spend the most on wine. Men and women aged over 45 (equally m/f), who were professional, and cohabiting/married drank the most wine.

With this information to hand, could there be a case for selling more expensive wine to the current customer base? Our analysis suggested that wine, as well as having a long-term growth trend in consumption, had a great following among a specific high spending demographic. By focusing on selling premium wine and enhancing this experience, we could increase the numbers of our target demographic. This strategy seemed to have a chance of reaching the management’s £5 target increase in spend per customer.

Wine Consumption UK: Long-term growth trend

Step 7: Present and sell your business case framed in the client view
Closing the deal, this deserves an entire blog in its own right! A sound tip is to sell a solution which is not alien to your client. An advantage of this concept was that the restaurant had a good wine list and promoted a monthly wine club to showcase its fine wines and attract new diners to its restaurant. As the management itself had already chosen to differentiate the restaurant on the basis of wine and therefore this added extra support to our idea of presenting a wine themed re-design. When presenting any new idea it stands more chance of success if your solution already falls within the frame of your client’s mindset.

We will have to wait and see if any of our 3 concepts are chosen by the hotel. However, by following this 7 step process a business case can be built. To summarize:

Step 1: Scanning the business environment (looking for themes and trends)

Step 2: Analyze the competition and look for feedback

Step 3: Pricing Strategy

Step 4: Define who is the current customer and who is your preferred customer?

Step 5: Collating & Analyzing Data

Step 6: Build the Ideal Customer Profile

Step 7: Present and sell your business case framed in the client view

Appendix:

Here are Inaperfectworld’s theme, space and interior boards by Rob Wilson and Emma Sjogren for the wine concept.

Space_Board Wine Concept copyright Inaperfectworld

Interior_Concept Wine Copyright Inaperfectworld

Wine Theme copyright Inaperfectworld

References:

NHS Information Centre (2009) Lifestyle Statistics “Statistics on Alcohol” Department of Health: England.

States of Guernsey (2007) Household Expenditure Survey 2005-2006. www.gov.gg/pru

ONS (2008) General Household Survey 2006, Office For National Statistics.

Surfing the Kondratieff wave of business

Long-term business cycles: The Kondratieff Wave (kondratieffwinter.com, 2012)

We all have to be reminded every so often that business is cyclical. It is nice when things are going well, it makes us feel good, and makes us feel that we have taken all the right decisions.

I remember chatting to a client in the depths of the stock market crash of December 2008 and him saying, “Will, we’re going to look back on this moment as the best buying opportunity ever!” He was right, it was a good time to buy and I only wish that I had had more cash available to buy at that time. However, I have little doubt that there will be further great buying opportunities in the future!

Some of you may have read Benjamin Graham’s book “The Strategic Investor”, first published back in 1949 and widely credited as being the book on which Warren Buffett bases his investment philosophy. Graham talks about the length of bull markets lasting between 3 & 5 years, the difficulty of course is identifying when you are actually in a bull market and not in a false rally. Still, if your stocks have been going up over the past 3 years it might be worth taking a closer look at the market for signs of increased turbulence, the bull market may be ending.

Business cycles are of different durations, in amongst the market noise there are longer economic cycles which can be identified. The most famous long-term analysis of business was done by Kondratieff. This shows the very long-term cycles in the business environment. He described the cycles in terms the seasons with inflation (spring), stagflation (summer), beneficial deflation (autumn) and deflation (winter).

According to the blog Kondratieff winter, we are now entering a long deflationary cycle.

Reading:

Kondratieffwinter.com (2012) http://kondratieffwinter.com/blog/k-wave/kondratieff-summary/

Graham, B. (1973), The Intelligent Investor, Harper Collins Publishers, New York, New York, USA.

Group Dynamics: The Politics of Risk

I’ve just come back from a ski tour in the Silvretta region of the Alps, which spans the border of Austria and Switzerland between the towns of Klosters and Ischgl. Here is the location of the Wiesbadener Hutte in Austria where we stayed on our third night of the  tour.

These ski-tours require careful preparation and an experienced guide. At this altitude, over untracked snow, there is a constant risk of avalanches, bad weather or of falling into a crevasse. Any single event, or succession of small mistakes can lead to disaster. Over the past few years I have started to venture off-piste without a guide with a group of friends. Now we are making crucial decisions in a group, such as which route to take, analysing the weather, avalanche risk and other signs.

Heading toward the summit of Piz Buin, having crossed the Silvretta Glacier

My question to you is this: Is a group of off-piste skiers likely to be more or less risk averse than an individual off-piste skier?

To answer this question let’s analyse the dynamics of the group. Are these people natural risk takers or generally risk averse?

Off-piste skiers are risk-takers; some might even consider them adrenalin junkies who get a thrill from being in the danger zone. In this situation the more risk takers there are in a group, the higher the risk threshold of the group. A group of risk takers will be inclined to take more risk.

Risk mitigation: crevasse rescue training with our mountain guide Remo Baltermia

Now consider a group of accountants or actuaries;  would their group decisions become more or less risk averse than as individuals? Accountants are stereotypically risk averse (I acknowledge this is a sweeping statement). If the stereotype holds for this particular group the risk threshold of the group is lowered and they become more risk averse.

This is just one example of “group think” (Janis, 1972) where people may be afraid of introducing conflicting opinions in a group. This is one of the reasons why companies tend form cross-functional teams or may even use personality tests when selecting team members to ensure there is a divergence of opinion.

In our group of off-piste skiers we are aware of this problem of group dynamics and this forms part of our discussions when decision-making. However, I think that the most effective form of risk reduction for our group is the frequent messages and phone-calls from wives/girlfriends throughout our tours telling us to “be careful”.

Further reading:

Janis, I. (1972) Victims of Groupthink. Boston, MA: Houghton Mifflin.

Succession Planning: The King is dead, long live the King!


“The most useful piece of business advice I have been given is to start planning for my successor on day 1”. These are not my words but those of a CEO interviewed on BBC Radio 4.

Succession planning can be difficult but it is a vital issue for any business. Royal families across the world adopted a simple policy that the first-born son would succeed to the throne. Many family companies still follow a similar policy (Fiat, News Corp etc). This is a nice clear-cut system that everyone understands. Of course, I am not saying that this is necessarily the best system.

Sometimes in a company there is no “heir apparent”. Queen Elizabeth I “the virgin Queen” had no heir and chose not to nominate one for fear that it would diminish her power. The problem is that if no succession planning is apparent people get worried. Remember the falls in Apple’s share price whenever questions were raised about Steve Jobs health?

Elizabeth I of England

Succession planning is not just a case of addressing our own mortality or the chance that we might have an accident; it is true for everyday projects. Management Consultants are often criticized for advising a company for a couple of weeks on a change, making a change and then leaving. Unfortunately, if the right measures are not in place, the changes are less likely to “stick”.

One of the lessons that I, and the team learned in Kenya was to start planning our departure and transmission of roles from day 1. We had left our planning too late and so, on leaving, our Kenyan team were unsure of their roles. Despite our best endeavours our local team was only 90% sure of the procedures and roles that they had to fulfill. Had we started planning from day 1, that 10% confusion might have been avoided.

When is the right price not the right price?

Sometimes things really are too good to be true. Often, if the price of something is too low, it is too low for a reason.

Many times while working in investment management my then boss would tell me “it may be a bargain William, but that price is telling you something”. Often he was right; the depressed price was a signal that there was an underlying problem with the company of which we were unaware.

Most recently, this happened to me in Kenya. I was getting stuck into my second week of the CBSM primary school build. We had established a good network of suppliers and barring a few minor problems with undersize foundation stones, things were going well.

Foundation stones being delivered of varying quality

However, money was tight (donations are most welcome by the way) and we were keen to save costs. Interestingly, in Kenya the cost base for a build is inverted to what you would find in Europe. There, labour is cheap and materials are incredibly expensive. For instance, our unskilled labourers were earning 250KSH per day –roughly €2.50 a day. A bag of concrete costs in the region of KSH800 or €8.00.

The foundations require vast quantities of aggregate (stone chips) and these arrived at site in 30 tonne loads. Initially, we had negotiated a price of KSH2,500 per tonne with our supplier Joseph, he always delivered on time, kept us in touch if there was a problem, and the goods were always to the right quality. By this time however, the build was attracting lots of local (unwanted) interest. People in shirts (as opposed to t-shirts) were turning up to the site. An unusual spectacle in this poor area, these turned out to be local suppliers who brazenly informed me that it was my “duty” to give them some business as it was a “community project”. I was reluctant to change suppliers as we had already established a simple functioning supply chain, with good stock control and I didn’t like their attitude. However, I am always interested to know the market price for goods so I asked for quotes for aggregate from two of the “shirts”. Kebaba bid KSH2,300 per tonne and Joshua bid KSH2,400.

Chatting to Masika the construction manager (white shirt) while a local supplier looks on

At first glance, here was a considerable saving to be made. Potentially we could save KSH6,000 per load. I was still unwilling to change suppliers. Besides, the local Kenyan team didn’t know these two locals. I decided to have a meeting with our trusted existing supplier Joseph. I decided to adopt an open book policy and presented him with the two quotes and asked if him for his thoughts. He looked at the paper, paused for a while and then reduced his price by KSH100 per tonne. He complained that the lowest bid was too low, there was simply no profit in that deal for the supplier after transport and other costs were added. Now, better understanding his supply chain, I could make a balanced decision. I therefore accepted Joseph’s bid of KSH2,400 told the other suppliers that our books were closed and asked them to leave the site.

Part of the CBSM build supply chain

The next day there was an uproar! Whilst I was procuring steel from Bungoma, the police had arrived and finding Kebaba (the low bidder) at the gates to the site, arrested him. Allegedly, he had been stealing aggregate (diverting lorries) from a government site. Had we taken Kebaba’s offer, there could have been serious repercussions not only for the build but also for the charity.

When dealing with suppliers it is important to understand their costs and know their business. Japanese companies such as Toyota are well known for taking a long-term view on business relationships and for the high transparency of the bidding process. For instance they often build-in an accepted profit margin into a deal. Moreover, if they then ask for further cost savings they will work with the supplier to ensure that these can be met and not at a price which damages the long term future of the supplier. After all, we want to ensure that suppliers can deliver in the long-term on cost, quality, time and also invest in their businesses. Ultimately this will be to our benefit too. The diagram below shows an “open book” 2 way communication strategy which can be used when dealing with suppliers as suggested by Lamming (1996).

2 way flow of information between supplier and purchaser

Sako (1992) in his analysis of UK and Japanese firms found that 3 types of trust are needed for good buyer-supplier relationships:

1. Contractual trust – the adherence to formal, legal promises
2. Competence trust – that either side is capable of delivering what has been prominsed.
3. Goodwill trust – which borders on “ethics”, trusting that appropriate behaviour will ensue.

Joseph is such a supplier. He delivers on time, on cost and to the required quality. I trust him and we communicate well; both giving and receiving information on the build. I also noticed that his trucks were in good condition and his employees were well looked after. Here is a man who is building his company for the future. Hopefully next time I receive a low bid from a supplier it will act as a warning light and I will be on my guard. In finance we have a term “KYC” for Know Your Customer, I think my experience in Kenya has taught me that the acronym “KYS” Know Your Supplier is equally valid.

Further reading:

Sako, M. (1992) Prices, Quality and Trust: Inter-firm relations in Britain and Japan. Cambridge. Cambridge University Press.

Brown, S, Lamming, R, Bessant, J and Jones, P. (2006) Strategic Operations Management, 2nd Edition, Elsevier Butterworth-Heineman. Oxford. UK

Next: Succession planning: The King is dead, long live the King!

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