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The Risk of “Managing by Consensus”

Posted on February 25th, 2018

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

A while back I wrote this article, Case Study: The Risk of Sales Concentrations, explaining how a sales concentration with one customer can bring down your business. Another aspect of that story is the series of management meetings that led up to that company’s ultimate demise.

Our management team was made up of a cross section of staff from around the company, including the owner, sales, operations and production, engineering, purchasing, inventory management, and accounting and finance. These staff meetings were run almost like a democracy, wherein a “consensus” was reached and “implicitly” voted upon (meaning when the conversation ran out and everyone went with the flow).

As I mentioned in the above referenced article, our company had become financially dependent on one major customer, which ultimately got into trouble itself. Yet the outcome of every management meeting was to include that customer in our sales forecast, even as prospective buyers stated they were not interested in buying our company if that customer was part of the package. And related to this issue was a large capital lease on an equipment line that pushed up our breakeven point of sales, such that we “needed” this customer.

Later, after all of our negotiations failed and the company’s assets were sold through a distressed sale, I met with one of the engineers for lunch.  Out of curiosity (my being a finance vs. operations person), I asked him which customers needed that particular equipment line, and his answer floored me. He gave me the name of that one customer who had prevented us from selling the company as a going concern.  My response, was, “You’re kidding me, that’s it?” And he replied, “Yep.”

Had this point ever come up in one of our management meetings, I think the outcome might have been quite different. At least I know what course of action I would have recommended – disposing of that equipment line and vacating the associated lease.  However, these meetings tended to be dominated by certain personalities on the operations side, so the above question was never asked.  This was unfortunate, as managing production flow was this engineer’s particular area of expertise having worked for a much larger company like ours.

But then also, of course, a suggestion to dispose of a major equipment line would have also meant further, severe downsizing of the company.  That idea no doubt would have been strongly resisted by the other managers who had been providing the assumptions for the projections (which always included this equipment line).  Their objective was to keep the “team” together, ignoring the fact that continued operating losses would ultimately bring down the company anyway.

So, the moral of the story is, when it comes to “managing by committee,” sometimes the end result is (as I later came to think of it), “Whoever speaks the loudest and longest wins” (the debate that is, not necessarily an “at-a-boy” for coming up with the proper solution).  Again, the determining factor in any business decision must always be profitability.  When a business is losing money, the views of anyone in management who does not grasp the urgency of restoring profitability should be discounted.  And perhaps, that person should not even be made part of the decision-making process.

Related Articles:

The Effect of Operating Losses on Cash Flow

If We Build It Will They Come?

Three Most Common Budgeting Errors

The Role of Cost Accounting in Planning Your Company’s Success

Financial Planning, or Business Turnaround – Your Choice

 

 

 

 

 

 


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