Tuesday, June 30, 2015

Bad management and restructuring

I want to do a quick blurb about bad management and corporate restructuring.

Bad managers cut costs by laying off people, closing remote operations, etc, without examining the real basis for the underlying profitability issues.

Typically there are three or four costs, employee specific costs, remote operation costs, corporate overhead costs and materials costs.  The key is to look at these costs individually and accumulated.  A lot of lazy accountants are too stupid to understand statistics so they work off of median and mean, which are easily generated  numbers.  The good bean counters work off of modalities, which tell us a lot more about what is going on.

For example, what is the individual performance modality?  This is where we take all the workers and create a histogram of their gross income generation.  In production, this is pretty much equal.  But, in other businesses, this can be radically different.  This modality curve defines my minimum expectation for worker income generation.  The curve should be skewed to the high side, meaning that the modality will be below the average gross income generation.  This is because high performers skew the curve.

What is the cost per income generating employee of the remote office?  Again, I would do a histogram of all the remote offices and look at the modality, not the mean or the median.

Corporate cost per employee should be the lowest of these three numbers, if it isn't, corporate costs need to be reduced.

This is actually basic processing statistics, the modality becomes critical and the mean/median are only important in their relationship to the modality of the process.

Looking at the modality curve, the analyst has to compare the width of the modality curve to 2 sigma.  Using the lower of 2 sigma or the width of the curve, it is fairly easy to set up lower and upper boundaries for process control, everyone producing below the lower boundary is let go, every remote office which costs more than the upper boundary of their modality curve is restructured to reduce costs. 

The total of the employee, remote operation and corporate overhead costs must be lower than the low boundary of the individual employee income generating modality.  This way, income generation is protected, costs are cut and profits increased.

Once individual performance standards are determined using modalities, everything else becomes obvious.  Then management can look at high performers and figure out what they are doing, then train others so that the modality begins shifting closer to the mean.  Done right, continuous improvement strategies result in process optimization.

This is all basic, Business 101, Processing 101, stuff.  The problem is, people are usually too arrogant to pay attention to the basics and figure they can do things better than the last thousand people who did it.

So, when you hear about a corporation that is restructuring, are they protecting gross income generation?  Are they protecting the corporate overhead (their salaries and perks, executive dinning room)?

Look at the financial services corporations that the United States bailed out and then handed over the future of health care to with "Obamacare".  Most of these guys didn't change their overhead, they depended on charity to protect their overhead.

Income in the States is multi-modal, there is a "line" with multiple "bumps" in it.  Each "bump" is a curve modality.

So what did those political decisions do?  Well, they reduced the amount of the three lower income modalities in the United States, which decreases the amount of money consumers have to spend in a consumer drive economy.

In other words, by implementing Obamacare and other corporate protections, the Obama Admin is protecting the high income modalities and damaging the lower income modalities.

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