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Where is the Leadership in New Knowledge?

December 1, 2008
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Given the collapse of the Great Bubble Economy and the outrageous imprudence or outright fraud at all levels of financial and business management, my hope is that Americans and American Business will become much more grounded and return to solid and tested management principles of yesteryear. Business is not an enterprise where everyone at the V and C levels can get rich quick.

In many years past, business was a place where one could build wealth over time and often a very long time. Part of the ability to build wealth in times past was the attainment of new knowledge. There was, at one time, a great respect, dedication and leadership in new knowledge. However, I am convinced that, in distribution circles, leadership in knowledge to really change things has all but disappeared. Wholesalers have substituted pell-mell acquisition, “infotainment,” sloganeering, and spin doctors instead of empirically supported and hard hitting facts.

Wholesaling is not one of the high profile industries where there are giga-millionaires made overnight. However, to say the industry has not been touched by greed is naïve. The most recent environment of P/E firms or intra-industry acquisitions where multiples skyrocketed and new rollup firms were created overnight was a sign of the financial avarice that plagued the industry. Today, most of these strategies are gone and for a very long time. The easy credit, the upside growth, and the ability to strip and flip are mostly memories. Beyond this, the spin doctoring of old knowledge and humor as requisite for presentation has run its course.

Recently, and regarding a new knowledge base we have worked on for several years, I was told by a rather high profile ASA wholesaler that the information was “too disruptive… too heavy… and not humorous.”  In the mind of this “luminary,” if the knowledge didn’t go over easy and wholesaler execs didn’t laugh, it wouldn’t score well as a seminar.  My position was, and has been, if you want humor or feel good stuff, go to a comedy club or rent-a-date. These events will take your mind off of tough business or patronize you as long as you can keep the money flowing.

But if you want stuff that helps, that gets to root problems and makes you change things, then you have to get a little uncomfortable. You will have to think differently and pay a price of moving from assuredness to doubt to acceptance of new and better knowledge. I was taught at an early age that easy is a lie and the yuk-fests that serve as knowledge in many industry seminars is shameful. 

While I won’t point fingers, I won’t blog in vague insinuation either. How many times do wholesalers have to go to compensation seminars, inventory management seminars, PAR Report seminars, or new and improved sales techniques seminars until they say “enough already!” How many times has this stuff been tried only to yield short-term profits and no substantial change in the long run?

Where are the association board members who stand up and say this stuff is simply repackaged old material with nothing new added? Where is the empirical research and the demonstrated blend of education and experience of the knowledge brokers? Where are the knowledge leaders in an industry who come together and create new knowledge that provokes lasting and helpful change? Where are the wholesale leaders who challenge some of the existing “comic geniuses” on the wholesaler seminar circuit about their lack of education, experience, and empirical evidence? Much of the stuff that substitutes for knowledge is thin as rice paper and decades old. Think not? Well, consider this:

  • Compensation change as a means to profitability and redesigning compensation models is at least 25 years old. It was big when I was coming out of graduate school in the late 1980s. Our recent research finds that there is no discernible difference in compensation models and their effect on earnings. It makes no difference if you pay sellers salary and bonus, salary and commission, salary, commission and bonus or straight salary. Earnings aren’t improved by any one type of compensation structure. In fact, over 40% of sales territories, regardless of compensation type, lose money (they have negative aggregate earnings). 

  • PAR reports - those comparatives of financial ratios supported by associations - are going on three decades old. They emerged in the 1970s from academics at Ohio State, Texas A&M, and Texas Tech among other institutions. Our research finds that using the financial ratios and logic from these reports often impedes operating profit generation. The measures are too broad-based, couched in accounting language, and good for period (time frame) accounting but not driving operating income. Our research says that wholesaler operating profit is driven by three ratios including: size of the transaction in margin dollars, type of transaction and its cost, and the mix of transactions. Where do you find these metrics on a PAR report? Financial reporting and ratios have their place but they are old tools. 

  • Measuring branch progress on expense allocations is fallacious. In essence, allocating expenses to branches using sales or margin dollars and to come up with a branch income statement means mostly nothing. You really can’t tell if the branch is profitable or not using these allocation methodologies. 

  • Several associations that generate research have numerous panel members who can’t tell one statistical technique from another and have never directly worked in a wholesale environment. In one recent survey on the growth in importing of foreign off-brands, a research panel was formed of mid-sized wholesalers and large domestic manufacturers. The wholesalers were then asked if they had plans to import foreign products and they summarily said “no way!” Then the enlightened association issued a report that advised their members that sourcing foreign products was a bad idea based on the “research!” Our work in the industry showed foreign brands growing at a 5% rate per year.

I’ll issue a challenge and invite interested readers to go to my site at www.benfieldconsulting.com and on the home page access a White Paper called Transaction Management. (Or use the following URL: http://www.benfieldconsulting.com/benfield_site/downloads/Transaction_management.pdf) Read and study the White Paper. It is a single-spaced, 14-page report on our findings using new knowledge over a three-year period. Study the exhibits taken from our fieldwork and ask yourself if you could benefit from the knowledge?
And then write or call me and tell me what you think. I’ll bet the report will make you anything but comfortable. 

The upshot of this entry is that for years wholesalers have been measuring and rewarding the wrong things to get to better profits or they’ve been using tools that are repackaged but worn out. They’ve settled into comfort zones expecting seminars to be “funny” and of thin substance instead of hard-hitting and thought provoking. If I’m a reasonable judge of things, however, I expect this strange mixture of thin knowledge, comedy fest, and repackaged junk to come to a soon and certain death. Why? Because the “infotainment” has run its course. It doesn’t help and wholesalers will need plenty of help in changing things to meet tomorrow’s environment. We won’t see thin stuff as often because it doesn’t work and wholesalers will need things that work and work well and quickly.

We also need knowledge leaders in the industry who champion new thinking and new ways. If your association-appointed leaders are handing you the same old hash, albeit repackaged, let them know or get rid of them. Tell them you are tired of the thin stuff and getting patronized and see what they say. In a larger sense, the death of the “infotainment” junk is a microcosm of a growing trend in America. For far too long we’ve relaxed our standards and exceeded them while slouching toward mediocrity. We’re borrowing from two generations forward to pay for our slovenliness and we are beginning to wake up to the fact that we can’t do free and easy forever. It’s time to raise our standards, accept that you have to sweat to change, and have a profound need for knowledge that jars us out of complacency. 

Of course, there’s an old adage that says you “attract more flies with honey than vinegar.” However, my view is who the heck wants flies? I want serious and thoughtful managers who expect to sweat to bring lasting and profitable change to their organizations. They are my best clients because they know what it takes to succeed.

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