'Zombie' Companies
DUMPING THE LOSERS
"The height of insanity is doing the same things over and over again and expecting a different result," Anon.
How do you recognize when a company or project or division or parts of a company are dead and need to be dumped? When do you decide to keep the winners and dump the losers?
Knowing when to held 'em and when to fold 'em is really important to entrepreneurs; if you don't know when to quit you could waste your career on things that just aren't going to work. My father, Professor O. J. Firestone, compared business to pouring water into a bucket. No matter how much water (read revenue dollars) you poured in the top, if there are leaks in the bucket (i.e., businesses that lose money), you are sinking and will never get ahead.
I have found that my father was more right than he ever knew. It isn't just that the fact that a business is unprofitable that kills you; it's that your costs are too high or your revenues insufficient or both. These are not all the same thing. I have been very good at building the revenue side of businesses that I have been involved with but not as adept at controlling costs. So you can have a high revenue business that is unprofitable because you are not controllig your costs. So paying attention to the cost side of the biz is important too. However, when revenues are bouyant but costs are too high you do NOT have a 'Zombie' Company; instead you just have a company where costs need to be pruned.
A Zombie Company is much worse than this. It has lousy revenues and lousy prospects. It's darned hard to admit you were wrong; it's an ego thing. So most entrepreneurs carry on with losers a lot longer than they should. I am guilty of this but I got way better at dumping the loser sooner as I got older. But first you have to recognise the symptoms.
Here are a few from my experience:
1. Costs are much higher than revenues.
2. Sales people blame the "Sales Cycle" or have other excuses which seek to delay the inevitable.
3. Morale is down and dropping.
4. Staff turnover is increasing.
5. People are forgetting the obvious ("I forgot the contracts", the story of Istari Electronics), blaming each other but never themselves (not taking responsibility for their own actions/not having a good 'heart') and not learning from their mistakes (repeating the same mistakes over and over again).
6. Stuff falls through the cracks.
7. Lack of initiative.
8. Lack of demand (curve) for the product or service (e.g., CFL football in Ottawa in the 1990s).
9. People start lying to you. (Note that most people don't actually lie to you. They lie to themselves first then they tell you what they believe is the truth. If you think you are dealing with a Zombie Company, you need to verify independently all the information flow; you need to triangulate on people by asking the same question of several people to see if you are getting the same answers.)
10. Current Assets are much less than Current Liabilities.
11. Media rumours of financial troubles begin to circulate.
12. Shrinkage increases- employees and others begin taking furniture, computers, money, client and customer lists. Your employees become your competitors.
13. Sick leave, MHDs, holiday pay, absence-on-the-job increase. People play 'golf' and other electronic games on their PCs.
14. Receivables become hard to collect because people erronoeously believe that if the company goes bankrupt they won't have to pay (untrue in most cases because the receiver will try to collect).
15. Staff hide purchases, purchase orders, other costs.
16. Sales increase at the end of a quarter only to be reversed in the next quarter as inventory is returned.
17. Fianancial statements cease to reflect accurately the cash position; cash becomes scarce.
18. Bank lines are fully utilized.
19. Creditors call at home and at the office. Payables exceed 90 days.
20. Productivity drops because supplier credit dries up and materials and services needed for production are hard to come by.
21. Client and customer complaints skyrocket. Repeat customers and clients are way down.
22. Your credit rating is dropping like a stone.
23. You can't get any financing deals done.
24. Your sales pitches are met with silence. (Silence is never good in deal making. It means that they either haven't made up their minds yet to give you the order, which is bad, or they have made up their minds and the answer is 'no'. People don't like telling you 'no'. So they will usually say: 'maybe'. In my experience the best answer is 'yes', the second best answer is 'no' and the worst answer you can get is 'maybe'. The latter wastes your time and their's. So if I hear 'maybe' a few times from a client, I tell them that I will take this as a 'no'. Then either they will say 'yes' or I have saved everyone a bit of embarassment from having a negative outocme to something. I never take 'no' personally.
25. You start to worry more about your legal position and less about sales and the biz. (In business generally, you need to be aware of your legal risks but almost no entrepeneurs can afford to be guided solely by legal concerns and not by business issues. There are so many potential legal risks in today's business world, that practically no one could do anything if they put legal issues first and business issues second.)
Copyright. Dr. Bruce M. Firestone, Ottawa, Canada. April 2004.
Student Note: Having said this, some firms like Fed/ex probably had all or most of the above symptoms yet went on to great success. There is no sure fire way to be absolutely certain that it is time to put a business or a division out of its misery. Fed/ex was successful against all the odds because Fred Smith had a burning desire to succeed and he was prepared to do whatever it took to ensure that Fed/ex continued on including some things that were almost certainly inappropriate and perhaps unlawful. But for every Fed/ex there are probably dozens of businesses that should be shut down or pruned ruthlessly. Pity the entrepreneur that says: 'If only I had more time and more financing, I could'a been the champ.' In almost all cases, this is just not so. Today, if you have revenues, you will get financing and not the other way round. That's why so many entrepreneurs start with nothing-- they pull themselves up using bootstrap capital.