Posted on

Courageous Conversations With Entrepreneurs

Gated communities provide their occupants with a comforting sense of security and safety in numbers. They can also be the cause of major angst resulting from locking human beings with varied tastes into the confined space of a pressure cooker. Add to that the cold and sterile wastelands of Whatsapp estate group chats and you have the makings of a social train smash. I live in one such gated community. There are dog owners and there are dog haters in not so equal measure in this community. House number X has a dog that chooses to make its presence known only during the magic hours of 10 pm through to about 2 a.m. and singularly drives the neighbor nuts in adjacent house number Y. But this is where it gets interesting. House number Y usually posts his annoyance on the estate Whatsapp group with a not so gentle “House Number X please get your dog to stop barking” at about 10 pm, followed by an exhausted “What the “%$^&” is wrong with your dog and its incessant barking?” at about 2 a.m.

For whatever reason, house number Y has never seen it fit to just go over to house number X wearing sack cloth and asking for release from whatever calamitous curse has been levied on him by that dastardly dog owner. Instead the Whatsapp messages just keep getting posted week after week with no evidence that there has been an attempt at one on one dialogue. The frustrated house number Y tenant is just speaking to himself. Every day and twice on Sunday.

Recently my work has had me helping medium sized family owned businesses set up advisory boards, which is a step below statutory boards whose directors adorn legally borne fiduciary duties. Observing the first conversations with newly appointed advisory board directors, what always strikes me is the amazement on the faces of the business founders. This amazement often emerges from the realization that there are individuals who have significant amount of work experience totally unrelated to the business in question, but which experience can add value in terms of seeing around dark corners that the entrepreneur has been totally blind to. Those initial conversations are often very rich as the entrepreneur gets asked questions about strategy, financial performance, operational risks that she had not even envisaged but have always been lurking below the surface, brand perception, sales assumptions and many other key business parameters. The only entity that ever asks some of these questions is the entrepreneur’s bankers and these questions are more motivated with “how will you repay our loan” rather than how can you grow your business sustainably while de-risking it responsibly.

For the entrepreneur, having talented individuals seated round a table with no other motivation than to see her succeed can be quite illuminating. Having gotten used to speaking to herself every day and twice on Sunday, it is refreshing to have considerable brain power to bounce ideas off of and to have people who can pull her off the edge of a cliff when she’s at the end of her tether.

One such entrepreneur told me that she appreciated her new advisory board as they provided much needed encouragement when she had started to get tired of the everyday hum drum of the business. Having grown the business to a certain level of stability, she needed a new challenge. The board had managed to point her to a new business opportunity that she had never thought of, while ensuring that she had the appropriate levels of senior management resources. The senior set of guard rails in the business would allow her to divert her attention to something different that would suck a lot of her intellectual capital and time bandwidth. That strategic focus on setting up a well-paid and highly experienced human capital side of the business is something she had not thought of doing before as she was used to having her hands on all parts of the business actively.

For entrepreneurs, it is not only lonely at the top but it can also be terrifying as their business is central to both their life and to their sheer survival. Courageous conversations are rare because there’s simply no one to talk to. Not even on a crisis tone deaf Whatsapp group. An advisory board is an effective way to getting much needed intellectual relief from the curse of daily business loneliness. Every day and twice on Sunday.

To gain more insights on how to set up an advisory board for your business, register for the Founderitis Program here: https://www.carolmusyoka.com/founderitis/

[email protected]

Twitter: @carolmusyoka

www.carolmusyoka.com

 

Posted on

Echo Chamber in the Family Business

An echo chamber is defined as an environment in which a person encounters only beliefs or opinions that coincide with their own, so that their existing views are reinforced and alternative ideas are not considered.. You must have seen one of those in your work team meetings when the leader is talking with everyone nodding their head furiously at whatever he says and laughing uproariously when he cracks stale jokes about his mother in law. Or maybe you’ve seen it in your family meetings, where a feared matriarch speaks. No one dares to contradict her edicts or opinions because doing so will destabilize the way things are done around here. Peace must be maintained. Even if she’s potentially leading everyone over a cliff into a deep abyss.

The danger of echo chambers is that without differing or dissenting opinions, the occupants of the chamber may fail to see potential danger in the horizon. Talent attrition brushed off as “anyway those guys were useless”, shifts in consumer tastes attributed to “those goods are cheap, our customers will be back” or worse still, family members who are suffering from mental health issues are labelled “just being spoilt”. These are some examples of blind spots that need to be called out by a brave, dissenting voice.

 

I have been getting a lot of queries recently from entrepreneurs curious about what a board can do for them. Let me start with a basic premise: you do not need to set up a statutory board which is where you appoint directors via the provisions of the Companies Act and have to register them at the Registrar of Companies. You can start the gentler way, which is to set up an advisory board. This is a group of experienced people who have no legal affiliation to your company but who come together to sense check your strategy, your risk framework, your financial performance or your product proposition. They can do all of that or some of that. It’s entirely up to you, the business owner, to define what advice you want from them.

It’s also entirely up to you to determine how many times you want them to meet in a year, what information you want to share with them and what renumeration, if any, you want to pay them. But let me warn you that if you want to get talented individuals who don’t want to feel that their time is being wasted, be prepared to open up your operations for scrutiny, your financials for a thorough review and your strategy for an intensely deep interrogation. You can create professional boundaries by ensuring you have a board charter that outlines what the role and the responsibilities of these advisory directors will be. Included in the board charter can be a non-compete clause which clearly states that an advisory director cannot enter into the same business line as yours, and if she does then this would be grounds for termination of the appointment. You should also include confidentiality clauses to ensure that the information shared remains within the business confines and is not the subject matter of a discussion at a nineteenth hole somewhere on a Limuru golf course. The same should be replicated in an advisory director appointment letter which states the tenure of the directorship, let’s say three years, that may be renewed. It should also state the remuneration (if you want monkeys throw peanuts, so get serious about what you want to give as a sitting allowance) as well as have confidentiality and non-compete clauses, the latter of which should be grounds for termination if breached.

Bats send out ultrasound waves and use their echoes to identify the locations of objects that they can’t see. Which is why the euphemism “Blind as a bat” is quite oxymoronic because though blind, those critters fly around quite efficiently. Your advisory board of directors will be your bats, to help you turn your business echo chamber on its head, helping you identify the potential stumbling blocks that you cannot see: Staff talent that needs to be rewarded better, succession planning that needs to begin happening, product features that are missing shifting market cues or market opportunities that are being left wide open. Give some thought to opening up your business to new voices in 2022, it might bring a road to Damascus moment.

This marks my 500th article in the Business Daily as The Nitpicker for the last 13 years. My many long suffering editors have continued to give me a voice on this respectable forum, and to all of them I want to say Asante Sana!

[email protected]

Twitter: @carolmusyoka

Posted on

Artificial Intelligence In The Boardroom

“Algorithm appointed board director” was the title of an article on the BBC News website on 16th May 2014.  “Artificial intelligence gets a seat in the boardroom” was a similar headline three years later on 17th May 2017 on the Nikkei Asian Review news website. Both articles were referring to a computer algorithm called Vital that had been “appointed” to the board of directors of a Hong Kong venture capital firm known as Deep Knowledge Ventures. Citing the Nikkei Asian Review article, “Dmitry Kaminskiy, managing partner of Deep Knowledge Ventures (DKV), believes that the fund would have gone under without Vital because it would have invested in “overhyped projects.” Vital helped the board to make more logical decisions, he said.”

 

By using an algorithm that could sift through masses of data on past investments, the company was able to narrow down on what the least risky investments were in the biotech space that they were playing in. The article continues, “DKV started as a traditional biotechnology fund, with a team of advisers and analysts using traditional methods for trend analysis and due diligence. But the biotech sector has a very high failure rate, with around 96% of drugs not successfully completing clinical trials. DKV then acquired a team of specialists in the analysis of big data – large data sets that can be analyzed by computers to reveal patterns. The team created Vital, the first artificial intelligence system for biotech investment analysis, enabling the fund to identify more than 50 parameters that were critical for assessing risk factors. Kaminsky said: ‘ As we analyzed more and more companies, we were failing to identify those patterns and factors that made a company likely to achieve success. But surprisingly, as we began to analyze thousands of companies, we discovered certain parameters that were good at predicting the risk of failure.’ ”

 

The primary role of a director is twofold: a monitoring and oversight role of past decisions made by management and a forward looking role to oversee formation and execution of strategy. In the DKV example cited above, the role of the algorithm was to help the venture capital board make the right investment decisions. Using big data, the algorithm was able to narrow down which specific drug research areas were yielding better outcomes and provided support to the board on which drug companies to invest in.

 

How could this translate to other non-investing type of companies? It is easy to draw a parallel to the banking industry for example where bank boards have to review and approve lending decisions based on analysis that has been done by a credit manager. While smaller loans have already moved to algorithm based decision making (Mshwari is a good example), the bigger and more complex loans still require human analysis largely due to a poor use of big data within the banking industry. Not sharing historical lending data, which can be easily done on a no-name basis to protect client confidentiality, prevents the banking industry from building a critical database that can be used to provide granular risk patterns for different market and industry segments.

 

While it can be argued that the information is being shared at a credit reference bureau level, what remains to be seen is how this information can be consolidated, analyzed and churned back to the banks to use for determination of probability of repayment. But credit risk analysis which is largely technical, is mainly a management undertaking, and brought to the board for approval. Having AI sort out that decision at management level would significantly reduce the work of the credit committee of the board. One can further argue that AI can also review the entire lending book of the bank, assess the current and potential portfolio at risk, and determine what amount of provisioning is required, as is currently demanded by the new international accounting standards. Which would then eliminate the need for numerous risk analysts within bank management.

 

AI could also potentially review the financial reports produced by management (if not produce the reports themselves) for accuracy. We could go very far with this argument, which is that if machines are able to do a lot more of the monitoring role that management undertakes and reports to the bank’s board, then technically, a lot of the work of the bank board can be reduced to oversight on the formulation and execution of strategy and the more human role of oversight of  key stakeholder engagement such as employees, customers and regulators. The DKV example is really a hyped version of a management decision making tool that is being elevated to board use. But it does spur some thinking for both directors and management on how daily operating decisions can be moved to more accurate algorithm driven processes.

 

[email protected]

Twitter: @carolmusyoka

 

Posted on

How to assess your risk appetite

Last week I touched on the topic of risk management and why boards of directors need to familiarize themselves with the topic. A risk is an uncertain event or condition that, if it occurs, can cause significant negative impact for an entity or individual.

Take the example of a member of parliament (MP). He is a fairly well paid public officer earning a six-figure salary, as well as pretty good perks like car grants and sitting allowances. The risk that he faces is that in five years, come the next election, he will have to expend an inordinate amount of time and resources to ensure his re-election. Since he has achieved a certain taste in lifestyle such as all expenses paid foreign trips, mileage allowances, state sponsored security etcetera, a loss will cause a significant negative impact for him. One way to mitigate such risk is to undertake a risk versus reward calculation. As chances of re-election are almost slim to none without pouring massive investment into the next party nomination process, the next best thing is to ensure that he acquires as much wealth as possible in the shortest time so help him God and may the Salaries and Remuneration Commission be damned. He would therefore support all efforts to reduce mileage allowances as well as salaries and gorge himself silly at the trough of state coffers while the belt of austerity girdles all other public expenditure. A high risk of being thrown out at the next election is matched by the commensurate quest for high reward.

Organizations require to regularly map out all the risks appertaining to their existence such asrevenues, costs, operations, facilities, taxation, fraud, cybersecurity, regulatory interventions amongst myriad others. Typically, each department should map out its risks and then the executive should map out what the overall key risks are and map them out on a table to determine their probability of occurrence versus the impact of such occurrence. (See image). This table is referred to as a risk heat map which visually illustrates what the risks faced by the organization at regular points in time are.

Thus a company that deals with plastic packaging would have identified and mapped out the risk of a regulatory intervention from the first time Kenya attempted the plastics ban during the Kibaki administration through various tools such as punitive tax and eventually an attempt at an all-out ban in 2011. Once the ambient noise about a ban began to get louder, that risk would have moved to the top right quadrant of high probability and high impact. When the ban was revoked, it should have remained in the high impact, but moved lower down the Y axisto medium likelihood. A well -informed board would put management to task as to what mitigants they are putting in place to diminish the risk. Hope is not a strategy, and a sheepish response from management that they’re hoping for an eventual change of government should never pass muster at the board level. Particularly since in subsequent years there was a successfully enforced plastic ban in Rwanda. Management would have done well to start looking at alternative packaging materials in the likely event that the risk of a total plastics ban would materialize.

But it’s not only the plastic packaging manufacturers that should have been watching the government moves with a tremulous lower lip and beads of perspiration speckled above their upper lip. Soft drink and bottled water manufacturers should have upgraded the regulatory risk of a total plastics ban to a high probability faster than they could spell polyethylene terephthalate, commonly referred to as PET. PET, which is used to manufacture many of the soft drink and water bottles, is a much-maligned material due to its primary inability to biodegrade.

It is noteworthy that while a risk heat map tries to identify the key risks that management faces in running the organization, it should be a dynamic rather than a static tool as risks shift constantly in likelihood and impact, with some extinguishing entirely while new ones appear in the ordinary course of time. The greatest danger for organizations is a risk agnostic board. There is no sustainability in adopting a high risk, high reward strategy for the short term. Unless of course, you’re an MP.

[email protected]

Twitter: @carolmusyoka

Posted on

Strategy is not business as usual

[vc_row][vc_column width=”2/3″][vc_column_text]I recently sat with a group of senior managers from multiple organizations talking about the difference between strategy and business-as-usual. It never ceases to amaze me how many managers believe that their strategic initiatives as defined by the organization are actually business as usual objectives dressed in ball gowns and glass slippers. An example was thrown into the discussion of one of the participant’s employer’s strategic pillars: customer centricity. How is that a strategic objective, I asked? Well, we know look at the customer as special and we focus on them to deliver a good service, was the earnest response. Wait, what? But isn’t the customer the very reason every single person in the organization comes to work, from the cleaner on the shop floor to the CEO? Yes, I was told, but by having customer centricity as a strategic objective we will now get the appropriate focus etcetera, etcetera. The reason for doing any kind of business is to get money from a customer and convert it as efficiently as possible into a profit from the shareholder. So claiming customer centricity as a strategic objective is as good as saying getting staff to come to work is a strategic objective: they are both matters in the ordinary course of doing business.

Targeting a hitherto untargeted customer segment using a differentiated delivery framework is a strategy. Serving existing clients is business as usual. Creating new service delivery mechanisms such as digital is a strategy; focusing on giving existing clients a wow experience is and should be business as usual. Looking out into the Kenyan business horizon, Safaricom makes an interesting case study on what strategy in motion looks like. Following its 2008 IPO, Safaricom entered the realm of publicly publishing its results. In the results for the financial year ending March 2009 which was the financial year during with the IPO took place, its revenue from voice was 83.4% while data which represented SMS, mpesa and other data revenue generated 12.9% to the bottom line.

By financial year 2013, Safaricom reported that voice now contributed 64% of service revenues.Five short years later the upward trajectory of non-voice data continued with voice contributing only 45% of service revenues by March 2017 compared with mpesa at 27% of service revenue and fixed and mobile data revenue at 16.8% of service revenue. Combined, mpesa and data revenue add up to 43.8%, which is slightly below what the voice data brings in. That’s a telling number right there.

You may not have noticed it, but Safaricom has stealthily crept into your life at multiple touch points during the course of your daily routine. From the way 72% of Kenyan market share communicates by voice, to the way Kshs 6.9 trillion in value goes through the mpesa payment system in the form of money transfers, business to business payments as well as customer to business payments. Somewhere along that chain are the funds you sent to your family, farm workers, payment at the supermarket till, barber bill, bar bill, church or funeral harambee contribution or fuel payment. 83,000 Kenyans now use Safaricom’s fibre for their internet connections at home, with 1,500 buildings fully wired for Safaricom internet. Those fibre numbers are only projected to grow. This strategy to ensure multiple touch points in the dawn to dusk cycle of a consumer’s life is very similar to global giant Procter and Gamble’s strategy to be immersed in the lives of their customers throughout the day which is the bedrock of their innovation strategy. From Crest toothpaste and Oral B toothbrushes, to Gillette razors and Head and Shoulders shampoo will carry the consumer through their morning routines. Pampers diapers, Vicks vaporub, Olay lotions and Always feminine products feature through that brand base as well as various dishwashing liquids and household detergents such as Ariel and Tide.

Speaking about consumers on their website, they say: “We gain insights into their everyday lives so we can combine “what’s needed” with “what’s possible.” Our goal is to offer them product options at all pricing tiers to drive preference for our brands and provide meaningful value.” That mind set ends up deriving $65 billion of annual revenue by the end of financial year 2016.

The numbers never lie. It’s fairly evident that Safaricom is headed on the same trajectory of impacting its customers from dawn to dusk as it strategically morphs itself from being a mobile phone company to the primary financial and data services provider for the Kenyan individual.

[email protected]: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]