Maximizing costs, minimizing ROI

The title of this article is both a provocation and a simple statement of facts.

It is funny to observe as something that was often the most critical issue with startups and growing SMEs is now visible in sensibly larger organizations.

The issue? The temptation of reducing risk by spreading too thin across multiple line of activities.

In theory, this could mean having multiple “fall-back” opportunities, should one or more of the alternatives fail to deliver the expected results.

In reality, this implies that you have multiple initiatives to coordinate- a tough call, made even more difficult to manage if you are within a competitive environment, where external issues could require a constant refocus.

In this article, taking the lead from the first public speech of the European President, a “what if” story on the application of the streamlining approach to the external relations of the EU 27.

I have been actually sitting on this article for a long, long time (1555 words).

But the current issue of Foreign Affairs contains all the elements that anybody reading enough material, with some experience in multiple countries, could think.

Intuition? Probably more like innovation and invention: 99% perspiration, 1% intuition.

This first article is short, as it is more, as the title, a provocation.

In my activities, often when I was working in brainstorming I had to do something more proactive than facilitating- I had to provoke, as to allow people to express, and give excuse to get rid of layers upon layers of posturing history.

Before discussing a possible future map, I would like to use a fictional SME, that is a mix of multiple companies I worked with and supported, in various European countries, plus companies from some other countries.

First: everybody talks about globalization

But as the funny documentary “Commanding Heights” from PBS (and other books I referred to in this blog over the last few months) show, “globalization” is often perceived as a “us vs them” issue.

If you want: an economic war, and, for us Westerners, the usual “good vs evil” is just one step away.

I heard owls time and again against this or that country.

Do you remember 1990s with titles such “Japan that can say no”, or discussions about the take-over of US from Japan?

Now it is China, or Sovereign Investment Funds buying up logistics in US and around Europe.

From a SME perspective, it is interesting to take notice of the pre-Euro and post-Euro era.

Second: business before and after the Euro

European Union countries have been trying to integrate their economies since the Treaty of Rome- but it is still too often a top-down job.

European Union has still an issue: the language and “mores” barrier, as we have countries with different approaches (e.g. rules vs principles) in regulation, and while Directives try to harmonize our common legal framework, it is quite tough to unravel and reform something that has been piling up since the dissolution of Charlemagne’s Europe.

And yes, do not forget that over the last few centuries Europe was ruled by different legal traditions (e.g. Arab Spain), and this is still partially mirrored by the organization within member states.

If you want to do business across European Union… my politically incorrect joke is always to use English in the West, Russian in the East- and then get ready to factor in whatever language or cultural tradition is required.

One of the toughest issues, when helping SMEs work in other countries, was to explain to highly motivated people that what worked, say, in Paris, did not necessarily work in Rome or Madrid or London.

And, of course, I had my own tough time helping fellow Italians to discuss and negotiate with English, French, Spanish, Americans.

While large companies have staff and procedures, and probably also lawyers and others with “staff locations” in each jurisdiction, SMEs have few key people, people who need to be involved when it matters.

All these points are what I usually remembered to my American and non-EU friends when they used to draw comparisons between EU and USA.

USA were mainly settled along a culturally homogeneous community, with a shared legal and cultural reference framework (also the formerly Spanish and French parts of US integrated in the main framework).

Before the Euro.

The Euro isn’t just a currency- means that both private citizens and SMEs can compare prices, or discuss prices with partners and suppliers.

It is still early- when I suggested to Italian companies complaining about the predatory prices that they paid to Italian banks that they should explore the use of banks in other Euroland countries, they started listing all the red tape still existing to force the use of local banks, also when everything is done electronically.

As an example: paying VAT, getting tax reimbursements, and so on.

From what I heard from some SMEs in various countries, it is still easier to consider producing outside EU and then import, than trying to produce in another EU country.

Third: organic growth

A basic issue with startups and SMEs is knowing when you need to surrender control to get a slice from a much larger pie, instead of sticking with your own small (and maybe unsustainable) pie.

Often it is simple: you can afford to be a startup with internal growth, but when you grow beyond a certain point, you attract attention- and competition.

Then, you internal cohesiveness becomes both a source of weakness and strength.

Strength, because you do not need to explain the logic behind a new decision, as everybody is moving in the same direction.

Weakness, because… well, for the same reason.

Inward-looking SMEs and startups lack cultural differences that allow to see the limitations of their internal processes from different perspectives, and to innovate.

Moreover- they are so cohesive, that any injection from outside is often rejected- unless the top-level is able to manage the insertion of “fresh blood”.

Solution? Often, being unable to grow organically, they expand through partnerships and multiple lines.

But this just postpones the needed adaptation and evolution of the internal culture- as it seems easier to build a maze of external relationships, while leaving everything inside the company unchanged.

The real issue: the organic, internal growth of the structure and its culture was not ready to scale up to the new complexity.

In my case, sometimes I had simply to attend a (free) brainstorming and wish them good luck, as I could not see the point of trying to shuffle chairs on the deck of the Titanic, and get paid to do something useless.

In other cases, when I was called I discovered that the companies had already de-facto transferred to third parties the “family jewels” (technology, processes, etc), without even securing an appropriate recover of their investment.

In effect: the SME, through hubris or gullibility, was subsidizing the innovation of their own partners- and doing a net transfer of intellectual property, usually getting through ever expanding transfers to keep going a relationship that was already lost.

Solutions? Focusing. Shrinking down. Dumping some lines. Losing some people and customers by attrition. Or, even more difficult, preparing for all of that, while also introducing changes to the internal culture.

But one characteristic was common: it worked only if the external and internal evolution were synchronized and managed by coordinated teams.

I never saw a multiple velocity approach working, as it would require the external world to be static. Sounds really familiar…

Fourth: the what if

For historical reasons (lack of a University degree, used to do and write business reports and studies, rapid-fire brainstorming, negotiations, working in multinational teams and at all the levels of the organizational structure), I ended up giving informal or formal (i.e. written) support to multiple SMEs and startups in my network across Europe, from the early 1990s until I dissolved it recently.

Few dozen cases, plus studies of best (and worst) practices, and monitoring of trends and technologies.

As the “quid pro quo” was to do these activities as goodwill should somebody in the network need future services, I was able to deliver advice that wasn’t constrained by the existing relationships.

The main issue was always: tell, informally or formally, what I suggested after reviewing all the information that I asked my partners or customers to provide to “feed” my analysis.

Every study started in the same way: a brainstorming (paid or unpaid), a selection of material from inside the organization, research outside the organization, proposed scenarios, and then brainstorming again, followed by more rounds, if needed, and closed by a final presentation and documentation release.

One point never changed: the evolution of an organization and its external relationships had to consider the existing conditions and the analysis of the specific strengths and weaknesses of all the parties involved.

Followed by a “political” assessment of the evolving motivation of all the parties involved in each relationship.

We can do a simple exercise: apply this methodological framework.

We can see in few days if your map matches my map of the future relationships.

Just a small hint: one of the scenarios that I identified is for an extension to EU of the Finnish model of external relationships during the Cold War.

Crazy? Maybe. But based on the review of publicly available data.

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