IF DETROIT WERE MY TURNAROUND CLIENT
If only Detroit were one of my Turnaround Business Clients (sigh), either the bankruptcy might have been avoided, or its method of conducting its “Municipal Business” might have been radically changed some time ago. There should have been much more oversight, checks and balances in all aspects of management, and operation, financial and forensic audits by a competent independent third party firm on a short notice basis. But then, the sad aspect of the public sector is that is by no means as accountable, or as interested in its investors (the taxpayers), as would be a simple medium-sized company.
When you combine poor accounting (and a lack of individual accountability), a lack of variance analysis, a lack of integrity in leadership, the absence of a formalized budgetary review process, the informality of fiduciary authority and a plethora of useless contracts for services and purchases that were not of benefit to the client [in a business they either call that “Other People’s Money” (OPM), which doesn’t really have to be accounted for directly if there’s enough of it (and who is keeping count as the nectar pours through the sieve? And more importantly, who knows what the total available capital for expenses and expenditures actually is?), or, in the worst case breach of fiduciary duty, fraud and embezzlement.
Goodness, if taxpayers realized that they were really shareholders, with the right to demand an accounting, a reconciliation, and an explanation of any ‘treasury leakage’ either through negligence or through political favors paid for at the expense of the populace. — DEC at 1Turnaround.
What follows is my curating and rather extensive and opinionated commentary regarding an article which I found in my inbox from Scoop.It!, a wonderful source of excellent articles and opportunities to really get a grand view of the topics which interest me, and are of crucial importance to my clients.
Editorial: What Detroit’s crisis can teach others Avoiding bankruptcy requires confronting crises early, focusing on taxpayers and making realistic promises
From [original article source] www.thesilentmajorityus.com –
Douglas E. Castle’s insight, as Curator:
I am in full accord with the writer’s point of view as it concerns Detroit, specifically, and as it concerns all businesses and organizations which have fiduciary responsibilities. Sadly. election politics as well as organizational office politics tend to bring out some unsupported or unsupportable promises which ultimately will become perceived as lies. In any business or organizational structure (For-Profit and Not-For-Profit) you cannot make empty promises, as they will cost you all of your negotiating power (based largely in credibility), and possibly your career when the truth comes out.
Let’s assume that we are following a sensible business protocol, and that we are responsible to the Board, our colleagues, our employees, our customers (or constituents), our creditors and our investors. A methodical approach must be undertaken — it is sad that these politically-oriented individuals don’t examine the financial position and projections of the governments or businesses which they are trying to get the opportunity to lead prior to embarking on their campaigns.
A general rule to start with is that you cannot ever make a promise which is unconditional, especially if it is dependent upon the promises of others (grants, investments, lots of new business revenues, a technological breakthrough and the like). Make fewer promises of good and plenty, and more commitments to fixing problems at their source to ensure safety, stability and success.
Aside: Not to ridicule anyone at the federal government level, but you can’t make inferences to “getting out of debt by increasing borrowing,’ or balancing the budget and helping businesses by increasing taxes on the poorer and middle classes and reducing services to them as well!
Never make a commitment that you do not intend to keep, and that you do not have a plan (a method) to keep. Exaggerate costs and the length of estimated completion or delivery time frames – it makes it easier to be a hero.
In terms of examining, monitoring, course-correcting and maintaining or improving the enterprise (whether it is government or non-government, For-Profit or Not-For-Profit), the protocols are universal.
Of course, in the case of all-too-many governmental subdivisions and entities, there is tremendous complexity, inadequate supervision, and labyrinthine accounting, authorization and record keeping. There’s too much capital, and too many persons with access to it, without proper oversight. A large number of seemingly trivial expenses and expenditures can eventually accumulate into a cavernous loss. This waste (being kind with my choice of terminology) is taxpayer money — in private enterprise, the shareholders would be taking the company’s management to court for this type of abuse. They would be speaking of breach of trust, breach of fiduciary duty, diversion of funds, fraud and possibly embezzlement.
I believe that Detroit is the first host organism to fall victim to an epidemic , and that municipal bankruptcies will be hooping up like crocuses in early springtime. And we’ll get closer to the truth about the extent of the federal deficit and the value of the U.S. dollar, fresh off of the press. That’s a scenario for The Global Futurist Blog to paint.
But then, I’ve gotten off of my focus. Let’s return to a standard fiduciary management protocol where each individual in the chain of command or hierarchy structure is responsible — truly responsible — at every level:
1) If a responsible individual sees or suspects a problem, it must be reported immediately to the appropriate persons of supervisory authority;
2) That person of supervisory authority should follow through with vigilance and persistence to see to it that the problem is solved before it wastes any more money and before it worsens;
3) The problem must be expediently fixed, and noted as such – after all, every minute of loss is a drain on profitability and solvency;
4) If there are too many systemic problems, and the organization’s current financials as well as its proformas (always have worst-case, realistic-case forecasts handy; they should be created frequently as assumptions and conditions change; they are a powerful management tool, and an early warning system) are not looking good, senior management must gather the right experts, both from inside of the organization and from senior management’s “A” list of outside professionals, and;
5) Re-examine the organization’s entire business model in terms of S.W.O.T. analysis, critical path dependencies analysis, and possible displacement (or antiquated assumptions) analysis. Look to prune your sunk costs and nonproductive recurring costs;
Note: From this point forward in my discussion, I’ll address this issue as if the business (even if it is the business of running a municipality) were yours, and that you were the executive ultimately in charge.
6) Reconstruct the organization’s business model with the help of the assembled expert committee, create a realistic, turnaround reconstruction plan, promulgate it to all of the involved and affected individuals, as well as to all other parties doing business or trade with the organization. Let them know of the changes, what the time frames really are, what sacrifices or compromises they will have to make lest the team effort fail (Note: If you’re a charismatic, credible, strongly committed leader, you will convince every individual, from the board room down to the janitorial staff that they are each, and all, partners in the the success of the business, and that necessary sacrifices may have to made to bring stability and better results for the benefit of all). Take a serious tone, especially when asking for sacrifices and compromises. Make everyone feel like a stakeholder and an employee or an agent of help;
7) Work the new plan to the letter, diligently, faithfully and without deviation. Report to all of your “partners” frequently as results come in and new forecasts are made. Your diligence, conscientiousness and candor in terms of reporting frequency and transparency will be appreciated and might make potentially hostile parties feel more like allies in a group project and a united effort. That latter is the effect for which you should strive – it justifies the sacrifices and compromises…and to make it even more potent, be certain that the C-Suite occupants, senior executives and the directors make visible meaningful sacrifices as well. You don’t want to look like a “too-big-to-fail” company that the U.S. government just bailed out [grin];
8) Demonstrate by variance analysis (projected versus actual results) how you are actually achieving the goals set forth in your turnaround business plan, and how you have converted waste and losses to a positive, potentially distributable fund balance;
9) From that positive pool of hard-won cash, reward all of the parties who have cooperated in the effort (at a sensible level,and not just to the senior most executives and directors, but to all of the participants, sacrificers and compromisers who have made it possible. Everyone enjoys a participatory celebration of success and a feeling of having participated in a victory…everyone! The object:
Demonstrate in distributable dollars and cents that the tough cuts have paid off in terms of solvency, stability and a positive cash flow. A great leader (as opposed to a basically attired career politician) rallies his forces for a job successfully done, reminds them that their efforts need to continue, and also reviews the victorious results of the variance analysis — show them how inflows have increased and how outflows have decreased. Make them all feel like stakeholders.
10) Promise to continue on course, and to remain vigilant and practical, as well as honest and tough. Continue to restructure and turnaround the business periodically with a “no sacred cows” and a zero-based budgeting approach. These techniques and tools work.
Douglas E. Castle http://DouglasECastleBlog.com
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Article Supplements From Contextly: http://app.contextly.com/sites/douglasecastleblog/sidebar/?page_id=292&sidebar_id=#…
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- Mich. gov. says bankruptcy the right choice (news.yahoo.com)
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- Meredith Whitney: ‘Detroit Will Start A Wave of Municipal Bankruptcies’ (economicpolicyjournal.com)
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- Top News: Michigan attorney general backs pensioners in Detroit bankruptcy (reuters.com)
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- Detroit VC: Why Bankruptcy Is Great For Us (inc.com)
- Unions Demand Obama Bail Out Detroit (nation.foxnews.com)
- If Detroit Were My Turnaround Client (douglasecastleblog.com)
- Editorial: What Detroit’s crisis can teach others Avoiding bankruptcy requires confronting crises early, focusing on taxpayers and making realistic promises (douglasecastleblog.com)
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