The Fall of Monitor - What the Heck Happened?

sailcas

2013/1/15
  
If you've been following the news over the last few weeks,
you may have heard that Monitor Group, the highly respected
consulting firm, declared bankruptcy and is in the process
of being acquired by Deloitte.
  
The question everybody has been asking is, what the heck
happened?
  
To many Monitor was considered the #4 firm behind McKinsey,
Bain and BCG. In my year, I knew people who declined MBB
offers to go work at Monitor - yes Monitor was respected
THAT much.
  
At McKinsey, I had colleagues who read everything Monitor
co-founder Michael Porter ever wrote. The word brilliant
came up more than once.
  
So what happened?
  
To answer that question, I'll share with you my perspective
on Monitor's fall, what we can all learn from it, and what
it means for you.
  
Let's start with the basics of why a firm, any firm, goes
bankrupt.
  
A firm goes bankrupt when it no longer has enough cash to
pay its bills.
  
This is usually correlated with Revenues < Costs, but not
always. I'll elaborate on why in a minute.
  
Traditionally a firm will fail for one of two reasons:
  
1) Not enough sales (or profit margin) 2) Too much sales
  
The first reason is more intuitive. When your revenues are
less than costs, at some point you can't pay your bills.
  
The second reason is a little counter-intuitive, so let me
explain that one in more detail.
  
First, it's important to realize that in my writings to you,
I spend most of my talking about strategy.
  
It's important to keep in mind that strategy differs
significantly from how one executes or operationally
implements that strategy.
  
In strategy, we focus on profits... where revenues exceeds
costs.
  
In operations, we (relatively speaking) focus less on
profits, and focus much more on cash inflow vs cash outflow.
  
Cash inflow = deposits to the bank account Cash outflow =
withdrawals from the bank account
  
In a case interview, it's assumed that when a company
receives an order from a customer (which causes its revenues
to increase), the customer pays the company immediately in
full for the order.
  
Similarly, in a case interview, when a company signs a
contract obligating them to some new expense from a
supplier, it's generally assumed that the supplier gets paid
immediately.
  
In these situations, to over simplify a little:
  
Revenues = Cash Inflow Costs = Cash Outflow
  
(Note: For the accounting oriented, I'm excluding some
non-cash costs like amortization, depreciation, etc..)
  
However, when you're running a company there are material
differences between revenues and cash inflow, and
differences between costs and cash outflow.
  
These differences are based on the TIMING of when the cash
related to a particular order is actual exchanged between
customer and company.
  
The same is true on the cost side. A cost is incurred when
you sign a deal with a vendor, but cash outflow is only
triggered on the day you actually PAY the bill.
  
As a general rule, it is advantageous for a company to get
paid by customers immediately, and to negotiate to
deliberately pay your bills 30, 60 or 90+ days after a
supplier provides their product or service. Under these
ideal circumstances, a company has a "positive cash flow"
cycle.
  
Most Fortune 500 companies have the negotiating power to
have a positive cash flow cycle.
  
For example, if you want to sell your products in Wal-mart,
they will place a $10 million order today, but pay you for
that order in 4 - 6 months. (Keep in mind this is
negotiated, and any vendors that say no don't get the
order).
  
Conversely, if you get paid for your products and services
months after the fact, but you must pay your employees and
suppliers immediately, this is a negative cash flow cycle.
  
A small business that's trying to sell to a Fortune 500
customer, will often have a negative cash flow cycle.
  
They'll land the $10 million order from Wal-Mart, but have
to find some way to pay all their expenses until Wal-Mart
pays their bills several months later.
  
As a result, it is possible to go out of business by having
TOO MUCH revenue (and not enough cash to pay all the
expenses during the period between when the order is
received and the bill is actually paid by the customer).
  
My consulting practice covers both strategy and operations.
With my clients, I am ALWAYS talking to them about cash
flow. I am constantly reminding my clients that a strategy
or an idea isn't fully implemented, until the "cash is in
the bank".
  
It's very easy for a CEO to approve an idea, but sometimes
neglect to verify if that idea actually produced cash 6 or
12 months later.
  
It's very important to verify that cash actually got to the
bank, because quite often the cash you thought a strategy
was supposed to generate, doesn't always materialize.
  
This happens for countless reasons -- you had flawed
assumptions in your original analysis, your analysis was
correct but there was some hidden problem in execution,
you're wasting money somewhere in the business without
realizing it.
  
Welcome to the headache known as operating a business.
  
In my own business, the first thing I do each morning is to
check my bank account balance to make sure the cash level is
what I expect it to be. When operating a business, cash is
your life blood.
  
This is analogous to what a doctor does in the intensive
care ward of a hospital. When a doctor enters the room, the
first thing she does is ti check your vital signs (pulse,
blood pressure, something called blood oxygenation level --
how much oxygen is actually getting into your blood).
  
Having spend hundreds of hours in intensive care as a family
member, I had many opportunities to observe what the doctors
do. The reason they check for things like pulse and blood
pressure is very simple. They do so to see if you're dead,
alive or somewhere in between (as is often the case in
intensive care).
  
Yes, it is that simple -- after all most of the patients are
not awake and well, it's kind of heard to tell if someone is
alive, dead, or just sleeping.
  
It is the same with cash. As a smart business operator, you
watch cash to verify your business is not dead. Hey, it's a
pretty useful discipline.
  
As my mother taught me when I was 10 years old, "Victor if
you have enough cash, you will NEVER go out of business." (I
have an unusual mother.)
  
When I was 11 years old, I used to wear a bright yellow
T-shirt around school that said, "Happiness is Positive Cash
Flow." (My teachers always thought I was a weird.)
  
In hindsight, I realized:
  
1) LOL... I did NOT have a normal childhood.
  
2) Positive cash flow doesn't buy you happiness, but
negative cash flow definitely gets you misery.
  
As it relates to Monitor, they most definitely did NOT have
positive cash flow, and they were most certainly miserable
about it.
  
So what happened to Monitor's cash? And why did Monitor
fall, when other firms did not?
  
While there are many reasons, I'd speculate their #1
underlying "root cause" issue was likely...
  
DENIAL
  
Monitor underestimated the severity of the problem they had,
they did too little to address the problem (i.e., magnitude
of solution = magnitude of PERCEIVED problem... but....
magnitude of solution < magnitude of ACTUAL problem), and
acted too late.
  
What likely happened was Monitor was negatively impacted by
the global recession of 2008. However, many other firms were
as well and they survived.
  
However, Monitor also suffered a scandalous blow to their
reputation when the media discovered the Libyan Dictator
Moammar Gadhafi was a client that hired Monitor to improve
his image in the Western media.
  
In particular, Monitor worked on Gadhafi using means of
questionable ethics. In addition, as part of that
engagement, Monitor helped one of his sons to write a
dissertation for his PhD from the London School of
Economics.
  
(There's a lesson on protecting one's reputation that I'll
circle back to in a few minutes.)
  
So between the recession and reputation damage, that almost
certainly caused a structural decline in Monitor's revenues.
  
At the time, in 2008, the best I can tell Monitor had around
1,500 consultants in 27 offices. While they reduced the
number of employees by about 20% and closed a few small
offices, it clearly wasn't enough.
  
They should have cut much more deeply in order to survive.
They didn't and 4 years later in 2012, they ran out of the
cash needed to support an unprofitable business.
  
Remember even with a negative cash flow cycle, if you have
enough cash in the bank you can survive long enough to
hopefully improve the cash flow cycle. Monitor ran out of
time and money.
  
If you've been following my work for any period of time,
you'll recall how much I emphasize (and continue to use to
this day) my profitability framework.
  
I've recommend that you use it, I use with my clients, and I
use it for my own business because well, profitability is
like really, really, really important.
  
That's an understatement!
  
Monitor started becoming unprofitable in 2008 due to both
the recession and the news around Gadhafi. They cut expenses
by 20% to be at least break even in profitability.
  
Then between 2008 - 2011, sales continued to decline and
rather than cut expenses further (and risk signaling to the
world that they were having problems), Monitor likely
decided to continue to run the firm at a financial loss in
hopes that either:
  
1) the economy and therefore sales would improve soon, or 2)
enough money could be borrowed from outside investors to
fund the losses until sales could recover
  
They miscalculated on both fronts -- the revenues did not
recover on their own and despite initial success in
borrowing around $50 million from an outside investor, they
were unable to get a follow on investment and ran out of
cash.
  
Monitor's bankruptcy is not only a major failure, but it's a
particularly humiliating failure. This is precisely the kind
of problem that clients hire Monitor to solve of them.
  
It's like finding out your doctor who has been telling you
to stop eating so much sugar, has diabetes.
  
It's embarrassing to say the least.
  
I mean at this point would you ever hire Monitor for a
profit improvement project?
  
  
  
THREE KEY TAKEAWAYS
  
In look at the Monitor situation, there are... (wait for it...)
THREE key takeaways:
  
  
1) ALWAYS Protect Your Reputation
  
As Warren Buffet says, it takes a lifetime to earn a good
reputation. It takes a few days to lose it all.
  
This is worth remembering in your career... especially a
career in consulting where the "product" basically is your
personal reputation or your firm's reputation.
  
Reputation comes in two flavors:
  
a) integrity of words and actions, and b) reputation by
association
  
The first is about actually believe in what you say and to
act in a reliable way towards others.
  
For example, when I recommend a particular skill, process or
behavior in a case (or with a client) and you follow my
advice, if it worked out well for you, might reputation in
your eyes goes up. If I told you something that did not work
or was flat out incorrect, then my reputation goes down.
  
Thankfully my reputation over the years has gone up on more
occasions than it has gone down.  It takes a lot of work and
care to make that happen. It does not happen by itself.
  
Last year, my writings and influence were read by CIB and
working consultants in 212 countries -- which is amazing to
me. Anecdotally, I'm told that upwards of 50% of the new
consultants at MBB are followers of my work in countries
ranging from Australia, Nigeria, Malaysia, South Africa, and
of course the US, and EU.
  
How did my reputation grow to seemingly span the world?
(Which again continues to amaze me).
  
The short answer:
  
One sentence at a time.
  
(In your case it might be one meeting at a time, one
presentation at a time, one analysis at a time, one day at a
time... it's daily consistency on the micro, that leads to the
macro reputation.)
  
  
The second form of reputation is reputation by association.
  
You are judged by the company you keep... in other words
you're reputation is assumed to be of the same as the
reputation of the people around you.
  
Conclusion: Be CAREFUL who you associate with.
  
Gadhafi as a client?  Maybe not the best choice.
  
Helping a client's son cheat on his dissertation at the
London School of Economics? Perhaps one should think twice
on that one.
  
Secretly hiring prominent academics to write favorable
opinion pieces on a Libyan Dictator?
  
Maybe, just maybe, not a good idea.
  
Do you really want to be know as the "go to" firm that
specializes in cheating and manipulation? The preferred
consulting firm of dictators everywhere? Is that REALLY the
reputation you want for your firm?
  
As one Monitor consultant said after the fact...and I
paraphrase "we screwed up royally."
  
Was Monitor really that desperate for revenue?
  
Building your reputation and reputation for integrity is not
without costs. The real acid test is are you personally
willing to turn down income for the sake of reputation or
integrity.
  
I routinely turn down clients when it's not a good fit for
them or for me.
  
I actively stay away from people I do not want to be
associated with.
  
In short, I'm very conscious of the choices I make. You
should be too.
  
Monitor wasn't.
  
  
2) PRIDE and EGO are the most expensive costs in a business
  
I have been saying for years that the largest expenses I
"see" on a company's financial statement are the pride and
ego of its leaders.
  
Of course pride and ego are not actual expenses of the
company, but the expenses incurred in protecting one's pride
and ego can in my experience be ENORMOUS.
  
What likely happened with Monitor is they continued to
shrink even after their initial staff reductions. Rather
than continue to cut expenses to be in alignment with the
new market demand, they consciously allowed expenses to be
higher than revenues.
  
This is very RISKY.
  
Why would a bunch of highly intelligent business leaders
rationally run a business unprofitably?
  
Well rational leaders wouldn't (or at least not for very
long).
  
But leaders who had their pride and ego tied up in the
business, and couldn't bear the thought of having the world
think less of them might.
  
They decided that rather than admit a moderate defeat, they
would rather be in denial, pretend nothing was wrong until
they accumulated a massive defeat in the form of a
bankruptcy failure.
  
  
To be fair, there is another perspective more flattering (or
less unflattering) portrayal of what went wrong.
  
Lets say that sales dropped off, and Monitor continually
slashed variable costs (i.e., salaries) to keep pace. I
didn't see any mention of this in the news other than the
original 20% cut in 2008, but it's possible it happened
quietly.
  
At that point, perhaps their fixed costs such as leases and
loan payments on buildings were so high and nearly
impossible to reduce partially, without eliminating entirely
(e.g., maybe they ideally tried to shrink the real estate
size of each office by 50% but perhaps nobody else wanted
it, they only wanted 100% of it).
  
While this is possible, I'm a bit skeptical this is what
happened as they had nearly 4 years of time to restructure
their costs to be profitable. That's typically more than
enough time to shed costs -- provided you intended to do so
aggressively.
  
As an example, when Steve Jobs re-joined Apple as CEO, he
took over Apple when the company had roughly 90 days of cash
left in the bank. Only 90 days before the company was
bankrupt. Jobs stopped the Apple from "bleeding" cash and
did it in 90 days.
  
In comparison, Monitor had closer to 1,400 days to do the
same, but couldn't.
  
Monitor just did not EXECUTE.
  
  
Slashing costs is not difficult. It is, however, extremely
unpleasant.
  
Medically speaking, cutting off a patient's leg to save
their life is not mechanically difficult, nor logically
difficult. Alive with one leg is logically better than dead
with two legs.
  
This makes completely rational sense... unless you're person
with the axe and it's your right leg were talking about. Can
you really lift the axe up and swing it down?
  
I know it's a bit of a gruesome visual, but this is
basically (sort of) the sort of "tough decision" that both
Steve Jobs and Monitor faced. Jobs was willing to swing the
axe. Monitor opted for using nail clippers instead -- not
enough in the end.
  
If you look at where Apple and Monitor are today, I think
the results of those pivotal decisions speak for themselves.
  
Which leads me to my third and final lesson:
  
  
3) Execution is HARDER than it looks
  
Amongst MBB-caliber consultants, especially the younger
ones, there's an enormous bias that:
  
Strategy = Hard Execution = Easy
  
The bias is RAMPANT inside these firms. Here's how it plays
out.
  
(And I'm going to apologize in advanced to any Harvard folks
reading this).
  
Lets say you have a hot shot Harvard undergrad, who also has
a Harvard PhD working at MBB.
  
In one of his early engagements, he discovers the client has
been focusing on a segment of the market that's shrinking in
size where profit margins have eroded.
  
The consultant recommends the client switch market segments
to a different segment -- one that's growing and much more
profitable.
  
After the final presentation, it's very easy for that
consultant to think:
  
Geez... it was like so OBVIOUS the client was focusing on the
wrong segment. I can't believe they didn't do this on their
own. Clearly, I / we are smarter than they are, and that's
why we earn the big fees.
  
Now nobody in consulting that I know would say that out
loud, but I know a lot of people who quietly think this to
themselves.
  
In fact, at some level, I used to think this way... that is
until I ended up going to industry, helping to run public
companies, and becoming a business operator of my own.
  
Lets say I have WAY more empathy for my previous clients
than I did at the time.
  
Execution is HARD.
  
Let me give you an example.
  
Since were on the topic of Apple (which I am a fan of), let
me give you an example.
  
Apple has one glaring vulnerability. It has extraordinarily
high profit margins. You could slash Apple's profit margins
by 50% and it would still be an incredibly profitable
company.
  
The entire history of technology and Silicon Valley is one
of initially inferior technology that's dramatically
cheaper, eroding the market position of a superior high
priced technology (e.g., PC's vs mainframe computer).
  
To oversimplify, one strategy is to compete against Apple at
the low end of the market by selling products at 30% of the
the price that are 70% as good.
  
That's "obvious" right?
  
Now, to actually do that is HARD.
  
Apple has decade long exclusive contracts with ALL the major
component suppliers in the world. They get preferred pricing
and they get supplied first before you do. You have to
replicate that somehow.
  
Apple has an enormous head start on innovation and design.
You'd have to come close to matching that.
  
Apple has an enormous portfolio of patents.
  
Apple has a ton of cash.
  
Apple has an incredible brand following.
  
Apple has... well a lot going for it.
  
To compete against Apple requires billions of dollars,
incredible levels of talent, enormous resources in 100
countries around the world to all execute simultaneously and
then maybe, maybe it might work... barely.
  
Hardly easy.
  
As a consultant, I thought strategy was "hard" and
operations "easy".
  
Today, having been (and continuing to be) both strategist
and operator, my point of view has changed completely.
  
Strategy is "easy" and operations is "hard".
  
At this point in my career, I can take pretty much any
business and within an hour or two find the core strategic
issue and often figure out how to fix it.  Basically, my
initial client meetings are really just what you and I would
call a case interview. The difference is my meetings are
usually over the phone or over lunch.
  
Now, it might take that client working 12 hour work days, 6
days a week, and getting THOUSANDS of employees to change
what they do every day... and to nudge, push, fight, and
battle every work day for 10 YEARS to execute what I
sketched out on the back of a napkin over lunch.
  
If you want to know WHY those in industry sometimes dislike
and criticize consultants?  It's because many of them
completely fail to grasp the last 3 paragraphs.
  
And you know what? Many of those criticisms are warranted.
  
Don't be one of THOSE consultants where the criticism is
warranted.
  
Execution is hard. Never forget that.
  
And in case you ever do, just look at Monitor.
  
They failed to execute, and it cost them dearly.