IT’S THE LITTLE THINGS: BUSINESS FAILURE

Stunted Business Development

A lack of growth in any business or indeed outright business failure is usually a combination of small things. It’s rarely one big event that causes issues, although that does occur as well. It’s a little like Hemingway’s response when asked how he went bankrupt” “Two ways. Gradually then suddenly.”

Research that I undertook with a colleague a few years ago reveals some of the ‘little things’ that matter in holding back an enterprise or indeed causing its shutdown.

Little Things

One of the conditions leading to ‘under-performance’ is that owners or leaders get too comfortable. They develop a set of beliefs about how their business world operates, its challenges, and opportunities. Unfortunately for some, often their worldview doesn’t match with the evolving reality of their business sector. These views may also enable the accumulation of a set of unnoticed events that are at odds with business reality. Such faulty rationalisations eventually promote serious challenges. The most common one at present is the assumption that employees are happily engaged at work, whereas the evidence is that worldwide this is not the case. There are other warning signals that all is not well, usually relating to organisational culture or financial measures (e.g., lumpy or erratic cash flow).

Little Things Evolve

Little things have a habit of accumulating (Hemingway’s “gradually”). They turn into big things. They evolve. Owners and leaders get stuck in their thinking. They commonly refuse to accept evidence that there is a challenge brewing, especially from outsiders. Worse, they habitually ”double down’ because they know that they’re right.

Owners and leaders also get distracted. Where they should be paying attention to indicators that suggest there is an issue, they get distracted. Some form of decoy takes their eye, diverting resources away from what should be more pressing matters.

The sheer amount of information everyone in business has to deal with compounds the growth of small issues into significant challenges.

A further issue, particularly in small and medium-sized enterprises, is the dearth of talent that managers have at their disposal. Often, businesses have under-qualified people monitoring processes that they don’t fully understand. On the other hand, you may have superbly qualified people, who are sadly not fully engaged at work.

Royal Commissions in Australia and public inquiries elsewhere have revealed that ignorance of applicable regulations too can make the cumulative impact of small errors far worse.

Some owners and leaders are unable to appreciate that there is a problem or to understand its magnitude.

A Series of Unfortunate Events: Barings Bank

A defining case of business failure, in which you can find all of the symptoms of ‘impending doom’ is Barings Bank. Founded in 1762, Barings was ‘banker to royalty’ until it failed in 1995 when its ill-thought-through expansion into futures trading caused its crash. Barings ticks all of the boxes outlined above, mainly due to one Singapore-based trader, Nick Leeson.

Its corporate structure was ill-defined, with confused reporting lines and poorly identified management responsibilities. A lack of controls and poorly segregated operating functions followed. Leeson ran both front and back offices illegally. There were few people experienced in futures trading. Not surprisingly, leadership and management failed.

Spotting Weak Signals

Spotting weak signals such as those that sank Barings needs what is called in the jargon ‘requisite variety’ in decision-makers. That is someone (preferably from outside of the organisation) needs to sit down with your Board or your executive and ask questions. What are the questions? The ‘six honest servants’ are a great place to start: what, why, when, how, where who. Another great question is: “really?”

My point may seem obvious. However, the conditions for business failure often are not so, at least to those inside the business.