The rationalization process is all about determining what is working and what is not – especially with a sharp eye to the future.
Most companies are doing very well these days and the effort to create or update their strategic direction is clearly on the rise. There certainly is no shortage of strategic choices to make with a healthy economy. My observation is that companies struggle in taking on too much and then figuring out how to prioritize what they keep and what they let go. Failure to divest yourself of areas of the business that don’t deliver an acceptable return dilutes your leadership talent as we always tend to spend more time on things that need attention than areas that don’t. It also allows a company to become “fat,” ensuring a harder fall when an economic downturn occurs.
A timeless saying related to strategy and planning for the future is, “Strategy is as much about what you are not going to do as it is about what you are going to do.” Many leaders don’t account for all that is not going well and instead focus almost entirely on where the company can go in the future. The reality is that all companies have parts of their business that are not performing well, have been marginalized, or are not a good fit for the firm’s future. Assessing – or as some refer to it, rationalizing each aspect of what the company does – is needed on a near-continuous basis.
- What part of your business do you rationalize? Any portion of the business that is large enough to have a material impact on the profitability of the firm, takes away human resources, and uses financial capital. The process of rationalizing what you do brings clarity to not only the present, but more importantly, helps shape the desired future for the company. We find the very best firms periodically rationalize the markets they are focused on, clients or client groups, service offerings, initiatives that had been launched previously and are still not considered established, and each established functional business unit within the firm. These functional units can include client market sectors, larger groups or departments, offices, regions, entire divisions, and even subsidiaries.
- When should you do this? The key is to perform this process often enough to identify and then change, reduce funding or exit those aspects of the business that are not meeting expectations. It is equally important not do this too frequently, thus causing disruption or giving up on the area being evaluated too quickly. Rationalization is best performed annually and no more than every few years. One approach is to perform this along with the strategy/strategic planning process. This timing gives you the opportunity to determine how what you are doing now relates to how it may fit into the business of your future. Care should be taken to avoid directly performing the rationalization in your strategy planning, because it could take away from the creative thinking needed for the future. The results of this effort may be an input to the planning process to help decide where the company will place its investments, including reinvesting in existing initiatives, exiting what is not working or does not fit in the future.
- Who would do this? You need to have your most objective thinker(s) perform the rationalization process. One key to make this a success is to choose an individual who is not directly attached to the topical area as independence is very important. Generally forming a small task group with specific areas to evaluate is an acceptable approach if a firm does not have one person that is well rounded enough to cover all the areas to be rationalized. An individual who is not invested or emotionally attached will make the best reviewer. In some cases, it is desirable to bring in some outside help using an industry experienced person to get the most objectivity in the process. Whether inside or out, an individual or a group of individuals who can bring market, strategic, financial, and operational experience to the table have the needed traits.
- What questions do you ask? The rationalization process is all about determining what is working and what is not – especially with an eye to the future. So the very first question to ask is how does this fit in our current and future strategy of the company? Many ignore this question and you find over time that a company continues doing things that were never included in their strategy. The remaining questions vary, depending on what aspect of the business you are rationalizing. For example, in evaluating business units, regional offices, or similar operations, you should evaluate the historical profitability, market potential, and strategic significance. The drain of your leadership talent as part of this evaluation cannot be ignored as that same time could be spent on other efforts that will drive the company.
Hopefully this gives you the picture on the missing part of strategy through a rationalization process. It is all about ensuring the best use of your financial, talent, and leadership resources to build value for the shareholders and all employees. The best firms focus on the “critical few” things that make a company successful. So whatever you do in planning for the future – don’t forget to look at what you are currently doing and whether you should continue on that course. This is all about doing less and doing what you do well.
Gerry Salontai is the founder of Salontai Consulting Group, LLC. Contact him at firstname.lastname@example.org.