I’m often surprised by what topics will spark interest in people, and cycles vs. innovation/disruption would not be one on my list of topics expected to interest people. But a couple asked me if I could elaborate my example a little more clearly, and so I’m going to go for a specific example currently facing my team.
We have a large branch, some 500+ people. Before the last round of cuts and reorganization, that number was closer to 700. Ten directorates dropped to 7, we moved a lot of financial processing people (back office types) to a service delivery branch, etc. But the part I want to talk about is the regular financing files for non-salary costs.
These costs are not extensive, maybe 10-15% of salary costs, and include things like travel, hospitality, equipment, newspapers, water machines, software licenses, training, etc. A lot of small costs that require a bit of transaction time. During the reorg a few years ago, it was felt that there were economies of scale and increased consistency to be had by centralizing the macro entry of planning figures for finances by our finance branch. They left basic processing in the branch, and each directorate has an admin officer that handles that. They also coordinate the planning inputs from various divisions, roll them up, send them off to the finance branch, etc.
Now, however, the finance branch is looking at it as something that can be done directly by the same admin officers, particularly now that we have a new system with less margins for error. Still complicated, still painful systems to work, but less manual stuff in a way. So, with the fear of the finance branch that they are spending too much time on processing/planning, and not enough on strategic budget management, they have delegated all of that planning and coordination function back to branches. For every branch except mine. We’re the last hold out.
We will eventually have it too, but that leaves us with a question. Most of the other branches have full branch management services in their corporate areas — in other words, finance is still centralized in their branch, with 4-6 finance officers handling most of the support function. For our branch, the finance branch would recommend the same — create a centralized system in our branch. Except I’m resisting that being the “obvious conclusion”.
The reason they are pushing it is because they are saying “the main problem with centralization in finance branch is that it is too time consuming for their group, crowding out the strategic role they’re supposed to be playing” and the way to solve that is to move that centralized function to another centralized function, in each branch. Except those are not the only problems. They are also doing double-entry with some of the functions now — the “centralized group” is keeping two sets of books, and if truth be told, so are the individual admin officers. So almost three or four copies/sets of entries. If I simply accept the move from point A to point B, that function won’t change. And any “strategic” role that my team will play will get overwhelmed by process, just as the finance branch people were.
Another problem in there is that the planning function gets lost in the transactional world, and things like salary forecasts in the system are decidedly out of date as soon as they are entered, and increasingly so until the next “period” update. What if I could find a way to get the admin officers to enter the non-salary data directly, to take responsibility for more regular updates on salary, and at the very least, reduce “triple or quadruple” entry down to “double” or even “single” window entry?
Equally, can I leave some of the coordination/strategic/support function that comes from the finance branch in my team? To decentralize as much as possible, or as much as proper, to make sure the forecasting and operations are as close to the actual delivery people as possible, but still retaining a bit of the challenge / strategic / coordination / support function in my team?
There are some problems that need to be addressed — multiple sets of data entry, transactional processes crowding out strategic management, lags in updates to some types of expenses, etc. But there are some good things too — decentralized for processing, centralized for strategic challenge function, centralized for support to make sure consistency in approach, etc.
Solving just the one problem (transactions > strategic) could force me into this long cycle of centralization / decentralization / centralization / decentralization. But what if I unpack the parts that work from the parts that don’t work, and see if I can keep some of what works at the centralized function and decentralize the rest?
Because what started this mess in the first place was the perception that decentralization was too expensive and inefficient and wasn’t working. Now, we’re finding centralization inefficient and now *it* isn’t working.
Sooooo, I’m trying to unpack to see if there is a hybrid solution that will stop the “yo-yo” from bouncing between the two extremes and allow me to keep the best of both worlds while minimizing the worst of either world. Yet without that conscious desire to stop the cycle, how do people inside the cycle see that it even is a cycle? Particularly when so many of the actors have changed and all they see is that the “current” isn’t working so we go to the opposite model instead of moving to the middle.
Or at least that is what is on my mind. Knowing full well that there is no single “right” answer.
While there are lots of politics watchers and lovers, my interest in government is really about public administration…structures, choices of instruments, governance processes, really anything “internal” about how the machine works. This past week ended with an expected announcement of a change in our branch structure as a result of changes in strategic direction and a rethinking of how best to meet those new needs.
However, what is of interest to me in the general sense is that some of the changes “undo” some changes that were made a few years ago. That sounds bad, but it’s really not. It’s just that some things that were changed a few years ago for very good reasons have now been changed also for very good reasons, yet environmental factors are not the only issue, nor even necessarily the driver. Some of it is, or perhaps may be, just cyclical.
Take for example programming by, well, just about by anyone delivering public services. The “best practices” are simple and ubiquitous…you want the program delivery to be light and flexible and as close to the client as possible. You ideally want the clients to have say in the design or at least feedback that can drive annual flexible tweaks. Health care, education, just about every field has the same message — empower and engage stakeholders and you’ll get better results.
Internal services are often faced with the same question. Take research for example. A number of years ago, my department did a review of research being conducted across the department. Not surprisingly, in a large organization, it was rather distributed. And people felt that perhaps that wasn’t the most efficient way to do it. Take for example say three groups doing research separately. And let’s assume they are in different areas so there’s no risk of overlap. On basic priority setting, group 1 could do projects A/B/C but not have enough money to do E/F/G. Group 2 in a similar boat does H/I/J but not K/L/M. And Group 3 does N/O/P but not Q/R/S. If ABC/HIJ/NOP are the top nine priorities no matter how you slice them, it doesn’t matter. Now in that analogy, Group 1 does C (their 3rd priority), and Group 2 cannot do K (their 4th) nor Group 3 Q (also their 4th), then you need as an organization to be sure that CJP are all higher than the fourths in the other groups. In other words, distributed decision-making can make for effective decisions within that group, but not necessarily the best across a portfolio. It’s not rocket science, it’s basic organizational theory. It’s a risk of decentralization of sorts.
So what do people do? They think, “Well, if I centralize, particularly when budgets are tight, I can make sure we’re doing it all consistently and efficiently”. Maybe there’s even some economies of scale that allows you to merge it all and do 10 or 11 instead of just 9 projects. The change goes through, and then a few years go by, and you see that while that great decision was well-founded, now you’re starting to see that maybe you need to decentralize a bit more. And then a bit more. And then a bit more. Mostly to put decisions in the hands of those closely aligned to the decision-making.
As a civil servant, I see these pressures constantly. While I started with decentralized above, it often starts with decentralized for IT or HR issues. Take for example IT, where it is usually initially provided by an IT branch. The program branch has some IT needs, often which are not completely met by the IT group. So the program branch hires someone to liaise with IT, hoping to improve support and access. And then maybe, just maybe, they hire an IT person or two of their own to handle some “extra” support that the IT group can’t do. Then maybe another person. Or decide they want to run their own server. Etc. Next thing you know, a program branch has a fully decentralized IT group and someone comes along and says, “Wait, this is really inefficient” (i.e. IT Branch starts having branches complain about their funding because they’d rather fund their own IT people than contribute to a larger branch that isn’t meeting all their needs) or says “This is really great, let’s decentralize it all”. Either way, you see a decision made to respond to one or two failures in a structure. They know there are pros and cons to the decisions, but they think the pros of the change outweigh the cons of the status quo, so they implement the change.
In the last five years, I’ve seen it on HR, IT, Finance, and now a bit different, a stakeholder engagement file. All of them have gone through the full cycle — we start off either decentralized or centralized, someone decides it’s either inefficient and weak or too tightly managed and unresponsive, and the change is made. Now we all know that the downside of decentralization is less consistency, less uniformity, potential for inefficiencies of multiple forms, yet the benefits of empowerment outweigh the costs of standing still. Then, five years later, someone looks at the decentralized benefits (empowerment) and decides the benefits of the change to centralized outweigh those decentralization benefits which are now viewed as costs.
Don’t get me wrong, none of them are individually bad decisions. Just really weird to see what is a bit cyclical in nature, and may simply be a push/pull of centralization/decentralization tug of war, driving decisions that each time seem like a force of positive disruption and even innovation to get better outcomes. And that happens in some cases even without any changes in the operating environments.
And what it leaves me with is a question…if I’m making a change as a manager, how do I know that I’m adequately counting the benefits of what is working now, given that I may not see it as easily as that which is not working (i.e. the costs)? Because what I’m starting to see is that we spend a lot of time “solving the problem” now only to see the alternate problem crop up strong enough five years later that we have to change back to “solve that problem”.
Andrea did almost all of the prep for the kitchen reno, including packing up most of the kitchen and moving boxes to the guest bedroom upstairs. Some of my absence was pure laziness, some of it was avoiding fighting about what went where and keeping my stress levels down, some of it was I wanted one of us to know where everything was so we wouldn’t be doing the dance of “where did she or he put that?”, and some of it was ownership…the basement reno was mostly about me, whereas the kitchen design and renovation was more driven by her frustrations than mine. I had a couple of issues, and I certainly had views during the design, but I wanted her to feel like the renovation was her baby. Plus she would be home for some of it, which would help with “ownership”. Other preparations though required getting the non-kitchen area ready.
I confess that going into the kitchen reno, I didn’t understand the full scope of the disruption. I thought our disruption would be mostly limited to just the kitchen and part of the family room. But having had the experience of drywall dust everywhere in the basement, and even with the dust barrier that was going to go around the kitchen during the reno, we moved everything into corners on the first floor and covered them with drop cloths.
For Jacob’s playroom, aka the family room, that meant taking all the toys and shelves, putting them at the far end of the room, and covering them with tarps. We also moved the kitchen table + fridge + microwave into the area, before the dust barrier went up — this made the room our interim kitchen for the duration of the reno. If you remember, we were only going to be 2-3 weeks for the reno, so Jacob could do without his setup for that time, and we’d mostly be limited to disruption for breakfast and making lunches as we would eat out some of the time and BBQ the rest. Fourteen to seventeen days, no problem.
As an example of my cluelessness about the level of disruption, I had never thought about our front room being particularly disrupted. I still thought, to the extent I thought of it as all, as being a bit crowded but mostly functional. As you can see from the cover-ups and even just the placement of everything, it would not have been even remotely usable during the renovation.
I admit that I have developed an almost unhealthy fascination with the publishing industry’s changes over the last five years. Separate from my own vested interest, I am also interested from an analytical perpective. People argue that “self-publishing” or “ebooks” are the changes that are sweeping their way through the publishing world, but I personally feel that it is more about the disentanglement of a previously integrated and controlled business model.
In the past, you had authors who produced content as a raw product, agents who marketed those raw materials to publisher after publisher, or editor by editor at each publisher, and publishers who took the raw product, massaged it, processed it, turned it into a final product, and took the sellable version to market. And there were huge barriers to entry into the market — agents wouldn’t take just anyone, publishers often wanted only agent-repped products, stores and libraries would mainly take books only from the Big Six publishers or their subsidiaries. Breaking into those areas would give you huge leverage, but they were jealously guarded corridors of power.
However, in recent years, the whole business model has been disrupted end to end…authors can get their books on Amazon and in ebook form without an agent or a publisher. They can get their own ISBN numbers, they can form small publishers to hide their “self” status if they want. They can hire copy editors, substantive editors, cover artists, publicists, anybody that the Big Six used to hire for big names. And, shhh, don’t tell anyone, but a lot of those editors and artists and publicists are the same ones the Big Six use, just selling their wares as freelance.
It’s a fascinating time for disruptions in the industry, so I was excited to see what the Guardian published on “Ten Ways Self-Publishing Has Changed the Books World”:
After a boom year in self-publishing the headlines are getting a little predictable. Most feature a doughty author who quickly builds demand for her work and is rewarded with a large contract from the traditional industry.
1. There is now a wider understanding of what publishing is…
5. The role of the author is changing…
7. New business models and opportunities are springing up,
I don’t agree with most of the conclusions of the author of the article, or at least not the nuances, but I do agree with the general trend. I was surprised though that they didn’t hammer home more on the issue of “time to market”. Overall, that is the largest single change that is disrupting the industry. Within days of the selection of the new Pope, authors were putting up books on Amazon. Some of them quite substantial and high-quality. In traditional publishing, the window would have been 18-24 months normally or super high rush could do it in 6 perhaps. I think too that Indie bookstores who are excited about getting in on Kobo sales should look instead at the POD market — there are printers that you can have in your shop, giant photo copier/printers essentially, that can print and blue-bind a book with a glossy cover in about an hour. Any book, any time, hard copy. That’s disruption.
One of my favorite bloggers writing about the publishing industry is Kristine Kathryn Rusch, a former “upper-midlister” who has moved into the world of self-publishing and prefers the results. She has lots of history in the traditional publishing world, ranging from short-story mags to full-length novels, and everything in between, and probably every form of publisher alive. However, unlike the evangelical nature of some of the newly converted, Kris’ posts tend to be more practically oriented — here’s a business issue related to publishing, here’s her experiences with it, here’s how she thinks it fits into a current business model, and here’s what she thinks is the best option for her. She’s not trying to convert the masses, she’s sharing info with the masses. It’s a great balance, and she treads it well. One of her latest posts is about royalty statements, and, basically, how screwed up they are. But she also goes on to talk about two other issues that I think are great — basket accounting and the audits by DOJ of the “colluders” who are being sued for the agency model agreements they colluded upon. See excerpts below:
Over a year ago, I wrote a blog post about the fact that my e-book royalties from a couple of my traditional publishers looked wrong. Significantly wrong. After I posted that blog, dozens of writers contacted me with similar information. More disturbingly, some of these writers had evidence that their paper book royalties were also significantly wrong.
The reason I was so excited about the Department of Justice lawsuit against the five publishers wasn’t because of the anti-trust issues (which do exist on a variety of levels in publishing, in my opinion), but because the DOJ accountants will dig, and dig, and dig into the records of these traditional publishers, particularly one company named in the suit that’s got truly egregious business practices.
Those practices will change, if only because the DOJ’s forensic accountants will request information that the current accounting systems in most publishing houses do not track. The accounting system in all five of these houses will get overhauled, and brought into the 21st century, and that will benefit writers. It will be an accidental benefit, but it will occur.
The audits alone will unearth a lot of problems. I know that some writers were skeptical that the auditors would look for problems in the royalty statements, but all that shows is a lack of understanding of how forensic accounting works. In the weeks since the DOJ suit, I’ve contacted several accountants, including two forensic accountants, and they all agree that every pebble, every grain of sand, will be inspected because the best way to hide funds in an accounting audit is to move them to a part of the accounting system not being audited.
My agent noticed that the royalty statements from one of my publishers were basket accounted on the statement itself. Which is odd, considering there is no clause in any of the contracts I have with that company that allows for basket accounting.
For those of you who are unfamiliar with basket accounting, this is what it means: […] a contract with a basket-accounting clause allows the publisher to put all three books in the same accounting “basket” as if the books are one entity. So let’s say that book one does poorly, book two does better, and book three blows out of the water. If book three earns royalties, those royalties go toward paying off the advances on books one and two.
So, accounting for royalties is actually pretty complex, as Kris’ post points out, particularly when it is being done with archaic systems, slow reporting, multiple vendors, multiple formats etc. A recent discussion on the MurderMustAdvertise forum was talking about how a specific small press was not doing a great job providing updated numbers quickly (as much as daily, as was desired during a promotion period). Yet the reality is that many of those data collection systems suck. Like with the GIGO acronym for computers — Garbage In, Garbarge Out. Lots of other people, as Kris points out, think it is the system playing with authors in order to screw them out of royalties. Where some people see malice, I see basic incapacity. I also think your expectations depend on where on a broad spectrum you sit:
a. Those who trad pub and who believe that there’s no other option for them;
b. Those who trad pub and who know there are other options, but don’t want them;
c. Those who go both routes;
d. Those who go indie, but might consider trad with the right deal; and,
e. Those who go indie, drink the Kool-aid, and like new religious converts, are ready to preach to anyone and everyone about their experience.
Those in the D-E realm want numbers NOW, as they get from Amazon for self-published titles. Those in the A-B group think they’re dreaming in technicolour. Dean Wesley Smith’s blog (Kris’ husband, btw) has talked too about how he would LOVE a program that would take reports from multiple systems, convert them into a single system, and let him fiddle with the data to come up with something comparable, useful. Something resembling modern business intelligence. I see that Random House just opened an Author Portal, an supposedly “innovative tool that will help with sales tracking” but I think we are still a long way away from seeing a sale in your local bookstore show up in some daily stat you can access yourself. But, as a small defense of the Large Press publisher, this is part of what you as an author gave up when you went that route. Just as if you sold through any third party — you gave up control. They’re selling your book, not you. Yes, you’re entitled to sales info; no, you’re not entitled to daily updates unless your contract included that.
In fact, calling and asking daily for something that you should know isn’t available daily has an official legal name — it’s called harassment, and it’s ground for damages under contract law as bad faith dealings.
Now, while it might sound like I’m defending the publishers with having wonky numbers, or negating Kris’ point, I’m not. Authors should get accurate royalty statements out of their publishers. Clear record of sales. Transparent accounting. Reliable calculations. All that you would come to expect from a contract. Does the system produce it currently? No.
Kris is optimistic that the audits of the big publishing firms will spur this transformation, pointing to Department of Justice forensic audits as a catalyst. Actually, while I think the monitoring that will be coming will point out a lot of the problems that she mentions in her post, I’m less optimistic of auditing as an agent of change.
My day job involves me regularly having to deal with auditors, and you can think of auditing as having four levels of audits:
a. Audit of financial statements — this is what the large accounting firms known as the Big Four do for large corporations, and it is pretty much worthless as an exercise. Think of it as a Tier 1 audit. What they do is go meet with the company’s people, ask them questions, get their answers, make sure the general policies are in line with Generally Accepted Accounting Principles (GAAP) and that the right systems are in place, do a basic probe of the systems, ask some big picture questions about risks / liabilities / assets / revenue streams, and come to the conclusion that the people doing it all know what they are doing and therefore, yes, the systems are adequately producing financial statements that accurately portray their business. Most investors don’t understand that…heck, most CEOs don’t understand that. Which is why you see these HUGE restatements of earnings where a problem was discovered five years later that the “auditors” didn’t catch and people go, “But they were audited!”. Put bluntly, these audits amount to no more than the auditors asking in five or six different ways “Are your financial statements accurate? Is there anything you haven’t told us that is material to this audit? No, okay, well then it must be good to go.” There was a great quote from one of the Big Four about two months ago where the CFO said, “Well of course we didn’t find anything wrong in that audit — they lied to us when we asked if anything was wrong.” Most people think auditors detect things like that on their own, but often they don’t. Tier 1s are done every year, relatively routine, and they don’t go farther unless there’s a problem detected.
b. Audit of control frameworks — this is a tier 2 audit. As per the Tier 1, this is where the auditors go in and say, “What are your control points for managing the financial systems?” When you see small companies with huge frauds, it’s often because the person authorized to contract for services was also the one authorized to make payments and the one authorized to record the costs. Large firms have control points to ensure that those things are approved by three different people, sometimes as simple as a signing authority form that says “John can order things, Mary can sign checks, and Jane reconciles the bank statements”. If Mike gets an invoice for a contract not signed by John, the system comes to a halt. That’s a control point, and auditors in Tier 2 will go to that control point and say, “So, how do you ensure that Jane didn’t sign an order? And what do you do if it doesn’t have John’s signature each and every time?”. Sometimes a problem in Tier 1 will prompt a Tier 2 audit — say, for example, that the balance sheet is a little imbalanced, because John’s been ordering a LOT of supplies and the inventory is larger than normal. This might flag that John is out of control, and a Tier 2 might start to look to see that all the expected controls are (still) in place and working as designed. A recent government audit in Canada was triggered by a whistleblower…and when the report was done, after discovering massive fraud by one individual, the conclusion was that proper controls weren’t in place, which is actually misleading. They DID have controls in place, they just weren’t being used. But I digress.
c. Targeted audit — this is a Tier 3 audit and is usually only initiated if there is a clear “problem” such as a process breaking down. If Mary approves just about everything, and Jane’s not been doing the reconciliation of the bank statements regularly, and John’s ordering a LOT of inventory, then cash flow might be a problem. Perhaps IT expenditures are high. So a targeted audit would do a walkthrough of the processes in place for IT expenditures, and review a significant sample of the IT expenditures. Maybe expenditures over $500K or hardware investments. It depends on the org and the situation — Nike’s investment in office computers might be scrutinized for every transaction; Google might do a 10% sample. It’s targeted, focused, specific. It does NOT look at everything unless there is a systemic problem, which would trigger Tier 4.
d. Forensic audit — this is a tier 4 audit, and sometimes auditors call it a “true” financial audit. However, in most cases, this is only done if there is a very clear case of fraud or financial irregularity. It involves a “complete” audit, in theory. This is what most people think of when they hear “audit” because they think of it like a personal audit by the IRS or Revenue Canada. In a personal audit, the auditors will look at every line, every transaction, every receipt. It’s the image that Hollywood likes to portray. But it only works for “personal audits”. Auditors cannot review every financial transaction made by a multinational company over the course of five years to make sure everything was recorded properly — there’s a very large question of materiality here. They are not going to check to see if the Middle Manager in charge of box design was authorized to have his parking reimbursed when he went to a conference in the city. First, there’s no point, and second, they are not there to repeat the work of the financial people who were there before. They’re auditors, not financial clerks. They’re checking on systems and looking for signs of problems…like criminal fraud.
What does this mean for the DOJ monitoring? Who knows is probably the best answer. The DOJ is looking at anti-trust problems, and specifically pricing collusions. Are they going to go into issues like basket accounting? Only if basket accounting looks like fraud and doesn’t reflect a proper accounting practice. People tend to think of accounting as a simple science but it’s more of an art. A financial clerk says “2+2 equals 4”; an accountant knows it depends on who’s asking the question for what year and which method of accounting for costs.
Take Kris’ example of basket accounting. It looks like clear, unadulterated fraud on the part of the publisher. That by simple accounting standards, they are mixing revenues without authorization, violating a contract, and ripping off the author. Except there is a general accounting principle of matching revenue streams to costs AND looking at holistic relationships with partners with whom you have multiple contracts. So, like Joe’s Stationery providing memo pads on standing order. If you pay part in advance, at some point you reconcile the “account”, not the individual invoices. And, using “basket accounting” or “accounts receivable” as your lens, it would appear that the author has three advances, and has only earned back part of it, so until “all three” are earned back, the account is in deficit. And beancounters could easily argue, “No more $$ until all advances are cleared.” Cuz that is what they do when they order stamps, so why wouldn’t they do that when they have vendors providing manuscripts to them? It isn’t right, it isn’t wrong — it’s whether the accountants will call it a proper application of general principles to a long-standing relationship, and a justifiable “choice of accounting methods”. Unless there is intentional application of a clearly inapplicable approach, a forensic audit will likely only say “Company X should review its choice of advance reconciliation.” Sure, the auditors will ask for info that the company doesn’t track, and the company will say, “We don’t track that.” But unless it is something that financial regs say they HAVE to do, the auditors will just note it as an out of date system that they recommend be considered for updating — they can’t say it HAS to be updated (an actionable finding, they can only recommend it — because the financial regs don’t require it either). Think of it like a personal auditor saying you shouldn’t keep notes of a financial agreement on a paper napkin — there’s no law against it, though, even if it’s stupid, so the auditors can’t compel compliance to a non-existent regulation.
And the crappy part of all of this is the DOJ has not yet said that a Tier 4 audit is what they will do…every scrap of paper, every expense, every payment of royalties. They may only do Tier 2 or 3, with regular monitoring. Tier 4 is an enormous cost.
Plus, if I was the in-house counsel, I’d be strongly resisting providing any info on royalties for two reasons. First, it is outside the scope of the alleged infraction, which is about pricing. That’s not nothing, that’s significant. Sure, it’s a “blanket warrant” but there still has to be rational connection to the purpose. It’s not a slam-dunk that this will be automatic. Second, such a blanket approach is also potentially highly likely to infringe upon proprietary info…if they gave a sweetheart deal to Turow but stuck it to Grisham, that is none of the auditors business and highly “internal”. Plus not something that publisher X can reveal without damaging its business, with no benefit to the audit or the litigation.
Kris is hopeful that the catalyst of the audit will force accounting system changes, but I’m less optimistic.
My only real optimism regarding the auditors is not that they will find out where the bodies are buried but rather than auditors tend to be very good at exposing HOW bodies could have been buried and thus telling other people (like agents, lawyers, authors associations) what the breadcrumbs might look like if some bodies are missing.
You might still have to sue them, and it might take awhile. But at least there will be some signposts in the final auditors reports, even if it won’t be a full map.
Or maybe I’m completely wrong and these auditors will be unlike every auditor I’ve ever met and they’ll rip them a new one. I guess I’m mainly doubtful that “regime change” is something that follows a rallying cry of “Send in the auditors!”.