Thursday, February 27, 2014

Five Eyes On The Fence

Some of you might know that I am in the process of finishing up a manuscript for my second book.

Manuscript. I like saying that word. It sounds prestigious and dignified. And the truth is that this book is the culmination of close to seven years of reflection. This book represents the challenges I try to solve when consulting with our business clients. You see, many of my partners and I don't solely give accounting and tax advice. Often, a simple tax question can turn into a complex discussion of the intricacies of doing business, so we help our clients with all five of their business’s capitals, not just their financial capital and tax-planning needs.

That’s right: A business has five capitals. Take RSJ, for instance. My first book, Say Hello to the Elephants, is an element of RSJ’s Intellectual Capital. The book explained our quadrant planning-process, which is a Structural Capital that we use to help our clients solve problems. Speaking of our clients, our network of clients, colleagues and associates represents a portion of the Social Capital of our company. And this sequential-step process (quadrant planning) helps us live up to the refer-ability standards that are part of the values defined by our Human Capital.

Buy Five Eyes on the Fence now

Intellectual, Structural, Social, and Human Capital: These are four of the five capitals that constitute a business, with Financial Capital being the fifth. It is one of my core beliefs that the effectiveness of business planning increases exponentially when an owner and her advisors keep an eye on each of these capitals—when they keep a total of five eyes on the fence, guarding their business.

I have read snippets about the different capitals. A number of authors, for example, have written about the importance of defining a family-owned business’s values (which are part of a company’s Human Capital). Tech company executives know that protecting Intellectual Capital is paramount. Yet, I’ve never read a book in which the author has integrated all five of the capitals in one place. This represents a huge gap in how advisors counsel their clients. And this is why seven years ago, I started to think about and actively seek guidance on how to deploy more effective planning.

You see, without an integrated system for evaluating a business’s five capitals, there are bound to be gaps. Opportunities will slip through these holes in the fence, so to speak.
Fast forward to today. I am much further along in understanding the integrated planning system that needs to be implemented if a business wants to grab a hold of its opportunities.The more I researched the book and worked through what each individual capital represented, the more I came to realize that each capital is complexly linked to the other. Like the links of a chain link fence, the five capitals are connected to one another and each is only as strong as the links that hold it together.

There are many good business consultants and I am certain that they, consciously or unconsciously, consider all five of the capitals when serving their clients. I am also certain that those advisors who fail to consider the effect of their counsel on each of the capitals can cause more damage than they can ever calculate. If a business increases its rates to improve its Financial Capital, but it fails to effectively communicate this rate-increase to the clients, its efforts will backfire as clients jump ship.

Need proof? Just consider the impact Netflix’s $6 rate increase back in 2011 had on the company. Surely, many of the customers who jumped ship—and according to several reports, the number was about one million more than Netflix intended—could have afforded the $6 rate increase. Judging from the slew of complaints that circled the social media world, many customers simply felt devalued, unappreciated, and … well, frankly, they had hurt feelings. The canceled their subscriptions on principle.

And who can blame them? If Netflix had focused as much on its Social Capital as it did on its bottom line, perhaps its Financial Capital would not have been so severely impacted back in 2011. Perhaps it could have communicated with its clients before the rate increase, showing paying customers that Netflix appreciated and honored them. Perhaps the company could have implemented the rate increase and lost only those customers who truly could not afford or did not value Netflix enough to pay the new rate.

You bet that this more-than-money approach makes planning more complex, difficult and sometimes even more costly. With equal amounts of certainly, I know that it also creates a higher probability of success because a business isn’t just money. It is the people, the values, the ideas, and the process within a business.

In writings to come, I intend to share with you some of my thoughts concerning each of the capitals. And when my book is published, you will have a  detailed look at each of the capitals, how they work together and what we are doing at RSJ to keep five eyes on your fence.

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