The One Page Fax
Are we drowning in data?
A few years ago, we heard a lot about the new age of Big Data. That age is now definitely here and shows up in all sorts of different ways. Take emails - how many work emails do you receive a day? 50, 100, 200, even more? From my experience, corporate life generates so many emails that just managing that flow of information becomes a significant part of the job. Attempts to push back on the dreaded world of the cc email aren’t easy, because you are fighting the ultimate get out clause - “you were on the email that…..”. Or what it really means, “you knew or should have known….”.
It's not much different with today’s corporate dashboards. There is so much corporate data that dashboards can run to 2 to 3 pages, or more. And it’s the same get-out, “well the Q3 data on page 3 of the dashboard showed an increase of 23%, so you should have known…….”.
And ironically, it’s now flowed back to where the idea of dashboards originally came from, the automobile. What was once a series of analogue dials showing key auto data like speed, revs and oil pressure has become a bottomless pit of menus, sub-menus and data that no-one could, or indeed should, be managing when they are driving.
The computer age has given us the ability to collect and analyze data that was unimaginable 20 or 30 years ago. The problem is that, to use an old expression, ‘we can’t see the wood for the trees’. We have so much data, so much information, that we struggle to see the underlying messages that the data is trying to tell us.
I believe we need to re-think how we manage this tidal wave of data when building corporate dashboards – so I developed a thought experiment that I call ‘The One Page Fax’.
Reframing the problem
Imagine that you are going on a four-week trip to your ideal incredible island, mountain or jungle retreat. You’ll have day upon day of day of your favorite activities in a place so remote that you will be without the intrusions of the electronic age. There’s just one problem – this magical location can only communicate with the outside world through a 1980’s fax machine. Even worse, you are limited to only being able to receive one page of fax per week and the quality is so poor that you can only get 10 items of data.
What are you going to ask your work colleagues to put on that fax? What is going to give you the information you need to be able to relax for multiple weeks on your trip, confident that your corporate world hasn’t blown up while you’ve been away?
What drives the business?
I attended a conference a few years ago and a VP of FP&A for a very large, US national corporate, was describing the journey in transitioning from spreadsheets to their new software. Now you might be wondering why such a large company was until just recently, still using spreadsheets at all. I’ll come back to this topic in a future blog, but it’s much more common than you think; take this story about the Williams F1 team which also highlights why spreadsheet design is so important.
What struck me in this presentation was the description of the journey requiring the transfer of the 35,000 corporate drivers in the spreadsheet models to the new software. Now it might seem like semantics, but there is a massive difference between a driver of the business and an input into the corporate plan. There’s no business on the planet that has 35,000 drivers, but inputs? Quite possibly – individual salaries, costs, parts prices, utilities, it can be an endless list.
My concern with not distinguishing between a driver and an input is that it encourages a mindset that is so wrapped up focusing on the accuracy of the planning numbers that you lose sight of the key decisions that are required to run the business. Forgive me for using a flippant example, but it’s no good cooing over the performance metrics of the Titanic’s three engines, 29 boilers and 159 furnaces if those same engines are driving you straight at an iceberg.
What really matters?
What really matters for your business or the section of it that you are responsible for? What is a driver and what is just an input? This is where ‘The One Page Fax’ thought experiment comes into its own. It forces the separation of drivers and inputs and, even more, ranking the drivers into a short list of what really matters.
I should note that this shouldn’t be a one-time exercise but a regular one to elevate out of the daily noise from information overload, to see the wood rather than the trees. The business, and the environment it operates in, is dynamic and so should The One Page Fax. Seasonality, new competitors, major projects, interest rates, etc. all can have different priorities at different points in time.
Creating the list
How to create this One Page Fax? We’ll walk through an example below, but here’s how I suggest working through the process. It might seem a bit old school (I admit it, I am. I mean I still remember what a fax is!) but I suggest putting down the phone, the computer and everything else and sitting down with a pen and piece of paper. Draw a vertical line down the middle of the sheet of paper and on the left-hand side, write down the data that you want to know. Be specific, so ‘Cash’ isn’t enough. Do you mean the cash balance today or in the future? Do you mean cashflow in/out and if so, over what timeframe?
Next, and this is really important, on the right-hand side write down why you need to know that piece of information. What does it tell you about the business? Does it address margin, growth, solvency? What decisions are you going to make differently if that number moves up or down? If it doesn’t change any decisions, then why do you need to know it?
Write down as many items as you can think of. Imagine being on that desert island without your computer if it helps. Then once you have created the exhaustive list, rank them. On another piece of paper, transfer the top 20 (if you have that many) and put them in the number order that you first gave them. Working your way from the bottom to the top, take the lower item and challenge the item above it for relative importance. Refer to the reasoning you wrote on the right-hand side if that helps. Move and renumber the items as you go and rewrite the list as many times as you need to.
Now we are going to take that list and cross out (if you’ve given up on paper at this point use the cross out formatting, do not delete) all the items ranked 11 or higher. At this point you might be wondering, why didn’t we just move across the top 10 items from the original list? Two reasons:
a) When you re-ranked the top 20, some items could have move in or out of the top 10. We want to complete the exercise before we limit the list.
b) Deleting items 11 and lower can create some mental anxiety. Can I really live without this? We want to harness that anxiety for good, to use it as a double check that we have our rankings right.
It might help to write down against each crossed out item why you are happy for it to go. This isn’t going to be a perfect list each time and we can improve by going back and understanding our reasoning at the time we made the decision – hence we only cross out and not delete. We humans are very good at post decision rationalization, we want to avoid falling into that trap.
Walking the talk - Delta Airlines
I thought it might help to go through the exercise with a real example and ‘Walk the Talk’.
My business experience is in more specialized sectors, so I did the exercise imagining I was Ed Bastian, CEO of Delta Airlines. I don’t have any experience of the airline industry other than flying as a passenger, but we almost all have interacted with the airline industry at some point in time, so I hope you will be follow how the thought experiment works. And my apologies to Ed if these are way off!
My weekly list of items for The One Page Fax for the CEO of Delta Airlines:
Projected cash balance in 3 months
Am I heading towards a financial iceberg?
Overall load factor (how full the plane is as a %)
Airlines are very operationally leveraged so this is the key metric to tell me how profitable we are
Load factor compared to same week last year
Airlines are seasonal, so I want to compare to last year to see if I’m improving/declining year on year not week to week
Jet fuel prices, 6 months forward
Jet fuel is the key variable cost and is contracted for delivery some months into the future. Ticket prices will have to flex if it goes up
Percentage of staff illness days compared to total worked
People are crucial to the business, staff taking time off sick is an early sign of underlying staff problems
Complaints as % of passenger flights flown
I want to know that my customers are happy and not likely to switch to a competitor. Filing a complaint is a first step in showing dissatisfaction which precludes switching
Cancelled flight hours as % of total flown
This indicates lost, or substantially reduced, revenue due to refunds or other cancellation costs
Maintenance hours as % of total flown
It this is going up it’s an early sign that my fleet is aging or has other underlying problems
Percentage of seats on next week’s flights currently booked
Compared to this week’s load factor, tells me how much of next week’s revenue is already booked, how much we are scrambling around to fill flights
10-year Treasury interest rate
Airlines can lease rather than own their fleet, so the cost changes with interest rates. If they are rising/falling I may change the timing of planned fleet upgrades
I hope you get the idea. We are looking to home in on the drivers of the business by blocking out the noise and what has less significance. Key to this is defining the metric exactly – take for example item 4, jet fuel prices 6 months forward.
The right driver definition
Jet fuel is, I believe, the most important variable cost for an airline since most other costs are fixed. One more passenger with their bags doesn’t increase plane lease costs, cost of the crew, customer service, website or almost any other costs. But it does increase the weight and therefore the fuel load required prior to take-off. The more passengers, the more bags, the more weight and therefore the more fuel is needed to get off the ground and fly to the destination.
But why 6 months forward and not the price today? I am pretty sure that to manage profitability, a well-run airline isn’t paying today’s spot prices for the fuel. They will be looking forward for a period of time and anticipating the total need to lock in prices. That way, they can set ticket prices now that account for that price and not leave themselves open to the vagaries of fuel prices going up and down in the time period between booking and flying. I’m guessing that it’s 6 months forward, but maybe it’s more – the key point is that it’s that forward price that matters more, not the spot price today.
Refining the list
Now you might be thinking that one more passenger also increases other costs like the snacks/food and you’re not wrong. So let’s look at the relative size to see what’s more likely to matter to Ed.
An internet search tells me that each passenger needs around 1 US gallon of fuel per 50 to 60 miles flown. Food is only served on longer haul flights, so a roughly 3,000 mile flight from NY to LA requires roughly 50 gallons of fuel which at around $4 per gallon is $200 per passenger. Based on my general experience of airline food, it can’t cost more than $10! Let’s be generous and call it $20 – it’s maximum 1/10th of the fuel cost – not trivial. But the relative size and the fact that fuel prices are usually a lot more volatile, means food is not worthy of making The One Page Fax for the CEO.
And this is a crucial distinction. There will be someone in the organization for whom snacks/food should be on their One Page Fax. Maybe the Chief Operating Officer and certainly the Head of Services. What is included in the list for each person should closely reflect the responsibilities delegated by the organization and should help drive the effective execution of those responsibilities.
The key to the exercise is to split out the drivers of the business from inputs that, while they might affect the numbers, in the big picture don’t really matter. We want to focus on the big picture first and foremost, honing the accuracy of our financial models later.
Simple is Difficult!
At this point your reaction might be one I’ve often had to my financial models, something along the lines of “But it’s so simple!”. You are not wrong but being simple doesn’t make the model somehow deficient or inadequate so long as we haven’t oversimplified. On the contrary, I’ve lost count of the models that I’ve come across that are complicated, obscure and near impossible to follow. Anyone can do complicated, simple is difficult!
This is summed up very succinctly by a quote attributed to a certain Albert Einstein:
“Everything should be made as simple as possible, but not simpler.”
What is on your One Page Fax?
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