Managing the Financial Cost of Change

Dear Coach Alan,

My company is in the middle of a major change in strategy.  We have made a commitment to dramatically improve our product quality so that we can compete in new markets and attract new customers. As a result of this change, last month we had the largest loss we have ever had as a company.  I am fearful that more losses will undermine the financial health of the company and freak out our bank, possibly leading to a pullback on the line of credit we need to finance our change.

I can attribute our loss entirely to the expenditures needed to improve our products.  I am also convinced that this change will lead to higher sales and profits. However, this gives me little consolation, and I am anxious to a point that I am coming down hard on our sales team to step up their efforts to sell.  I am also beginning to scrutinize every expense, cutting back on all expenditures that are not essential to our business. I need some help on how to cope with the financial and emotional stress this change is taking on me and my company.

Tom

It seems like you are in what psychologists would describe as an “approach/avoidance conflict.” You have a goal that has both positive and negative consequences. In your case, as you advance to this goal, you are experiencing the financial pain of getting there. This is causing you anxiety and stressful reactions to the very goal you are trying to accomplish.

Tom, you are beating yourself up over losing money. But are you really losing money?  As your coach, I would ask you to reflect on your situation by asking you the following questions.

If you had planned and had been aware of the true cost of this change, would you still have moved forward?  And, if so, how would you have budgeted for these expenses?  In your case, it appears that you were not adequately prepared for the expenses related to the changes you are making.  And, you are financing these expenses out of your normal operating budget.  If you had budgeted the change separately and compared related expenses to this budget, would you still feel like you were losing money?  Or, would you realize that these expenses are part of an “investment” that needs to be evaluated on its own merits? Another question I would ask you is whether you have identified milestones and time lines for implementing change.  Project management techniques will help you keep track of both costs and time to market for your new products.

The above questions are based on three coaching principles.

The first is to identify positive tension. If the strategic goal for change is fully embraced and the current product strategy is not tenable, then you have the motivation to move forward.  Knowing what you know now and by reflecting on your current financial losses, asking yourself to rethink how you would have budgeted and managed for this change will have the effect of doing the preparation that you had not done originally.  This reflection would allow you to separate the expenses of the change from your normal operating expenses.  It would also offer you a method of tracking milestones and timelines that would cause delays and additional costs. In coaching terms, you would be reframing what you consider to be a loss to what it really is: an investment with a separate budget and time line. Reflecting and reframing will allow you to track both your normal operating expenses and your investment expenses.  They should also ease your anxiety over losing money. And, instead of putting pressure on your sales team to sell more, you might seek their commitment to implement the changes you are planning for.  They will need training and resolve to put your new “investment” strategy into action.

I have found that your situation is not that uncommon.  Mixing development costs and operating costs can greatly mask what is really going on financially.  To reduce confusion and truly reflect the cost of change, businesses need to budget for change in a way that clearly separates the cost of change from the rest of the income statement and thereby reduce confusion and concern. This will in turn help executives like you avoid displacing their frustration on employees to work harder when they should be engaging employees to embrace the forthcoming change.

Your situation is a good example of why executive coaches need to understand business.  Without awareness of how budgets work, coaches will not know how to ask the questions that bring clarity and resolution to dilemmas like yours.