Exhibit 26




Part One: Personal Story on selling value to your boss

Part Two: Some additional readings on "leading from the middle"

Part Three: Personal Story on getting a chain to rethink marketing around "old-to-old" matrix



When I first got out of business school in June í74, I went to work for a wheeler-dealer fellow who was building a chain of primarily printing paper distribution companies in the mid-west by acquiring tired old family businesses. He was and still is a remarkable fellow who was long on vision and ambition and always short of time for digesting all that he pursued. He was necessarily a great delegator, and I was someone who couldnít say no, so I was quickly and happily buried under assignments.

He sent me initially to Peoria, Illinois to be the acting assistant branch manager of a division that had about 35+ people that had been a chronic loser ever since he had bought the business 5 years earlier. I nominally reported to the branch manager and then to a group vice-president, both of whom were a generation older and grizzled veterans of the industry. But, I was the main manís protégé; had his ear; and he was willing to try new stuff to solve chronic old problems that were not responding to old solutions.

Six months later, in December, I received an unexpected, late-evening phone call from both the CEO and the group VP who I reported to. They had been doing year-end evaluations of all of the managers in my group and thought that they should review me too. The gist of the five-minute call was: "Hey, you are working hard (60 to 70 hours per week) and learning fast. Keep it up, and we are giving you a 10% raise that is going into our budget processing that we are also doing."

I was pleased. I hadnít expected anything to change for at least a year, so a 10% raise was great news to a kid with a mountain of college and grad school debt and one business suit to his name.

Fast forward to December í75. I had now been working at this distribution chain for 18 months. I had played a huge role in successfully turning around the Peoria division and had been promoted back to the St. Louis HQ to fill the new position of corporate sales manager. We had, at the time, 6 companies in 6 cities with about 50 full time sales reps and only 3 part-time, titular, branch-level sales managers. ("Sales management" was still a low-key, art form subject area in the early Ď70ís that emphasized golf lessons and time-and-territory management. Most reps were former warehouse people who had promoted up through the ranks in the 50ís and 60ís.)

In mid-December, the CEO invited me to sit down for a formal year-end, performance review that was a significant negative experience. The CEO pulled out a pad of paper on which he had written about ten items for which he thought I was (solely?) responsible with A to F grades attached. It was the first time that I had seen the list; some of the items were responsibilities that I hadnít known were mine. There was no relative weighting of the tasks, no hint of how to measure progress and no set deadlines for completion. It was more of a wish list of problem/opportunities that anyone on the management team would like to see go away.

This was, in retrospect, a case of an over-subscribed, deal-maker trying to do the right thing on the fly having a visit with a naïve, workaholic, super-pleaser, control-freak kid who always strived for Aís on everything.

I didnít say much, because I was so shocked and upset. I later went through a range of emotions from quite negative to eventually thinking about what can I do to manage my boss so this doesnít happen again, and we can literally be on the same page. I went back and suggested the following ideas:

  • Boss, I was quite upset about our visit, but itís mostly my fault for not being more organized. To get more organized, though, I need your help on a few things.
  • Letís make a list of what you want me to do in the next 3 to 18 months, because most things donít take 12 or less months to do and all end at fiscal/calendar year-end.
  • Letís weight them by importance Ė A,B,C Ė and letís assign urgency or completion dates.
  • Then, allow me to grab you for at least 10 minutes every month and/or whenever you want to add or modify responsibilities or projects to my list, which happens a lot, because we are growing rapidly and developing holding company capabilities for the first time. (This "where do you want to put it on the priority list" was a vital tool. From then on, instead of quick verbal exchanges, we would review the entire list, that was too much to humanly do, and do updated triage. This would force him to decide which wishes would be starved or reassigned to make way for new, more important or urgent things. This was often a frustrating experience for a guy who wanted everything done yesterday.)
  • As for incentive pay, I suggested that I get paid in some way that was aligned with how his bonus was calculated. Because we had a lot of bank debt due to our growth by acquisition, the bank had a covenant that restricted what he could pay himself based on profits divided by inventory and receivables, the bankís main asset collateral.

These new, working-together-better agreements worked sensationally and became catalysts for a new generation of operational innovation plays. I created a "return on controllable assets" (ROCA) form for each of the six profit centers which I reviewed with the management teams at the six divisions even though the "division Presidents" did not "report to me" and did not have incentive plans based on ROCA. I pointed out that this was the formula by which the CEO got paid and now me, so if they wanted to please their boss they shouldnít ignore these numbers. I even recommended that they lobby the CEO for a similar pay plan to replace the still fluid, sometimes subjective, year-end treatment they had been getting. Because they all still had commission-able accounts that they had had for years, they were over-focused on just growing margin dollars. (Key point: the best way to overcome historically-rooted, dated assumptions and beliefs is to create new metrics that reflect new realities and keep "dialoguing" about what we need to do differently to close the performance gaps. The hard core, old believers just want the new data to disappear, but we have to gently keep pressing the new data and the new gaps that they underscore.)

Once I got everyone looking for new, creative solutions that were bounded by improving - ROCA, target customer niche service metrics and key account growth numbers - things really started to improve. Even though I was a staff guy to whom the division Presidents did not report too, none of them could argue with the comparative performance improvement numbers from all divisions that I started sharing amongst them. They all started to listen to my ideas for "pushing the wheel of learning". I was leading without line authority.

I also consistently grabbed my fast-moving boss for the formal, monthly 10-minute review which was preceded by sending him a simple progress report that I typed up with the real-time "to do" list chart attached. After a few months, he even said: "Look, I know you are doing a great job, you donít have to remind me every month." So, I skipped one month, but then went right back to doing them. I reasoned that:

  • Out of sight is out of mind and taken for granted.
  • Automated reminders make people consciously notice something and register some positive thought about the sender; they make the invisible visible, the intangible, tangible and more valued.
  • You should keep selling until the customer even complains about being tired of hearing how good and valuable you are for their bottom line.
  • Hereís a political tip that will help you on a quiz link below. Give as much credit to your boss as possible for whatever good is being accomplished.

Some questions for middle managers to think about:

Have any of you succeeded or failed at trying to find out more accurately:

  • What your boss really expects from you?
  • How they weigh all of your assigned responsibilities?
  • When they expect certain things done and on what measurable basis?

Have you asked them what they need from you for them to look better and make more or how you can better align your activities for mutual progress in the organization?

Assume that your boss is your customer who determines: "value"; whatís a fair, competitive price (salary) to pay; and whether they want to make a next level commitment with you (promotions and/or new, more important assignments). How do you make what you are doing visible on a repetitive basis to make the intangible, tangible and valued? Any comments, stories and/or questions on these matters?

PART TWO: Some additional readings on "leading from the middle":

The following suggestions are arranged from the shortest (most fun) to the longest and more tedious:

When we lead from the middle, we will run into both "tops and bottoms" (superiors and subordinates) who will disagree with our views. They seem to have hardened belief systems of their own that seem to be statements of fact, but are actually missing any current facts. To create new understanding we have to first help them surface where their beliefs come from. "The ladder of inference" is a good discussion tool to use in a politically deft way. Hereís a link to that tool at two different interesting sites for would be change agents:



Because politics is a reality, hereís a quick nine-step quiz on how politically savvy we are:


I was able to find two, business professors on the web who seem to be going after the "lead from the middle niche". Here is a link to the one who is more succinct:


Here also is a link to a more verbose, generalized piece by a guy who has written books on the "lead from the middle" topic. Skim this one at best:


For a systems theory view on how "tops, middles and bottoms" do politically dysfunctional dance routines with each other and how to stop the nonsense, skim through this slide show that outlines the main concepts from Barry Oshryís ground-breaking book, Seeing Systems (í95).


PART THREE: Personal Story on getting a chain to rethink marketing around "old-to-old" matrix

This story all started in about June í76. There was a separate, but related problem that I was also working on which became known as the "small order opportunity". The entire thinking behind and the tactics for solving that problem are covered in "section three" and more specifically, modules #-ed 3.5 Ė3.11, in our video-based transformational training program entitled: "High Performance Distribution Ideas for All". Lots more on the video, its resellers, etc. is in the center of our home page at www.merrifield.com.

Now on with the story about old-to-old marketing.

I had learned in my first 18 months at this chain that trying to lead change from the middle of the organization chart was a patient, humble process. As a 26 year-old staff guy with no direct-line authority over those to whom I was writing, I didnít expect a big initial reaction. Experience had taught me to be prepared for diplomatic disinterest and some conventional industry wisdom rebuttals. The new, data-supported, trend analysis would do the tough talking. I would just ask thoughtful, provocative questions looking for one to a few innovative-minded managers to raise their hands.

If I could find one or more division managers willing to do some experiments, then I could patiently keep publishing comparative division metrics along with the learning progress and hopefully improved results from the experiments. If my thinking, metrics and experiments all proved to be positive, then the rest of the management teamís collective perceptions might change after about 5 to 7 progress reports.

Here are some of the points and questions that I raised in the memo:

  • In the case study it appears that it was 5 times harder for the sales force to crack a new customer than it was for them to effectively sell a new product. Is it the same for us? The trend numbers for key account penetration for all new and most mature sales reps is not encouraging. Should we improve our account cracking team skills, strategies and incentives from our normal selling methods for all territories in which reps havenít been successful? Shouldnít we put rookies on smaller, maintenance accounts that are hived-off from the few reps who have a track record for big, new account development? What might happen if we then supported our account crackers with a special total-team selling approach, extra service heroics and an extra, company funded expense budget?
  • Shouldnít we be systematically exhausting all of our old-product-to-old-customer possibilities before we do anything else? What new information tools and selling methods would enable us to do this on a measurable disciplined basis?
  • The case study mentioned only top-line sales growth. It didnít mention how much of the incremental sales dollar would flow immediately through to the bottom line. If one of our customers did buy more incremental, old items on a larger order size basis, we would get a bigger gross margin payload for the fixed cost of the transactions including the delivery cost. Fixed transaction costs are big, especially for freight-sensitive, low-value-per-pound goods. How much of the incremental margin dollars would flow through to the operating profit line? I figured 50%! Do you agree?
  • If we want to defend our best accounts, could a new value creation offense be the best defense? Isnít finding mutually overlooked old items to sell customers who are already trying to consolidate their purchasing and purchasing costs with us a big win-win economic? How could we design a database that would allow us to generate what kind of computer report of best, most likely, incremental, old items to review with each customer? (See note #2)
  • The bottom 50% of our stocked items ranked by sales activity are only averaging about 1-2% of our warehouse sales across all locations. Does this suggest that we could do a lot better job at selecting fewer, more promising new products to sell more thoroughly to more carefully pre-targeted customers who said they would like to buy them from us? Does our historical batting average on new products suggest that we should significantly reduce our rate of adding new items until we can learn lessons from our dust collecting cash traps in inventory?
  • Could we also have a huge dead inventory investment that is junk that we bought with the acquisition? Did we know what percent of the inventory was actually worth scrap value when we did the deal? Did the former owners? Could we structure our next deal based on different valuations for different classes (A,B,C,D) of inventory items calculated by our system after the deal is closed? We should probably write off the dead items based on tax and bank-loan considerations. We might exempt inherited dead write-offs from operational profit bonus calculations, but should we start measuring, timing and writing down new item fizzles on a regular basis? Then, we could learn what our true profitability, book value and marketing weaknesses are much sooner and avoid another big no-value write down in the future.
  • If we start discussing all of the issues and questions in this memo followed up by experiments using newly developed infotech tools and marketing methods, couldnít we develop breakthrough operational capabilities? How, for example, can we improve on the crude, first approximation ranking reports that I designed for inventory-item, sales-activity rankings included in this memo? (This report was a big project in í76; a snap today!)
  • Does the grass and cash look greener in both new products and acquisitions for our chain, because we canít understand the success details that we canít see? What new details should we be looking at in our present business to do better which we might then re-apply in our next acquisition?
  • I will look forward to discussing this memo the next time I visit your location.

As I subsequently cycled through our divisions, here were the general reactions to my memo:

  • Most had "read it" but couldnít remember any of the details.
  • They had no real ideas or plans for any of the topics I raised. They were all too busy perpetuating the past.
  • As we went through the memo in a step-by-step way, they had conventional, industry-wisdom reasons for why we had to continue to be "full line" distributors for all of our suppliers and add new items generously. The few winners were more than paying for most of the losers we had, werenít they? And, they were already selling all of the old items to old customers, because they were thorough professionals.

An important contextual detail was that all of them had more incentive pay tied to generating margin dollars from their assigned accounts than they had in growing operating profit faster than inventory and receivable investments. (All of our operations managers had key account responsibility and incentives in those days; the buyers were on salary and very defensive about the new "cash traps" in inventory metrics.)

But, there were about 3 managers out of 20 who had both read and thought about the old to old opportunity. So, with their energy and curiosity, we started to "push the wheel of learning", improve inventory performance reports, pioneer new, total-team, account cracking solutions for both best old and target accounts, etc. As we "failed forward" towards achieving new levels of operational excellence, I reported the progress along with new monthly division metrics to the rest of the management team.

Other enabling changes were made that helped to reshape management perceptions and actions:

  • Management incentive plans were re-weighted at year-end to favor improving pre-tax return on controllable assets.
  • All new stocked items were coded and tracked and were also assigned a "product manager". If a new product couldnít find a "product manager" volunteer, then it wasnít put in stock.
  • Old and new non-moving inventory was written down and eventually disposed of on a much faster, systematic basis that regularly effected year-end bonuses. (New product investment rates plunged compared to previous years.)
  • New inventory performance numbers were generated so that all locations could be compared on a monthly basis. The numbers included: percent of inventory dollars tied up in: a) excess stock, b) dead and c) new for stock in the last 12 months trailing. This sparked a wave of first remedial improvement programs and then preventative programs to reduce all three categories by over 30% of average inventory investment while fill-rates actually improved.



Exhibit 26 at www.merrifield.com