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CRIISSP: The Lean Route to a Superior Stock Market Valuation

by Cliff Ransom
December 1, 2020

CRIISSP: The Lean Route to a Superior Stock Market Valuation

by Cliff Ransom
December 1, 2020 | Comments (6)

                                                                   What is essential is invisible to the naked eye.

                                                                                --Antoine Saint-Exupery, The Little Prince

The institutional money management clients of Ransom Research, Inc., an independent equity research firm, believe that companies involved deeply with lean thinking make great investments. My role centers on identifying cultures rooted in the philosophy, tools, and repeatable practices and behaviors of enterprises dedicated to overarching lean principles such as respect for the individual, continuous improvement, and the voice of the customer. To support that goal, I have postulated a set of essential qualities that reveal an organization’s lean mastery and serve as key performance indicators of the ability of any enterprise to produce superior results over time.

These metrics are linked to my oft-repeated mantra, “Buy Cultures, Not Stocks.” Investing remains a black art driven by both financial and non-financial measures, and a central challenge is the identification of public companies which comprehend the need to pursue non-financial metrics.

I believe that most business enterprises focus on inappropriate measures. Wall Street values EPS, return on sales, and return on invested capital, but I consider these historical metrics to constitute “inward-looking” tallies. They reflect what is good for the corporation and its shareholders, not necessarily what is good for employees or customers.

CRIISSP represents a set of essential qualities that reveal an organization’s lean mastery and serve as key performance indicators of the ability of any enterprise to produce superior results over time.My paramount metrics are the ones which I call “outward-looking” metrics: Safety, Employee Engagement, Quality, Delivery, Innovation, Shared Productivity, and Cost. These measurements anticipate products or services which create the most value to customers and end-users. These metrics are the precursors to EPS, Free Cash Flow, Return on Equity, or Return on Invested Capital. In my experience, such goals can never be sustained with traditional top-down organizational structures, but must emerge from a fully-realized lean culture. I stress the word, “sustained,” because it becomes a key consideration in my CRIISSP acronym, which we pronounce, “crisp.”

I developed that acronym after more than 30 years of analyzing the performance of publicly held companies with an espoused commitment to lean (or some variation of it): meaning Consistent, Repeatable, Improvable, Integratable, Scalable, Sustainable, and Predictable processes. These letters define a cumulative and compounding set of processes that describe how Wall Street comes to believe that the entity is on a path to present a CRIISSP profile which deserves a relatively-high valuation in terms of a price-earnings or EBITDA ratio.

Investors understand that even the most innovative management teams and the deepest cultures must sustain results to satisfy my handy-dandy CRIISSPacronym. For the purposes of discussion, assume that the average Price/Earnings multiple for the market, over a very long span of time, is roughly 15 times. My shorthand word, CRIISSP, suggests the phases of investor confidence which must be demonstrated to gain a multiple that exceeds that benchmark. Over time, often a period of 5 to 10 years, lean adopters can gain 1.0 to 1.5 multiple points on relative valuation as they demonstrate each letter of the CRIISSP characterization.

I make no pretense of suggesting that these seven-layered observations are scientific, but they do pertain with respect to valuation.

CRIISSP

Consistent The investment world rewards entities which deliver consistent results. Consistency is also the easiest metric to assess, since it is largely time-based. The longer the span of positive attainments, the higher the probability that the shares will be accorded the first level of valuation increment. Please note that “positive attainments” can mean many things: profitability and profits, free cash flow in excess of net income, inventory turns, 100% quality, 100% complete and on-time delivery to customer requests, and workman’s compensation recordables at zero (and zero, by the way, is the only goal for a lean thinker).

Repeatable The sense of the word repeatable addresses both investor perceptions and enterprise prowess. Woven throughout CRIISSP is the lean concept of kata, or the repetitive practice of specific activities, for instance, in martial arts. I also use repeatable to reflect an inflection point that undercuts any sense of randomness. When “consistent” blends into “repeatable,” the melding warrants a minimum of two extra multiple points on valuation. Lean champions acknowledge the need to adjust practices to fit local or regional conditions, but the cultural aspects of lean thinking must be, in a word I learned from Danaher, “non-negotiable.”

Improvable This word refers to the use of lean thinking to improve lean thinking, which, to me, is a preeminent objective of lean thinking. Improvable also connotes the presence of both the process that delivers such improvement and the cultural commitment to perpetual and continuous improvement. Each condition must be present to validate improvability. Ill-informed observers of lean bloviate that the goals of lean center on cost-cutting and headcount reductions, which I believe are about the seventh and eighth reasons (if that!) to adopt lean thinking. To me, lean thinking frames the preferred methods to engage employees, build customer intimacy, fund growth/avoid capital, sustain and improve culture, and enhance valuation.

Integratable I rely on an ersatz word, integratable (as used in a non-mathematical or non-software sense), to stress thatLean thinking frames the preferred methods to engage employees, build customer intimacy, fund growth/avoid capital, sustain and improve culture, and enhance valuation. business practices, behaviors, and processes must migrate across an enterprise in the finest application of yokoten, or the horizontal sharing of best practices. The goal should be universality, from the C Suite to the factory floor and into every element of what I call the Transactional world, including “Carpetland.” It extends backward to planning and the supply chain, and it extends well into the aftermarket, and beyond, All divisions and all aspects of management must abide by the same principles. I refer to Integratable most often when alluding to that rarest of corporate transformation skill sets, the ability to make acquisitions and add value. In my experience, most M&A activity destroys shareholder value.

Scalable is “Integratable” on steroids. Scalability speaks to the ease by which one can achieve 100% coverage across an enterprise, to rapid deployment and programmed execution. Very often, scalability pivots on a playbook, a template which is followed with religious fervor. At Danaher, Fortive, and other Danaher spinoffs, these codified yet ever-changing bodies of knowledge are called “Business Systems.” At Toyota and Manitowoc, internal practitioners speak of “The Way.” As an investor, I will insist that I see playbooks which are clear, concise, consistent, codified, and central to operations at every levels of the enterprise. I added this second “S” to the CRIISSP acronym only recently because, after 27 years, I finally appreciated the power of a well-articulated reservoir of knowledge. Cutting across every letter of the acronym, but pertaining most specifically to scalability, is the number one “tool” of lean thinking, Hoshin Kanri, a strategic planning methodology. As I am fond of saying: “Hoshin Kanri is where no one starts, but where all the best wind up.”

Sustainability Lean super-achievers focus on sustainability, striving beyond the creation of lean practices and evolving to continuous improvement into perpetuity. The primary cause of death for the large number of failed lean implementations which litter the landscape is, in my experience, the inability to sustain lean thinking. In my blacker moods, I suggest that more lean efforts fail than succeed. I ask senior managers: “Please do not even start your lean journey if you are not serious about never stopping.” When process transformation becomes so ingrained that investors accept it as a reality, valuation starts to move into a highly differentiated zone.

Predictable When the first six augmenters of valuation come sequentially into play, the ne plus ultra is the concept of predictable corporate outcomes. Predictability provides a final burst of energy to the price/earnings multiple: when investors finally come to accept that the process is deliberate. I suggest that investors need not articulate the concept of predictability; a semi-subconscious attribute may be sufficient. In the final analysis, the art of stock picking relies on many intangibles, but when investors believe in the combination of the first six factors, predictability is validated.

CRIISSP is all about the degree of confidence of investors, and such confidence is what drives long-term discount rates. It is my contention that the best outcome for investors is that confluence of rising earnings and rising valuation. Indeed, I would argue that achieving and preserving a premium valuation is the highest accolade that a public company can garner. There is nothing about a high multiple that investors should dislike.

Lean thinking must not be viewed as a static system. Investors must realize its status as ever-evolving, in keeping with the concept of Continuous Improvement. CRIISSP represents the best template I have for tracking that which is essential. I just wish that I could find additional good examples. Please call me if you have a candidate!

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6 Comments | Post a Comment
Orry Fiume December 02, 2020
2 People AGREE with this comment

Cliff Ransom is the only investment analysist that I know of that understands Lean.  Since his early experience of being one of the few analysist that followed Danaher from the beginning of its Lean Transformation and actually participating in Kaizen events, Cliff has learned, hands on, the power of a Lean Strategy to create values for customers, and ultimately stakeholders, including shareholders.  When he visits companies, he first goes to the gemba, rather than a conference room like other investment analysist, to see if management’s words are reflected in the reality of their company’s value creating activities. 

At the end of the module on Performance Measurement during my workshops I end with this quote:

     Not everything that can be counted counts

     Not everything that counts can be counted

Cliff’s CRIISSP criteria for assessing companies’ Lean efforts is the embodiment of that quote.  Most investment analysist focus on the things that are easy to measure…with some of them not particularly important.  Cliff doesn’t ignore those traditional metrics, but puts greater emphasis on those attributes that are, at best, difficult to “count”…and others neigh impossible.  As a poet once said “I can’t define beauty, but I know it when I see it.”  In the end, it is the combined attributes of CRIISSP that lead to superior results for all stakeholders.

 

 

 

 

 



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Christopher Mecray December 03, 2020

Great article Cliff!



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Tim Dunn December 03, 2020

Cliff, as always, you add great insights that matter!



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Allan R Coletta December 04, 2020

Cliff Ransom’s CRIISSP model provides a unique scorecard to assess how any lean system is functioning across the enterprise.  He offers a perspective rarely attained based on his many years associated with studying and shaping companies endeavoring to undertake the lean journey. I hope this article becomes the basis for a more expansive exploration of the topic by Cliff sometime in the future. 



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art byrne December 04, 2020
3 People AGREE with this comment

Cliff, great article as always. As Orry Fiume points out Cliff is one of the few, probably the only, investment analysts who really understands lean as a strategic way to run a business and not just some cost reduction program. His seven CRIISSP points are an excellent way to help investors understand what type of behaviors will lead to long term above average results. I had to laught when reading his Sustainable point where he says, "Please don't even start your lean journey if you are not serious about never stopping." In my experience, when a CEO tells his management team, "Ok, we are going to start on a "continuous improvement program," the first response is usually along the lines of, "Gee boss, that's great, but when do you think we'll be done?" Poof, that didn't last long. or conversley, when trying to talk a CEO into starting lean I often get the response, "Wow Art that sounds great but we are so busy right now we can't do it. Maybe later." My response of course is "you mean your too busy to get better?" Stay away from companies that think like this and follow Cliff's advice. You may get rich.



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Steven Winoker January 03, 2021

Cliff,

Spot on as usual. Appreciate the clear and CRIISSP thinking.

Steve



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