I went to Jean and asked the same questions.Her vision was to have each guest be completely pleased with the cleanliness of the room and to have the room in perfect shape when guests arrived. I asked how she felt about Maintenance. She said that Marty really didn’t care about her or Housekeeping: from his perspective, they were there  to fix things and she was there to clean up after them. “That really annoys me,” she said, “because we are not here to clean up after Maintenance.We’re here to ensure the comfort of our guests and make sure their rooms are cleaned. The engineers are supposed to clean up after themselves—and they’ve been told that a hundred times. They just don’t care. And they know if they leave a mess, it reflects on Housekeeping, not them.” I then asked her about the scheduling of the rooms for cleaning and the housekeepers.

She provided me with all the details of the tasks.  After my discussions with Marty and Jean, I began to understand that they really had more in common than they thought. So I invited them both back to a meeting. At the meeting I showed and explained to them the Partnership Continuum model and asked if they were interested in working through the model together. They both agreed. So I asked each of them to share their personal vision with the other. After they did so, I asked them to come up with a shared vision they could both agree on. Since they had so much in common, it was easy for them to do. The shared vision they agreed on was this: Each guest would have a clean room in which everything worked properly.

Understanding where risks lie and what needs to be done to reduce risk is an important part of the process of financial decision-making. For example, you need to know not only where the break-even point is, but also how and when it will be reached.

Reducing business risks

Reducing the risk inherent in business decisions is rarely a linear process. Instead, it is best achieved by applying principles and techniques appropriate to the specific situation and risk. Several of these techniques are outlined below.

Decide the discount factor: the percentage that will be deducted from each year’s cash flow. Determining this is central to the whole exercise. A higher discount factor will generate a lower overall valuation. Typically, two things influence the level of the discount factor. The first is the level of business risk. If the risk is high (and the investment is unlikely to meet its projections), the discount factor should also be high. Second, there is often a compromise between the cost of borrowed money (such as 5% interest) and the return expected by the investors (for example, 15%); in this case, the discount factor would be 10%. It may be desirable to select a range of discount factors, providing optimistic, realistic and worst-case scenarios.

Apply the discount factor to the net cash flow for each year of the projection and to the terminal value. The figures resulting from these calculations are the present value contribution of each year’s future cash flow; adding these values provides a total estimate for the value of the investment.