Fatal Mistakes of Cutting Your Price

Everyone has had the experience of wanted a job so badly that they make the most elementary of mistakes. This is, in part, what keeps management consultants in business. I just experienced this first-hand and it moved me to write this post. (I won’t disclose the contractor). They had sent out a bid for some home plumbing work. The bid was over $750 which was significantly more than I had expected. When they followed up I told them that their bid seemed out of my price range. Then came their error–they quickly responded, “What if I can get it down below $600? I am playing with the numbers and I can shave off some of the time. I always figure extra time in for the “uh-oh” type moments.” Really–that is what they replied. So I guess they just were going to screw me with the original bid! I will NEVER use them again for anything.

So what do you do when you want a job and price seems the issue? Rule #1: NEVER LOWER YOUR PRICE WITHOUT TAKING SOMETHING OFF THE TABLE! Doing so simply makes you a whore. His mistake came up front–his bid should have clearly stated the scope of work. Then he could have lowered his price by “taking something off the table.” For example: the bid includes a 5-year warranty of the parts and labor. He could justify lowering the price by telling me that if he took the warranty down to 90-days the price would be less. That maintains the integrity of his first bid (and of his company!) Rule #2: See Rule #1. You cannot just dicker price with a client and maintain your integrity. If one time McDonalds allowed you to get a Big Mac for 50 cents all you would feel is ripped off for every other Big Mac you have ever (or will ever) bought.

In this case, if he really wanted (needed) the job and since he didn’t have a “fall back” he should have said, “I don’t know if we bid your job properly–let me take another look at different ways we could do it and see if there is a less expensive option.”

To get a review by The Fremont Group and see if there are ways that working with a small business management consultant could make you more money give us a call! 303 338 9300

The Cost of Not Seeking Help

On TFG’s Linkedin page, we recently commented on a kickstarter campaign which crashed and burned violently. Worst of all, the project could easily have been a success if only a few key actions had been taken.
Summary: The project was an affordable espresso machine for the home market. Founders just wanted to crowd fund a small production run of 50 units to be made by hand. In pricing the product, the founders discounted their labor to zero. When posting their project, they did not restrict the number of units which could be ordered. In the end, they found themselves on the hook for producing 2000 units. The project collapsed because the cost of creating and perfecting a factory production process was too high. No units were ever shipped.
Their key failing was not seeking advice on their plan from trusted advisors. At the outset, it would be easy to see the project could easily spiral out of control if demand exceeded the 50 units which could be produced. Thus exposing the project’s weaknesses before anything negative happened.
No matter how long you’ve been in business, there’s no excuse for this type of oversight. If you want an honest assessment of your business or strategy, schedule a free webinar with TFG. We’d love the opportunity to earn your trust.

Case Study–Expenses Out of Control

 

Client

$4 million construction firm specializing in hospital work; 35 employees

Issue

Expenses varied tremendously from month to month with no clear controls.

Consulting Actions

Owner identified 3 line item expenses and created a “target” number for each. Appropriate department head was made responsible for the result and incentified to beat it. Daily or weekly report was generated by department head and submitted to owner.

Client Benefits

Responsibility was effectively delegated to a key person for the expense; the required result was identified, the intermediate results were monitored, owner maintained comfort level of control yet authority to act was delegated. Each department head received bonus for exceeding target, profitability improved, and the program was expanded.

The Fremont Group, a non-profit organization, can be contacted regarding their work with this company.

CASE STUDY: MANAGEMENT BY COMMITTEE

Consulting firms who want to post a case study must complete on of our two standardized forms dependent upon whether or not the client has waived confidentiality.  Contact us at 303 338 9300 or by email at admin@tfginfo.org to post your case study.  Use the same format to contact this consulting firm about similar issues.

The Fremont Group works extensively with franchise owners.  In a recent engagement they encountered a franchisee who, despite being in the franchise’s top quarter of producers, had been losing money for the past year.  The initial assessment showed that morale among employees was very low; theft had occurred but not acted upon; their volume had significantly fallen off after their purchase one year prior; and three of the four owners had very little confidence in the fourth who handled the daily operations.

The Fremont Group immediately implemented actions to improve morale and terminate the employee who had been stealing.  Communications were significantly improved and employees were given a daily “focus point” for their work.  A monthly meeting was implemented to reward good performance and to obtain their “buy in” to improvement.  The managing partner was evaluated and found to be competent but not a strong “leader” in part because of his age and also due to the family situation that he faced on his board.  The company had no real concept of how their financial statements worked so sessions were done to teach them what they mean and to create key profit variables that they would track in a flash report.  This was implemented but two larger problems emerged: (1) the four owners were all family members and had a very difficult time putting aside their “baggage”; and (2) the accounting upon which the flash reports were based was extremely inaccurate.

Counseling the owners improved their ability to function.  They communicated better and were able to put aside some of the family issues.  Unfortunately, the partner responsible for accounting (also the daughter of one owner, sister of another, and sister-in-law of the managing partner), simply was not capable of producing accurate statements.  Both the managing partner and the accounting partner were being paid in excess of what the company could pay to have their services performed by third-parties—but this was in part why the four of them bought the business to begin with!

Recommendation:  Significantly cut the hours of the managing partner, pay him hourly, and have him complete the essential functions that the current employees could not perform.  Terminate the services of the accounting partner and contract for them at market.  These actions will reduce the overhead of the company to a level where profitability can be achieved.  All four partners must then cooperate to implement a marketing plan.

POST YOUR COMMENTS

Small Business Issues–How do you prepare employees to be owners?

The Fremont Group is engaged with a landscape contracting firm.  The owner of 20 years is approaching retirement.  He is a “type A” who has run the company without delegating any real authority to any of his employees.  He has 3 competent employees to whom he wants to sell the business but they are totally inexperienced.  One is his best field worker; the other two have worked the field and do most of the sales.  Of them one is more office orientated but has never had responsibility for the books and both have always relied upon the owner who would have final say regarding bidding.

Let us know what you think should be done to prepare these 3 for ownership.  (It is always permissible to assume some of your own facts in order to make your points!)

Taking your construction business to the next level

This article is from Business Owner Magazine published by the management consulting firm, Global Resources.

From Entrepreneur To CEO

By Joe Polizzotti on Oct 25, 2011

It takes a certain type of mindset to lead a construction company to success.

Most construction company owners started out working for someone else, became experts at a technical skill and then decided to go into business for themselves. Their desire for independence is rarely motivated by money. Rather they are entrepreneurs who want to steer their own ship and control their own destiny. But while an entrepreneurial mindset is necessary to get a company off the ground, it’s not enough to run a successful construction business.

The entrepreneurial mindset is one of “Yes, I can.” Entrepreneurs don’t believe they can fail and see every problem as an opportunity to be conquered. They have a vision and a powerful drive to achieve it. That’s why entrepreneurs are good at conceiving and starting businesses.

But once the business gets off the ground and starts to grow, the owner has to evolve from entrepreneur to CEO. Vision and drive are still important, but operating a successful business requires a whole new skill set. In fact, entrepreneurs don’t usually make good business managers because they would rather look for new opportunities and develop new ideas. They are bored by dayto- day management chores and don’t have the patience to develop and study operational reports.

Entrepreneurs who fail to evolve into CEOs as their companies grow tend to become “worker bees,” so stressed by putting out the day-to-day fires of the business that they forget why they went into business for themselves. They wanted to be their own boss, work less and spend more time with their family. Instead, they end up as captive slaves, working in the bowels of the ship, six or seven days per week.

Another contributing factor to this trap is that entrepreneurially minded, highly skilled business owners tend to be perfectionists. Believing they are the only ones who can do anything right, they see no need to hire a good leadership team that can share the management burden. Furthermore, with a “superman” or a “superwoman” taskmaster at the helm, employees never learn to make their own decisions because they expect to be overruled if they try. They defer to the owner for every little matter, which robs him or her of the time that should be spent focusing on the big picture.

As a result, employees don’t grow professionally and cannot contribute to make the business profitable.

To avoid this vicious cycle, here are four key steps entrepreneurs need to take to become CEOs:

  1. Change the mindset from worker-bee to CEO. Owners are, by nature, “doers” who feel worthy when they are “doing something.” The problem is they may be simply spinning their wheels.
  2. Create a business plan and stick to it. Focus on executing strategies with the big picture in mind.
  3. Hire or develop an effective leadership team. This includes defining the leadership team’s roles (including the owner’s own roles) and holding everyone accountable for results.
  4. Develop minimum standards for employees. Require key people to hold employees accountable for results, not for just putting in time. Without minimum standards, employees will set their own, which are probably not going to be in line with the owner’s standards.

With these components in place, the business will become profitable; the owner can focus on leading, rather then working and will have time to spend with family. Employees also will be more productive and engaged because they know they are part of the solution, not the problem.

Tools for Profit
Let’s look at some of these factors in more detail at an actual business: Onslow Stoneworks Inc. in Swansboro, N.C., which imports, fabricates and installs marbles and granites. For owners and President Mike Schott, working with stone and granite is a family tradition, going back to ancestors who came from Italy and owned granite quarries in northern New Jersey. Last year, revenues were just $1.5 million, down from $3 million a few years ago. “We were suffering terribly last year from lack of business,” Schott explains. “In addition to the sharp downturn in the construction industry, a number of other stone companies had branched out and opened up, and competition was fierce.”

Schott’s greatest worry was that a large percentage of the business came from a national chain and produced very low margins. He felt very uneasy about this unprofitable work and doubted whether his business skills were sufficient to sustain the company under these conditions. With the help of an outside consultant, he took the steps necessary to turn the business around.

One measure was to adopt a format to control inventory. “We set up a square footage matrix, which, for the first time, gave us a clear understanding of what waste meant to our bottom line,” Schott says. “In the past, we used to purchase raw material and use it as needed, and although we were careful to avoid waste, we never really saw the full picture.”

Another success strategy was to reformat Quickbooks to accommodate waste, cost and job tracking. “We’ve always been good at what we do professionally, but we were not as proficient when it came to finances and tracking our true costs,” Schott says. “Now we finally have the financial reporting tools a successful business needs to have.”

Using these new tools, Schott established how much square footage the company needed to produce per day, per week and per month.

“In the past, we did not price based on square footage,” he says. “Now, our financial tools help us understand where our line in the sand is as far as profitability is concerned. We know how aggressive we need to be to obtain jobs in a very competitive market and how much we need to produce to meet our projections. Knowing what our costs and margins are makes it much easier to price, track and stay on course.”

These new insights, in turn, allowed Schott to make the low-margin work for the national chain more profitable. “Knowing how much square footage we have to install per day to make a profit led us to change how we schedule jobs,” he says. “We consolidated trips—delaying some jobs and moving others up—to achieve significant reductions in travel time. We now make money even with low margins.”

Now, Schott has peace of mind knowing that the business is profitable. “A business owner gets up in the morning for the thrill and the excitement of making money,” he says. “As a side benefit, we love what we do. The idea is to combine both to make a living.”

“In order to do that, you must be 100 percent certain what the hard costs are, and you have to have the tools to evaluate how efficient you are so you’re not relying on gut reaction, but on black and white reports,” Schott continues. “If you don’t know what your true costs are to produce your product, how could you expect to stay alive when margins are so tight these days?”

Although entrepreneurs don’t usually start a business with the sole objective of making money, the only reason for being in business is to make money. Doing so requires more than an entrepreneurial mindset. It requires an organizational structure headed by a leadership team whose roles, responsibilities and accountabilities are clearly defined, and a system that allows the company to run without the hands-on, worker-bee involvement of an owner who has to make all the decisions and is the only one who can do anything right. The owner’s job description is to ensure enough business is being generated and then manage people to perform quality, on-time work so the company can make a profit.

The four principles of running a business are: Get the job done on time or sooner, within budget or less, without rework or overtime AND with control over material costs. Those four factors guarantee success. When one or more are absent, there cannot be a consistent profit, and the firm will wither away and eventually go out of business.

Building a bottom-line successful company during a recession

(Article was edited)
“…it was Monty’s open-mindedness which was the key to his success.”

Back in 2003, business was easy for Monty Kosloski, owner of Friend’s Plumbing. The housing boom was in full swing, people were spending money freely and Monty was growing his business by double-digit percentages every year.  But instead of just letting the rising tide of the economy lift his boat, Monty had the foresight to bring in help to build a strong foundation for his business. Monty realized that for him to grow, expand and survive over the long run, he needed to put in place the methods, systems, controls and incentives that are the hallmark of a wellrun company.

Like so many neopreneurs, Monty spent more time working in the business than working on the business. While building a successful business, Monty found himself overwhelmed by all the hats that he was wearing. As the owner, he thought he should be involved in every decision and answer all his employees’ questions to keep the business running on the course he had directed for it. However, this simple management structure in which everything went through Monty left him overworked. His key employees were being under-utilized and he felt overwhelmed by the lack of structure in his business. To Monty, delegation was a foreign word from a foreign management language.

In spite of being involved in every decision, Monty knew that he was leaking profits in his plumbing business because of the lack of organization and efficiency. However, he didn’t know exactly where he was losing money or how to fix it. Just as homeowners needed a professional like Monty to fix their plumbing issues, Monty knew he needed to bring in expert to help fix his profit leaks rather than trying to fix them himself.

Monty became excited about the prospects of making more money. However, he did not fully understand how the impact of putting organization into place in his business was going to dramatically change his company for the better.  From day one, they began to change the culture of Friend’s Plumbing, and Monty was involved in every decision. In fact, his open-mindedness was the key to his success. Without Monty’s commitment to alter the way he managed his business, there would be no hope for changing the broader operations of Friend’s Plumbing with all his employees. “Once I made that decision to move forward on day one, consultants presence was an incredible lift to my people,” he said.

Immediately, they went to each individual to take some responsibilities off Monty’s back. While making the organizational changes for Friend’s Plumbing, they worked very carefully to ensure that every employee was comfortable with the changes being made. “Even though they said some of the same things I said, it made more sense [to the employees] when he said it,” Monty said. One of the effects was that everybody in the company “got more excited—the way they drove, the way dressed, they way they did everything” he continued.

“From programs on computers, cash flow, raising prices 50 cents—it was a combination of hundreds of things” that brought about the overall changes to Friend’s Plumbing, Monty said. Books were changed and new systems were put in place from cash flow to cost controls to productivity-based incentives, which could be used over and over again to ensure the modifications to the company operations became lasting. “After that first week, we changed and have never been the same since,” Monty said proudly. Moreover, it gave him the opportunity to regain control over his business, with everyone in the company pulling together as a team with a new direction.

“Probably one of the most important things they did for me was to set up a financial tracking system, which is more than just the bottom line you get from the accountant,” Monty said. “It’s a daily thing—you can’t look at just one or two factors with the economy the way it is. I now have all the tools I need as we go along.”   Monty said that a variety of new financial and operational reports that gave him the ability to manage all the critical variables necessary for his success. “I think what it allowed me to do was track, not only on a weekly basis, but also on a daily basis,” he said. “Looking back, it has allowed me to notice something on the horizon—something going to go bad.”  Monty said it was a simple formula that could be adjusted on a regular basis according to his needs—daily, weekly and monthly. Monty indicated that one of his fears about changing was the “fear of the unknown, and falling back into old habits … not anymore,” he said with confidence. “The systems keep me on track.”

To improve productivity at Friend’s Plumbing, they developed productivity-based incentive plans to generate more revenue and profits, which could then be shared with employees. “One of the things about our business is that it’s a service business where we have a lot of opportunities to sell products,” Monty said.  Monty had sold service agreements in the past, but had stopped. “Hourly wages went up; incentives and Christmas bonuses increased,” Monty said. In addition, there was money to share with the administrative staff in the office and the dispatchers. “Money does drive people,” Monty said.

In organizing his business and creating an engine for growth through productivity-based incentives, Friend’s Plumbing grew from having six to seven vans on the road to currently having 25 vehicles. Monty said the key to gaining the maximum benefit out of a consulting experience is to be open-minded. “[The business owner] must be willing to make the changes, otherwise you won’t benefit,” he said. “If you do everything, you will make more money. Your people will make more money.”  The difference in his company before and after was dramatic. “It’s the total attitude,” Monty explains. “The employees are conscientious about how they look and how they treat everyone. The incentives and spiffs [have created] a different company. Everyone is more relaxed. Managers are now empowered to do their job, and everyone accepted that. Fortunately, I had good people to fill the positions outlined.” “Now they have the authority to make decisions,” he explains. “And that’s good for me to be out of the office. I can sell more. I don’t feel I am working as hard in the business as I am working on the business.”

Learning how to transform from being one of the workers in the business to becoming the master strategist of the enterprise is one of the fundamental changes. However, the business owner has to be open-minded and willing to change and accept the new way of doing business. Additionally, as Monty’s experience has shown, the results will mean greater success for the business owner. “It works,” Monty said. “We are different. We are a lot different for the better.”

Back in 2003, Monty was not concerned about surviving. He was concerned about getting his arms around a fast growing plumbing business where he was overstressed and overworked. Unfortunately, many neopreneurs believe these factors are simply the price one has to pay when owning a business. “When they came here in 2003, it was almost easy at times,” Monty said. “But last year in 2008, we had 10 percent less sales than the year before. Yet, it was the most profitable year I ever had. That’s kind of scary. So, as I look into this year, and we actually had two very bad months—January and February were very bad—but the changes that I was able to implement by going into my cost control system, and understanding my expenses and my profit and all the things that I have in how I am going to create a bottomline successful company, I am so optimistic about this year. I think this could be possibly better than last year, and sales may go down 10 percent. But I am going to survive. That’s the key—I have the tools to make the changes.” Monty has always had all the tools he needed to fix a plumbing problem. But he didn’t have the tools he needed to run his business successfully in both good economic times and bad, nor did he know what he truly needed.

Looking back on his experience, Monty has this advice for other business owners. “Once you have made the judgment call, you realize it’s something you have to do,” he said. “If you don’t make that move now, you will regret it. They are the experts. These people have the answers. We are definitely a more controlled, structured organization, and we now have more of an insight into all of our problems. Prior to this, our employees did not present themselves correctly. The organization of this company has totally changed. Everything seems to be better when you are successful; and, in order to be successful, you have to have a good system. That’s what they did for me.” As Monty looks at his business today, succeeding in the middle of the worst economic recession since the Great Depression, he credits consultants for helping him not only survive the tough times, but also to thrive in spite of them. In a moment of sober reflection about his decision to bring in consultants to build a stronger foundation for his business when the tide was rising during the construction boom, Monty said, “I probably wouldn’t be here today if I had not brought them in.”

Management Retreats

The Fremont Group recently surveyed small business owners and found the following results: only 5% of small businesses held an annual management retreat however those companies that did listed it as one of their most beneficial activities. Small business owners with fewer than 100 employees—some with only 10—found that a properly run management retreat was a critical part of their success. They also felt that it was most important in times of difficulty (i.e. recession).

What is a management retreat? It really is as simple as taking your key employees away from the office—sometimes for only the day but more likely for two days—and, with a set agenda, involving them in the planning process of the company. For the companies that do this they get ideas and buy-in from their key people that is invaluable. The Fremont Group consultants are trained in facilitating such events. They meet with you and together determine an agenda and a budget and then are the facilitator in the meetings. They also host some part of the sessions in which you are not present. Following the retreat they assist with the follow up.

What gets done? Think of it like this—we often go to individual employees and ask them, “What could be done to help them in their job? What are their goals? How do you think you could achieve those goals?” This type of questioning often brings out key information that help you run the company. At a management retreat we are doing the same thing only doing it by department instead of by individual. When tied down the department managers almost always set the bar higher than we would have ourselves. Then we develop a plan to accomplish these goals and train them to “trickle down” the actions to the individual employees in their department. This creates a focus upon significant change and upon “their” results. A second, and equally important benefit is the elimination of communication barriers. Your key people feel more informed and empowered and therefore produce more.

Who should attend? Your management team members are your “climbers.” The management retreat is one of their ladders. Invited should be (minimally) the head of sales, operations and finance. They, together with their key people, will get out of the office and come back more focused and productive then ever.

Call the office to discuss using Fremont to facilitate your annual retreat.

June Case Study

FACTS

A second-generation business in flooring and carpet was doing quite well. They grew to a sales volume of about $20 million per year with nearly 100 employees. The brothers who operated the company are approaching retirement age, have received a good salary and have done well themselves. The company has a great reputation and very high market share—particularly in residential new construction. Unfortunately they are located in an area that has been hit extremely hard by the recession. New construction has come to a halt. Builders are not paying. Accounts receivable have skyrocketed and their volume is half what it was the year before. They have taken steps in laying people off and trying to control costs but it seems that whatever they do it isn’t enough. They expect things to turn around but it could take another year or two.

Post in the comments the recommendations that you would make for immediate, short and long-term actions.

Note—all case studies are fictional and any resemblance to an existing business is coincidence.