You really own a system

Most business owners do not know what it is that they own.  They don’t own the people—we did away with slavery; you usually don’t own the assets—the bank does.  What you really own is a system.  It is a system that converts market demand for your goods and services into cash into your account.  That system is the value of your business.  Franchises sell it—that is what you buy when you purchase a franchise—and that is where the value is.  Unfortunately most owners don’t own a business, they own a job.  The profit and cash flow is produced through their own efforts instead of through the implementation of systems, procedures and controls that produce the cash flow and profit.

In a quantitative analysis of functionality, each function of the business is defined in terms of the result that it must produce. As an organization grows, it becomes apparent that positions are developed around people, not functions. The organization must be re-examined in terms of functions. Positions must be created and defined in terms of what the “system” requires of each position not in terms of what each employee wants to do. The proper assignment of all functions will eliminate gaps and duplication. Gaps are those functions that no one in the organization presently chooses to perform. Presently these unassigned functions all fall to the owner and interfere with his ability to do his job. Duplication is when more than one person chooses to perform the same function. This is the root of “finger pointing” and is often done be employees referred to as “empire builders.” It is critical to remember that you own the business, you own the system and you, and not your employees determine which positions perform which functions. In a small business people often wear more than one hat—which is fine—what cannot happen is more than one person cannot wear the same hat. A company, which does not regularly perform this task, ends up in organizational chaos. Duplication and gaps are the leading cause of inefficiency.

A second common error is defining positions through a list of tasks. That leads to endless and fruitless reviews regarding how many of the tasks were performed and to what level they were completed.  Each function must be defined in terms of a result. It is not sufficient to merely state the tasks that you expect of each person. You must convey to them the result that you expect. Job descriptions must be written in terms of measurable results, not as a list of tasks. Results are measureable and you can’t manage anything that you can’t measure. The results for each function are determined by the results that are needed to accomplish your financial plan. When you have each position’s functions defined in terms of a measurable result you can establish accountability. You cannot have accountability without it.

Incentives now can become rational—they are bonuses paid for performance exceeding the result that you have paid them for. Cash bonuses can only be paid for results that either increase sales above the plan or reduce costs below the plan.

This is often the most important organizational exercise that a company can perform. This analysis provides a rational basis for compensation, accountability and incentives—organizational structure—and is tied to your budget. If you want a job you should get one from a reasonable boss who doesn’t work you all hours of day and night and rarely compensate you appropriately.  If you want a business you have to build it.

A systematic financial review can lead to greater profits

by Mike Rudd

There are several elements within a small business environment that should be analyzed and reviewed to establish potential profitability as compared to current performance.

Financial statement review
In a review, three to five years of financial statements should be analyzed and categorized. Compare the performance of each category within the chart of accounts over the financial review time period. Categories should include types of revenue, variable or direct costs, indirect overhead, general and administrative overhead, debt service and leases.

Break down each dollar amount into a percentage of revenue to determine operational variances within each line item. Review individual circumstances that contribute to variances and their impact on company profitability. Combine the bestperforming percentages to establish the business�s optimal financial performance.

Quantifying financial impact
The financial impact of a business owner�s management practices should be reviewed.

Accounts receivable. Lack of consistent monitoring and specific collection procedures lead to reduced cash flow, restricted access to product and increased borrowing. By reducing the accounts receivable collection cycle, a business is able to increase the amount of cash flow on an annual basis, reduce borrowing and increase profitability.

Inventory analysis. In the case of a stocking distribution company, inventory is one of the single largest assets it has. The management of this asset plays a significant role in the success or failure of the business. Excess inventory on hand reduces profitability due to handling costs, breakage, shrinkage, reduced cash flow and increased borrowing.

Sales and margin mix. The gross margin mix of the individual revenue categories determines the overall margin available to the business for indirect overhead, administrative overhead and profit. If the product revenue mix is skewed toward low margin products or services, then the revenue stream will not compensate for reduced margins. Increased sales could actually lead to decreased profitability.

Break-even pricing. Break-even is the point of revenue generation that has covered the associated variable costs and produced enough gross margin to cover the company�s indirect and administrative overhead. Utilize break-even pricing to understand and create a pricing structure that allows for new product introduction and customer development and takes into consideration the inherent competitive advantage of additional gross margin without the burden of overhead.

Labor incentives. Increase labor productivity by developing and implementing excess profit-based incentive programs, performance job descriptions and management information systems. Average employee productivity can be increased, and the reduced overtime, reduced warranty, scrap and waste expenses, and additional capacity will increase profitability.

Reducing variable or direct costs. A business can reduce material costs by negotiating better terms or pricing, consolidating purchases, utilizing buying groups, committing to one supplier for annual purchases and reducing theft, waste and warranty work.

Benchmarking
Review the performance gaps between your business and peers within the industry. Identify gaps in profitability, productivity, costs and financial ratios. That information should be combined with the problem costs associated with the lack of appropriate and consistent systems and controls, in addition to procedures that must be embraced and implemented to achieve desired company profitability.

Each business is unique and should take into account special considerations when establishing its viability.

Clients of The Fremont Group—and particularly those of Team Fremont—do a monthly financial review with our affiliate and find this one of the most critical, long-term benefits of our work.

Accountability

The vast majority of business owners are quick to tell us that they want to “hold their employees accountable.”  “No one is accountable here.  They aren’t held accountable.  Yada yada yada”  However when you ask them what it means to hold them accountable invariably their responses tend towards wanting to punish them.  Accountability is a huge issue among employees—the reason being the owner himself doesn’t understand what it means.

The root of the word accountability is account—account as in your accounting and as in numbers.  Accountability therefore requires numbers—a measurement.  This measurement is generally omitted from the employee’s job description—if they have one at all.  So let’s begin with the job description.  A job description must convey to the employee the results that the employee must produce.  When a job description consists of only a list of tasks, you might have a training manual but you do not have an effective job description.  When an employee is given only a list of tasks you will always lose the argument—“Why isn’t this done?” “Because I did this this and this instead.” “But that’s not what I wanted you to do.” “But how was I supposed to know—i have all this other stuff to do.”  You lose.  Establish accountability in the job description by defining the result that was supposed to be produced rather than just things you want them to do.  Each job description must include the tasks you want performed AND the results that are supposed to be produced from each task.  Preferably they are also prioritized—what may be common sense to you may not be common sense to them—in the job description you codify common sense.

When the result is defined it must be measureable and it must be understood.  A result that is missing either lacks the agreement between the parties as to what result is expected and whether or not it has been produced.  So even if your employee (or yourself) are afraid of “accounting” the “accounting” has to be put back into “accountability.’

The second issue that must be overcome is the natural tendency towards NIMBY—not in my back yard.  Accountability sounds good for others but what about the owner?  You cannot hold people accountable until you hold yourself accountable.  In a broad sense the owner is accountable for owner is accountable for three things—the gross profit percentage; the overhead percentage and driving sales above break even and to the desired level.  If you aren’t doing your job it is hard to expect that of others.  You can delegate responsibilities within those categories but you cannot delegate the accountability for the result.  The buck stops here.

The third issue that must be addressed in developing accountability is the issue of incentives.  Accountability and incentives are a ying and yang.  You cannot have one without the other.  The days of management by intimidation are over.  Defining results for accountability purposes also creates results upon which to create incentives.  The result identified in your job description is the amount of results that you are already paying for—you have an “agreement” (though the job description) with your employees that they will deliver to you x results and in exchange you will deliver to them y compensation.  If they deliver less than x results you hold them accountable; if they deliver more than x results you have a reward in the form of incentives (and therefore encouragement to produce beyond their prescribed result).

So when you as an owner are frustrated that employees are not being held accountable; blame yourself for not doing the groundwork that creates a system of incentives and accountability that would do so.

WHY YOUR COMPANY IS OUT OF ALIGNMENT AND WHAT TO DO ABOUT IT

Focus is the alignment of the value center of ownership with the company’s management, employees, vendors and customers.

The owner just can’t figure out why his employees lack “common sense.” Management is excited—they have created a process of measuring and monitoring an activity yet even after it is implemented, the bottom line of the company drops. Employees are frustrated because they have to face customers who have been treated poorly. These all can be symptoms of a disease we at The Fremont Group call “alignment disorder.”

When your tires are out of alignment it costs you money and endangers your life. Your tires wear unevenly and have to be replaced prematurely. Your control of the car while breaking is compromised putting you and your family in danger. Worst of all, when you really accelerate your steering wheel shakes and you con lose control causing a major accident. The same thing happens when the interests of your employees are not aligned with the interests of the company. When it is in an employee’s best personal interest to take an action that is not in the best interests of the company you have an alignment disorder.

Alignment disorder is when an employee can make more money by working slower and accumulating overtime pay rather than getting the job done efficiently or when it is more important not being blamed for a problem than fixing it. A sales person lying to a customer to get a sale; employees leaving at 5:00 with a project a half-hour from finishing; or the raise given to the one who complains the loudest are all examples of alignment disorder. Bringing a company into alignment first requires that you clearly identify what the company is trying to accomplish. Alignment disorder is often a symptom of an owner who has not clearly communicated to his or her employees what is really important—or a company that says one thing but practices another. Of course once this mission is clearly stated and communicated, systems, procedures and controls must also be introduced which incentify the positive behavior and punish behavior not in conformance with the corporate objective.

What truly is important to you and your company? Money is obvious. If we don’t make a minimum, mandatory profit any other altruistic ideals you might have cannot be achieved. Although it is possible to forget that we need to earn a profit, our work at The Fremont Group rarely encounters this omission. (Possibly because companies that ignore profit are not in business long enough to become our clients!) It is much more common for us to encounter companies that have lost their “value center.”

There is only one reason for your business to exist—to make your life better. We preach this as the “First Commandment.” The obligation of your business is to make the life of the owner better. The things that are making your life better should be identified and built upon; the things that are making your life worse should be identified and eliminated. If however you do not clearly identify your “value center” as making your life better, you will miss a significant portion of this axiom. Everyone has a value center beyond just earning the maximum profit possible. If we did not we would make all “cost-benefit” decisions resulting in acting upon anything that would save the company a nickel regardless of the human consequences. Joe would be fired after he got old or hurt because he could be replaced cheaper. Agreements would be breached if it would save money. Customers would be provided cheaper goods if we could “get away with it.” Few owners (and none of our clients) would totally agree with this approach. There is a “higher agenda” for almost all of us. The litmus test of your value center is easily determined. Take a sheet of paper, as much time as it takes and write out your epitah—how do you want you and your company to be remembered after you are gone? Profit will be included but list at least five additional values that you want you and your company to be remembered for. When you finish you have defined the value center of your company. This now must be transmitted to your organization.

The transmittal of your value center to your organization is required to create alignment and focus. When your employees clearly understand your value center and are incentified to act in accordance with it they suddenly acquire “common sense.” This transmittal is an on-going process. It starts with the hiring process, continues in specific training, is reflected in your incentive plan and most of all is observed by all in the actions of the owner. Just as the parent who tries to teach his children not to lie as they call in sick to work to go skiing, the example of the owner is more important than the rhetoric. When the value center is defined the owner must be sure that they are identifying values that they are prepared to live by themselves.

During the 1990’s many consulting firms made money by convincing businesses that they needed to write a “mission statement.” Had it been done effectively much of the company’s value center would already have been identified. As Steven Covey wrote in The Seven Habits of Successful People (and many others have paraphrased) it is important to “start at the finish.” Most mission statements are either “forward-looking” or current attempts to define the mission of the business. We have already defined that the reason that every business exists is to make the life of the owner better but what is the purpose of the business? What are the things other than money that really will make the life of the owner better by fulfilling their true objectives? This is the value center.

It was also common for companies to create mission statements by committee. Bring in your management team, have them work with a consultant for a day (or more) and come out of the room with a well-written mission statement. Put this mission statement on the wall in the lobby and go about your business. This approach is an abdication of the leadership function of the owner. The troops look to the general for leadership. They expect the general to have a plan—a clear vision of what is going to be done. Then they expect to be informed as to what their role is in this plan. They don’t want to hear the general be “wishy-washy” about the plan and ask them what they want the plan to be. The common element of all leaders is they have a plan; they clearly communicate their vision or plan to their subordinates; and they act decisively upon that plan.[1] It is therefore the leadership responsibility to clearly define the purpose of the company. This is not a group activity—this is a look into the heart of the leader. If the owner does not do so, the company can never have the focus required to be successful without relying upon luck. Time spent by an owner identifying their value center is akin to time spent planning a project—every hour spent in planning saves two on the job.

A clearly defined value center creates in an organization a new definition of “success.” Most of us are not trying to be just the company who makes the most money; most of us have some values that must be complied with in making that money. As an owner we must accept a new definition of success that complies with these values. The attainment of this newly defined success brings about real fulfillment. To be accomplished we must train our people in its meaning and we must at all times demonstrate to the organization the priority of these statements through our daily actions.

In order to transmit your values to employees you not only need to live these values but you must also train your employees in them and incentify them to act upon them. If it is in their financial interest to make a sale using methods outside of your value center you have a structural issue. If they simply don’t understand how they should prioritize competing interests you have a training issue. The mere demonstration that you are willing to invest in training employees regarding these values makes a huge impact upon the organization. It is easy to say “do what is right” but when the company “puts money where their mouth is” the impact is undeniable. That impact brings your employees into alignment with your value center. It creates a focus within the organization. It puts everyone “on the same page.” It makes you more money and it brings about a fulfillment that transcends your bank account. It makes you successful.


[1] We need look no further than the Katrina disaster in New Orleans to see an example of poor leadership. There was no plan, there was no communication of the plan and no decisive action. A strong leader would have immediately appointed a single individual to act in accordance with the values that had been instilled in them decisively pulling together all of the available assets of this country. There would have been second guessing but a strong leader accepts second guessing. Six months later instead of trying to explain and avoid blame lives and a city would have been saved.

Have We Forgotten Profit?

Traditionally when someone started a business they struggled. If they were lucky (and good) they achieved enough results to stay in business for awhile and eventually to prosper. For those companies that reached this stage they then commenced upon the tried and true strategy to acquire wealth for themselves and for their children who were being groomed to succeed them. They made sure that they made an adequate profit; that they maintained strong, positive cash flow; and they plowed those funds back into the business–for expansion of inventory, purchase of long-term assets or merely into additional retained cash. This made complete sense because their objective was to build something that would survive beyond themselves. The result of this focus was the development of thousands of strong, small businesses—the backbone of the economy.

Fast forward to the new century. We had just completed an economic boom that was unprecedented in the history of our company. Fortunes were made but those fortunes were concentrated in the financial sector of the economy. The new mantra for the entrepreneur (they are no longer small business owners) is let’s get our idea to market first; let’s create a marketing plan; and let’s sell (or do an IPO) as soon as possible so we can get rich quick. This was fueled by thousands of persons who were able to do just that—but they weren’t plumbers. Such opportunities for wealth are either inherited or emerge from changing technology. Unless you are in a position to benefit from changing technology (or an obscenely rich relative dies) this plan won’t work. Most of today’s young small-business owners are trying to shove a square peg through a round hole.

Our advice to anyone starting a company is to forget the idea of selling out and getting rich—statistically it is almost impossible. You would be just as well off buying lottery tickets and we all know the expression, “if you business plan includes winning the lottery you need a new business plan.” Unfortunately the get rich quick mantra has created a generation of owners who do not really know how to make a profit! Amazon didn’t have to, why do we? Because you aren’t Amazon!

How sad it is that of the last 100 small businesses I have been in fewer than five had a functional budget designed to produce a desired pre-determined profit. How sad it is that most of them didn’t even have a budget! How sad it is that I am yet (in over 4,000 small business analysis) to come across a company with a rational, excess-profit based incentive program for employees. How sad it is that these same owners have no clue as to how they can even hold their people accountable! The Fremont Group examines these and other basic business concepts in our Minding My Own Business Workshops. If you can’t attend—buy the book. And then refocus our efforts in the next year to acquiring wealth by earning a profit rather than from winning the lottery.

Delegation

Delegation is a learned technique. In order to effectively delegate a task there are a number of steps that must be taken. Stephen Covey refers to the delegation process as, “Creating Win-Win Stewardship Agreements”[1] First the task must be clearly defined—specify the desired results. It is vital that the desired results are results, not methods. Often times the task looks different in the eyes of the two parties. In order to accomplish a meeting of the minds you must define the task in terms of results. The result is what is critical and is what must be clearly defined. The definition must include measurement—how will be determine if the results have been achieved? The person must not only understand how the result is being measured, they must also understand and agree as to how the result is being measured. Once the desired result is agreed upon, the parties then agree upon how the result should be achieved—the steps that must be taken and guidelines must be set. Within those guidelines is the level of authority that the person has. There are six levels of authority—(1) wait until told; (2) ask; (3) Recommend; (4) Act and report immediately; (5) Act and report periodically; and (6) Act on own.[2] This defines the level of authority that has been delegated. These levels change as you gain or lose trust in the person.

The third, fourth and fifth steps identified by Covey are to identify the available resources (human, technical, financial, etc., define accountability (essential to the integrity of the delegation), and to determine the consequences—what happens if the result is or is not achieved both to the individual and the organization. Lastly, the parties must agree upon a feedback system. The person must be providing enough feedback to provide you with a comfort level of knowing that they are on track to achieve the result. The feedback can be formal (such as a report) or it may be informal (such as sticking his head in your office twice a day to let you know where he stands) but regardless it must be complied with. It is the feedback element that is most commonly ignored.

Effective delegation relieves the owner’s obligations and develops employees. “A leader is not appointed because he knows everything and can make every decision. He is appointed to bring together the knowledge that is available and then create the prerequisites for the work to be done. He creates the systems that enable him to delegate responsibility for day-to-day operations.”[3]


[1] First Things First, Stephen Covey, Simon & Schuster 1994. If you are to read one of Covey’s books, 7 Habits of Highly Successful People, is the book to read. In First Things First, Covey covers some of the same ground but gets much more technical in his analysis.

[2] Ibid.

[3] Moments of Truth, Jan Carlzon, HarperPerennial 1989

Management Techniques (Part II)

This is a follow-up to the Management Techniques post. We will walk through the five criteria.

1. Employees must understand what results are expected of them.

This is not as simple as it seems and it is the foundation that most business owners miss in trying to manage. Imagine a baseball manager having a meeting with his key player—but without statistics. “You’re not hitting well enough.” “Yes I am.” “You don’t get enough hits.” “I got two yesterday.” “You should have more home runs.” “I hit one last week.” “This has to change—we will meet again next week.” And how is that discussion going to go next week? This might sound like a common meeting of owner and employee. If you have ever told an employee that they are not doing a good job and they argue with you—you have violated this first principle. How different that conversation would be if you had statistics: “You’re being paid to hit .300 and you’re only hitting .200—what’s the problem?” “I got two yesterday.” “No, you aren’t listening—you are being paid to hit .300 but you’re only hitting .200, what’s the problem?” Silence. “You are being paid to hit 30 home runs a year buy you are on pace for only 10, what’s the problem?” “I hit one last week.” “You aren’t listening. Do you need different working conditions or more training? We’ll be glad to do whatever it takes, but what we really should be focusing on is your bonus—if you hit .333 you get another million dollars, I’ll be manager of the year, the team will win more games and the company will make more money. So what do we have to do to get you to .333? I know we can’t do it in one week but next week when we talk you need to be at .250 or we will have to bring in another player and pay them out of your salary—we don’t what that do we?”

So the first rule is to establish results for each position. Where do the results come from? If you add up all of the results of all of the employees you have what it takes to accomplish your financial plan for the company—your budget. You hold people accountable for the results that are required to meet your budget; you create incentives for results that exceed your budget and produce additional profit.

Conveying those results to the employee is the critical part. It is not enough to have the standards, they are worthless unless they are conveyed to the employee in a manner that they understand. This is where effective job descriptions come in. Employers who create job descriptions that are merely a list of tasks will fail. The list of tasks is the training manual. Real job descriptions communicate to the employee the results that you are paying them to produce. And they must understand that their base pay is contingent upon the production of those results.

Examine your organization in that context—does each employee understand that their pay is contingent upon the production of defined results?

2. Employees must understand how those results are measured.

You can’t manage it if you can’t measure it. In fact, you can’t manage people. People do whatever they want to do. What you can manage is results. And you can create an environment where people are not comfortable not producing their results and therefore they actually want to do what you want them to do. You will be unsuccessful if the measurement of an employee’s results are not: (1) done in a way that is simple enough for them to understand; and (2) done frequently enough for those results to become the focus of their day. In fact, the ideal system has the employees themselves calculating their results on a regular basis. This means that the employee must have enough information to be able to calculate their results.

3. Employees must know if their results have met the minimum level of expected performance.

An effective system causes employees to calculate their results and compare them to the standards established for their position and pay grade. This ties into a system of employee reviews. There is a collateral advantage to this. As an owner the most critical information that you need is the ‘bad news.” Good news is nice—but what is critical is that you know immediately if something is going wrong. If the employee knows that they are being held accountable for a result and sees that that result is not going to be achieved, they will let you know immediately so that they can negotiate a change in the required result. At this point you have a critical juncture. You can either treat the news as an excuse or a reason. The difference between an excuse and a reason is the excuse isn’t true. If an excuse is offered you must choose to either replace or retrain the employee. If a reason is offered you must change the standard and change your plan (budget) to accommodate the new reality. Your success is determined by the excuses that you are willing to accept.

4. The frequency that employees must report those results and be held accountable must be determined by their level of authority.

Many owners fail to distinguish between the levels of authority that they grant to an employee. The lowest level of authority it the authority to do nothing—watch. The next level of authority is the authority to recommend. The third level is the authority to act and report immediately. The fourth level is the authority to act and report periodically. The highest level of authority is the authority to act independently. Not recognizing this hierarchy is a laziness driven fault that dooms many employees to failure. It is tempting on the owner’s part to “just hire good people” and trust them to do good work. This is absolutely wrong. Every employee must progress through these stages before they can reach the top—and many never will. It is also a fluid scale. Employees can move up and down this scale regularly. Ideally their base compensation is also tied to their level of authority. You are setting up an employee for failure if you just “toss them in the water and see if they swim” and even worse you are inflicting the cost of turnover and failed results upon your business. If left undirected the employee chooses their own level of authority—do you really want the results of your business left to the chance choices of new employees?

5. There must be immediate feedback for unacceptable results with a meeting where the manager asks two questions—“Why did we fail? And what are we going to change tomorrow?”

Those two questions are the key to management. If an employee knows the results that they are required to produce; they know (and possibly even participate in the calculation of) the measurement of those results; they know if their results have met the established expectations for their position; and they are reporting those results on a regular basis there are only two relevant questions to ask—why did we fail and what are you going to do about it to change it tomorrow?

The implementation of these five principles is the cornerstone of an effective organizational structure.

Management Techniques

In order to effectively manage[1]

1. Employees must understand what results are expected of them;

2. Employees must understand how those results are measured;

3. Employees must know if their results have met the minimum level of expected performance;

4. The frequency that employees must report those results and be held accountable must be determined by their level of authority;

5. There must be immediate feedback for unacceptable results with a meeting where the manager asks two questions—“Why did we fail? And what are we going to change tomorrow?”

These five steps will be further analyzed in the next five posts.


[1] Effective management is getting a group of people to do something that they would not ordinarily do and enjoy doing it. (Paraphrased Douglas McArthur)

The Fremont Business Operating System

Attendees at a “Minding My Own Business” Workshop have been exposed to the Fremont Business Operating System.  This system is the baseline for all management consulting performed by affiliates of The Fremont Group.  It starts with a clear identification of your goals—and the goals of your spouse.  What is it that you really want from your business.  Once the reason for your business to exist is identified, a financial model of your business must be created.  What results are required in order for you to obtain your goals?  Many small business owners operate like the football coach with a game plan that reads, “if everything goes right we will only lose by a touchdown!”  That coach won’t keep his job for long and the business owner who doesn’t have a game plan designed to win the game won’t survive long either.  From the development of the financial model it can be identified (1) if the goals are obtainable; and (2) the results that must be accomplished in order to obtain the goals.  This model then becomes the cornerstone of the company.  It is the basis for organizational structure—what results are required from each position, the communication and evaluation of those results, accountability, and incentives.  It creates the profit plan and the sales plan.  It is the basis for pricing—the use of break even pricing and the establishment of pricing models.  The financial model is a road map that you modify as you make wrong turns—after all, man plans and God laughs.

Put together, FBOS is your strategic plan.  Owners who operate without it can be successful—particularly if they are lucky—but those who operate with it and diminishing their reliance upon luck.

Note–Fremont Business Operating System, FBOS and Minding My Own Business are registered trademarks of The Fremont Group

QUANTITATIVE ANALYSIS OF FUNCTIONALITY—WHO IS SUPPOSED TO DO WHAT AND WHAT RESULT DO THEY NEED TO PRODUCE?

In a quantitative analysis of functionality, each function of the business is defined in terms of the result that it must produce. As this organization has grown, it is apparent that positions were developed around people, not functions. The organization must be re-examined in terms of functions. Positions must be created and defined in terms of what the “system” requires of each position not in terms of what each employee wants to do. The proper assignment of all functions will eliminate gaps and duplication. Gaps are those functions that no one in the organization presently chooses to perform. Presently these unassigned functions all fall to the owner and interfere with his ability to do his job. Duplication is when more than one person chooses to perform the same function. This is the root of “finger pointing” and is often done be employees referred to as “empire builders.” It is critical to remember that you own the business, you own the system and you, and not your employees determine which positions perform which functions. In a small business people often wear more than one hat—which is fine—what cannot happen is more than one person cannot wear the same hat. A company, which does not regularly perform this task, ends up in organizational chaos. Duplication and gaps are the leading cause of inefficiency.

Each function is then defined in terms of a result. It is not sufficient to merely state the tasks that you expect of each person. You must convey to them the result that you expect. Job descriptions must be written in terms of measurable results, not as a list of tasks. The results for each function are determined by the results that are needed to accomplish your financial plan. When you have each position’s functions defined in terms of a measurable result you can establish accountability. You cannot have accountability without it.

Incentives now can become rational—they are bonuses paid for performance exceeding the result that you have paid them for. Cash bonuses can only be paid for results that either increase sales above the plan or reduce costs below the plan.

This is often the most important organizational exercise that a company can perform. This analysis provides a rational basis for compensation, accountability and incentives—organizational structure. This company is currently no where near able to establish systems of compensation, accountability and incentives upon a rational basis.