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.

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.

Who’s got the monkey?

AN ANALOGY THAT UNDERSCORES THE VALUE OF

ASSIGNING, DELEGATING AND CONTROLLING

William Oncken, Jr. and Donald L. Wass

In any organization, the manager’s bosses, peers and subordinates, in return for their active support, impose some requirements, just as the manager imposes some requirements upon them when they are drawing upon his or her support. These demands constitute so much of the manager’s time that successful leadership hinges on an ability to control this “monkey-on-the-back” effectively. Mr. Oncken is Chairman of the Board of The William Oncken Company of Texas, Inc., a management consulting firm. Mr. Wass is President of the company.

Why is it that managers are typically running out of time while their subordinates are typically running out of work? In this article, we shall explore the meaning of management time as it relates to the interaction between managers and their bosses, their own peers and their subordinates. Specifically, we shall deal with three different kinds of management time:

Boss-imposed time – To accomplish those activities which the boss requires and which the manager cannot disregard without direct and swift penalty.

System-imposed time –To accommodate those requests to the manager for active support from his or her peers. This assistance must also be provided lest there be penalties, though not always direct or swift.

Self-imposed time – To do those things which the manager originates or agrees to do. A certain portion of this kind of time, however, will be taken by subordinates and is called “subordinate-imposed time.” The remaining portion will be his or her own and is called “discretionary time.” Self-imposed time is not subject to penalty since neither the boss nor the system can discipline the manager for not doing what they did not know the manager had intended to do in the first place.

The management of time necessitates that management get control over the timing and content of what they do. Since what their bosses and the system impose on them is backed up by penalty, managers cannot tamper with those requirements. Thus their self-imposed time becomes their major area of concern.

The manager’s strategy is therefore to increase the “discretionary” component of their self-imposed time by minimizing or doing away with the “subordinate” component. They will then use the added increment to get better control over their boss-imposed and system-imposed activities. Most managers spend much more subordinate-imposed time than they even faintly realize. Hence we shall use a monkey-on-the-back analogy to examine how subordinate-imposed time comes into being and what the superior can do about it.

WHERE IS THE MONKEY?

Let us imagine that a manager is walking down the hall and he notices one of his subordinates, Jones, coming up the hallway. When they are abreast of one another, Jones greets the manager with “Good morning. By the way, we’ve got a problem. You see….” As Jones continues, the manager recognizes in this problem the same two characteristics common to all the problems his subordinates gratuitously bring to his attention. Namely, the manager knows (a) enough to get involved, but (b) not enough to make the on-the-spot decision expected of him. Eventually, the manager says “So glad you brought this up. I’m in a rush right now. Meanwhile, let me think about it and I’ll let you know.” Then he and Jones part company.

Let us analyze what just happened. Before the two of them met, on whose back was the “monkey”? The subordinates. After they parted, on whose back was it? The manager’s. Subordinate-imposed time begins the moment a monkey successfully executes a leap from the back of a subordinate to the back of his or her superior and does not end until the monkey is returned to its proper owner for care and feeding.

In accepting the monkey, the manager has voluntarily assumed a position subordinate to his subordinate. That is, he has allowed Jones to make him subordinate by doing two things a subordinate is generally expected to do for a boss – the manager has accepted a responsibility from his subordinate, and the manager has promised her a progress report.

The subordinate, to make sure the manager does not miss this point, will later stick her head in the manager’s office and cheerily query “How’s it coming?” (This is called “supervision.”)

Or let us imagine again, in concluding a working conference with another subordinate, Johnson, the manager’s parting words are “Fine. Send me a memo on that.”

Let us analyze this one. The monkey is now on the subordinate’s back because the next move is his, but it is poised for a leap. Watch that monkey. Johnson dutifully writes the requested memo and drops it in his out-basket. Shortly thereafter, the manager plucks it from his in-basket and reads it. Whose move is it now? The manager’s. If he does not make a move soon, he will get a follow-up memo from the subordinate (this is another form of supervision). The longer the manager delays, the more frustrated the subordinate will become (he’ll be “spinning his wheels”) and the more guilty the manager will feel (his backlog of subordinate-imposed time will be mounting).

Or suppose once again that at a meeting with a third subordinate, Smith, the manager agrees to provide all the necessary backing for a public relations proposal he has just asked Smith to develop. The manager’s parting words to her are “Just let me know how I can help.” Now let us analyze this. Here the monkey is initially on the subordinate’s back. But for how long? Smith realizes that she cannot let the manager “know” until her proposal has the manager’s approval. And from experience, she realizes that her proposal will likely be sitting in the manager’s briefcase for weeks waiting for him to eventually get to it. Who’s really got the monkey? Who will be checking up on whom? Wheel spinning and bottlenecking are on their way again.

A fourth subordinate, Reed, has just been transferred from another part of the company in order to launch and eventually manage a newly created business venture. The manager has said that they should get together soon to hammer out a set of objectives for the new job, and that “I will draw up an initial draft for discussion with you.”

Let us analyze this one too. The subordinate has the new job (by formal assignment) and the full responsibility (by formal delegation), but the manager has the next move. Until he makes it, he will have the monkey and the subordinate will be immobilized.

Why does it all happen? Because in each instance the manager and the subordinate assume at the outset, wittingly or unwittingly, that the matter under consideration is a joint problem. The monkey in each case begins its career astride both their backs. All it has to do now is move the wrong leg, and – Presto! – The subordinate deftly disappears. The manager is thus left with another acquisition to his menagerie. Of course, monkeys can be trained not to move the wrong leg. But it is easier to prevent them from straddling backs in the first place.

WHO IS WORKING FOR WHOM?

To make what follows more credible, let us suppose that these same four subordinates are so thoughtful and considerate of the superior’s time that they are at pains to allow no more than three monkeys to leap from each of their backs to his in any one day. In a five day week, the manager will have picked up 60 screaming monkeys — far too many to do anything about individually. So he spends the subordinate-imposed time juggling his “priorities.”

Late Friday afternoon, the manager is in his office with the door closed for privacy in order to contemplate the situation, while his subordinates are waiting outside to get a last chance before the weekend to remind him that he will have to “fish or cut bait”. Imagine what they are saying to each other about the manager as they wait: “What a bottleneck. He just can’t make up his mind. How anyone ever got that high in our company without being able to make a decision we’ll never know.”

Worst of all, the reason the manager cannot make any of these “next moves” is that his time is almost entirely eaten up in meeting his own boss-imposed and system-imposed requirements. To get control of these, he needs discretionary time that is in turn denied him when he is preoccupied with all these monkeys. The manager is caught in a vicious circle.

But time is a-wasting (an understatement). The manager calls his secretary on the intercom and instructs her to tell his subordinates that he will be unavailable to see them until Monday morning. At 7:00 p.m., he drives home, intending with firm resolve to return to the office tomorrow to get caught up over the weekend.

He returns bright and early the next day only to see, on the nearest green of the golf course across from his office window, a foursome. Guess who?

That does it. He now knows who is really working for whom. Moreover, he now sees that if he actually accomplishes during this what he came to accomplish, his subordinates’ morale will go up so sharply that they will each raise the limit on the number of monkeys they will let jump from their backs to his. In short, he now sees with the clarity of a revelation on a mountaintop, that the more he gets caught up, the more he will fall behind.

He leaves the office with the speed of a person running from a plague. His plan? To get caught up on something else he hasn’t had time for in years: a weekend with his family. (One of the many varieties of discretionary time.)

Sunday night he enjoys ten hours of sweet, untroubled slumber because he has clear-cut plans for Monday. He is going to get rid of his subordinate-imposed time. In exchange, he will get an equal amount of discretionary time, part of which he will spend with his subordinates to see that they learn the difficult but rewarding managerial art called “The Care and Feeding of Monkeys.”

The manager will also have plenty of discretionary time left over for getting control of the timing and content not only of his boss-imposed time but of his system‑imposed time as well. All of this may take months, but compared with the way things have been, the rewards will be enormous. His ultimate objective is to manage his management time.

GETTING RID OF THE MONKEYS

The manager returns to the office Monday morning just late enough to permit his four subordinates to collect in his outer office waiting to see him about their monkeys. He calls them in, one by one. The purpose of each interview is to take a monkey, place it on the desk between them, and figure out together how the next move might conceivably be the subordinate’s. For certain monkeys, this will take some doing. The subordinate’s next move may be so elusive that the manager may decide, just for now, to merely let the monkey sleep on the subordinate’s back overnight and have him or her return with it at an appointed time the next morning to continue the joint quest for a more substantive move by the subordinate. (Monkeys sleep just as soundly overnight on subordinates’ backs as on superiors’.)

As each subordinate leaves the office, the manager is rewarded by the sight of a monkey leaving his office on the subordinate’s back. For the next 24 hours, the subordinate will not be waiting for the manager; instead, the manager will be waiting for the subordinate.

Later, as if to remind himself that there is no law against engaging in a constructive exercise in the interim, the manager strolls by the subordinate’s office, sticks his head in the door, and cheerily asks “How’s it coming?” (This time is discretionary for the manager and boss-imposed for the subordinate.) When the subordinate (with the monkey on his or her back) and the manager meet at the appointed hour the next day, the manager explains the ground rules in words to this effect:

“At no time while I am helping you with this or any other problem will your problem become my problem. The instant your problem becomes mine, you will no longer have a problem. I cannot help a person who does not have a problem.”

“When this meeting is over the problem will leave this office exactly the way it came in – on your back. You may ask my help at any appointed time and we will make a joint determination of what the next move will be and who will make it.”

“In those rare instances where the next move turns out to be mine, you and I will determine it together. I will not make any move alone.”

The manager follows this same line of thought with each subordinate until at about 11:00 a.m. he realizes that he has no need to shut his door. His monkeys are gone. They will return, but only by appointment. His appointment calendar will assure this.

TRANSFERRING THE INITIATIVE

What we have been driving at in this monkey-on-the-back analogy is to transfer initiative from superior to subordinate and keep it there. We have tried to highlight a truism as obvious as it is subtle. Namely, before developing initiative in subordinates, the manager must see to it that they have the initiative. Once he takes it back, they will no longer have it and the discretionary time can be kissed good-bye. It will all revert to subordinate-imposed time.

Nor can both manager and subordinate effectively have the same initiative at the same time. The opener, “Boss, we’ve got a problem,” implies this duality and represents, as noted earlier, a monkey astride two backs, which is a very bad way to start a monkey on its career.

Let us, therefore, take a few moments to examine what we prefer to call “The Anatomy of Managerial Initiative.” There are five degrees of initiative that the manager can exercise in relation to the boss and the system:

1. WAIT until told (lowest initiative);

2. ASK what to do;

3. RECOMMEND, then take resulting action;

4. ACT, but advise at once; and

5. ACT on own, then routinely report (highest initiative).

Clearly, the manager should be professional enough not to indulge in initiatives 1 and 2 in relation either to the boss or to the system. A manager who uses initiative 1 has no control over either the timing or content of boss-imposed or system-imposed time, and thereby forfeits any right to complain about what he or she is told to do or when. The manager who uses initiative 2 has control over the timing but not over content. Initiatives 3, 4 and 5 leave the manager in control of both, with the greatest control being at level 5.

The manager’s job, in relation to subordinates’ initiatives, is twofold; first, to outlaw the use of initiatives 1 and 2, thus giving subordinates no choice but to learn and master “Completed Staff Work”; then, to see that for each problem leaving the office there is an agreed-upon level of initiative assigned to it, in addition to the agreed-upon time and place of the next manager-subordinate conference. The latter should be duly noted on the managers’ appointment calendar.

CARE AND FEEDING OF MONKEYS

In order to further clarify our analogy between the monkey-on-the-back and the well-known processes of assigning and controlling, we shall refer briefly to the manager’s appointment schedule, which calls for five hard and fast rules governing the “Care and Feeding of Monkeys.” (Violations of these rules will cost discretionary time.):

RULE 1 Monkeys should be fed or shot. Otherwise, they will starve to death and the manager will waste valuable time on postmortems or attempted resurrections.

RULE 2 The monkey population should be kept below the maximum number the manager has time to feed. Subordinates will find time to work as many monkeys as they find time to feed, but no more. It shouldn’t take more than 5 to 15 minutes to feed a properly prepared monkey.

RULE 3 Monkeys should be fed by appointment only. The manager should not have to be hunting down starving monkeys and feeding them on a catch-as-catch-can basis.

RULE 4 Monkeys should be fed face to face or by telephone, but never by mail. (If by mail, the next move will be the manager’s, remember?) Documentation may add to the feeding process, but it cannot take the place of feeding.

RULE 5 Every monkey should have an assigned “next feeding time” and “degree of initiative.” These may be revised at any time by mutual consent, but never allowed to become vague or indefinite. Otherwise, the monkey will either starve to death or wind up on the manager’s back.

CONCLUDING NOTE

“Get control over the timing and content of what you do” is appropriate advice for managing management time. The first order of business is for the manager to enlarge his or her discretionary time by eliminating subordinate-imposed time. The second is for the manager to use a portion of this new found discretionary time to see to it that each subordinate possesses the initiative without which he or she cannot exercise initiative, and then to see to it that this initiative is in fact taken. The third is for the manager to use another portion of the increased discretionary time to get and keep control of the timing and content of both boss-imposed and system-imposed time.

The result of all this is that the manager’s leverage will increase, in turn enabling the value of each hour spent in managing management time to multiply without theoretical limit.

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.”

Six Responsibilities of a Small Business Owner

The Fremont Group sponsors workshops based upon the book, Minding My Own Business.  The book identifies the six responsibilities of a small business owner and then analyzes each.  The Fremont Group derives funds in three ways—the sale of the book , donations and our workshops—all run by volunteers.  Do your own self-examination of your responsibilities.

  1. You must earn a minimum, mandatory percentage of profit.
  2. You must create cost controls to assure that the profit is produced.
  3. You must put your people into an organizational structure where they are responsible for the enforcement of the cost controls through accountability and incentives.
  4. You must sell—internally and externally.
  5. You must keep the money you make—tax and risk management.
  6. You must have fun.

How did you rate?

Operations Manual

Systems and structure works. People live in chaos. Their personal lives are a mess. We want to provide for them a place where there is a predictable system. Where they know what is expected of them. Where for 8 hours a day they have structure. Young children will play the same videotape over and over again to fill the psychological need for predictability. When tied to a system of development or promotion for employees you significantly reduce turnover. But you must be willing to constantly work on your system and you must be disciplined enough to consistently enforce it. If you cannot respect your system then you cannot expect your employees to respect it.

In order to have an effective “system” of operations it must be documented. Each function must be documented so that consistency is achieved. The importance of the documentation becomes evident when there is turnover. The new person must have something that they can pick up and say, “this is how I do my job.” This is critical if the business is going to become systems dependent rather than people dependent. Every football team has a playbook yet the owner doesn’t.

The Operations Manual describes how the company would work if it were 1000 miles away and you could never visit. It describes how each job is done and what each person has to do so that their boss has a comfort level of knowing that the job has been done. Remember that it is a constant work-in-progress.

WHY YOUR INCENTIVE PLAN DOESN’T WORK AND WHAT YOU HAVE TO DO ABOUT IT

An incentive is an action taken to change the short-term behavior to match a pre-determined objective.

In dealing with employees we are constantly dealing with the issue of “alignment.” Alignment is matching the best interests of the company with the individual best interests of the employee. The theory is that each person acts in their own best interests and therefore by rewarding certain activities with a reward that is desired by the employee; their actions will change to obtain that reward. In the development of an incentive program one has to determine what changes in the behavior of employees would benefit the company, the amount of benefit that it would generate, and how to deliver to the employee some percentage of that amount for the desired change in behavior. In other words, if an employee changes their behavior and now does “X” and that as a result of this new performance the company will benefit by “Y” dollars, what percentage of Y should we pay to the employee and in what manner.

Often overlooked in this analysis is the issue of what behavior we are already paying for in the base pay of the employee. If a sales person receives a base salary, then there is a certain minimum amount of sales that they must produce in order to cover that salary. Therefore if we are going to also pay a commission on the sales that they generate, those commissions should only start after that minimum production has been generated to cover their base salary.[1] This issue gives rise to the axiom that “you cannot create a rational incentive plan until you have first defined the results that you are already paying for in their base pay.” The violation of this rule dooms most employers in their attempts to develop an incentive plan without professional help. As a consultant all you have to do is look at a company’s job descriptions to see if they have identified results that are required for each position rather than tasks and if you only see tasks, you can be assured that any incentive program that they have is fundamentally flawed.

These are the basics of incentives. More recent analysis has brought criticism to the “stick” and “carrot” approach to behavior modification. In Coaching for Performance, by John Whitmore,[2] you will find an analysis of Maslow’s Hierarchy of Needs as applied to the workplace. He advances the theory that standard incentive programs treat people like “donkeys” rather than “humans.” He applies Maslow’s Hierarchy of Needs to show that incentives should instead be directed to moving people up this scale—from “Belonging” to “Esteem from others” to “Self-Esteem” to, finally, “Self-Actualization.” He also provides an excellent analysis of the stages of team building.

In my experience, no new theory is ever completely right, and no old theory is ever completely wrong. The truth is generally in the middle—which leads us to management development.

In Minding My Own Business,[3] I have divided employees into three categories—climbers, campers and quitters. A climber is any employee who is self-motivated and wants to perform. A camper is any employee who is merely there for a paycheck and receives their self-fulfillment from activities other than their work or career. A quitter is someone who is actually detrimental to the organization and probably will not change. All three types of employees can be found at all levels of the company—there are field level climbers and there are high management level campers and quitters. Often our comfort zone will actually create campers out of the climbers that we promote to high level management. The critical purpose of these classifications is this: although your climbers only account for about 20% of your workforce, they produce about 80% of your profit; your campers account for about 75% of your workforce and produce about 30% of your profit and your quitters actually cost you about 10% of your profit. So where do we want our turnover? In the campers and quitters of course. But to avoid having turnover of your climbers you have to give them a ladder—climbers want to climb and if we don’t provide the ladder, a competitor will.

In the past we have structured incentive programs to merely provide bigger carrots to the climbers, however the application of newer theory would be more effective. Climbers want more money, but also want the opportunity to progress up the Maslow Hierarchy. Campers are not necessarily seeking their fulfillment from their employment and therefore are not going to respond as well to these incentives as is a climber. Campers can be safely treated as “donkeys” and enough reinforced behavior will result to justify the incentive. Quitters on the other hand are another matter. They are not yet to “donkey” status and therefore must be identified and treated with parental directives—your performance is unacceptable, here is how it must change, if it does not change within a given period you will be terminated.

Left out of the analysis by Whitmore is the role of the “team” in the development incentives. Although he discusses team building at length, the tie is never made to the Maslow Hierarchy. In a workplace, it is only through the creation of a “team” that the progression from belonging, to esteem from others, to self-esteem to self-actualization makes sense. Therefore after an organization has created an effective and rational incentive program next the “climbers” should be identified and “teams” should be created to implement a second level of motivational incentives. This has numerous ancillary benefits. First it provides a “ladder” for those climbers to climb which reduces their turnover and increases their bond to the company. Second it allows the owner to tap into their most important resource and delegate to this team (or teams) responsibility for management issues that is currently taking up their time and energy. This frees the owner to be better at doing his or her job of running the company.[4] In the development of this “management team”[5] the owner is actually building a company—a company with value that exceeds their own input. This is critical if the owner ever intends to leave the company (sell). For a company to have any real value the cash flow must be produced by systems, procedures and controls rather than by the individual efforts of the owner; otherwise when the owner leaves, there is no company.

To summarize, the owner must:

  1. Identify what results the company is currently paying for in each position’s base pay.
  2. Identify the climbers, campers and quitters.
  3. Assume that the quitters are leaving and recruit for these positions so that no quitter can hold the company hostage. Turnover should occur on your time table, not theirs.
  4. Identify the changes in behavior that the company desires.
  5. Determine the benefit that would be derived to the company from this change in behavior.
  6. Develop and implement an incentive program to align the new behavior of employees with the desired result.
  7. Determine the size and structure of a “management team” to be comprised of climbers.
  8. Perform team building activities within this group.
  9. Assign to this team management issues and tasks that will free the owner to do a better job of “running the company.”
  10. Continually reinforce the decisions of the “management team” and create opportunities for “new climbers” to join.

[1] Note that taking this into account by providing a reduced commission rate is actually counter-productive as it penalizes your high producers who greatly exceed the amount required to cover their base. Any compensation plan that over-compensates the lower performers and under-compensates the higher performers is fundamentally flawed.

[2] Coaching for Performance, Third Edition 2002, John Whitmore, Nicholas Brealey Publishing, London.

[3] Minding My Own Business, Dirk Dieters, Author House 2005.

[4]Ibid. See MMOB for an analysis of the six responsibilities of the business owner.

[5] Note that the “management team” consists of all climbers, not just those climbers who are in management. Field workers and staff level employees may also be climbers and those people need to be included in this “management team.” The Fremont Group has developed a formula for the rating of employees upon this scale and for the identification of persons in non-management positions who are equally critical to the long-term success of the company and whom must be included in this program.

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.