Situation: From time to time companies face crisis situations. A company, planning ahead, wants to establish a culture that can deal with crises effectively. What are the most important elements that should be part of this culture?
Advice from the CEOs:
Everything starts with a brutally honest SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats) of your company and operations. Identify where you are Strong, where you are Viable, where Urgent Care is Necessary, and where you have No Reason to Be. Based on this assessment, cut your losses – for example, eliminate exposure to the No Reason to Be activities and efforts – and focus resources on your strengths and what is necessary to assure your future.
Support all efforts or activities that you will keep or pursue with a Bottoms-Up Financial Analysis. This will include a P&L, Balance Sheet, Cash Flow Analysis, assumptions, variables, and best, most likely and worst case scenarios. This Financial Analysis is an essential part of facing up to the Brutal Facts of your business and environment. From this exercise you will gain clarity on where to focus first.
The greater the potential crisis, the more frequent this exercise must be.
When dealing with creditors, remember their priorities: honesty, eventual payment, fair treatment and long-term customers. Present them with a credible plan, don’t make commitments you can’t keep, keep all commitments that you make, keep in touch monthly, and pay what you can. The development of trust makes it possible to negotiate incredible terms.
Special thanks to Tom Spanier of Spanier & Associates for his contribution to this discussion.
Situation: The CEO of a small-to-medium business wants to reduce day-to-day management activities and spend more time focusing on new opportunities. How do you shift focus from management to strategy and how do you identify the right person to take on the management role?
Advice from the CEOs:
As CEO your primary focus needs to be on the future more than the day-to-day. As a smaller company, the management role needs to be filled by an individual with broad multidisciplinary experience. To replace yourself, you need a Renaissance person – someone with industry knowledge and experience who buys into your business model.
As you evaluate candidates, look for attitude, not resume.
Analytical skills are critical – mental capacity.
These need to be complimented by guts – emotional intelligence.
Your current business is not the business that you and your co-founders started. It is a larger entity, more solid, and you need to bring in people who can take it to higher stages of growth. Finding the right person to fill your role is a long-term process.
Bring in 3 to 4 solid candidates as employees in important roles. Test them with challenges to see who can grow into the larger role of company manager.
Look for people who can grow your downstream businesses as candidates to manage the full business.
In the current market you have time on your side. While hiring is improving in some regions, there are still many more candidates out there than available jobs. This is unlikely to change soon.
Situation: A company has an offshore operation with 10 engineers and a good General Manager. They will hire five more engineers in the next month. Their target billing rate is projected to be profitable when they reach 15 engineers. Their challenge is that they need to bear the investment loss to have an offshore capability, but are not sure that they’ll see a pay-off. How can you accelerate the offshore learning curve?
Advice from the CEOs:
Given the current situation, give yourself a window of 60 to 90 days. Create a go/no go decision point and let the General Manager know this. It will provide motivation for the off-shore operation to come up to speed faster.
Another company projected a 2 year break-even based on others’ experience in the geographic location.
They are nearing the 2-year point with the office up and running, on target with schedule, under a General Manager with proven experience.
They see payback on their initial investment at the 2.5 to 3 year point, and thereafter duplicating their payback every 6-12 months or better.
It is important not to undercharge for off-shore work.
One company charges $125 for work done in India that they would have charged at $180 if done in the US – a 29% discount. This is for high billing rates, with spreads even better for lower billing rate work.
If a client pushes for offshore rates, bargain for a lower initial discount for off-shore work compared with US-based work, but combine this with an offer to generously share additional discounts as the offshore location improves productivity.
Bottom Line: Stay the course. Long-term this investment will pay off.
Situation: A company wants to recruit outside members to its Board of Directors. Currently, all Board members are founders except for a single early investor. How do you recruit outside Board members?
Advice from the CEOs:
Board Member selection is a strategic matter. You want to have people on your Board who have done what you want to do strategically with the company.
A Board does not run the company. Board Members provide input and perspective to help the CEO make better choices while running the company.
Board Members have fiduciary responsibility – to the Shareholders, the government (to assure that the company is being run legally), to customers, to employees, and to vendors. Their role is to assure that the company does what it says it plans to do.
How affordable are Board Members?
Stock options are very feasible if you have little cash to pay salaries. Much will have to do with the prospective member’s buying into your vision.
You will need to secure Directors and Officers Insurance for Board Members – $3K+ per year per member.
The rationale behind payment in stock is for Board Members to have the same incentives for company success as shareholders.
Target remuneration of Board Members is, for a pre-IPO company $100K per year if the company is successful, but if not then $100K over 5 years. Members of the Audit Committee are generally paid about double what other Board Members receive.
Is there a downside of having numerous minor shareholders?
Not really, except perhaps nuisance. You run the company. As long as you retain majority share ownership, Board members can only advise.
Sitting on another Board is one of the best ways to improve your own abilities as CEO. Advising another CEO on how to run their company is a learning experience.
Special thanks for input on this topic to Bill Rusher, founder of Rusher, Loscavio and LoPresto.
Situation: A company pays employees based on skill level. Raises are given as an employee learns additional skills. In some cases, when they give an employee a raise, productivity drops. The company has tried other approaches including bonus systems and profit sharing but did not find these effective. How do you effectively motivate hourly employees?
Advice from the CEOs:
Before trying a new motivation scheme, find out what matters to your employees. It may not be either bonuses or profit sharing.
Develop and send out a questionnaire listing different factors – revenue sharing, bonuses, creativity, doing quality work – ask what matters to you? Get their feedback.
People work for respect – many studies have shown that as long as the payment offered is fair, salary is secondary.
Hire an advocate for your employees – a part-time HR person. An important role for this individual will be to determine what motivates employees, what they want from their jobs, and how improvements in both processes and the working environment can boost productivity.
What is the real issue: employee motivation, employee productivity or cost reduction?
If material waste is more expensive that labor – create metrics and rewards to reduce waste.
At companies that use the Toyota Production System employees receive points for process improvements. At the end of the year they receive a cash payout based on the points earned during the year.
Employees are rewarded publicly. The incentives are cash, recognition and respect. These companies find that recognition and respect trumps cash.
Depending upon your cost structure, it may be more productive to focus on scrap reduction. Bring in someone with experience who can find the sources of scrap. The effort will pay for itself rapidly.
During the hiring process, require educational attainment as evidence of the individual’s commitment.
Look for skills experience – machinist, etc. Match skills and experience to your needs. This will lead to faster learning curves and will help to reduce waste.