Situation: A CEO is concerned that there is insufficient fairness and accountability within her company. One manager is paid hourly and the CEO is thinking about shifting this person to salary plus bonus both to put them on par with other mangers and to create more accountability. How do you create accountability?
Advice from the CEOs:
What exactly are you trying to achieve? An operations manager is paid competitively at hourly rates, even compared to salaried employees. The issue is that this person has no responsibility for results as they relate to the P&L. Given this, the group consensus is that it is better to have this person on an incentive program that ties compensation to the performance results that you want.
One objective is that you want this employee to contribute more to planning, strategy or the company’s attempts to develop solutions to the challenges that they face. Have you spoken to the employee about your expectations? Does the employee realize that you want or value their input? Direct communication with the employee is important.
While the employee understands his responsibilities in the operations area, be sure that he is aware that he is also important to the profitability of the company, and managing operational expenses which are contributors to that profitability. Depending upon the individual’s background, he may need training about the links between expenses and the P&L.
Given these factors consider the following options:
Adjust the employee’s compensation by switching from hourly to salary. Make the base livable, but not comfortable, and tie the bonus (which will make the total compensation package comfortable) to the profitability of the business. This will have an immediate effect.
Clearly explain to the employee that you value his creativity and input. Give this person the freedom to contribute and make it clear that his contribution is expected. Early on encourage this and acknowledge contributions in meetings.
You may want to make this person a part owner of the business. This will have a long-term effect.
A small company has need for legal advice, but is unsure how to properly utilize a lawyer. Legal costs have gone up over the last decade, so expense is one concern. Another is a desire to understand how to form an effective relationship with a lawyer or law firm, and how to effectively manage billable hours. Bottom line, how can a lawyer help you meet your business goals?
Advice from the CEOs:
First, seek the counsel of a firm that specializes in small businesses. Just as you would seek a specialist physician to treat a serious medical condition, SMBs are best served by corporate lawyers who understand how they are different from large corporations and who can advise them at a rate and under an arrangement that fits their financial situation.
Schedule regular “off the clock” lunches and conversations with your lawyer. The ideal lawyer for smaller companies serves as an “outside counsel.” Your outside counsel is essentially your legal quarterback and should be willing to meet with you off the clock to discuss general business needs. Of course, as a courtesy to your lawyer, if your conversation starts getting into areas where you are receiving legal advice you shouldn’t expect free advice.
Know what to ask your lawyer versus what to ask your auditor and tax specialist. Each has a separate and distinct domain.
Trust your lawyer – or find a new lawyer. The best legal relationship is when your lawyer is treated as a member of your team. Sharing the business context aids your lawyer in advising you.
There is no need to overspend on lawyers, but you do need to assure that you spend for what you need. A good relationship with your lawyer can help you to walk the line where you are spending appropriately.
Special thanks to Deb Ludwig of DJL Corporate Law for her contribution to this discussion.
Situation: A company goes through an annual strategic planning process followed by an annual business planning process. At mid-year they do a review and correction. The challenge is that if the company is behind plan, the management team does not take ownership of plan revisions – it becomes “the CEO’s Plan.” How do you gain commitment to revisions in the annual plan?
Advice from the CEOs:
Throw out your current process and start over.
The challenge is to gain more buy-in and accountability. This only comes if the targets come from those responsible for delivering them – both for the original plan and if any revisions need to be made.
Look at who you involve within the organization – can you drive involvement deeper to generate additional buy-in across the organization?
Hire an outside facilitator to guide you through the process instead of chairing the meeting yourself. This prevents the resulting plan from becoming “your” plan. It also changes the culture of the meeting as well as the buy-in.
If you use a bottom-up / top-down process, moderate the plan results with an eye to two realities:
Bottom-up input from the sales team is rarely more pessimistic than the CEO’s input. If it is ask what is happening.
Make sure that your top-down numbers are empirical and based on the best market research that you can obtain.
If your plans have consistently fallen short over recent years:
You may be baking the targets too high.
Consider building the revenue plan optimistically, but build the expense plan conservatively. This helps control expenses and attain profitability targets.
So that the two plans are not misaligned, review them more frequently – perhaps quarterly on a formal basis with monthly reviews – so that if your revenue plan is meeting targets you can adjust spending to support production and delivery.
It is common to have one set of numbers for sales and a different, more conservative, number for expenses. As long as you conduct frequent review and adjustment of the expense number to sales performance, this works. Many companies also use different targets for operations than what they present to the Board – with the more conservative numbers for the Board.
Situation: A company has used the same accounting system for over 10 years. The current system produces information quickly and easily, and empowers management and sales to make good decisions. However, it doesn’t respond to customer information requests as well as newer packages. What are best practices for updating your accounting system without losing data?
Advice from the CEOs:
One option is to keep your legacy system, but migrate to a user-friendly platform designed to work with a CRM system that can better meet customers’ needs.
Keep both systems up live until you no longer need the old system, except as an archive of your historic data.
Be sure to cross-train other employees so that your current system doesn’t become worthless if your key administrator gets hit by a truck.
Before you decide which direction to pursue, ask what your employees like the current system.
What do they find most useful?
What accounting features do you need to support your growth plans?
What key functions of the current system would you have to emulate?
How expensive is it to maintain your current system?
Is your business so unique that no off the shelf alternatives exist?
Could you adopt an 80-90% solution and customize the rest?
It may be difficult to do this on your own. Look for a consultant with a background in accounting applications to analyze your needs.
If you feel that you must make a change, but are not ready to do so, develop your solution gradually.
Interview with Kelly Masood, President, Intilop, Inc.
Situation: An emerging company is gaining traction as it moves from early adopters to mainstream. They need to continue to develop new technologies, while bringing down the cost of existing products. This is a delicate balancing act for a small company. How do you grow without losing control?
Advice from Kelly Masood:
It’s important to maintain momentum and continuous improvement. From a practical standpoint, we do this by applying common sense to our technical discipline. Common sense, here, is a relative term. It isn’t really taught in school at any level, but is gained through experience. This is the true expertise of the CEO.
The delicate part of the balancing act is the mix between developing new technologies and building an effective business model. An effective business model is built on innovative and cost effective products and sustainable profitability. Since new technologies go through development stages, it is important to create break points where you transition from development to productization to marketing and sales. Continuous improvement in existing products based upon customer feedback and new product ideas for future developments are crucial aspects of a successful business model.
If you want to minimize outside funding and investment you have to watch cash flow and development expenses. Revenue from existing products is the key. When you don’t have resources, you become resourceful. If the team is dedicated to producing innovative and good products that make business sense, they figure out how to accomplish it without cutting corners.
To mature your team over time you must keep them motivated, occupied and adequately compensated today while inspiring them to make it big in the future.
You maintain interest through the pursuit of new technology and the learning associated with it. Engineers like to see their designs work and turned into a product that creates value, is used and is appreciated.
Keeping the team occupied and challenged starts with choosing the right talent in the first place and then getting them to focus on building great products.
Compensating them with a fair salary means locally competitive rates, sweetened with stock options to provide great upside potential.
For us, retaining great employees is about enabling them to innovate products that will find broad market acceptance.
Key Words: Early Adopter, Mainstream, Develop, Cost, Continuous, Improvement, Common Sense, Business Model, Cash Flow, Expense, Price, Retain, Employees, Off-shoring
Situation: A company lost money last year, but turned the corner with a profitable final quarter. One of the company’s divisions continues to lose money, though the losses are small compared to the total picture. The CEO is considering cutting this business. What factors should the CEO consider in making this decision?
Advice from the CEOs:
What expense factors contributed to the loss?
The biggest factor was allocation of vehicle and space expense. This division has seasonal revenue but carries the allocated expenses for the full year.
Make sure that your allocated expenses are fair to the business. Do overhead allocations reflect utilization? Unless closing the business eliminates vehicles or space, if you terminate this business these expenses will be borne by the rest of the company.
Study your allocations by shifting the allocation made to this business to other businesses. What is the impact on their profitability?
If you find that the current allocation does not reflect utilization and adjust accordingly, does the business still lose money?
If this division covers its direct expenses along with most of its allocated expenses, a small loss in this division may be preferable to a reduction in profitability of other businesses from closing the division.
How strategic is this division to the overall business mix?
Is this business essential to your product/service mix or just a customer convenience? If you terminated the business will customers be upset?
Do competitors offer this service, and would you be disadvantaged by discontinuing it?
What are the alternatives?
Can you raise prices to increase profitability and refuse business that does not meet this pricing?
Can you restrict the offering to less price sensitive customers?
Can you refer customers to other vendors or sub out this business?
Can you reduce the scope of the offering while adjusting pricing to enhance profitability?
Can you source other labor alternatives to reduce cost?