The “buggy whip” trap.
by Dave Berkus on May.16, 2013, under Growth!, Protecting the business
Surely you’ve heard the buggy whip analogy. A business making those necessary items ignored the signs of progress and found itself without a market. Perhaps that happened to sword smiths upon the invention of the rifle, and certainly to the makers of cassette tapes upon the dawn of the CD.
I found myself in the middle of such a slow-rolling change twice in my career. First, in the late 1960’s (yes, I know, a long time ago), there were 31 phonograph record manufacturing plants in Southern California alone. By 1975, there were only two. That is sudden change, brought about by the fast acceptance of the cassette, which in turn gave way to the next technology, CDs, after a rather short lifecycle. Record plants were noisy, dirty places, using chemicals I can only imagine now rest somewhere in the ocean, to electroplate the “stampers” and press the records. Cassettes, in contrast, could be manufactured in small rooms with much less expensive equipment and no damage to the environment.
The second time I learned the buggy whip lesson was at the dawn of the personal computer age, and this time we guided our firm without a hitch from minicomputers to networked PCs, even growing the business as we gave up the lucrative $100,000 hardware sales in return for service fees to network our customers’ systems, install our database, and migrate to customer-purchased desktop and servers.
[Email readers, continue here...] Here it is, not so many years later, and the signs are more subtle yet, but the speed of obsolescence is much faster. Take for example, the public’s quick acceptance of Facebook, Zinga, Mixi, and other social networking portals, leaving early leader MySpace wondering what happened to their comfortable lead and large fan base. With rapid sharing of information and recommendations, a fickle public can change its mass preferences seemingly in an instant.
How do you spot the buggy whip trap and differentiate it from a simple business cycle slump? The answer is simple, but somehow out of reach for most senior executives and entrepreneurs. Micro trends may seem to be a whisper, as mini-trends follow with leading adopters making a bit of noise. It is those leading adopters who take the chance on new technologies, new companies, new styles, and new idioms. That is why so many larger companies pay specialty marketing firms to find, court, and listen to those individuals who lead the pack in taste and action.
For those of us who don’t have the resources to hire these expensive market trend-watching firms, there are more simple yet effective opportunities. Usually, technology and style trends begin with those aged between 15 and 23. And which of us doesn’t have at least one close relative or child at or near these ages? Have you ever asked for an hour of such a relative’s time to discuss what’s “cool” or “coming” or “must have” in their lives?
It is human nature to protect one’s investment of money, time and brand in an enterprise. That leads naturally to a resistance to change and inability to willingly move to replace your own product with something new that will kill its revenues.
But we all know that if we do not do it when offered the evidence of obsolescence, someone else will. So, are you investing in your own form of buggy whip product or service today?
What if you don’t know what to ask?
by Dave Berkus on May.09, 2013, under Positioning, Protecting the business
Great executives and managers seem to intuitively know what they don’t know. But it is not at all uncommon to not even know what questions to ask.
How do you avoid being sideswiped by the new product you never saw coming, or by the “black swan” event no-one ever thought of – that might threaten your business?
Speaking with a roundtable group of fellow associates, most all of them CEOs, we addressed this question and spent an hour brainstorming how to protect against just such a lack of forward vision.
One CEO stated that she engages regularly in scenario planning with her executives, asking “what if” questions to explore the edges of the group’s thinking about everything from disruptions of supply to changes in customer taste to acts of God such as floods or earthquake. The group agreed that this is an excellent process, engaging the entire team and members’ experience to explore the unknown.
But what if no one in the group thinks to ask the pertinent question that leads to the most impactful unknown? What if that threat is outside of the experience of anyone in the room? What if no one knows what to ask?
[Email readers, continue here...] Another CEO chimed in with an answer that made us all think. Most every technology advance has been predicted in works of fiction years before the fact, he stated. Why not look to fiction for clues? From devastating events like tsunamis to future user interfaces predicted in such films as Star Trek or Minority Report, there are liberating clues within the experiences of most of us. Think of Flash Gordon or Dick Tracy, characters from many decades ago with communication devices that have not only come to life but have been far surpassed in reality. Tom Cruise’s virtual handling of graphics by hand movements came true only a few years later, even popularized as a game with Microsoft’s Kinect system driven by body movement alone.
Our frame of reference must be as broad as possible when asking “what if” questions to protect our future. Read more science fiction if you are involved in technology. Read more disaster novels to expand your thinking to the very edge, even if only for a minute as you examine what and how to react to the unknowns that are sure to someday challenge us.
Manage your bottlenecks!
by Dave Berkus on May.02, 2013, under Protecting the business, Surrounding yourself with talent
As a manager, you have a number of critical tasks that are general to your position as opposed to specific to your industry. These include ensuring the continued health of the organization, setting the moral compass for your stakeholders, providing for succession by training and documenting, leading the effort in compliance of regulations and safety needs, and … elimination of all possible bottlenecks that impede the efficiency of your organization.
The definition of a bottleneck in your business is one that constricts the flow of work from one area to another in the flow of product or service through your organization.
[Email readers, continue here...] A bottleneck in your organization’s flow of product or service can happen, shift, or disappear quickly. Common to all bottlenecks are three factors:
- All product, labor, and cost before the bottleneck are impeded from creating maximum efficiency by being forced to slow output or build inventories. This is a costly loss for any business and one that should be a focus for your management as soon as identified.
- The bottleneck itself strains to keep up with demand, often to the point of reducing its own efficiency in the process of attempting to keep up with demand.
- All processes after the bottleneck are slowed for lack of flow into their zone of control and waste time, money, space and output, always resulting in reduced revenues and profits.
You can be the bottleneck. If people are waiting for you to respond to a question or make a decision about design, process, spending for a core need, or any of tens of critical decisions, you are creating a 
slowing or stoppage of work before you and idle resources behind you. If this describes you at any moment in your day, you should consider removing yourself from the bottleneck list by delegation, reduction of your non-critical workflow, or (heaven forbid) increasing your hours of production.
If failing to hire a critical employee is the cause of reduced efficiency, you must act quickly to either make an effective hire or alter the environment that creates the urgent need, all to remove that bottleneck.
And if an inefficient or undersized machine or department or process is creating a backup of critical path work flow, you must address this as an urgent matter whose cost is much more than the cost of the machine or person needed, but the amplified cost of the lost output it affects.
You, as a successful manager, must be attuned to and responsible for elimination of all forms of bottlenecks within your span of control. Watch for, and stamp out, all those you identify as soon as you find them. The effect of your action is magnified several-fold at the output stage of your business, leading to increased customer satisfaction and increased profits.
The FAIRNESS doctrine.
by Dave Berkus on Apr.25, 2013, under Protecting the business, Surrounding yourself with talent
Reduce the emotion; reduce the threat of lawsuit.
You’ve certainly experienced the angry outburst from an associate or employee who has just learned of an event that the person took as “unfair,” no matter how rational the explanation by the decision maker.
Most emotional responses to decisions in business are generated not because the person making the response feels the decision was unwise, but rather unfair.
So I’ve created the “Fairness Doctrine,” as a stated element in the cultural fabric of businesses where I am involved. Simply stated, a decision or action that affects an individual must be made with consideration of the affected individual’s view of the fairness of that decision. This doctrine is a variant of “do unto others” but with a twist. The recipient of the decision in this case usually has little opportunity to respond in kind (“as you would have them do unto you”). It is this frustration coupled with the simple outcry of “That’s not fair!” – that can affect the culture of a company in ways never considered by the original decision-maker.
People sue others and their companies usually because they feel emotionally that they have been treated unfairly, not just because they were affected financially.
[Email readers, continue here...] Firing a person considered a key associate without any advance warnings or public revelation for the reason, such as the need to consolidate or downsize, is a good example of setting up such a groundswell of accusations of unfair treatment. Public dressing down of an employee in front of associates is inhumane and often generates a negative response from all who witness or 
hear of the action. Closing a highly effective department, shutting down a marginal company, canceling a promising project all are good examples of management setting up a visceral response of “unfair” among those affected.
I have often addressed the issue of maintaining the dignity of the individual in a business environment. The two are linked: the fairness doctrine and treatment of an individual with dignity, no matter how distasteful the decision implemented.
So my advice is to take the time to establish the reasons for pending actions – if not in an emergency environment. Speak privately to employees who are in danger of being fired, documenting the discussion to the employee’s file. Open up to the general group with facts that might later affect them, even at the risk of losing one or more to a hunt for a new job. Most employees and associates, treated with respect and dignity, will respond with understanding and lose the emotion that might have accompanied receiving the later news of a negative event.
In fact, many times over the years, I have seen whole companies rise to new levels of efficiency, creativity, and sense of urgency when informed of the alternatives being considered by a board or management.
At the risk of losing talent not targeted, it is only fair to treat people as intelligent beings capable of understanding the dilemmas faced by management, and sometimes able to find solutions to problems not seen by those in control.
Contractors must really be independent!
by Dave Berkus on Apr.18, 2013, under Protecting the business
How many of us have “hired” independent contractors over the years, a bit worried over the gray area between employee and contractor as defined by the IRS? I’ve experienced the results of a wrong decision, and the IRS and state agencies are not forgiving in their pursuit of penalties, interest and most damaging, assessing a company with the on both employer and employee taxes when reclassifying the person as an employee.
Yes, that’s right. The company must pay the employee’s portion of the taxes (and penalties on these) as well as paying those they would have paid if the person were an employee.
And the IRS has raised the bar on its test as to whether an independent contractor is not in reality an employee. So it is important – no really urgent – that we review some of the twenty – yes twenty – tests the IRS now uses to determine if a person is an independent contractor.
1. Contract for service: An independent contractor should work under a written contract with the company, defining the end result expected, time to achieve, lump sum or unit cost, ownership of intellectual property created and more.
[Email readers, continue here...] 2. Direction: The contractor directs itself, rather than being managed as an employee. And just as important, a contractor does not supervise any of the company’s employees directly. This is tricky when a contracted CFO assumes a position of directing an accounting department. Usually, in acceptable cases such as this, the contracted executive comes from a recognized agency with a history of paying its own employee taxes, health insurance, and other benefits. Without this protection, a contracted executive is suspect, even if working with more than one company at a time.
3. Integration: A contractor provides services which are not an integral part of the core business of the employer. This one is tricky. Is a contracted CFO an employee because the CFO job is integral? How about a contractor CEO? The person must pass all the other tests when one of them, such as this, crossed into the very gray zone.
4. Individual on the job: A contractor may hire a substitute without the company’s permission – although the company should then be able to terminate the contract with the contractor if the substitute is not acceptable.
5. Term: A contractor is hired for a specific project, usually tied to a time term. An undefined period of time favors the ruling as employee.
6. Reporting: Here is a surprise. The IRS wants to test that a contractor is NOT required to submit regular reports. Yet, most of us would want to have such documentation of progress other than an invoice.
7. Tools and materials: The contractor must supply his or her own tools. This is tricky when a contractor sits at your desk using your computer and your phone system all day.
8. Physical facility: The contractor must have its own “home office” even if in a bedroom, from which primary work is performed.
9. Works for more than one company: If such a person works only for a single company for any period of time, that person will probably be determined to be an employee. A contractor must make services available to the general public.
10. Termination: A contractor works under a contract – which means that an independent contractor cannot be “fired,” as long as results are satisfactory as defined within the contract of service.
There are more tests, but these are the ones most often used by the IRS. States add a few of their own; so beware. Pay contractors using account payable systems, not payroll services. Pay only upon receipt of invoices, not with regularly triggered checks or transfers of uniform amounts without invoice documents to back up the payments.
Many small or early stage company CEOs look for opportunities to cut cash drains, knowing that payroll is usually the greatest cash drain of all. The temptation to reduce that by fourteen percent or more by classifying a gray area employee as a contractor is very high. And that includes self-payments to a founder.
Founders working for a company are employees if they take regular payments, subscribe to company benefits, attend regular company meetings, or fail any of the tests above. The temptation to just draw cash and call it a loan, or document a year’s withdrawals with a 1099 is great, but highly risky.
There is nothing worse than a large tax bill and threats of a government agency seizing a cash account when a company cannot or does not respond with proper documentation or payment. And even a single year’s worth of transgressions, when added into a single tax bill with penalties and interest, can appear daunting to small and young companies.
Like payment of payroll taxes by incremental impound each pay period, as opposed to waiting until the last minute and making manual tax payments, it is a proper discipline of management to “take the hit” incrementally to protect the business from a catastrophic failure to pay a governmental agency any form of tax when and as due. Need we emphasize the personal liability of management AND the board of directors attached to tax payments?
Good management takes discipline and enough knowledge to prevent these possibly crippling errors in judgment that stem from decisions made to avoid or put off tax payments when accrued or due.
Hone your sense of urgency!
by Dave Berkus on Apr.11, 2013, under Growth!, Surrounding yourself with talent
It is an unfortunate truism that most of us become a bit stale in our jobs after some time, even if we are most successful at it and appreciated by all who work for or with us. It is human nature to start in a new position with enthusiasm, lofty goals, new ideas, and a heightened awareness of those around us and their ideas for the business.
And it is equally human for anyone to become complacent to some degree after an initial flurry of effort, ideas, reorganizations, brilliant decisions, and early successes. Complacency is relative. There is no direct measure to determine when a manager, even the CEO, has run out of new ideas and that sense of heightened awareness. Usually this is masked by our having a better grip on the real drivers of the business, able to quickly see when things are not going right or people not performing to their peak.
But think back to those first days on the job. You were ready and willing to effect change, to listen to anyone, to take in ideas, and share yours with your peers. You spent extra hours more often in creative efforts, encouraged discourse, and delved into new ideas and projects with enthusiasm.
You exhibited a sense of urgency that charged your direct reports, made you want to come to work every day refreshed, and demonstrated to all that something special was happening in their world.
[Email readers, continue here...] Can you honestly state that your sense of urgency remains today at the same level as when you first started at this position? Few of us could, and that is the reason why investors often feel that turnover in executive ranks is not so bad after all. The average life of a CEO in the position is shorter today than ever before, partly because investors expect continual acceleration, 
and partly because a person seems to have only so much new material to offer. If each of us could maintain that same sense of urgency that drove us to succeed early on, our peers, direct reports, investors, and stakeholders would all notice and respond accordingly.
Challenging your peers and reports to come up with new ideas, solutions, projects, and improvement in processes – all are signs of a good manager still in control of his or her sense of urgency. It is hard for those around you to slack off with such a whirlwind adjacent.
I have previously told the story of the successful CEO who drove to work each Monday morning asking himself, “What if this were my first day on the job as CEO? What would I do?” He kept his company and his peers always thinking ahead, if nothing else to prevent his surprising them with ideas and solutions to problems that should have been uncovered and acted upon earlier.
It is not an easy task – reinventing yourself to be that person you were on the first day, but with the knowledge and experience since gained. But it is an important part of being a great manager and retaining the focus upon excellence that certainly drove you to succeed back then.
Avoid the office politics trap.
by Dave Berkus on Apr.04, 2013, under Depending upon others, Surrounding yourself with talent
It is hard to separate this kind of advice from economic lessons in running a business, when office politics can threaten a business in ways that are subtle, but sometimes just as devastating as economic shocks or continuing poor management.
Most any office with more than one level of management (more than ten employees) can become a Petri dish for office politics. It may be human nature to attempt to gain the good graces of one’s superior in the work place. But it is a perverse form of human nature to do so at the expense of others. Some employees disrupt a business intentionally in order to gain attention and an advantage over fellow employees.
Other times, people with personal agendas or personal dislikes of other individuals will disrupt the harmony of an office environment with negative statements, rumors, and damning comments. We’ve all seen this unhealthy form of human activity in an office environment at one time or another.
So here’s the advice: Never repeat, encourage, or even listen to the personal attacks by one individual against another within the organization. The first time you join in the conversation instead of stopping it, the first time you nod in agreement, the first time you take a side as a manager –is the last time you rule over an office-politics-free organization.
[Email readers, continue here...] A boss has power that person doesn’t often realize s/he has, when viewed from the lens of a subordinate. That power becomes perverse when a boss takes a side in any disagreement that is personal as opposed to business-problem oriented. The result is almost always hurt, frustration and anger from the party on the wrong end of such manager reinforcement, and a loss of work time and certainly good will toward the organization and toward management itself.
To set the example by stopping the personal attack, refocusing the parties on productive work and moving on is to state by your words and actions that you will not tolerate such behavior in the work place. To ignore such action when observed is to allow one person or a small group to undermine the organization in subtle steps that can only increase in size and effect.
Worse yet, to take a side in a personal dispute is to reduce your authority and alienate one person or group and reinforce bad behavior.
Document your tribal knowledge.
by Dave Berkus on Mar.28, 2013, under Protecting the business, Surrounding yourself with talent
It is not common for the CEO of a rapidly growing company to think of slowing down the furious pace enough to have each manager (including the CEO) document the job process managed, as well as see to the documentation for each process managed below.
And it is even more of a challenge to consider documenting the tribal knowledge of a company’s key employees. Examples include forcing the entire sales and customer support team to use a single database such as SalesForce or Sugar or Act to document the interactions with prospects and customers, or using “REM” statements liberally inside software code to notify future coders of critical information contained and reasons for making code branches, assigning variables with unusual names or more.
[Email readers, continue here...] As CEO, have you made a list of your critical chain of advisors, including bankers, accountants, industry advisors, and more? Do you have a “secret spot” for critical information someone might need if you were incapacitated or worse? Especially when we are young, we feel invincible, and documenting tribal knowledge seems a chore with no reward.
Then inevitably a key employee gives notice and we begin to worry over what knowledge we will watch walk out that door, wonder how we will recover in the short term and grow out of the problem in the long term. We worry that asking our subordinates to document their processes will look like the first step in removing them from their job. And we worry over lost productivity during this effort.
But if we make this a part of the culture of the corporation starting at the top and from an early point in the life of the organization, this process becomes an accepted way in which managers learn and leave behind, able to move up the chain with minor disruption both in the job left behind and the job assumed. It makes for a smoother process for seeking outside hires by providing a model for the job specification to be written.
And it allows everyone to better appreciate the organization, understanding the limits of each position and the duties performed, avoiding conflicts between managers when in the future changes are made in the organization and in personnel during periods of growth or even downsizing.
Tribal knowledge is an asset of the corporation, to be protected as much as cash in the bank.
Important notice to Berkonomics RSS feed readers!
by Dave Berkus on Mar.26, 2013, under General
You may lose your feed immediately after this notice (March 26th, 2013) as we switch today from Feedburner to local control of your feeds. PLEASE come to http://www.berkonomics.com now and re-enter your email address at the RSS on the upper right of the screen to continue receiving your feeds. (Email readers are not affected by this change.)
Thank you!
Dave Berkus
Be a leader!
by Dave Berkus on Mar.21, 2013, under Depending upon others, Surrounding yourself with talent
This simple statement is not what it seems at first. I quote this from a frequent family exhortation by parent to child in the Kemp clan, going back several generations. The late Jack Kemp, famous as quarterback for the Buffalo Bills and later as US Secretary of Housing and Urban Development then Vice Presidential candidate, told this story about his mom, as he continued the tradition with Jack’s now-grown family.
“Be a leader!” each would say as they sent their offspring out into the world each morning. As Jack explained it, the call was not for his children to lead in the traditional sense, but to enable others to grow and prosper – the definition of true servant leadership.
This short statement is a reminder of what it means to be a great leader – to focus upon the welfare and growth of one’s peers and subordinates.
[ Email readers, continue here...] Think of what internalizing that and making it true would do in this business world. There would be no office politics, no suspicion of the intent or hidden agenda about management, no wasted time protecting that part of the anatomy we must protect when making many of our decisions in management.
Used in this context, servant leadership turns the leadership pyramid upside down, causing each level nearer the customer to have more empowerment to serve the customer than the level formerly above it. Nordstrom, Zappos, and an increasing number of retail-centric companies practice this religiously. It may not be appropriate for your enterprise at this time or in this niche, but it certainly is always appropriate in your family and social lives.
“Be a leader!”
