The dangerous game: Hiring from a competitor

Sometimes it is the first thought you or your managers have when in need of skilled talent, especially for sales or product development.  It is not hard to find and observe the best employees of a good competitor at work, skillfully moving the competitor forward in a visible way.

Two slices of the pie for one price

And it is a tempting slice of pie – two slices for one price – to take a critically needed employee from a competitor, damaging that firm while building yours.

The negative aspects of the process

The problem is that a visible hire that “cuts” the competitor makes the competitor’s management bleed.   And you’ve heard of blood revenge.  That’s the worst kind, because it results in emotionally lashing out at the offender (you) with a response that is greater than the action that precipitated it.  In many cases, your firm can withstand the response.

Legal issues

[Email readers, continue here…]   In a particularly acrimonious case, the competitor’s management may threaten to sue, based upon the exiting employee’s knowledge of trade secrets or accusing the employee of removing confidential information.  To protect yourself, first it is important that the target new hire either have already quit the job from the competitor, or has approached his or her senior manager with a request to exit and work for your company.  Yes, this flies in the face of a “grab the best employee” hire, but blunts most of the energy from the opposite side.   If you are willing to accept the risk of legal action, then the next issue rises to the top…

The danger of a salary contest

In some cases, though, cross-raiding of employees by offering unsustainable salaries or perks you cannot offer to all because of your size and financial position will leave you in a position to pay grandly for your action.

Considerations to contemplate before doing this

Consider the relative size of the competitor, the visibility of the target employee, and your ability to withstand a backlash before exercising the two-slice tactic.

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Posted in Protecting the business, Surrounding yourself with talent | Leave a comment

Can your employees recruit from a customer or supplier?

The recruitment traps

It has happened to all of us who have been leaders in business long enough.  One of your employees is approached by an employee of a customer or of a supplier, stating that “It sure would be great to work in your company.”  And without a policy or sometimes without thinking, your employee responds with a “Let me help,” or worse yet, “I have a position open.”

State your policy clearly

You should be clear from the start that no one at your company may offer a job to any current employee of a stakeholder – a customer, a partner in development or in distribution, or of a supplier. The rule should be one that includes only one “out”: if a person resigns from the position with the stake-holding company, then you will be happy to talk about a position.  No winking, sending signals, or quiet promises.

The exception

There are instances where such an existing stakeholder employee offers to go to his or her boss and ask permission to speak with you, and the boss not only concurs but agrees to call you (not just to take your call).  In that case alone, it is proper to continue as far as the offer and beyond.

My story of an employee over the line

[ Email readers, continue here…]   Let me tell you the story from one of my companies where I was chairman that recently learned about the recruiting rules that should have been in place – the hard way.  The CEO of my company checked into a hotel that was a customer for its enterprise management system, and through a few innocent questions found that the owner of that hotel and other hotels was about to purchase several new systems for his new projects.  The front desk clerk cheerfully gave my CEO the hotel owner’s contact information.

The blow-back from the other side

So, the CEO called the hotel owner that day.  “I will never deal with your company again!” was the short reply from the hotel owner to the CEO, shocking the CEO looking for a closer relationship and future sales.  It turns out that another manager from my CEO’s company had recently approached that very same cheerful hotel clerk, hinting that a job would be available if she’d like to apply.   The clerk told the owner, and the rest is history.

Backing your way out of a bad situation

Properly, my CEO begged the hotel owner for forgiveness, immediately sent an email to all our company’s managers reinforcing the existing policy of not hiring a stakeholder’s employee and spoke to our employee making the offer in a non-threatening tone, again reinforcing the policy.  During the phone conversation with the hotel owner, our CEO carefully set the stage for a later call to mend fences and check on progress with the existing system already installed.  He made all the right moves given the situation.

But wouldn’t it have been easier to avoid this kind of sticky and dangerous event in the first place?

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Posted in Depending upon others, General, Protecting the business, Surrounding yourself with talent | 2 Comments

Do you empower others?

So, we’ve previously discussed why it is important for you to build consensus in an organization in most every major decision.  To do that, you must be able to relinquish some degree of power, overriding decisions made by consensus only with some thought and certainly with an explanation to those involved.

Never fear empowering others

If you’re secure in your position, you should never fear empowering direct reports to make decisions that fall within the resources allocated to them and within the budget agreed to with them.

Why not to be a micro-manager

A micro-manager cannot cede that kind of authority, even within pre-arranged limits, and as a result meddles with decisions made by direct reports, removing authority from each whenever one of those moves are made, and rendering the individual one degree more impotent in the eyes of that person’s reports.

Helping your direct reports empower others

On the other hand, a great CEO or manager not only empowers his or her direct reports, s/he directs those people to do the same with their reports down the line.  Of course you do this within limits that should seem obvious: financial impact has been provided for within the plan; and no other individuals or departments are affected negatively by such an empowered action without notice and involvement.

Helping your direct reports grow in their positions

[Email readers, continue here…]  The more power you cede, the more you become a teacher and the more your direct reports grow in their positions.  Further, the more you share your decisions, the more you prepare those below to assume your position if ever necessary or appropriate.

Doing it right to help your organization scale and grow

If you cannot or will not empower your direct reports, you must ask yourself: what’s the deal?  If it is insecurity that is the root cause, then the best course of action is to share the power even more quickly, as you’ll look and feel more like the group is supportive of you and your position.  If you are a micro-manager and are unwilling to allow those below to fail, even with more minor decisions, then you are restricting their growth in their positions, certainly causing dissatisfaction in their ranks, and missing the most important opportunities to enable scaling your organization to a much larger size.

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Posted in Depending upon others, Growth!, Surrounding yourself with talent | 3 Comments

Are you a consensus leader or dictator?

It’s a good bet that you’ve been exposed to articles, courses and lectures about various styles of management, and how each is appropriate for some companies and for some levels of organization and at various times.

When should the dictator in you emerge?

A consensus-building leader works well in that style until someone yells “fire!” and the emergency requires a dictatorial style of management to act quickly, protecting lives.

Different organizations require different styles

If you’ve ever been on the board of a non-profit organization, especially one in education, you know that a dictatorial style of management has no place in the organization (again unless there is an emergency requiring life-saving decisions).   In the non-profit sector, all decisions move slower, frustrating many board members who are business tycoons or entrepreneurs used to making rapid, final decisive moves in the workplace.

Bold leadership decisions as a norm

But wait a minute.  Is it appropriate for managers in any business to make a habit of making rapid, decisive moves as a matter of style?  In a past insight, I used the phrase: “Bet the farm only when the crops are on fire!” to underline the risk in making continuous bold decisions that obligate a company’s resources in a single transaction.

The argument for consensus leadership

[Email readers, continue here…]  It is much more appropriate and certainly more appreciated if you take the time to bring your direct reports along in the thinking process, to obtain their input with issues that affect them, and to attempt to gain consensus from the leadership team before moving into implementing decisions where risk is involved or where the others are affected.

An additional benefit from consensus leadership

Many a time I have thought a solution was obvious until one of my board members, peers or direct reports pointed out a facet of the problem not previously considered.  Bold decisions seem to reflect strong leadership.  But more often, they reflect a deficiency in willingness to cede power to the group unless for some reason necessary to withhold that power.

The wiser choice of management style

A decision made by consensus is probably a wiser decision and surely one that will be received down the line with more willingness to implement it than one posted as an order.  Orders come from somewhere up there in the minds of most people below direct reports.  And there is no better way to destroy a company’s culture than having the majority of those in the workforce believing that they are just “workin’ for the man” (woman) when they start their work each day…

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Posted in General, Surrounding yourself with talent | 2 Comments

How to undermine or reinforce your corporate culture

Ever had a manager who hung those motivational posters around the office, spoke of “pushing together,” or “you’re empowered to give great service” – and then acted at least once in complete disregard of those statements?

You don’t want to be caught even once

It takes only one time caught by subordinates to lose the faith of an entire group of faithful followers.  And that certainly counts for customers too, although the customer jungle drums don’t communicate quite as fast as the virtual water cooler system, even with today’s many ways of posting negative reviews about company behavior.

Culture done right

On the other hand, there are great examples of managers who put their reputation or large amounts of company resources on the line to reinforce just such statements.  Think of a surprising positive interaction you had with a call center employee or store clerk who resolved your problem and calmed your anger by exceeding your expectations.

[Email readers, continue here…]   That positive experience happened to me recently when I made an off-handed complaint to a call center employee solving another problem for me and she immediately said, “I’ll take care of that by crediting you in full for the cost of that unit.”  I was floored and told dozens of people about the unexpected service offered without an angered demand or even a request for compensation.

An example of doing this right

How do you empower your people to do what you claim as your motto or standard of service?  Some hotel chains have a policy that any desk clerk can make a problem right up to a cost of over a thousand dollars.  Now that’s showing faith.

A personal example of reinforcing corporate culture

I have told the story of a customer of our company whose facility was destroyed in a catastrophic fire which took with it all the records of guests staying at and reserved to be coming to the property.  The catch: the property was on a remote island in Australia, and the manufacturing plant in Southern California.

People working together with only the customer in mind

Without a second thought, our people gathered to help the distraught property management recover data from backups, interview present guests, and quickly install the brand-new computer diverted from another installation shipped overnight to theirs.  The benefit to the customer was obvious as was their continuous praise for the company and our people in helping them in their hour of need.  But just as important, the employees of the company participated as a unit in following the stated promise in our motto, “Customer first, always!”

Actions always speak louder than words.  Always.

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Posted in Depending upon others, Surrounding yourself with talent | 1 Comment

Let’s talk about your banking relationship

 The warning is real

You’ve heard the old one – that a banker always seems willing to offer a loan when you don’t need it.  For small businesses, there is such truth in that statement that you can trust the story to be based as fact from experience.

Exceptions and good reasons to work on them

There are great exceptions for growing businesses and for businesses that have a track record with a banker.  Working capital loans and lines of credit are needed for growth and during times of business stress.  If a business were operating above breakeven and revenues and expenses steady, profits would flow to either the shareholders’ pockets or to working capital and taxes. Each cycle gives the CEO a chance to use those profits to some positive advantage, including increasing the marketing budget, paying down loans, building working capital, increasing reserve cash balances or paying shareholders.

The scary exception

But if a good business finds itself in a bad downturn, there may be a need that did not exist before for temporary cash, even as management reacts and moves to trim fixed overhead.

Relationship banking and you

[Email readers, continue here…]   Approaching a banker during such times tests relationships.  If there was no previous relationship, few bankers would rely upon anything but a personal guarantee backed by hard assets before considering a loan.  But for those wise executives who included their bankers in occasional update calls, press releases, invitations to company events and an occasional personal visit, the strength of the relationship will often show its benefits during times when lending rules of the bank are near the “can’t do it” point.

How about existing loans outstanding?

For those with existing bank loans, that constant attention is more than just important.  As loan covenants become closer to being violated or after such an event, bankers have some latitude in deciding how to handle their accounts.

The dreaded workout group, whatever the name

Upon discovery of a violation of loan covenants or even when a banker hears of bad news without prior notice or updates, bankers sometimes turn the company over to the bank’s workout group – a place you never want to visit.  In the gray area where covenants are broken but barely, covenants can be waived for a period of time as companies rectify the problems, all based upon the quality of the relationship between banker and client.

It is during those challenging times that it is most difficult to tell your story to your banker, but it is just then that are the most important of times.

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Posted in General, Hedging against downturns, Protecting the business | 1 Comment

How do you handle your cash reserves?

Here comes some advice for all of us to use in business or in our personal lives.  But to understand it, we need to delve into the short-and long-term sources and uses of cash.

Good cash strategies to remember

It is tempting to use available cash in good times to build the business and in challenging times to pay the bills and even to outdo competitors in marketing efforts.  Those are both good strategies.  But there is a tactic that we need to remember that just might save us someday.  And it has application to our personal lives as well.

The rule of cash reserves

For our businesses: Once a business has achieved break even and beyond, it should build a cash reserve equal to at least two months’ worth of fixed overhead to protect against unexpected internal or external emergencies, and to allow for your relatively restful slumber at night rather than worry about cash balances.   For our personal lives, the same rule applies, with two months’ reserve should be an absolute minimum.

Protecting our “sticky cash”

It’s a good practice to keep that reserve, which we’ll call “sticky” cash, in a money market account, not because of its earnings potential, which is usually so small as to be inconsequential, but because it is visible and requires effort to invade the balance.

How about seasonal businesses or seasonal work?

[Email readers, continue here…]   Seasonal businesses and seasonal personal work are more challenging, and maintaining “sticky cash” is even more important, since it must see you or the enterprise through the low times, long or short. For seasonal sources of income, short term bank loans are an ideal way to augment cash flow and for businesses to finance receivables during high season, always assuming that the loans will be paid off in full – from seasonal receipts.

Matching a loan term against use of funds

If borrowing from a line of credit or any of several forms of loans not specifically created for long term repayment, never use those borrowed funds to buy assets or pay down long-term debt.  You will be mixing your short-term asset (cash from the loan) with long term payments.  Tempting as that is, the practice – even if used once – can lead to trouble when it comes to repayment of the loan.  Always match your borrowing term against your use of funds.  And a line of credit should always be considered short term.

Loans for major asset purchases

On the other hand, an extended loan for purchase of a building, car or working asset, should have a repayment term that extends into years of interest and principle payments to match the life of the asset or prevent drain of working capital.

So, remember the source of your cash on hand. And remember the need to maintain reserves, and how to protect them by isolating those reserves in a money market account. And maintain those disciplines always to protect ourselves during hard times to survive the downturns that hit most of us at some unpredictable time in our business and personal lives.

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Posted in General, Protecting the business | 4 Comments

Why recurring revenues increase your company’s value

The massive shift in revenue models in recent years

Have you noticed how many web apps and content have turned into subscription services during the last several years?  Call it the Netflix effect.  Application developers once considered their products as licensed in what would closely be allied to a single sale.  Until someone realized that recurring revenues were much more highly valued by the subsequent buyers of similar businesses and investors, and that loyal users would be willing to pay annually.

Paying for content

Content providers found the same thing when many found that they could charge a subscription fee instead of relying just upon advertising.

Subscribing to most anything that used to be updated annually

Well, now we have a much larger group of products and services with and without the Internet discovering the same thing.  As former buyers, our costs as users goes up, sometimes dramatically.  But most of us are willing to pay as these products, apps and services have become ingrained into our regular usage, entertainment and especially in the protection of our systems.

Can you convert your model without losing your customer base?

[ Email readers, continue here…]   So, the conclusion is that most every business can take advantage of continuing, recurring revenues from its customer base.  Sometimes, products are designed to make all their profit upon the recurring revenues from supplies or support.  We immediately recall the razor and blade analogy to illustrate the point when planning product development and release.

The case of Xerox in the early years

Xerox in its formative years, even though barely having enough cash to market its then revolutionary copier, elected to lease rather than sell the units.  Even though that reduced short term earnings, lease revenues over time far outweighed any combination of sale and maintenance revenues, and Xerox grew into a major company based upon its innovation and its recurring revenues.

An investor’s early question

In examining mature software companies, one of my first questions is to ask for the percentage of total revenues coming from recurring sources – annual renewals, leased software, maintenance agreements, content fees, or monthly retainers.  Usually that amount exceeds 50% of total revenues and is often much more.  Mature businesses bring less in an M&A transaction than fast-growing companies, but the stability of recurring revenues always gives comfort to the buyer and allows the seller to slow the sales process, find multiple candidate buyers, and create increased demand for the company.

Call it “predictable revenue”

Think of the portion of fixed overhead covered by recurring revenues.  If the gross profit margin averages fifty percent in a service company, and if fifty percent of all revenues come from recurring sources, then it is probable that the company is stable and operating at or above breakeven, and predictably will sustain its value longer that companies that must sell to survive each year.

A buyer’s bonus

And in a sale of the company, it is usually better for the seller who will command a bonus valuation based upon some multiple of recurring revenues due to the comfort value to the buyer and the increased lifetime value of each customer to the enterprise.

Stability during recessions

Finally, in a downturn, and there will be downturns that match the economy when a company begins to mature, recurring revenues can and often will save the company itself and smooth the revenues through the downturn.

If you have not spent considerable time refining a strategy to include recurring or predictable revenues, do so now.  And remember, that once annual contracts are in place if that is your model, they must include escalation clauses based upon some cost index to prevent their profitability from declining involuntarily over the years as inflation eats into the value of each non-indexed contract.

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Posted in Growth! | 1 Comment

What is the real goal for our management and company?

Often, we joke together as managers of companies or of people that our goal is “world domination” or “to crush the competition.”  But no matter how stated, the primary goal of an enterprise is to make money.

The three measures of progress

How do you measure progress toward such an undefined goal? We measure it by profit orrevenue in dollars.  But that is a number in a vacuum without at least two other measures: return on investment (ROI) and percentage of net profit to revenue.

Comparing ourselves to the giants

Microsoft, Google, Amazon and other great firms generate billions of revenues and profits and even have a high ROI and high net profit percentage. But some of our own small businesses have even higher percentages of return on investment and percentage of net to gross.  So, the amount of money made is a number in a vacuum without the rest of the tools to tell the story.

How about companies formed to profit and give to charity?

Many entrepreneurs begin their venture with the lofty goal that some portion of their eventual profits will be given to a sponsored foundation or directly to charity.  Some form “B” corporations to codify their vision into the articles of incorporation.  This certainly seems a satisfactory way to “do well by doing good” or serving the needs of others.  Investors often have a problem with this though and are put off by the altruistic split of profit and attention by those founders.

And who do we serve with our profits?

[Email readers, continue here…]   It is common and certainly appropriate to tell the world that our profits and success serves not just our shareholders but our stakeholders, which include employees, suppliers and customers in that mix.  A strong, secure company pays its bills on time, follows through on promises to its customers, and pays its employees a fair base and incentive compensation.  Companies living on the edge or losing money often cannot make those vital promises, affecting its reputation, security and equity value.

An easy response to “world domination”

The next time someone tells you that their goal is world domination, you might politely smile and remind them that a more modest goal might better serve the stakeholders over time and that it might be a bit easier to accomplish.

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Over-promoting employees. Recalling the Peter Principle

Remember the Peter Principle?

Funny how good messages come back in new forms after years of languishing out in the ether.  Dr. Laurence J. Peter in The Peter Principle: Why Things Always Go Wrong wrote in the early 1960’s of the “lateral arabesque,” describing how companies promote incompetent employees sometimes by sending them to another department or division to get them out of the way of progress.

 “The lateral arabesque” is real

I use the term “lateral Arabesque” differently in a more poignant way to describe how companies rarely realize the true value of an employee until s/he jumps (the arabesque) to another company in a higher position, valued there financially and for skills which were taken for granted in the original company.

Rebound: The Double Arabesque – rehiring the employee

The twist (“double arabesque”) is that your company management only then realizes what the person is worth, and makes advances to bring him or her back at an even higher salary and more inflated title.

The moral of the story

[Email readers, continue here…]   The moral is that great employees are never as valuable as when they leave and land at a better position elsewhere.

Yet, there is a lingering problem

I’ve lived this experience time and again, most recently with the chief architect of a product line who jumped to a competitor for more money and more recognition.  Remember that the grass IS almost always greener… The original company was afraid to upset the structure of its salary compensation schema and could not (would not) take the chance to raise the person’s pay to be more than competitive early enough to show the love and trust deserved by the valuable player.

How to fit a returning superstar into your salary range

That’s the quandary. Mature companies have structure and ranges of salaries that are baked in so carefully as to not disturb the ecosystem.  How do you over-compensate the most valuable players?  Additional stock options?  Bonuses?  Higher base pay? An increase in title?  More attention? Each of these is a good tool and should be considered before needed to reward and encourage the best players before they can imagine playing for another team.

The final irony

The irony of it all is that the lost person’s replacement probably will be offered a starting salary higher – sometimes much higher – than the one paid to the departed player.  And – to regain the one departed, an even higher offer will have to be made.  Two jumps:  a double arabesque.  One initiated not just by the player, but by the largess of management.

Have you star players in danger of performing the dreaded lateral arabesque?

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Posted in Depending upon others, Surrounding yourself with talent | 2 Comments