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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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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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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Annual reviews or constant feedback?

Here comes a controversial subject.  How often do you take the time to rate your direct reports?  Is it worth the time and effort when measured from the perspective of the company and of the employee?  In terms of time, this can be expensive and disruptive to you and your direct reports. In terms of value…well let’s examine that.

What metrics will you use to fairly evaluate each direct report?

First, like any important process, the metrics used to measure effectiveness and progress are so important to a successful outcome, that a good manager will spend time reviewing those metrics used by others and create an appropriate set of measurements for your company that reflect the most important attributes of the employee as they relate to the needs of the company.  There are many formats for use in rating and reviewing employees, and selection of the proper form and format is the first step in a successful process.  But note that this alone will be time-consuming for you.

How often to review, if ever?

I’ve been asked often if such reviews should be performed quarterly, semi-annually, or annually.  Note that few ever ask if they should be performed at all.

One argument: legal protection for the company

When an employee is subsequently dismissed for any reason, the documentation of past performance and reviews, including any past notification of weaknesses or warnings, becomes an important shield to protect the company against a subsequent lawsuit or challenge from a state employee review process.  Many companies do not take the time to perform such reviews and end up paying the price in adverse rulings by courts or commissioners based upon verbal statements alone. So, protection of the corporation is reason number one for investing in such a process.

Do employees care enough to go through the process?

[Email readers, continue here…]   Second, employees most often genuinely want to know how they are performing against the company’s standard and management expectations.  It is human nature to desire praise; and the review process is one tool to provide such positive feedback to employees. This still does not address the question of how often to make this a formal process if ever.

Alignment of employee goals with those of the company

Third, every employee should be directed to work toward the goals of his or her department, which in turn are aligned with those of the company itself.  By providing a format for review that includes a number of key performance indicators that measure just such alignment, both the employee and the manager keep focused upon the real goals for productivity.

Passing on corporate values

Fourth, corporate values are passed on to employees in a number of self-reinforcing ways, including discussion of values during the review process.  Many a business would not have strayed into a dangerous regulatory and legal abyss if employees were shown, told, and measured by their adherence to the values stated by their corporation as important to all stakeholders.

So, how often should you and your reports do this?

To answer the question of how often to perform such employee reviews, from experience I believe that quarterly formal written reviews are too much of a task for all.  Semi-annual reviews are excellent, especially for companies that offer stock options as well as merit increases for outstanding performance.  With such reviews, option grants could be tied to one review and merit increases to the other.  Two carrots in a year are better than one for obtaining desired outcomes.  The very minimum level of acceptability should be one annual review for an employee.  There are those who are passionate about tossing out the formal review process completely and just providing feedback when warranted, positive or negative.

How about reviewing the CEO?

I participate in a number of CEO reviews as board chair of those companies.  In such reviews of the top executive, I reach out to his or her direct reports for input, and then I turn to other members of the board of directors.  With such a comprehensive view of CEO performance, it is much easier to sit with the CEO and provide valuable input that is useful for CEO development.   And even founder-CEO’s are thankful for the input received, usually taking criticism as a challenge to grow in the position.

Our conclusion

I’d have a difficult time thinking that any company, large or small, could perform at its peak without great employee metrics including individual key performance indicators, capped by consistent reviews and feedback.   You’ve just heard the arguments for and against specific periodic reviews.  That decision I’ll leave up to you now that you’ve heard from both sides of this controversial argument.

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Do you act like an Eagle Scout?

You may have been a Girl Scout or a Boy Scout in your youth.  Certainly, you are aware of the top rank in each – the Gold Award for girls and the Eagle badge for boys.  Scouting teaches leadership and even if we were not members in our youth, there are lessons for us all.

Be prepared!

For example, the Boy Scouts of America motto is “Be prepared.”  And from that comes training in first aid, disaster preparation, and outdoor skills, planning for events and outings, and any number of simulations or practice runs at rescue training – from snake bites to earthquakes to fires to broken limbs to heart attacks in the wilderness.  We could learn from this simple motto memorized by boys from ten to eighteen.  (Our illustration is by Norman Rockwell, of a Scout in the uniform worn in the 1950’s and 1960’s.)

Asking “What if?” to protect against bad outcomes

Simply learning to ask, “What if?” of our direct reports is a good first step toward reducing exposure to bad outcomes, whether attempting to plan for handling a natural disaster or workplace calamity.

And the twelve points of the Scout Law

[Email readers, continue here…]   Every Scout memorizes the twelve points of the Scout Law: A Scout is trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, thrifty, brave, clean, and reverent.  That may seem an overwhelming list of aspirations, but would it not be a better world if each of us practiced most, if not all, of these?

Better employees and better managers

By the time a boy reaches Eagle Scout, he has internalized the Scout Oath and Scout Law to a degree many employers later recognize makes him a better candidate for a job merely by that attainment in his youth.   After all, only two percent of all Boy Scouts do reach Eagle rank.

Living those values even if never a Scout

We adults cannot revisit our youth to live seven years of our lives with these principles always in close sight.  But we can aspire to act like an Eagle Scout, an adult who recognizes the values and attempts to practice them in business and personal life for the betterment of ourselves and our companies

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Gamify those otherwise dull work assignments

Most of us are driven by the competitive spirit, the desire or need to win.  It reinforces self-worth, provides closure at the end of a good effort, and energizes us during the effort to achieve.

Being driven to achieve results

Many of us as managers – and our employees as workers – are driven by process, actions required to achieve a result.  And many of these actions are repetitive to a fault, contributing to boredom and ultimately to restlessness and desire for something new, in or out of the company.

The solution that works

There is a solution.  Everyone loves a good game.  It provides a short competitive experience with a measurable outcome in which the players know who won and by how much.  And it challenges each player to play again with learned skills and an incentive to beat the past score.

How do you make “process” into “game?”

[Email readers, continue here…]   So, think of ways to make each process into a game, one in which there is a defined metric or measure of the winner at the end of a cycle short enough to permit teaching, celebration, challenge, and motivation for the next time played.  Create small but meaningful competitions between groups or individuals for which recognition or small rewards are published in advance.  Allow for wins to be accomplishments of the team, as much as the individual, so that competition is a team sport, not an individual play for power.  Create and publish metrics as goals and comparisons to past accomplishments.  And pause to celebrate each new first or top score.

Empower your people to gamify their leadership

There are so many places where routine jobs can be made into a game.  Sales people know the rules and play to win, celebrating each small success along the way.  Why not empower each person or manager of each task in other areas to create similar challenges and metrics?  These cannot be viewed as corny or artificial ways for management to gain more output from a group without significant recognition or reward.  Or you will risk a backlash in which employees see the effort as merely a way to increase productivity in disguise, with no reward worth the effort.

Be a good coach and be creative.  We all want to play to win and be recognized for our efforts.

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