Chief Executive Boards Blog

4 Steps to Eliminate Process Failures

2012-05-20T13:20:00.000-07:00

Things go wrong. You get upset. People get reprimanded. And then it happens all over again - either the same problem or a different problem. This comes up in CEBI meetings all the time. Why is that?

You have business processes. I hope they're documented and people refer to them, at least occasionally. If that's not the case, you have a problem that we'll cover in another article.

Even with documented business processes, something goes wrong. That's a business process failure. What separates great organizations from good organizations is their response to a business process failure.

Many good organizations, after the reprimand, say something like, "Don't let that happen again." And then, of course it does. That's due to a lack of an important business process of its own -- the process of responding to a process failure. Here's a rough outline of what should happen in the case of a process failure:

It's documented -- there's actually a written report of what happened. This can be a simple template on a shared drive or knowledge base, and the process failure reports can be saved in a similar location.
It's analyzed to its root cause. This is not a toss-off answer, like "Failed to follow the process." The Japanese say, "Ask WHY five times." For example:
- Order got shipped to the wrong customer
- Why?
- Jack wasn't here, and Jim did the shipping
- Why was that a problem?
- Jim doesn't know the shipping process
- Why?
- He hasn't been trained
- Why?
- He's not Jack's backup for shipping
- Who is?
- Actually, it was John, who quit last month, and we didn't train anyone else
- So what's the root cause of this problem?
- We don't have a clear-cut list of backup people for critical business processes like shipping
Once the real root cause is identified, then the important final step kicks in -- Corrective Action. The corrective action can take a lot of forms, such as:
- Creation of a checklist that doesn't exist
- Posting of a checklist that didn't get run in a place it's easy to find
- A process improvement to an established business process that broke
- Creation of a new business process to replace an informal handoff of knowledge
Implement and test the Corrective Action. Make sure it works, and make sure everyone who's supposed to be trained in the new process actually is.

A business owner once said, "We don't seem to have a consequence for not following our business processes." I said, ""Why not make the consequence fit the misbehavior? The person who fails to follow a business process is required to do the process failure analysis and write up the corrective action."

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Prepare for the Greying of Your Workforce

2012-05-08T12:46:00.000-07:00

Only a few years ago, we were concerned about the departure of the Baby Boomers from the workforce and the "brain drain" of experience that would go out the door with them. What happened? Nothing. They can't afford to retire.

One questionably positive outcome of the market gyrations of the Great Recession has been the wake-up call for Americans on their retirement savings. Unfortunately, many investors made the classic mistakes of retail investors, selling into the panic of falling equities markets and then failing to capitalize on a 100% runup in the same markets over the past 3 years.

But the problem is not about those who "lost" retirement savings. It's about those who never had any to begin with and aren't on track to have a meaningful amount - ever. According to the Employee Benefit Research Institute, of those Baby Boom and Gen-x households in the third quartile (50%-75%) of income, only 50% have retirement savings adequate to maintain a lifestyle at 70% of their current income if they retire at age 65. Extend that retirement age to 75, and their odds improve to only 60%. Extend retirement to age 85 and it's barely 70%.

We are likely to see an age of retired Americans living in poverty, compared with their current standards of living. Why? Because they don't understand their current situation and are running out of options to resolve the shortfall in their retirement savings and investments.

Their only option? Keep working. Or return to work after they see their net worth evaporating much more quickly than they imagined. There's good data on the likelihood of this. As defined benefit plans were winding down, many workers received lump-sum payments of their accrued pension benefits. Most of those spent all that money in 3-5 years.

As employers, we're going to be seeing Baby Boom and GenX employees staying in or re-entering, vs. leaving the workforce. Most of us don't have very good strategies in place to cope with an elderly workforce and all the costs and issues that come with it. You'll have more sick leave, more "forgetful" mistakes and probably more accidents as workers pass 70, 75 and perhaps even 80.

If you have ideas or suggestions on this topic, please click "comments" below and share them with others.

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Terry Weaver

CEO

Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

The 5-Step Performance Improvement Plan - Last Stop Before the Door

2012-04-16T19:38:00.001-07:00

I'm surprised at the paranoia among business owners and CEBI members over terminating someone. Perhaps the HR Consulting industry has promoted seminars to a tipping point that's convinced people they're surely going to get sued for firing someone. Nothing could be further from the truth. Yes, it does happen in isolated cases, and when it does it's messy. But it doesn't happen very much. In 40 years of terminating well over 100 people, I've never had a finding against me, either administratively or legally.

To avoid a claim of wrongful discharge or age discrimination, everyone says "document, document, document." Does that mean it takes two years to build a case? No.

A simple approach to documenting non-performance will keep you in the clear 98%+ of the time, and will take you 90 days or less. Here are the steps:

If it's the first time you've had a specific, direct conversation about the performance deficiencies, pull out your Crucial Conversations book. In case you or a key manager of yours needs some training, this book is taught in the CEBI Leadership Mindset Workshop, coming up on August 1-3, 2012 in Cleveland, OH. After making your way through the Crucial Conversations script, finish with something like, "Bob, I know you can correct this problem, and I need you to understand that if we have to discuss this again, we'll be talking about a Performance Improvement Plan with a specific timeline to get it fixed."
If Bob is the performance problem you think he is, he'll foul up again. When that happens, go back to the Crucial Conversations script, finishing with, "Bob, when we talked about this last time, I told you we were going to create a Performance Improvement Plan for you. I'd like to see you day after tomorrow to go over that."
When you meet with Bob, have a specific written list of the performance deficiencies, along with the specific performance milestones Bob has to meet in the next 30, 60 and 90 days. Those need to be aggressive, but potentially reachable. Say, "Bob, it's imperative you meet these milestones. If you don't, I'll have no choice but to terminate you for non-performance. If you don't think you can get there, just let me know and we can make arrangements for you to look for a position that's a better fit for you."
Bob may take you up on your offer, in which case you can say, "Bob, if you want to resign and go look for something else, I'm fine with that. If that's the case, we'll provide 2 weeks' pay to tide you over while you're looking." Then help Bob draft that up, get him to sign it, help him clean out his desk, hand in his keys, and help him out the door. Same day. Tell him he can come back 2 days later to pick up his final check. Do not keep Bob on the payroll after he knows he's going to be terminated. You'd be amazed at how many job-related injuries such people have.
If Bob decides to stick it out, just keep track of the milestones, document the misses, and your problem is over in 90 days or less. Then sit down with Bob, saying, "Bob, it looks like this just isn't going to work out. Today's your last day. I need your keys and I have a box here so you can clean out your desk. Here's a packet with everything you need to know about your benefits continuation options." Then walk Bob out to the door. Same day. Bob can pick up his final check 2 days later, or whenever payroll runs.

This is not that big a deal. I've had it work out in each of the above ways. In a few cases, Bob just hasn't "gotten it" before, and responds to your direct approach, shapes up and the problem is solved. In many cases, at steps 3 or 5 where Bob figures out it's going to get ugly he'll go find another job - either before or within the 90-day Performance Improvement Plan window. For even hard-core cases, when they figure out you've set targets that they've consistently missed they'll think long and hard before claiming they "had no idea" they weren't performing (and were wrongfully discharged).

In the words of one of my favorite business books, Fire Someone Today, there are only 3 sentences to step 5:

"You're fired"
"Here's what you need from me"
"Here's what I need from you"

Keep it simple, and you'll avoid the gremlins that have crept into the termination process. Do your senior managers a favor, and teach them this process also. You'll be amazed at the people they've been waiting to fire, and thought you didn't want them to.

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Can Barak Obama or Mitt Romney Help the Middle Class?

2012-04-15T14:11:00.003-07:00

The middle class is down for the count. It's become increasingly irrelevant in today's economy. President Obama and Mitt Romney both say they have the right medicine for the economic resurgence of the middle class. They're both wrong, according to a very insightful article by Geoff Colvin of Fortune Magazine. There's nothing either could do from the office of President to solve this problem.

That's a harsh and dismal forecast for a widening group of Americans still facing high unemployment and stagnating pay. Middle class workers are angry, and in large part don't understand who they're angry at or why. According to Colvin:

"The sorry situation of the middle class began long before the financial crisis and recession. Incomes in the broad middle have gone nowhere for more than 20 years after rising slowly but steadily through most of the 20th century. Why? Many theories have been advanced, but the one that holds up best is set out by Harvard economists Claudia Goldin and Lawrence Katz in articles and a book, The Race Between Education and Technology. The economy continually demands higher-level skills from workers, they argue, and for most of the 20th century the U.S. workforce kept up. In 1900 few people stayed in school past eighth grade; by 1970 a large majority finished high school, and many went on to college. American workers became the world's best-educated and earned the rewards.

"Then, in the 1970s, America's level of education stopped rising. The high school graduation rate peaked at 77% in 1969 and has since dropped to about 69%; college rates, too, stopped rising. The economy kept demanding more workers with advanced skills, but we stopped producing more. At the same time, other countries relentlessly educated their people, so the U.S. workforce fell from No. 1 in the world to the middle of the pack. Result: The minority of workers with advancing skills became more valuable, while the broad middle got flat or even falling pay."

Colvin goes on to explain that the infotech revolution makes upper-class workers more productive. They can earn more, they can buy things more competitively and they can invest more wisely. They get richer. The lower class, on the other hand, hasn't been hurt much by infotech, as their jobs are place-based. They lay bricks and cook in restaurants -- things that require people on site, and haven't been automated.

Jobs of the middle class, however, have been automated out of existence, making them increasingly irrelevant to the economy. As an example, Alvin Toffler, in his book Revolutionary Wealth calculates that ATM machines have probably replaced 200,000 bank tellers, a job that most would consider middle class. Today, if you carry on luggage, there's only ONE airline employee involved in the entire process of ticketing, payment, printing boarding passes, checking in and boarding an airplane -- the person at the gate who actually scans your boarding pass. One more step in using face recognition to comparing yourself to your government ID photo, and that job's replaced by automation as well. All those jobs in the airline industry used to be considered middle class jobs.

Goldin and Katz lay the problem squarely at the feet of the US educational system. The fix is obvious but clearly not easy. We need a complete overhaul of our education system, starting before Kindergarten. With apologies to those in that profession, what we're doing isn't working, and it's been getting worse for 40 years. I've spent enough volunteer time with educational institutions to know that this is a huge and seemingly intractable problem. It has to be solved locally -- it's something the federal government has clearly demonstrated it has no ability to fix. Of course, the most powerful union in America will need to be dealt with along the way.

The most plausible fix (to me, anyway)? More school. Year-round school. Our 180-day school year originated in an agrarian society that needed kids available for summer farm work. Japanese have 243 days of school per year. Germans have 240. American kids' reading and math proficiency relative to grade level declines at every grade. Why not require, if not of all kids, that at least those kids behind in reading or math take remedial classes in the summer, thereby catching them up with their peers by the fall? The KIP schools, piloted in the Bronx decades ago has proven that year-round school works. Why can't we take advantage of that example?

As business owners, this middle class that's unprepared for the workplace needs of this century should be a critical concern, both economically and ethically. How can we let such a large part of our population continue to decline in prosperity, largely because they don't know any better? What can we do to turn this ship around?

I welcome your comments and ideas.

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CEO

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TerryWeaver@ChiefExecutiveBoards.com

7 Ways to Avoid Becoming a Commodity

2012-04-15T13:17:00.002-07:00

Members of Chief Executive Boards International are more successful than most business owners, and fared better during the Great Recession. Why? Lots of reasons, but the one most apparent to me is they're rarely commodity suppliers. One member described his business as "boutique". I like that term. If you've found some good ways to avoid commoditiation of your products or services, please click "Comments" below and share them with others.

Whether you provide a product or service, buyers are attempting to commoditize what you do -- to make it just the same as 3-4 other suppliers, so they can beat you down on price. It's up to you to resist that strategy on their part, and avoid becoming commoditized, which is the shortest possible road toward lower margins and working harder for less profit.

Here are 7 strategies CEBI members use to avoid commoditization:

Just say "No" -- When RFQ's show up that intend to commoditize what you do, just refuse to play. If successful on such RFQ's, you'll end up with a low-margin job that will sap your energy and your organization's resources. Then you'll need another one to "keep everyone busy", the standard excuse for taking low-margin, commodity work.
Look for your niche -- What's your "sweet spot" in your market? One member says "We specialize in Pain in the A** Work". That's becoming his tagline -- doing jobs that are complex and difficult. He's not bashful about what he charges for that. Another specializes in machining difficult materials like Inconel and titanium. Another specializes in casting alloys that last longer in use than competitors' alloys.
Provide specialty (boutique) capabilities -- Capabilities like high mix, low volume or short lead times set you apart from competition and allow room for better margins. One member quotes parts on a piece price basis, but specifies lots of 1, 5 or 10. Makes him competitive on 10 units, and profitable on 1. This averts a favorite scheme of commodity buyers, who quote and promise you hundreds of parts, then actually order them one at a time.
Look Before and After -- This is one of my favorite strategies of a CEBI member who has built an entire product family by looking at what customers use just before or just after the customer uses his product, then integrates whatever that is into the product family. Sometimes that's a service. A die casting is almost always machined or finished. If you're a die caster, why not integrate machining or powder coating into your service offerings? Done in-line without double-handling or shipping the parts surely reduces cost. That combination of services makes you harder to replace, and gives you more margin flexibility.
Educate -- Get your story together so you're talking in different terms than the other suppliers. An Architect should be talking about your business and how the building will support or enhance the business or the customer experience. Most talk about roofs and walls, being "partners" and other vague platitudes. Talk in terms of "total cost of ownership" and "life-cycle cost", then back it up with numbers.
End-Around the Purchasing Department -- Figure out a reason that you need to be talking to the end users (those who actually handle your product after it's delivered) or the specifiers. At the worst, you become the preferred supplier, rather than just one of the pack scrambling after the next RFP.
Control the Specification and Selection Process -- Once you get around the purchasing department, the specifiers will be interested in helping you with an unfair advantage over other contenders (in return for your help in doing some of their work). Put price far down on the list of selection criteria. Help them define what information, documentation, and data will be required by the procurement, and then help them put together the selection matrix. Weighted toward your strengths and away from your weak spots, a weighted selection matrix is a near-sure winner, especially if you know your competition well.

Boutique or commodity? It's your choice. If commodity is unavoidable, you have only one essential strategy -- become the undisputed low-cost producer. Southwest Airlines makes all decisions against this criterion, and has developed a brand and a cult following along the way.

A boutique supplier has a lot more running room, a lot more pricing leverage and, generally, a lot more profitable and defensible business.

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CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

2 Ways to Improve Your Kids' Financial IQ

2012-03-25T12:45:00.010-07:00

In a recent meeting of Chief Executive Boards International, a member raised the question, "Anybody got any ideas on helping your kids understand and believe in saving and investing?" When the conversation was over, another member said, "That was worth the whole meeting."

Two great ideas came out of that meeting that I thought you could use. If you act fast (before your kids file their 2011 tax returns), you can even use these retroactively for 2011.

Roth IRA Income Matching -- Most useful for kids before they're professionally employed, this strategy is simple.   For every dollar earned (as reported on their tax return), offer to match, up to dollar-for-dollar, their earnings in a Roth IRA account (up to the Roth maximum, currently $5,000).   Easy to set up with any big-name fiduciary (T Rowe Price, Fidelity, Vanguard, Schwab, etc.)

This applies to baby sitting, paper routes, busboy jobs, etc.   What happens over their high school and college years is that a fund of $20,000 - $30,000 accrues.   When you finally pull out the statement, explain how it added up and how it's become serious money.

Suggestion:   It might be advantageous to keep those statements to yourself for several years -- just intercept them from the household mail.   True, if a kid older than 18 wants to, he can raid the account and spend the money.   If that happens, you then know you have a completely different problem and you can go to work on that.

Variation on this idea -- One of our members said he had been doing this since his kids were little, paying them $5,000 out of the company (to create the required earned income) and then funding the Roths for the full $5,000, restoring the FICA haircut that comes along with this strategy.   I'm not so much of a fan of this one since there's no incentive -- perhaps useful up to, say, age 16, and then revert to "I'll match what you actually earn."
Roth IRA Contribution Matching -- Once in a professional job, they probably have a qualified plan, like a 401(k), available.   Yet few young professionals take advantage of these.   So, offer to match, up to dollar-for-dollar, their own 401(k) contributions in a Roth IRA (up to the Roth maximum, currently $5,000). Yes, they can contribute to both a 401(k) and a Roth, assuming they're below the income phase-out limits.    In fact, even if they're over those limits, there's a strategy by which you could still to this:    Click here for details

If they don't have a qualified plan at work, then they can contribute to either or both a conventional IRA or Roth IRA.    The catch is that the maximum allowable annual contribution is $5,000, including your match, between both accounts.   So, you could match $2,500 dollar-for-dollar or, say, $4,000 at 25 cents on the dollar.

Both of these ideas hinge on an important principle -- They've gotta do something for themselves before you'll do something for them. Keep that idea in mind, whether dealing with kids or employees.

The core idea here is to create a "snowball" that's big enough to interest them in making investment choices, and also to demonstrate that simple, regular monthly investments (and living far enough below your income to make them) are the keys to long-term financial independence.

As I mentioned, one member said these two ideas were "worth the whole meeting," I hope you find that to be the case, as well, and that you'll move quickly to decide whether you want to do this retroactively for 2011. Of course, you have plenty of time to start such a program in 2012.

If you have some strategies for building financial IQ and discipline with your kids, please click "Comments" below and share them with others.

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Terry Weaver

CEO

Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

Working Harder and Earning Less?

2012-03-20T17:23:00.002-07:00

I'm starting to hear a consistent theme in conversations with both Chief Executive Boards International members and my general business owner acquaintances. Most businesses are up from a year or two ago. Good, right? Maybe not. Their revenue is up, but hours are up, payroll is up, inventory is up and working capital is up as well. In some cases they're paying overtime to avoid late deliveries. Sound familiar? Read on.

Several of these same business owners have found that they're not making any more money than they were at lower revenue levels, and at the same time they're getting stretched on working capital. Not to mention the stress. The reasons vary, but the symptom is more common than I would have thought. When asked what's happened, they say things like:

"We've had to add some people to support the increase in business, and they're not up to speed yet." In some cases this conversation has caused a member to realize that at least one of those new folks just isn't going to get up to speed -- ever -- and it's time to cut his losses.
"We've had some raw material cost increases"
"We're running some overtime to keep up with demand"
"We've added some new systems and tools." In at least one case, this conversation caused a business owner to revisit just how those tools have impacted the business. Perhaps the value added by providing more customer documentation is not something the customer is paying for -- it's just added cost to so something "because we can." That member is revisiting some of his newer business processses to look for cost-reduction opportunities.

Several members were reminded that they hadn't raised prices recently. When you're running overtime and seeing raw material costs go up, it's time to raise prices. If you can't make lots of money when you're running flat out, you're doing something wrong.

One member said he's just raised prices by 5% across the board, and they're sticking. He had some pushback from his partner, to whom he replied, "Look, we're running a $7 million business. If we raise prices by 5%, we net another $350k without doing anything -- no more shipments, no more employees, no more inventory and no more work." The partner saw the light.

Have you forgotten how much easier it is to raise prices than to work harder? Do the math -- or see this article: 5 Reasons to Revisit Your Pricing Strategy

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CEO

Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

Virtual Customer Previews, Reviews and Signoffs

2012-03-20T13:39:00.002-07:00

Do you need to periodically update your customers on project progress, preview designs or get customer signoffs on project delivery? It doesn't have to include an airplane or an onsite visit.

A Chief Executive Boards International member is now doing customer acceptance of complex, customized manufacturing machinery by webinar. Using GoToMeeting, the customer is invited into the plant from his desktop PC. Multiple webcams on the floor allow demonstration and observation of the machine from almost any angle. Moreover, you can turn the webinar controls over to the customer and let him "drive". If the customer likes what he sees, you may save both money and time in getting approval to ship or to continue into the next project phase.

Think about what happens if things go wrong -- if the customer isn't happy with what he sees, you have an opportunity to correct the problem and give it a second pass without an additional trip, for which he'd probably want to backcharge you.

Saves time and money, besides creating a recording of the acceptance webinar for documentation. Our member reports that he's recently shipped machines without the customer setting foot into his plant.

If you've found some good use for webcam/webinar tools in your business, please click "Comments" below and share them with others.

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Terry Weaver

CEO

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The Best Gift for Your Kids -- Financial Independence

2012-02-12T07:42:00.000-08:00

One of the most valuable lessons we could impart to our kids is a good sense of financial strategies and skills for their lives. That's the critical success factor in achieving financial independence. I'm hugely partial to a "how to" book for couples (or singles) just starting out -- The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich

I also suggest giving kids subscriptions to Money Magazine, the most practical, no razzle-dazzle investment guide for the average household I know of. Many Americans are now starting to talk about having to work 'till they're 80 - that's when they think they can afford to retire. According to a survey by the Employee Benefit Research Institute, 56% of Americans have less than $25,000 in savings. This is chilling, and the result of choices those same people made when they were 20. They never "figured it out" where saving and investing are concerned.

Why is that? Because nobody taught them. They made poor choices in their financial lives, and mostly at the early stages. They got behind the saving and investing curve early, spending all (or more than) they made, then having kids and continuing to float their lifestyle up to meet or exceed their income.

Michael Kiosaki's book, Rich Dad's CASHFLOW Quadrant: Rich Dad's Guide to Financial Freedom, makes the point that there are only 4 ways of generating household cash flow. The fourth quadrant -- "Investor", where your money works for you, is the one most Americans (and many business owners) don't get. In fact, the power of compound growth rates of your diversified investments over 60 or so years (from your early 20's to your early 80's) will prevail every time. Actually, it almost doesn't matter what you invest in -- just don't invest it all in any one thing (such as your own company, or anyone else's).

If you had only one strategy -- to max out your 401(k) plan every year, as early as possible in your career, you'd be a millionaire by age 50 (perhaps 40). Yet almost no one does so. Why? They don't "get it". Nobody taught them.

Add to that driving cars that are bought used and paid for, rather than carrying a car payment (or 2) for your whole life and you'd be a multi-millionaire by age 50.

The gift of a lifetime for your kids would be a start at understanding frugality, saving and investing. As Dave Ramsey says, "If you will live like no one else, later you can live like no one else".

Happy investing, and happy lifetime income from it.

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Terry Weaver

CEO

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TerryWeaver@ChiefExecutiveBoards.com

What's Your Anesthetic?

2012-02-10T15:38:00.001-08:00

A very talented entrepreneur I saw recently said, "Business owners all have some pain -- some more than others". I knew that. What he said next was surprising. "Most of them don't have antibiotics -- they have an anesthetic." What's your anesthetic? Here are some favorites:

Try not to think about it -- Keeping yourself "heads-down" working in the business will keep the real pain off your mind
Distract yourself with something else -- usually something mundane or routine
Blame someone or something
Make excuses
Compromise your own goals -- just settle for less

Sooner or later the pain comes back. Then you need an antibiotic. Something like:

A different perspective
A different strategy - stop doing the same things that haven't worked so far
A different person working on the problem

Where's the best place to get antibiotics for what ails a business owner? From other business owners. They know where it hurts. They know how it hurts. They know what they did to eradicate their own pain, and they'll share it with you. All you have to do is pull your head up out of the day-to-day grind and put yourself in a situation where others can help you.

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Terry Weaver

CEO

Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

The Cloud, The Tablet and The Smart Phone

2012-02-10T15:23:00.000-08:00

America is in decline. We've lost our way. We're no longer the leaders and innovators of the world. We've shipped all our jobs offshore.

Are you kidding me? Are you just not paying attention? Are you listening to the TV news? Apparently you haven't been in Chief Executive Boards International meetings lately. Ninety percent of our members are expecting 2012 to beat 2011 - some by a wide margin.

The facts:

America is producing more manufactured output than ever before. Yes, it's doing it with fewer people. Almost everything (goods, as well as services) in America is increasing in output, with fewer hours of labor expended. We call that Productivity -- the units of output divided by the labor hours needed to produce it. I've heard, "all we're creating are hamburger-flipping jobs." Not true, but guess what? Even that industry is producing more hamburgers with fewer minutes of labor per burger.

I just watched the boarding of a 150-seat airplane managed by a single gate agent. Just a few years ago, there would have been 3 people involved in that process. Most passengers showed up with boarding passes they printed themselves - either at home or at self-service kiosks. They paid for their tickets without another human being even involved. Contrast that with 20 years ago -- you had your assistant call a travel agent, and set in motion a process that was probably personally touched by at least a dozen people, including the driver who hand-delivered the printed tickets. Is that a "highest and best use" of a human being??

So what's the "next big thing"?

Brian Wesbury, my personal favorite economist, says the next wave of economic growth and productivity improvement is a revolution of computing, moving off the desktop and into the airwaves. A 20-year long trend of accelerated productivity improvement is continuing, in large part fueled by Information Technology.

If you have a library of old company newsletters from the 70's and early 80's, you'll find countless articles exhorting employees to improve productivity. Despite all that print, productivity didn't move a lick. Companies fought for 1% and 2% productivity gains. Reason? Nobody had any new tools by which to do anything much better.

Late 80s -- personal computers. Control of computing resources moved from the high priests of the corporate computer room to the desktop of the branch and regional office. Early 90's -- the Internet. Suddenly the branch and regional offices could communicate and collaborate, whether Corporate liked it or not. And they started performing better. A lot better. Suddenly productivity started improving across all kinds of businesses by 4%, 6% and 8% per year. And so it has been for the first 20 years of the Internet era.

During the recent recession, productivity soared -- yes, on less output, but with even fewer labor hours.

This wave of innovation is not originating in China or India or Europe. It's originating in America, where it always has. In the Post-Japan world economy, Americans are the ones on the leading edge of applying Information Technology to deliver almost everything better, faster and cheaper. The rest of the world benefits, but largely follows, rather than leads.

So, whether you're making bets on investments or tooling for your company, look to the "cloud" and look to mobile devices. Look for ways to put more information tools in more hands in smaller packages. Tablets for the sales force. Tablets on the shop floor. Smart terminals on the belts of the warehouse staff. Smartphone apps tailored specifically to your business, your processes and your workflows. Look for ways to take elapsed time out of everything you do. Get the information on to the next process step, even before the material arrives.

Think about it.

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http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Equity Not Required -- 5 Alternatives to Equity for Key Employees

2012-01-23T19:07:00.000-08:00

"I want him to have a piece of the action." "I want him to have some skin in the game." "He wants equity in the company." In this case "him" is a key manager or valuable employee, male or female. If you're a business owner, you've probably said or heard one of these things. They come up all the time in meetings of Chief Executive Boards International.

There are two sets of assumptions in these statements, both usually mistaken. The employee assumes that he'll become richer if he has a piece of ownership in the company, and that the owner would be inclined to gift that to him. The owner assumes the employee understands the risks and rewards of business ownership, and is willing to take them, including putting some money at risk.

What the employee is usually saying is, "I want to make more money, and I want to be recognized and rewarded for my contribution to the company's success." What the owner usually wants is a way to motivate the employee to better performance, to think more like an owner, and to have some "bronze handcuffs" that would disincentivize him from leaving.

So, business owners spend an inordinate amount of mental energy, consulting fees and legal fees to put plans in place to accommodate additional owners (partners). You need buy-sell agreements, valuation plans, stock restriction agreements, non-competes, employment contracts and a variety of other suspenders and belts to make this work. And then?

"You want me to PAY for that?", the formerly-interested would-be partner exclaims. That's when the business owner gets offended. He can't believe, after all that begging and what he's spent to set the company up for multiple owners, the employee thinks he's somehow entitled to the gift of equity. I've actually seen long-time great relationships between owners and key employees spoiled by this misalignment of expectations.

So, what are the options? First, when the topic of equity comes up, make your position clear -- you're not giving it away and you're not buying into the idea of "sweat equity" (a euphemism for giving equity away). One CEBI member suggested the best response to "I want some equity" is, "How much is your house worth?", meaning "How much money could you come up with to buy into the company?"

That's usually the end of the equity conversation -- when the employee realizes he's going to have to actually put something at risk. So, what are some alternatives to meet both the objectives of both the employee and yourself?

A well-defined current-year incentive compensation plan that pays out annually. Then give the employee the option of diverting a large portion, if not all, of that payout into a qualified retirement plan (SEP, SIMPLE or 401(k)).
A long-term incentive compensation plan that accumulates performance over, say, 3 years and then pays out similar to #1 above.
A deferred compensation plan. This is usually calculated on the same basis as options 1 or 2 above, except that the payout isn't immediate -- it is deferred into the future, thereby incentivizing the employee to stay and quantifying the "leave behind" in case of termination. These types of plans usually "vest" some number (3-5) years after the incentive is earned and then pay out upon reaching an age, say, 60 or 65 or in the case of change of control (you sell the company).
A phantom or shadow stock plan. These plans are not "real" stock. The employee is neither an investor nor shareholder. It's essentially a promise of the company to pay in the future some compensation that emulates the outcome of stock actually owned. Shadow stock would be awarded as part of a well-defined incentive compensation plan. The shadow stock would emulate the value of real stock, thereby providing the key employee with an "owner-like" benefit without having actually invested in the company.
A "change of control" agreement. You agree with a key employee that if he stays on until you cash out of the business, he gets a piece of that deal. Can be a fixed amount, an amount based on the transaction value, and may increase over the years. This "bronze handcuff" costs the employee nothing, and you owe him nothing if he doesn't stick with you.

These are just a few of the ways to recognize, retain and reward key performers. None of them tangle you up with a partner or change your relationship. You're still the owner and they're still the employee. They just have a more clearly defined reason to pitch in and to stay around.

If you've come up with a creative long-term compensation or retention plan, please click "Comments" below and share it with others.

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Terry Weaver

CEO

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http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

LLC? Want to Save Some FICA? Consider an S-Election

2012-01-14T08:43:00.000-08:00

More and more LLCs are discovering the advantages of electing a different tax structure while retaining their registration as an LLC under state law. Time is of the essence in this decision, which must be filed within the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. That would be March 15th for this year.

The alternative? Elect S-Corporation tax treatment for your LLC. Yes, you can simply decide you want your LLC taxed as if it were an S-Corporation, while legally remaining an LLC.

Why would you want to do this? There are several reasons:

If you're a multi-member LLC, some of your fellow members (and perhaps yourself) might rather get an "ordinary" paycheck and a W-2, rather than a draw or "guaranteed payment" from the LLC. This includes ordinary withholdings, and considerably reduces the burden of members making large quarterly estimated tax payments. This is particularly beneficial to minority % members. It also simplifies distribution of qualified plan benefits, such as a 401(k).
If you're a single-member LLC, you're currently paying FICA and Medicare taxes on the entire profit of the LLC, including the money you reinvest in the business. As an S-Corp, you pay FICA and Medicare taxes on only your own W-2 income - whatever is justifiable as "reasonable" for your work in the business. The remainder of profit is considered that of the entity, and taxable to the members as only ordinary income, as reported on a K-1.
That's fair, I believe, considering that some of that income is probably reinvested in the working capital of a growing company. Why should you pay taxes on money you can't take home?
Distributions of available cash are still allowed, and with no tax consequences, since they've already been taxed (Less FICA and Medicare -- see #2 above). They must, however, be distributed proportionally according to membership %, just like an S-Corporation (including yourself).
You retain the simplicity of the LLC - you still do not need a board of directors, meetings or minutes.

Why wouldn't you want to do this? Again, at least a couple of reasons to consider:

Under an S-Election, your LLC must conform to the same ownership rules and restrictions on distribution of profits and cash as an S-Corporation. LLCs can distribute cash or allocations of profit (on your K-1) any way they want, regardless of ownership %, which may be a flexibility you don't want to give up.
You may limit some of your own qualified plan benefits. For example, your 401(k) match, SIMPLE IRA limits or profit sharing calculations would be done on your own W-2 compensation, rather than the entire profit of the LLC.
While you can "undo" your S-Election, it's neither cheap nor simple. Be sure this makes sense for you before you go down this road.

This not advice. It's an idea for you to become knowledgeable of, then validate with your own trusted legal, financial and tax advisors. Here's a good article as a place to start.

Do remember you have enough time, but not a lot, to get this done for 2012. March 15, 2012 is the drop-dead date to make an S-Election for this tax year.

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http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Assistants -- The Pendulum is Swinging (Again)

2011-12-19T09:48:00.000-08:00

Have you gotten rid of clerical/administrative assistants and required your execs and sales people (and perhaps yourself)to handle their own correspondence, phone answering, order entry, etc.? That's now becoming "old school".

As email, voicemail and office automation swept through companies worldwide, many clerical and administrative jobs were eliminated with the thought that people could just do their own administrative work. Turns out, savvy business owners and CEOs are discovering that's not consistent with the highest and best use of their scarce resources.

A Chief Executive Boards International member has learned that he can increase productivity of his top sales producers by adding a "Sales Assistant" to help with the many time-intensive tasks of order entry, order acknowledgement, order changes, shipping information requests, etc. There are a lot of heartbeats and keystrokes needed to manage a customer relationship and many of those are not the best use of a sales person's time.

This is an easy return on investment (ROI) calculation. Just look at the incremental gross margin a sales person could produce by selling full time, rather than doing his own paperwork. Compare that to the cost of an assistant. For simplicity, if the assistant costs, say, $50,000 all in and your gross margin is 50%, it takes only $100,000 in additional sales revenue to break even. If you can split an assistant between 2-3 people, so much the better.

Take a look at your highest producers and see if they could run faster if you hired someone to carry their briefcases. You might find yourself part of a new "leading edge" of management thinking.

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TerryWeaver@ChiefExecutiveBoards.com

Drama Not Included

2011-12-12T19:31:00.000-08:00

I came upon a business improvement strategy this month that surprised me. Drama eradication. It surfaced in a Chief Executive Boards International meeting, where a member was talking about an employee who has drama circulating around her most of the time, and he doesn't think he needs it any more. He's right.

My wife and I had a weird experience this past weekend. We went to our neighborhood Pak-Mail store to send off some Christmas packages. The store has recently been sold by an owner who was almost always there, was friendly, and seemed genuinely happy to see you come in. Kind of like my barber, just a casual, comfortable place to do business. Businesslike, efficient, and no drama.

This visit, however, two women were running the store. The one behind the counter was dashing between machines -- frenetically would have been an understatement. She actually tripped and almost fell once. Not like they were busy -- there was only one customer ahead of us. Now, the process of weighing and labeling packages and collecting the customer's money had never before been so dramatic, but this day it appeared someone had made one too many visits to Starbucks.

Her associate was at a counter, slaving over some kind of manifest with sighs and great animation, and stepped up the tension by dramatically announcing, "I'm not ignoring you, but I just have to get these packages ready for the postman, who's already been by once." These two seemed intent on feeding each other's drama to the point it was just plain uncomfortable being there. As we left, we looked at each other and almost simultaneously said, "I don't know if we'll be back in there." We've been shipping packages there for 15 years, but previously drama was not included.

Contrasting Scenario

I've had my second recent experience flying Southwest Airlines. Volumes have been written about Southwest, but I don't recall any focused on the lack of drama in the Southwest experience. What do I mean by that? The boarding process. First, there's no need to crouch at the ready to jockey for position when your boarding "group" is called. They give you a boarding number, designating your place in line. They have a well-signed queuing area where people just line up in their assigned order - 60 at a time. Then they call segments of the line onto the plane, by number, and people walk onto the plane. Simple, cheap, and drama not included.

On the plane, there's no drama, either. They don't charge for checked bags, so people are not attempting to stow small refrigerators in the overhead bins. As a result, there's plenty of bin space, just like there used to be on most airlines. With no assigned seats, people tend to distribute themselves down the aisle, filling windows first, then aisles. Nobody has to get up to let someone from a later boarding group into their assigned window seats. It's just an amazingly calm, orderly and swift process. Drama not included.

So, I'm wondering if drama might be an indicator to watch for and eradicate from your business. It's hardly ever positive, and if you can find the root cause, which may be a broken business process or, perhaps more likely, a person whose bias towards drama you just don't need.

I'm interested in comments on your experiences with drama eradication. Or maybe you have some metrics -- some sort of drama index?

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5 Signs You Have a Toxic Employee

2011-12-11T07:10:00.000-08:00

There are marginal employees, weak employees, and problem employees. A drain on your business, and you'd be better off without them. Then there are toxic employees. These people are a cancer that's eating away at your business hour by hour. You have no idea how much these people are costing you, and they could cost you your company.

What's the difference between a lousy employee and a toxic employee? Intent. Most lousy employees are that way due to a benign disregard for what you want. Toxic employees, on the other hand are actively undermining you. Here are some examples of behaviors I've seen from toxic employees:

Manipulation -- They consistently manipulate others into doing what they want or forgiving their misdeeds. They ask forgiveness rather than permission, and then cleverly avoid any accountability or penalties for their actions (see #3 below).
Misrepresentation -- They spin communications to their benefit. They misrepresent the company to customers, and they misrepresent commitments they've made to customers. They say things like, "I didn't tell them we'd do that", when, in fact, they either did or they let the customer believe we would.
Misappropriation -- They use company funds in inappropriate ways. A recent example given by a member of Chief Executive Boards International was an employee's use of a company credit card to charge a personal vacation. He then came in and said, "You can take it out of my pay over the next 3-4 pay periods." Imagine that, he wrote himself a personal loan out of company funds and expected (and got) no consequences from it! I once saw a toxic employee vote himself a raise by writing down unapproved overtime. I think he was in cahoots with the payroll clerk, who never called it to the attention of the owner.
Inciting discontent -- They start rumors or twist facts to pit other employees against each other, against their supervisors or against you.
General mischief -- They're troublemakers, sometimes not for any obvious reason. It's not that there's something in it for them, they just have a pathological need to stir things up.

You may be thinking, "Yeah, that sounds like Joe, but I'm working with him on it." Forget it. You can't fix these people. They've been operating this way since childhood, and it's a deep-seated psychological problem that you're probably not qualified to fix (if indeed they want to be fixed).

If you have one of these folks on your payroll, his antics have become a spectator sport. All the other employees are in the bleachers watching to see what you're going to do about it. They know. They know you know. They're just waiting to see how long it will take for you to get rid of the toxic employee. And then the REAL fun starts when all the other stories of misdeeds and toxic behavior come out. You won't believe some of the stuff you'll hear.

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CEO

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TerryWeaver@ChiefExecutiveBoards.com

Hard Work Stopped Paying Off - or Did it Ever?

2011-12-11T06:59:00.000-08:00

President Obama recently said, "Long before the recession hit, hard work stopped paying off for too many people." That statement applies to business owners, as well, although not in the context the President intended. Fact is, hard work alone never "paid off" - for anyone.

Working hard is a virtue. It's a survival tactic. It's not a strategy. It's something you have to do when your business (or life) strategies aren't working.

A Chief Executive Boards International member once said, "The real measure of the value of your business is how much time you can spend away from it."

Think about it. If the route to improving your business by, say, 20% is working harder, what do you do if that "works"? How do you get the next 20% increase? Work even harder? Visualize 2 or 3 or 5 more iterations of that. Sooner or later you run out of gas. You're burned out and depressed, perhaps divorced or, worse yet, you're disabled by a stroke or heart attack. Working harder is not a strategy -- it's a downward spiral to an eventual unraveling of the company, created by yourself.

Here are 8 Alternatives to Working Harder -- ways and places to get some better strategies that reduce, rather than increase the amount of work you have to do.

Think about it.

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5 Steps to Triple Your Telephone Prospecting Hit Ratio

2011-12-10T14:15:00.000-08:00

You want to contact a prospect by phone. Perhaps he's even expressed an interest in your product or service. You know you can't get an order by email -- it's going to take a conversation to get the selling process to the next step. You try to catch him answering his own phone - no success. You try leaving voicemails, asking him to call you back -- he doesn't.

You need a better plan, and here's one that's worked for me.

Send an email a day or two in advance, with a short (no more than 2-3 paragraphs of a couple sentences each) description of what the call is about or why you want to talk to him. In the first or second line of the email, usually in bold font, say, "I'll call you next Tuesday morning to fill you in on this. If there's a better time for you, just reply to this email or give me a call at 864-527-5917 to let me know." Use a subject line something like, "Can we catch up Tuesday morning?"
Build a process for sending these. You can send 10-12 of these for a single morning or afternoon of prospecting phone calls. Use a merged email generator like Worldcast, your CRM, or "Resend this message" in Outlook.
You'll be amazed at how many people respond with a better time -- in one recent morning, I had that happen on three out of five prospects. Then you have an email dialog going, with no gatekeeper in between, where you can make an appointment that suits you both.
Many, of course, will not respond to you email, and you'll call them on the appointed morning or afternoon. Some of them will take your call. For others you'll get an assistant or voicemail. Voicemail is probably preferable, because you can leave a message something like, "Hello, this is Terry Weaver calling from Chief Executive Boards International. My phone number is 864-527-5917. You've been receiving our newsletter for business owners and we hope it's been useful to you. As you know, CEBI is a membership organization of business owners and CEOs who meet to help and advise each other. It's been hugely valuable to our members during these times of economic uncertainty. I'd like to take a few minutes to fill you in on how this works, and I'll call you again on Thursday morning. Please give me a call at 864-527-5917 if another time would work better for you. That's Terry Weaver, Chief Executive Boards International, 864-527-5917."
Pull up your earlier email about the Tuesday morning call, and forward it to the prospect, with a subject line like, "Can we catch up Thursday morning?" That email body is something like: "I'll call you Thursday morning to fill you in on this. If there's a better time for you, just reply to this email or give me a call at 864-527-5917 to let me know."
Call again, as promised, on Thursday morning. You can, if you wish, repeat steps 4 and 5 one or more additional times.

This has worked remarkably well for me. First, I do on occasion hear from someone proposing a different time for the call. And, interestingly, having sent the email just recently seems to increase the hit ratio of my call getting through - as if the prospect was actually expecting it. If you have some other telephone prospecting means that work for you, please click Comments below and share them with others.

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Questions Down, Answers Up

2011-11-27T12:17:00.000-08:00

"What would you do about that problem?" Good question, asked most every day in most companies. One Chief Executive Boards International member says it's usually asked by the wrong person. He says that question ought to be most often asked by the boss, not the subordinate.

Think about it. How often do you, the boss, become the "go-to guy", where your subordinates are asking you for answers? If your answer is, "most of the time", it's because you have it backwards. Instead, you're the one who should be asking your subordinates, "What would you do about that problem?"

Try inverting the information flow in your company, such that you're asking most of the questions and your subordinates are providing most of the answers. In other words, "Questions down, answers up". Give it a try, and you'll find yourself becoming steadily less essential to the day-to-day operation of the business.

Also check out: Want Your Employees to be Independent Thinkers?

If you have some other ideas on how get your employees to think and act on their own, please click "Comments" below and share them with others.

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LinkedIn -- The Reference Checker's Friend

2011-11-11T14:01:00.000-08:00

Businesses that sell mostly or exclusively to other businesses have found low return in most social media investments. The exception, in my view, is LinkedIn -- the social media site for businesses and professionals. It's not uncommon for people to use LinkedIn in one way it was intended -- to get a "warm" introduction by a mutual acquaintance to someone or some prospect you're trying to reach.

There's another use, however, that I've been amazed by. Use LinkedIn as a stealth reference checker. Here are a couple of ways I've done so:

I was recently helping a client screen some resumes for a key management position. We got down to one of the front-runners, and I said, "Let's have a look at this guy on the web." Google popped his LinkedIn profile, and would you believe a friend of mine was a mutual connection (knew both of us)? I called him up, told him who we were considering, described the job opening, and said, "How do you think he would do in that role?"

Long pause. Then he said, "Well." Another long pause. "I really can't divulge inside information from his previous employer." Long pause (mine). "Wow", I said, "Thanks so much -- I completely understand, and thanks for saving another business owner a whole lot of time."

I consider this one to have been a bullet dodged.
Third Party References -- Search LinkedIn for other employees of a candidate's previous company. Call them and see what they'll tell you about the candidate, if they happened to be there at the same time. These aren't the hand-picked references a candidate might give, but rather people who in most cases have no reason not to be honest with you.

If you have some other ideas on how to use LinkedIn for recruiting or reference checking, please click "Comments" below and share them with others.

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8 Red Flags You Don't Want on Your Balance Sheet

2011-11-05T06:33:00.000-07:00

Business owners have (mostly) a working knowledge of their income statements. For most, the balance sheet is something they don't understand and pay little attention to. I've seen several balance sheets recently that would best be described as train wrecks. Curious, since it's the balance sheet that several people look at first. Those would include:

Bankers -- The balance sheet is the cross between the altimeter and the fuel gauge (the income statement is the airspeed indicator) for your business. The balance sheet shows the "vital signs" of the business. Bankers reject loan applications out of hand if they can't make sense of the balance sheet. Their logic? Why ask questions of you about the anomalies? If you understood your balance sheet it wouldn't have been in that condition.
Buyers -- If you're remotely interested in the long-term value of your business, a credible, buttoned-down balance sheet is essential. If you present a balance sheet riddled with questionable items to a potential buyer, they automatically assume the rest of the financials are suspect, as well. The result is a reduced multiple for their valuation and far more rigorous due diligence, since you've damaged your own credibility right at the gate. If it somehow gets to an offer, you can be sure there will be multiple painful contingencies in the buyer's favor.
Plaintiff's Attorneys -- I heard this from a sharp young lawyer this week. Things like loans into and out of the company, to and from shareholders, make it appear the business is being used as a personal "piggy bank". Running personal expenses through the business (usually over the company credit card) gives a similar appearance. Besides giving the impression of a lack of financial discipline, these actions can, in fact, provide evidence that the business entity (LLC, S-Corp or C-Corp) is really just a fake -- that the business is actually commingled with personal funds on a day-to-day basis. In the case of a judgment against the company, from which your corporate veil is intended to protect your personal assets, you give a plaintiff's attorney plenty of ammunition to prove that there's no veil at all -- the business and personal assets are commingled and therefore not protected. This is known as "piercing the corporate veil", and could easily allow a financial mishap in the company to take you down personally, as well.

I've recently worked through forensic accounting projects with several small businesses to clean up "red flags" on their balance sheets. Have a look at yours, and see if you find some of these red flags:

Loans to Shareholder -- These are usually distributions in drag, sometimes made because posting the cash you took out of the business as a distribution would strip all the equity out of the company. Good example of commingling funds. If you need cash to buy groceries, borrow it as a personal loan or a home equity loan. You went into business to make money, not to loan yourself money.
Loans from Shareholder -- These are usually equity investments in drag. You put money into the company. Why was that? Company not financially healthy enough to support itself? If the business needs to borrow money, borrow it from a "real" lender, like a bank or an individual. Can't get a loan from someone else? I don't want to loan you money, either. In the case of any shareholder loans, a sharp/aggressive IRS agent may try to use these accounts to retroactively terminate an “S” election if the company has more than 1 unrelated shareholder -- major tax consequences.
Missing Fixed Assets -- Where are the vehicles? Where's the furniture? Where's the office equipment (computers, servers, etc.)? The purchase cost, as well as the accumulated depreciation should be easy to find. There's a difference between fully depreciated assets and MIA assets. Accumulated depreciation greater than cost of assets (see #4 below) means the owner does not look at the balance sheet and his/her accountant does not look at it either.
Negative Assets -- Negative assets are usually liabilities in drag. Some can be legitimate in limited cases. Most aren't -- they're usually posting mistakes, sometimes years old. Clean 'em up.
Negative Liabilities -- Why would you owe someone negative money? Generally a posting error.
Negative Equity -- How did you take more money out of the business than you've made? Using the business as a front for your personal cash flow problems?
Other "chaff" -- Odd "remainder" amounts in dormant accounts. If an item on the Balance Sheet hasn't changed in 2-3 years, it deserves a look. Is it real? Is it relevant? Can you explain what it is and why it's there?
Inexplicable "clearing" accounts -- QuickBooks Payroll is famous for creating these. They're a red flag that payroll doesn't balance, and sometimes accumulate to big numbers over time, meaning that expenses are being either overstated or understated, depending on the reason for the payroll imbalance problems.

If you routinely give your Accountant a messed up balance sheet – he will clean it up (or should) and send you a large bill to do it.

Take a hard look at your Balance Sheet, just as a buyer, banker, plaintiff's attorney or IRS agent would. Does it pass muster? Can you explain every line item? If not, get a good financial advisor to help you sort through where the bodies are buried, get them cleaned up, and get your balance sheet presentable as evidence that your company is operating in control and you're running a business, not a personal piggy bank.

For most small businesses, making sure your cash, accounts receivable, inventory and accounts payable accounts are clearly reconciled to the supporting schedules, lists, bank statements, etc. is all the owner needs to do every month to feel good about the balance sheet. By the way, you'll be surprised at how much you learn about your business during the exercise.

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Terry Weaver

CEO
Chief Executive Boards International
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TerryWeaver@ChiefExecutiveBoards.com

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What's Going Right?

2011-10-31T13:18:00.000-07:00

CEOs responding to the Chief Executive Boards International Fall Economic Survey confirmed that reports of the death of the US Economy are greatly exaggerated. In fact, things are generally working better than reported by the popular press. Link to Video Summary of the CEBI Survey

I'm quoting one of my favorite economic forecasters, Brian Wesbury, who answers the question, "What's Going Right?":

"Everyone knows housing is still weak. And, everyone knows jobs are growing, but not fast enough to seriously lower the unemployment rate, which stands at 9.1%.

"Everyone also knows real GDP has expanded for nine consecutive quarters, at an average annual rate of 2.5%. No one is satisfied with this; but it is a recovery, not a recession.

"So, how can real GDP grow when housing and employment are so weak? Something must be going right…somewhere.

"Well, it turns out that the strongest part of the economy has been business investment. Equipment and software investment (Cap-Ex) has grown five times faster than GDP – 12.9% at an annual rate over the past nine quarters.

"The strongest category has been transportation and related equipment (trains, planes, trucks, etc.), up 43.3% at an annual rate over nine quarters. Computers and peripheral equipment (including servers, printers, routers, etc.) are also up 26.2% at an annual rate in the past 2 ¼ years. All of this data is adjusted for inflation, and what it shows is, contrary to popular belief, businesses are spending and investing. Moreover, businesses investment is a bigger share of the economy than housing.

"Consumer spending is up, too, despite weak confidence data. After adjustment for inflation, consumer spending is up 2.2% at an annual rate over the past nine quarters. In a shocker, real furniture and household durable equipment spending (refrigerators, washing machines, etc.) increased by 5.0% in the past year and now stands just 0.3% below its all-time high from late 2007. Despite weak housing, and worries about credit, household durable spending has rebounded to pre-crisis levels.

"Last we looked, the only help government is giving businesses is a more rapid depreciation schedule – which is a tax incentive for investment. Yet, trillions are being spent trying to stimulate housing and employment. In other words, what government is trying to boost by spending is going wrong, but where it uses tax cuts things are looking up and going right. If government could find the courage to have faith in markets and not itself, more things would be going right.

"That said…it seems clear that the economy is finding enough strength in business investment and consumption to offset the pain caused by housing and employment. We expect the scales to remain tipped toward growth in the quarters ahead and look for 3% real GDP growth in 2012.

"This growth could accelerate if government spending and regulation were reduced in a significant way. Housing already looks to have found a bottom. Imagine what happens when it finally turns up? Buck up, not everything is going wrong. In fact, there are many things going right in the US economy."

You may be interested in the complete article: http://www.ftportfolios.com/Commentary/EconomicResearch/2011/10/31/whats-going-right

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

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Sales Commission Out of Control -- Do You Cap It?

2011-10-09T20:01:00.000-07:00

A manager posted a question on a CEO web forum about the idea of capping sales commissions: "One of our sales reps is blowing out his sales numbers - and is set to earn commissions that far exceed any other rep and even place his total comp above any employee, including myself. I want to understand if it is ever wise to put a cap on commissions when we revisit comp plans for next year?"

When is it a good idea to put a cap on the amount of commission someone earns? Resounding answer: NEVER. If you ever get these inclinations, take a cold shower and rethink. Rationales for this conclusion ranged:

That's a good way to demonstrate to someone that you can't be trusted -- set up a compensation plan, then when the person starts doing what you said you'd reward, renege on the bargain
f you created a defective incentive compensation plan -- one that pays too much money for too little accomplishment, it's your fault, not his
If your plan is well designed and you have a guy hitting it out of the park, what's the problem? Pay him what you promised and hope he'll just keep on doing it more. If a star salesman's economic value is higher than yours, his manager, get over it.

The prime objective (and litmus test) of a compensation plan is "The House Wins" -- hopefully by a factor of 4:1 or so. What do I mean by that? This is a good application for analysis at the margin. What's the marginal benefit to the organization (gross margin) of the next $100 of sales (or $100,000)? And what's the salesman's cut of that? Regardless of how the commission is calculated (on total revenue, on gross margin, on units sold, etc) you'd like the house to have a "win" of at least 4:1. That would mean a sales commission of 20% (or less) of gross margin. Of $100 gross margin, salesman gets $20 and house gets $80 -- a 4:1 ratio. 3:1 isn't bad, either -- 25% of GM for the salesman.

What if there's a base salary involved? Is the commission rate the same? Perhaps, but you don't want to be paying commission on the first dollar of sales. See: "The #1 Incentive Compensation Plan Design Mistake". There's another variation on that theme at: "Incentive Compensation Not Working? Try Plan "B".

Are you completely unhappy with your incentive compensation plan? You're not alone. See: "8 Questions to Ask if Your Incentive Comp Plan Isn't Working".

PS: One misguided respondent commented that "Perhaps you could buy off the salesman with equity in lieu of commission". If you ever start thinking about giving away equity, take a cold shower, slit your throat, then call me.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

Qualifying Sales Prospects -- Go for da MAN

2011-10-05T12:57:00.000-07:00

Sales people habitually spend time on leads and prospects that aren't ever going to buy. That's because they're not the "MAN". What's that mean? They don't have all the qualities of a real prospect:

Money
Authority
Need

Steve Hoffmann of Skyline Exhibits and Design is, like many business owners, his company's lead sales person. He really knows his craft and we find ourselves regularly talking about sales training and sales management. Steve shared this simple, memorable and effective algorithm with me. Breaking it down into parts, here's what makes the MAN (it's not clothes anymore):

Money -- The money is not only budgeted, but it's available (no "if" qualifiers in the way) and the project itself fits into the company's overall strategy. No contingencies -- the money is there.
Authority -- The person we're dealing with is the one who can sign the order. Not a recommender. Not a committee. Someone with the authority to spend the budget without any additional levels of approval.
Need -- There's some kind of pain that this proposal addresses. Something is missing and your proposal fills that void.

So, the next time your sales person talks about a prospect that's just about to buy, ask, "Is he da MAN?"

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

Make an Additional 100 Marketing Impressions a Day

2011-09-05T08:48:00.000-07:00

Would you like to put your marketing message in front of another 100 qualified prospects or current customers each day? You could reach at least that many, if you'd put that message in the email signatures of not only yourself but also your entire staff. The signature feature is available in almost any email client, including Microsoft Outlook, and is an easy way to put something interesting, provocative or humorous in front of everyone receiving an email from your company.

Chief Executive Boards International member Tim Gase, owner of Peerless Saw Co., has a signature footer that's provocative and a bit humorous at the same time. Tim's company makes circular saw blades for, among others, the sawmill industry. Here's his footer:

NOTICE: It is okay to print this email. Paper is a plentiful, biodegradable, renewable, recyclable, sustainable product made from trees that provide jobs and income for millions of Americans. Thanks to improved forest management, we have more trees in America today than we had 100 years ago.

Consider a company-wide policy and standard for marketing messages in Email signatures. The emails are going out anyway -- they might as well be part of your marketing plan.

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Terry Weaver

CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

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