“Tis an Ill Wind…

…that blows nobody good.” That old sailor’s proverb, first recorded in 1543 and further popularized by Shakespeare in “Henry VI” in 1623, is as plain today in its meaning as it was almost 500 years ago. Anything that is bad for someone is probably good for someone else.

It’s especially true in business. The failure of a company is a terrible event for its owners, employees, vendors and customers, but clearly offers opportunity to its competitors. A hurricane is rightfully characterized as a disaster, but it may not be such for contractors or lumberyards. Droughts are bad for farmers and ranchers, but generally benefit beach resorts. The effects of Moore’s Law place ever-increasing margin pressure on vendors of computer equipment, but the rest of the business world benefits from enhanced productivity.

oil scaleEnergy costs are one of the most far reaching examples of this dichotomy. Oil prices (at 85% of their foreign exchange) have propped up the Russian economy, despite sanctions over Ukraine. If they fall too far, it may destabilize the situation in Eastern Europe much further. Despite that, thousands of businesses would celebrate the savings from decreased transportation and chemical costs.

Natural gas prices have recovered from their lows of early 2012, but remain far below the averages of the middle 2000′s. Producers frequently flare off the gas from oil wells, rather than try to take it to market. The gas producers want to convert LNG importation facilities for export, since prices are far higher in Europe. The chemical producers, enjoying cheap feedstock for plastics and fertilizer, want the plants left alone. Local governments on the Gulf Coast stand back, afraid of offending either large-employer base.

What effect do swings in energy prices have on your business? Please answer my one-question survey here. No respondent information is collected, and you can see the current results instantly.

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When Employee Incentives Don’t Work

My definition of an incentive is variable compensation designed to encourage specific behavior. The challenge is to make sure that behavior is really something you want to encourage.

A home building company bonuses purchasing managers based on their ability to reduce the cost of construction. Not surprisingly, those managers negotiate aggressively to lower bids from subcontractors. The lowest bidder frequently wins the work with a price that is a few hundred dollars per home less than his competitor.

Home BuildingUnfortunately, in one case the lowest bidder is a firm that is notorious for falling behind schedule. They frequently delay the closing by two weeks or more, at a carrying cost to the homebuilder of about $150 a day for the delay. Despite the cost, the purchasing manager continues to award the subcontractor new work. Why? Because the manager’s bonus doesn’t consider the complete scope of building costs, but only direct construction pricing.

A Wholesale Distributor compensates salespeople on total sales. He also instructs them to never lose a deal to a competitor because of price. The salespeople regularly sell products at a margin that doesn’t completely cover costs.

A provider of home security services scales compensation based on each salesman’s ranking at the end of the month. The company also promises installation within ten working days of purchase. Every month there is an influx of sales as month-end approaches. The first two weeks of the next month require substantial overtime among the installation crews to meet the guarantees, although those same crews are frequently idle during the last half of the month.

As you read this, it is natural to say “That’s easily solved, Just change this, or stop doing that.” In fact, that kind of objective viewpoint is one of the primary benefits of the peer groups we run in The Alternative Board®, and is frequently the first level of value I deliver in my consulting and coaching practice. “Why are you doing that?” is sometimes surprisingly difficult for an owner to answer.

Usually the response is “Because it works.” The definition of “success” in these cases is that the employee is engaging in the behaviors expected. He or she is selling more product or cutting costs. The owner is afraid of what will happen if the incentive is changed. Will expenses spiral out of control? Will revenues plummet?

Adding conditions to existing plans (“You can now meet price only as long as it isn’t below a certain margin.” or “You can hire a low bidder only if his job performance record is satisfactory.”) is inevitably perceived by the employee as restricting his or her ability to maximize the incentive, and often leads to gaming the system.

Incentives are an ongoing balancing act between what is best for the individual and what is best for the organization. When the results don’t serve both parties, they have to be restructured. The short-term impact of a disgruntled employee is more than offset by the improvement to organizational health.

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Small Business Owners are the Same Everywhere

I’m returning to this space almost exactly a month from my last post. It’s the longest period that I’ve missed in the last 6 1/2 years, but I heartily recommend a refresh break to business owners, and it was worth taking my own advice.

A brief apology to those readers who received some 30 posts on Friday. It was a glitch in a program update, and it happened so fast we couldn’t stop it. Fortunately, it appears to have gone to only a fifth or so of subscribers. If you were one of them, I’m sorry for the inconvenience. I loathe spammers, and it was embarrassing.

Also, while I was gone our staff undertook a revamp of this site. I am so pleased by their work. I hope you like it. Huge kudos to Christi and Devin for their creativity and hard work. On a technical note, it you are still seeing the old red titles for the posts, delete your Temporary Internet Files and it should show in the new fonts and colors. Thanks.

We spent much of our time over the last few weeks in Paris and Barcelona, where many of the businesses are larger and run by employees. One week was in the small towns of Southern France, where most of the establishments we patronized were run by their owners. Although service was excellent with only a couple of exceptions, businesses run by the owners were universally outstanding.

On our first night in Paris the hotel clerk mentioned L’Entredgeu as nearby (in the 17th arrondissement) and the best in the area. We were beat from the plane trip, and walked in at about 8:00 looking for a table. We later found out that reservations usually need to be made 3 days in advance. The owner was clearly surprised at our lack of a booking, but consulted her reservation list, and conferred with the chef as to his supplies for unexpected guests before deciding she could seat us. As the restaurant filled completely with locals (it was very small) we obviously had snared the only free seats for the evening. The food was fabulous, and we never once felt that we were “allowed” in. She was a gracious and attentive hostess, and the experience was a highlight of the whole trip.

Ventenac en Minervois is a very small town along the Canal du Midi. At Le Grillade du Chateau the owner hustled among 30 tables, directing multiple staff and the open kitchen (although clearly with no control over the chickens wandering the outdoor seating area.) She was a Maestro, while serving up some of the best seafood ever in gorgeous presentations.

Escriba kitchenIn Barcelona, locals tipped us to the paella restaurant for the cognoscenti, Escriba. We wore out a lot of shoe leather trying to find it, which was by no means a certainty, so again arrived on a Saturday night without reservations. The hostess apologetically said that the only way they could seat us was near the open kitchen. They had no idea what a treat that was, as we spent our evening watching their two chefs handling up to 10 giant paella pans simultaneously. A great meal and a cooking lesson in one night! Most importantly, one of our party has a severe allergy to peppers, which makes consuming any paella a challenge. After initially advising her to order something else, the owner returned to tell us he had consulted with the chef, who had prepared one of the base formulas only an hour before and not yet fully seasoned it. If we would order that specific dish, he felt confident that he could deliver their usual quality without using peppers.

Of course, any of these three or others may not have actually been the owner. Our language skills were insufficient to determine their positions exactly. Perhaps they were just terrific managers with an ingrained appreciation for delivering a memorable experience and taking care of the customer. Certainly they all knew that we were tourists, and unlikely to return much less become regulars. It doesn’t matter, they each had the Hunter’s attitude, working frenetically and going the extra mile for their customers.

With all the big attractions, from the Mona Lisa to Sangara Familia, it’s funny how some of the most lasting memories are made by a single person. Keep that in mind when your next new customer calls.

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  1. Pingback: Small Business Owners are the Same Everywhere | The ExitMap | Transition Planning for Business Owners and their Advisors

  2. This sounds like a fantastic trip. Fun, food, and the ability to see how the rest of the world runs their small businesses. Lots of lessons learned and ready to share. And, a hardy welcome back.

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Wageflation and the Talent Wars

Why are so many employers complaining about the availability of talented workers and the cost of hiring them? Government statistics indicate that real, inflation-adjusted wages are now below 1986 levels. In 2012, the Federal Reserve tracked both an all time high in want ads, along with an all time high in the long-term unemployed, especially among recent college graduates. How can we have both a surplus and a shortage at the same time?

unemployedThe talent wars are heating up. There are three major reasons why things will continue to get tougher for employers at one end of the spectrum, and for some workers at the other.

1. Demographics: As Boomers retire, the generation that follows (GenX) has about half the birthrate from the early 20-teens to the late 2020s, meaning that for every 8,000 Boomers who hit 65 years old daily, there are about 4,000 people reaching age 45. Supply and demand alone will drive pricing for the top echelon of workers.

2. Disparity: The Gini coefficient measures the gap between rich and poor by country, and it is widening in all of the industrialized economies. Technology is replacing mid-level white collar workers (salespeople, data entry,  customer service). Those who lose a task-based job seldom move up into a higher knowledge or decision making position. They more frequently have to settle for lower-paying task-based  employment. So wages decrease for the semi-skilled, while they increase for the highly skilled.

3. Disconnection: I’ve written before about the “Follow your passion” mantra. I have no statistics handy, but we all know that unemployment for college graduates is worse among the psychology and sociology majors than it is for engineers. The higher education system is built to generate revenue from kids sitting in big lecture halls, who support the institutions’ research and academic stars. I identified this gap between the workers that business seeks and those our education system produces as the major issue for employers over the coming decades in my interview with Bob Morris a few weeks ago.

So on one end of the scale, average wages are declining for workers, even those with degrees, who are underemployed in relation to their skills. On the other end we have increasing competition for those whose skill-set is in demand, from electricians and engineers to managers and executives.

That is why I hear complaints such as “He just got his engineering degree. I’ve hired those kids for years at $45,000. I offered this one 70K, and he turned me down for another job that paid 90!” It will get worse.

Small business has always been the training ground for employees entering the workforce. We take people with a specific skill set, and teach them general job skills like showing up on time, following directions and getting along with coworkers. As partial compensation for that investment, we’ve been able to pay “entry level” wages. The challenge going forward will be how we sustain higher pay scales based on the specific skills, while still bearing the cost of general job training.

NOTE: I regularly use these pages discuss a business owner’s challenges in maintaining balance between work and life. After 6 years of dedicated weekly posting, I am going to take some of my own advice. My wife Leila and I are celebrating 4 decades together by taking something that is longer than a vacation, although not quite long enough to be called a sabbatical. I’ll see you in a month.

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  1. John H. says:

    John,
    One very important contributor to the high wage expectation is the enormous levels of student loan dept new entries to the workforce bring with them. My friend, an experienced engineer out of work for a year, was recently offered a job at $20 an hour. He requested $24, largely because at $20/hour and a relocation to suburban DC he couldn’t have made ends meet. His prospective employer passed, and cited the position as being done away with.

    What happens to our spending-driven national economy with graduates saddled with life-long levels of college loan debt? What happens to home sales?

    More importantly, what happens to future generations in terms of saving for college for their children,l and what appears to be a self full-filling prophecy for generations to come?

    • John F. Dini says:

      Great point John. We are proud of our “lifestyle” as Americans, but we have also put ourselves in hock over the last 50 years on every level. Every parent I know who makes the college visit rounds is shocked at the level of creature comforts that are now considered standard for student living. Those apartments, on campus eateries and mega fitness centers were built on $1.6 trillion in student debt. It really isn’t sustainable.

      BTW: There are 2 million Americans over 60 years old who still have outstanding student loans, and 140,000 are having their Social Security payments garnished.

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Reputations are Sticky

“We have a great reputation in our industry.” In thousands of hours of coaching and facilitating I’ve never heard a business owner say “We have a lousy reputation.”

Customer FeedbackThe myopia of working hard to deliver a product or service leads us all to the belief that customers and vendors understand the effort we put in and appreciate it. How do you validate your reputation objectively?

ABC television has released its NBA schedule for the coming year. The Cleveland Cavaliers, although almost a completely new team (albeit with LeBron James) have five national dates. The Oklahoma Thunder also has five, obviously due to MVP Kevin Durant, and despite the fact that they’ve been ousted from the playoffs by San Antonio in two of the last three years. The reigning champion Spurs will be on the air twice, and one of those dates is Christmas Day as part of a five game marathon.

Why? Because the Spurs are boring. They are at or near the top of the league in most offensive categories, with dazzling assists and three-pointers galore. NBA Commissioner David Silver has proclaimed their performance in the 2014 finals as the best basketball he’s ever seen. They won the championship by the widest scoring margin in history.

But to the casual basketball fan, the core of the television audience, they are boring, defensive stoppers in low-scoring games. That is a reputation built a decade ago, when they won their first three championships to miserable viewership ratings. Reputations stick, and television networks aren’t in the business of reeducating their viewers.

Many years ago I sold auto parts to independent repair shops. My employer was often in a cash bind, and we needed to sell what we had in stock. A mechanic would call for shock absorbers. “We don’t have those,” I’d say, “but we have some great deals on air filters today. Why don’t you stock up?” It always seemed that what we had, everyone else had as well, so we’d haggle price to make a sale.

Years after I had moved on I ran across a friendly competitor. I mentioned to him how hard it was to meet our margin targets, because everyone else seemed to sell for a lower price. “Are you kidding?” he responded. “Every shop in the country knew that you guys would do anything for a sale. Whatever you had in stock drove the price down for everyone.”

I was shocked. I thought we were the class of the industry, but we were perceived by our competitors and customers as the bottom feeders.

Customer surveys are valuable, but you have to assume some bias because the respondents are already doing business with you. Validate your reputation in the marketplace by asking people who are objective. Query your vendors’ salespeople as to what the competition says about you. Ask customers who don’t do business with you, or who don’t do business with you any more, why they choose the competitor and not you.

Reputation is important. Make sure you know what yours really is.

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2 Responses to Reputations are Sticky

  1. Great topic. This is a continuing problem with most businesses. They have blinders for their own reputations or they don’t really want to know the answer to the question from former customers or people who’ve never bought. Asking the really hard questions is never comfortable.

  2. Pingback: Reputations are Sticky | The ExitMap | Transition Planning for Business Owners and their Advisors

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