Posts Tagged ‘employee’

A New Way to Measure Profits?

Wednesday, December 2nd, 2009

The article “Financial Performance Measurement for the 21st Century” by Lowell Bryan and Claudia Joyce of McKinsey Consulting puts some rational basis to my long held belief that People are the most important asset in any company – particularly growing ones. The authors ask and answer the question “What gives us the best Return on Investment (ROI) in this knowledge based economy – traditional, ‘tangible’ capital based assets or ‘intangibles’ such as knowledge, relationships and the reputations of talented people (which companies can turn into institutional knowledge and skill, brands, software, patents etc.)?”

Between 1995 and 2005, the market value of the 30 most successful companies in the world rose by almost 500%. This was driven by a similar increase – 500% – in average profits. (This makes sense – increase your profits and you increase the value of your company.) What caught my interest, however, was that during those 10 years, the companies’ average profit per employee grew by more than 200% even as the number of employees doubled, while the return on capital increased by only 33.3%.

So could maximising returns on people (maximum profit per employee x optimum number of employees) be a new way to measure performance? After all, total profit = profit per employee x the total number of employees. The authors argue that focusing on this formula offers several advantages over focusing on return on capital. Profit per employee is a good proxy for earnings on intangibles and total employees is easier to define than capital (which is subject to interpretation using accounting and finance definitions). And this formula focuses us on the fact that  talented people, not capital, are usually the scarce resource.

If profit per employee is part of an acceptable measure of performance then proactively managing it is an effective way of improving performance. Arguably there are more opportunities to increase profits relative to the number of people employed in this digital age than ever before. Other advantages are that profit per employee is easy to calculate; payroll is expensed rather than depreciated making it a conservative output-based measure of results and the calculation of net income is based on accounting rules, making for relatively objective comparisons between companies.

One way to increase profit per employee is to reduce the number of low profit employees (an incentive to move more quickly on poor performers). Which raises the question of how you know which employees are contributing and which aren’t. The answer is to link department goals to the company’s goals and then link individuals’ goals to those of the department.

The responsibility – and power – for changing financial results lies in the hands of frontline managers. So, if we treat each department as a contribution centre, rather than a profit centre, then department managers are responsible only for the costs they can control, not the portion of overhead that is “allocated” to profit centres. In this way, managers – and individual employees – can be focused on improving the activities of their department, and increasing their team’s motivation by producing results that are also good for the company.

But optimizing the number of employees doesn’t necessarily mean keeping their numbers low. The authors point out that Wal-Mart has relatively low profits per employee and a relatively large number of employees. Their business model is an example of how increasing the number of employees rather than the profits per employee can also increase the value of the business. Highly automated systems and processes in logistics and at the point of sale has allowed Wal-Mart to cut their supply chain and inventory costs and allows them to quickly respond to emerging sales trends. Those, combined with low labour costs, support the size of their staff.

The current standard used to determine how successful a company has been is its financial statements – Balance Sheet, P and L and cash flow. But these documents are prepared using Generally Accepted Accounting Principles (GAAP) which treats investments in intangibles as expenses. The danger there is that when we need to increase profits in the short term – and I’ll bet we’ve all had to do that at one time or another – expenses are the first area we cut. So, we achieve our short term goal – but actually shoot ourselves in the foot in the longer term.

So I’m all for any measure that puts human capital (people) where it belongs – front and centre in business owners’ minds – while promoting long term growth. So let’s change the metrics we use to measure successful performance so that they include returns on talented people as well as returns on capital investments.

By the way, any misinterpretation of what Lowell Bryan and Claudia Joyce are actually saying is entirely mine.

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Winning Business Ideas from “Kinky Boots”…….

Saturday, August 15th, 2009

I was indulging in one of my favorite Friday evening habits a couple of weeks ago, relaxing and watching a movie. On this particular Friday night my wife had decided (isn’t that how it works in your house?) that she wanted to see a movie that a number of people in her office had enjoyed. It’s called “Kinky Boots”.

It’s about a family run shoe manufacturer in the U.K. that has been producing a high quality product for four generations. (By the way the movie is based on a true story.) The hero inherits the business only to find that, while his father had led everyone to believe that the business was holding its own, it was, in fact, in very serious financial trouble. A visit to one of the firm’s largest customers revealed that its traditional market had been taken over by cheaper, lower quality, imported products (can anyone relate to that problem?).

The young owner has to begin immediately laying off long serving members of the workforce. While doing so, he gets a lecture from a young female employee who tells him that, instead of moping around asking “What can I do?” he should get out and find a new market niche (really, they actually use the word “niche” several times in the movie). She goes on to suggest that this was perhaps something they (management) should have done long before the firm got into trouble.

Without spoiling the plot for you – let’s just say there are alcohol and female impersonators involved – our hero does manage to find a new niche. It’s an easily identified group with a specific need which is not being met by the firm’s competitors. The group is large enough to generate sustainable profits and they want a quality product. The company uses its experience and knowledge base to develop a unique solution. It supplements that by attracting a designer with specialist knowledge of the niche’s thinking.

I couldn’t believe it. Right there in the middle of my Friday evening, was a movie about “Kinky Boots” giving pointers on leadership and an excellent example of how to develop a winning marketing strategy. And it was doing it in a far more entertaining way than many of the books and articles I’ve read or courses I’ve attended.

But there was more. The movie went on to deal with some of the other issues we face in this fast changing, demanding world in which we operate. For example, reaching quality standards which are different from those of the traditional business demands more of workers than has ever been done in the past. As an owner how do you communicate the absolute necessity of making the change? And make them understand that even if they are willing to do their traditional best it is no longer good enough? How do you push and how far do you push to maintain their enthusiasm while motivating them to do even more?

We know things never happen one at a time so while driving up quality our hero also has to meet a deadline for launching the product line. When the pressures mount on you how do you communicate a sense of urgency to a work force that already believes it is doing its best? And while you’re expecting them to change, is that enough, what about you, the owner? The movie’s example of the personal challenges owners face began at the beginning of the film when our hero decided to leave the firm. A simple sense of duty to his heritage and the employees after his father’s death pulled him back. But the changes required by the new strategy were so radical and the risks (including the personal, financial risks that all entrepreneurs take) of implementing it were so great that he had to develop enormous commitment to the success of the new direction.

Then there were the people issues which seem to dominate our lives. The company culture reflected the solid, traditional values and roles on which it was built. The potential solution, however, involved embracing customers with very different roles and values. And bringing the specialist designer into the firm raised all of the challenges associated with integrating minorities into the workplace.

Recognize any of this? Ever found yourself in a similar situation? Realistically most of us have had to deal with one or more of these issues one time or another. And it’s hardly unusual for several crises to erupt simultaneously (the perfect management storm).

I’m working with a couple of companies at the moment which missed opportunities to develop new niches when they were busy. I also see situations where owners ask “What can I do?” without knowing where to find the answer. (Alcohol and female impersonators are not universal “cure alls” and I certainly don’t recommend either or both.) Then there are companies that had a product for which they went to find a market, rather than starting with a market need first. Finally, some companies also pick niches that are too small or which require too much investment to ever yield a reasonable, sustainable profit.

But the challenges inherent in change, motivation and communication are ones which we all deal with on a day to day basis. And are ones with which we can all use some help.

Watch the movie and you’ll see how the characters made out. You’ll also see some examples of excellent strategies being put into practice – and the courage and persistence in the face of adversity that you know, as business owners, are required to implement them. You may even pick up a few tips – I know I did. And if you get nothing else out of it, you will be entertained.

 (In case you missed it…………..”Kinky Boots” is from the same team who created “Calendar Girls”).

6 Tips for Managing in Recessions

Sunday, July 26th, 2009

Despite what the media suggest, the recession will not lay waste to every company and household in Canada. Some will be seriously affected and my sympathy lies with them. However, for most of us the impact will be bearable. We know from experience that there are things you can do to mitigate, even minimize, the impact of a recession and articles containing tips and suggestions are already becoming quite common. Here are 6 of what I consider to be the most valuable ideas from the articles I’ve read recently.

Tip # 1. The best time to look for money is before you need it, so make contingency plans now. Do a spreadsheet analysis of the impact of a 5 or 10% decline in sales on your cash flow. Go and talk to your Bank, they’re tightening their terms and restrictions already but they will work with you if you’re a good customer. It’s also a good idea to build a relationship with a second Bank, if you haven’t already done so.

Tip # 2. Look inside the company for cash, for example….can you renegotiate payment terms with your suppliers to avoid borrowing money to pay them? Or will they give you a discount for cash payments? Can you trade off extended lead times, less than 100% fill rates, variable (but not unacceptable) product or service quality against price reductions to improve your gross margins? Sell off unproductive assets, aggressively discount and sell slow moving (i.e. almost dead) inventory, don’t let your Accounts Receivable extend their payments.

Tip # 3. Don’t Lower Prices – Add Value. Avoid the temptation – and pressure – to cut your prices. It will be almost impossible to raise them again later. Either launch a de-featured version of your current product or service and attach a lower price point to that. Or talk to your customers and find out what they need to deal with their challenges and find other ways to “add value” to your current offerings without inflating the cost.

Tip # 4. Don’t make deep cuts to headcount. Letting good employees go can have serious long term effects. You immediately lose the investment you made in training and developing them and you lose an employee whose strengths – and weaknesses – you know. It’s also not uncommon to find that an employee you’ve laid off carried far more knowledge about the operation of the company in their memory than you had realized – and didn’t write it down before they left. There are always some employees who are not pulling their weight. If you have to let anyone go, release them.

Tip # 5. Don’t make deep cuts to promotional activities. Resist the temptation to reduce your promotional budget. If you’ve spent money to create awareness you’ll lose the benefits of that investment if you stop or dramatically reduce your expenditures on, for example, Trade Shows, Advertising and Sponsorships. Look critically at the response rates for your promotional activities and freshen the message or switch dollars from one tool to something more effective – but don’t make deep cuts to the total dollars.

Tip # 6. Help your employees cope. Watch for signs that your employees – particularly the key members of your team – are having problems coping with the recession personally. Everyone makes bad decisions occasionally and, given the easy access to credit of the last few years, many people have overextended themselves. Help them find the advice or counselling they need to deal with their temporary problems. Don’t solve their problems for them – but support them while they do it themselves.

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