Wednesday, November 30, 2011

How Mentors Can Help

Earlier this month I enjoyed listening to a baseball hero of mine, Cal Ripken, Jr., talk to a room full of business executives. He shared the eight principles that helped him beat the "unbeatable" record of consecutive games played in the Major Leagues, outlined in his book Get in the Game: 8 Elements of Perseverance that Make the Difference.

He shared the following experience that portrays how business mentors can make a huge difference in outcomes. Several years into his career his team drafted a hot-shot pitcher with a fastball that put fear into even the greatest hitters and a curveball and changeup that, when they were working, were unhittable. With as much hype and attention this new pitcher attracted, he fell far short of expectations having struggled for the first half of the season. With runners on base and a tough hitter coming to the plate, the rookie catcher approached the mound.

After a few seconds, Cal joined them at the mound from his position at shortstop, a rare occurrence, and asked what the meeting was about. The pitcher looked at Cal and explained he had no idea what to do in this situation. Cal looked at the young catcher who shrugged his shoulders, clarifying that their meeting was going nowhere. Cal told the pitcher what pitches to pitch along with when and where to pitch them. Three pitches later the batter walked back to the dugout, frustrated after striking out. The young pitcher and catcher had found their mentor, someone with experience and perspective that could make all of their talents, efforts, and enthusiasm as effective as possible.

Cal went on to explain that for the rest of that season he called a lot of pitches from his position at shortstop, giving signs to the catcher who then relayed them to the pitcher. This was, and still is, unheard of and unprecedented. But it worked amazingly well as this pitcher turned his career around and the Orioles were all but unbeatable the second half of the season. In business, we have to be humble and hungry enough to seek out those with more wisdom and more battle-tested experience than we have to tell us what pitches to throw, who to throw them to, and when to throw them!

Thursday, November 17, 2011

How to Use Revenue per Employee

How do you know if you are over or under-staffed? If sales are increasing, are you hiring too quickly or slowly to keep up? If your sales are dropping, are you cutting too many or not enough employees?

These are tough questions to answer, and every business owner needs to carefully consider quantitative and qualitative information to make the best decisions. Let me explain how this works and then give a couple of examples.

The most common quantitative measure to determine if you have the right number of employees is revenue per employee. Your industry has a benchmark that you can get from others in your industry or from a service that provides such metrics. For example, certain medical device manufacturers average about $250,000 per employee. Just take your total sales revenue and divide it by your total employees or full-time equivalents (FTEs). You should also consider your total salary, wages, payroll taxes, and benefit costs as a percentage of revenue relative to your industry averages and your historical performance.

The qualitative measurements include walking throughout your business and trying to determine how busy  your employees appear, listening to your employees complain about how they need more help if you expect them to keep up with the growing demand for your products, and more.

For example, your employees appear busy, but your sales are dropping meaning your revenue per employee is dropping, too. These two are not consistent, so you investigate to find out that your employees are taking longer to do the same work. In this example, the quantitative analysis wins and you know you need to "right-size" your staff.

Here's another example. Your sales are flat, yet your employees are increasingly complaining about being overworked. You investigate this inconsistency to find that the manufacturing function you used to outsource but then brought in-house is taking three times longer than anyone expected. Your analysis leads you to conclude you actually need to hire more employees to handle the extra work. When you compare the cost for the extra employees and the savings you generate from in-sourcing, you find you are actually more profitable than before, even though revenue per employee dropped.

A careful consideration of both qualitative and quantitative measurements will bring to the most effective staffing conclusions. Don't be afraid to ask the tough questions, and never depend exclusively on just the numbers or just subjective opinions.

Wednesday, November 9, 2011

The Rolling Forecast Adds Value

Have you ever felt frustration as you try to plan your company's performance for the next twelve months, only to suffer even greater frustration when you try and measure your actual performance to that plan? The source of that frustration is usually a common issue small and medium-sized businesses (SMBs) experience. You see, SMBs are even more volatile than larger businesses, and the assumptions made in the forecasting process are even less accurate and more likely to change during the twelve-months for which you are planning.

In my recent American Express OPEN Forum article Why You Should Reconsider Your Business Forecasting Strategy, I give some tips on how to use a rolling forecast/budget to overcome this issue, which will ultimately help you make your business more successful. It requires discipline once per month or quarter to update your projections based on everything you have learned about the assumptions you are making, but you'll get so much more value from the efforts you take to plan and budget. A static budget just doesn't make sense for SMBs.

Wednesday, November 2, 2011

2 Reasons Small is Better than Big

I am reading The Machine that Changed the World, which tells the story of how Toyota innovated the from the mass production methods to lean manufacturing, disrupting the automotive industry to become one of its most dominant players. One of the most notable discoveries of lean manufacturing was that small production batch sizes, as opposed to large ones, were better for two reasons-- (1) Reduction or even elimination of the carrying costs associated with needing to stock large quantities of finished parts, and (2) Low quality and mistakes are discovered much more quickly, saving significant labor and resource cost while increasing efficiencies.

These same advantages can apply to why being a small business has its advantages to being big. First, being small requires entrepreneurs to be more creative and resourceful...basically, get more done with less. While big companies have excess inventory to try and be efficient and keep all of their workers busy, small businesses know exactly what inventory they need, always quickly adjusting to the demands of their customers. In addition, the employees of entrepreneurial companies are accustomed to wearing many different hats. For example, a large manufacturer may employ 10 welders. Even if the products that require welding are not in demand by the customers, some companies will have the welders building parts anyway, just to try and keep them busy. Small companies, on the hand, seldom employ people who can only weld. Their employees can probably also machine, temper, and do most, if not all, of the other manufacturing functions.

Second, catching mistakes and "pivoting" the business is so much easier when you're small. It can take years for big companies to change, yet today's business environment requires more dynamic, nimble business initiative than before. In fact, when large companies like Google, GE, and others want to innovate, they acquire companies that are innovative, paying a premium for that which they cannot do themselves. Advantage...small business.

So, the next time you feel overwhelmed by bigger companies with what you perceive to be a superior competitive business, remember you have more going for you than you may initially think! Small is the new BIG when it comes to maximizing resources, meeting customer needs, and innovating.