Dec 8, 2021 | Governance, Management
It is bonus time again, approaching Christmas. Many businesses have some sort of bonus scheme that matures at this time of year and are wondering if it is worth the effort.
Does it give you a return on the investment of time and money, or is it just an expected part of employee’s salary? Does it have the potential to result in disgruntled employees when they do not get as much as they expect or think they are worth, or worse, are angry that someone has got more than them?
Both are very common problems.
Conceiving and managing a bonus scheme is a really tricky management challenge.
We tend to give bonuses with little consideration of the psychology behind what makes them work, under what circumstances and in what contexts. We tend to take the easy way, which is just to tie it to a combination of increased revenue, some dodgy assessment of performance done by the manager, and profitability.
If you have a bonus scheme and want to see how they work best, go down to your local club that has pokies, and observe those playing. Compulsive, repetitive, continuous, despite knowing in the long term they cannot win, but the short term, they just might. This is the sort of behaviour that if mirrored in your business may be very productive in the short term, and destructive in the medium to long term.
Context is very important. For tasks that are repetitive, often referred to as ‘left brain’, financial rewards do increase productivity. Conversely, once an element of ‘right brain’ the source of critical thinking, creativity, nonlinear outcomes is required, financial rewards not only do not increase productivity, but they can impact negatively.
A bonus scheme that acknowledges these differences, and delivers has five parameters you need to consider, and work with to produce the best combination for your circumstances:
- Type of bonus. Money or in kind? Money is usually the default, but in kind can be a powerful motivator, and is less likely to be dismissed just as part of the salary package. You could offer a dinner out with their partner, gift vouchers, a cruise, some local adventure, there are many and varied options. Most will be more effective than just money in most circumstances.
- Eligibility. Who is eligible, how is the eligibility for the bonus to be measured, collated and communicated? Is it for the individual, the work group, or whole company, is there a qualification period, is it the same for everyone irrespective of rank, or is it on some sort of sliding scale? A field of landmines to be navigated in making those choices.
- Measurement. Is the measurement quantitative, qualitative, or a combination of both? What are the administrative processes that will manage them, and keep it consistent? How transparent will the results be?
- Frequency. What is the frequency of the bonus? Is it monthly, quarterly, annual, on an agreed timetable, or are the time lapses between bonus occasions random, as are the rewards you get out of a poker machine?
- Reward type. Are the rewards themselves random, or against a sliding scale of value. Usually this will be cost, but when giving in kind bonuses, what is value to one person may not be to another. For example, a former client who was an avid racing enthusiast offered time in a go cart in the west of Sydney as a bonus. To several of his employees, the thought of racing a go cart was as far from a bonus as they could get, the thought of winning was a disincentive.
There is a huge body of psychological evidence underpinning the drivers of behaviour, and we are learning more every day. The best known are Ivan Pavlov, who recognised in the late 1800’s that specific behaviour can be stimulated by a cue that the ‘subject’ associates with the behaviour. You see this every day, as people respond to such things as a ringing in a theatre to announce the end of interval, the traffic lights at the end of your street, and so on. It is a learned behaviour in response to a cue. The second is B.F. Skinner, who in the 1950’s recognised that variable rewards were more powerful than those that were known, aka, the poker machines. More recently, Daniel Pink has written extensively about the mismatch between what science knows about motivation, and what business does.
Header credit: Once again, the wisdom of Dilbert graces the header. My continuing thanks to Scott Adams for creating the cartoons that explain my thoughts.
Dec 3, 2021 | Leadership, Management
How often have you heard the question ‘tell me about your weaknesses‘ in an interview of some sort?
As a corporate bloke climbing the greasy pole I heard it a lot, and it has popped up from time to time in the last 25 years I have been consulting.
It always struck me as the question disinterested people would ask, when they ran out of sensible questions.
However, all is not lost.
A recruiter I know looking to fill an interim role called me, and we got caffeinated, during which he expanded his view that I was partly wrong.
A part of his process is to define the four crucial ‘Must haves’ for a role he is filling. Towards the end of an interview, he asks the candidate to rate themselves on the 4, best to worst.
It is a more sophisticated way of asking the dumb question, and engages the candidate in a conversation about their self-confessed strengths and weakness in the context of what is important to the role, after the interviewer has had the opportunity to make their own assessment. Any significant divergences can be further investigated.
If I was interviewing for a B2B sales manager, I might have the following 4 ‘must haves’ :
Coaching – How do you work with front line sales people to help them improve their performance?
Attention to detail – Are you a detail person, or a ‘big picture’ person?
Creativity – Are you someone who finds creative solutions to problems, or are you best communicating and working with an established process.
Growth – How good are you at finding new avenues to grow, by better leveraging the resources you have?
Recruiting for a senior financial manager, or CMO, would require a different four questions, but you get the picture.
I was not the right person for the job my recruiter friend had open, we both knew that, but I came away from the conversation with a great insight into a common question, one that I have sometimes had difficulty answering politely (I once responded with ‘you will have to hire me to find out’. Did not get that gig).
Nov 26, 2021 | Analytics, Management, Operations
Communication of outcomes, from the strategic drivers of your business to what was produced in the last 5 minutes at a station on the factory floor, is increasingly recognised as the key to performance improvement.
Communicating the right things, to the right people, at the right time is as important as the communication itself. A communication is only successful when the meaning received is as intended, and the receiver can do something useful with the information.
Most businesses are already able to collect more data than they know how to use productively. The challenge is to pick the few that are the drivers of decisions at each level. Collecting data for the sake if it makes no sense. If it does not provide insight to decision making, why bother?
The five questions:
Who is it for?
The MD needs different information to the operations manager, whose needs are different to those on the factory floor. This cascade exists across the business, up and down the functional silos. The more the information can be made responsive and relevant to the cross functional users the better.
What is the objective?
What are the people using the data trying to achieve, and by when? Information is most useful when it charts progress towards an objective. Again, the nature of the information and the cycle will vary by level and role in the organisation.
What is the frequency?
By the minute, hour, day, month, all users have unique needs, and all information has a cycle time that makes it relevant. Typically, the higher up the organisational hierarchy, the slower the cycle time. However, making the information available to all on demand is an extraordinarily effective way of generating functional and cross functional alignment.
How do we improve performance?
Solid data is the starting point for every improvement initiative, from the smallest improvement on the factory floor to the drivers of strategic success. The scientific method prevails and requires the stability of good data on which to work.
What data is needed to answer these questions.
Data needs will evolve over time as objectives and progress toward them evolve, and is highly context sensitive.
Danger signals: there are two of them.
- Too many metrics. The dashboard should be three, up to five at a stretch, certainly no more. Data is only as good as the decisions and behaviour they drive, and the more there are, the less motivating they become. Ideally the three are: rolling current, next period, progress towards the objective.
- Vanity metrics. I see these all the time, they are easy, may look nice, but are functionally useless. The obvious example is Likes on a social media platform.
The cadence of an organisation is one of the defining factors of success. The frequency and relevance of the dashboards at every level, the way they make outcomes transparent is a key to performance improvement.
Nov 15, 2021 | Leadership, Management, Small business
The term ‘Washing Machine Brain’ was used recently by a client as we sorted through all the competing tasks and priorities of his role running a small, rapidly expanding business. Everything was mixed up, tangled, swirling at a rate he found difficult to keep up with, let alone get on top of any of the seeming endless list of tasks.
Common problem, and a very expressive descriptor.
Over the 18 months I have been working with him, the number of tasks and the complexity of those tasks seems to have increased geometrically, while the revenue has increased arithmetically.
Again, a common problem in a rapidly growing business. Every advance delivers a new set of management challenges, until a tipping point is reached. After that point, the scaling of operations can be done off the established base, and the ratio is reversed.
Over the 18 months, we have achieved a number of milestones, and left some significant tasks underdone. The product is a bespoke manufactured product with a sizeable number of customer driven variables, many of which are challenging to explain to the customer base.
We have:
- A very clear strategy, well understood by the small number of employees. .
- Implemented an operational planning process from order to installation that works pretty well. This uses Trello as the formal communication tool, enabling transparency across the operational staff, as well as encouraging input and accountability.
- Developed an electronic customer record in Dropbox that is the storage and reference point of all design and operational data that relates to individual customers.
- Automated the quotation process, although there is manual intervention still required, and given the nature of the product, may always be required. However, there are still many ‘wrinkles’ to be sorted out.
- Partially implemented a powerful CRM system to manage the outbound sales effort and lead funnel. Like many of these products, every time we turn a corner, there is more to do, but the promise of further automation to assist scaling is seductive.
- Generated more sales leads than can be managed with the existing operational and sales resources.
- Moved from break even to making sufficient profit to reinforce the owners faith in the product, and ensures the business has the resources to fund growth internally.
We have not:
- Successfully implemented a systematic qualification process to optimise the time spent in the pre-sale stage. We need a process to identify tyre kickers and potentially difficult customers & jobs early enough to either walk away, or price them accordingly.
- We do not have an adequate handle on cash flow, or the accounts generally. As a reformed accountant, this disturbs me greatly. These ‘back-office’ tasks require robust processes and resources, and remain a work in progress,
- The supply chain on which we rely is disorganised and hugely wasteful, much of which we wear in lead time uncertainty. While we do not control a key part of the manufacturing, the incentive to find a way to exert control is compelling.
- Labour availability is a profound challenge. The product relies on physical installation which can be complex, depending on the site. It has a range of variables new to this country and finding experienced people has proven almost impossible, and finding suitable trainees at least as hard.
None of this is unusual in growing successful businesses, but knowing that does not make the challenge any easier.
The only antidote is focus. Relentless focus.
Pick the few things that can be done today, this week, this month, and focus on getting them done, before moving onto the next source of value to be addressed. In so doing, spend the time and effort to complete each activity as well as possible. It is inevitable that in a growing business, the requirements will change, so processes need to be able to evolve, but there is little more frustrating and wasteful than having to re-cover areas you had thought behind you. Over time the washing machine will become significantly less chaotic as we iron out the wrinkles and scale the business. (Sorry, could not resist the obvious pun)
Oct 15, 2021 | Leadership, Management, Small business
One percent is a tiny fraction. A question I have asked many times of clients, and management in my former corporate life is ‘who could not……… by one percent?
The blank is filled in by a variety of items:
Raise prices, reduce trading costs, reduce overheads, increase volumes, and so on. Nobody ever says ‘No’ to the proposition.
When you look at the impact, particularly cumulative of those one-percenters, they supercharge profits.
We are all in business to make profit, without profit, we are not in business. While there is an extremely important place for calls to be good corporate citizen, provide all stakeholders with a mission and vision to which they can relate, and to build for the long term, none are possible without commercially sustainable profits.
Many SME’s I talk to fail most basic understanding of the make-up of their P&L, and how the one percenters impact on profitability. Usually it is simply because their accountants have failed to break their costs up into fixed and variable, and they have no idea of the impact of the one percenters as they have never done the exercise on a spreadsheet which makes it incredibly obvious.
Profit is not a bad word, it is the gold standard.
It also not a useful objective, which is a role played way too often. Profit is an outcome of a whole range of other, often very small things, done successfully.
Cartoon credit: Dilbert. Anyway, who would want to do business with an unprofitable business?
Oct 8, 2021 | Analytics, Management, Operations
We are all wary, in fact, usually very reluctant to put prices up, in case we lose customers. We ignore the sage advice of Warren Buffett who knows something about making a bob when he said: ‘If you have to go to a prayer meeting before raising your prices, you have a lousy business’
Increasing prices is a valid concern if two conditions are not met.
- You are undifferentiated in a way customers value
- You are in a commodity market.
There are five strategic drivers of price, the items that should be considered in your strategic thinking that delivers your pricing architecture:
- Your business model
- Price packaging
- Strategic priorities
- Market power
- Behavioural drivers.
Before you consider the actual price you will be charging, you need to have built the pricing architecture that best accommodates the dynamics at play in your market, and the price elasticity of demand.. Any pricing decision has two dimensions:
Strategic: The pricing architecture that is consistent over time, which provides the structure of your price list.
Tactical. Price can be moved around as necessary, while always remaining inside the pricing architecture.
Many just leave price decisions to the end, a grave mistake, as finding the Optimum Price, the one that leaves a minimum ‘on the table’ will have a profound impact on your profitability.
If you produce a simple spreadsheet, such as the one below, you will be able to model how the profit changes at various price assumptions. It is almost always the case, that to a point it is better to put your prices up and take a modest volume loss, than to drop prices hoping that the added volumes will deliver greater profit.
The assumptions in the chart:
- The Price we charge is entirely our decision.
- The volumes we forecast at any price point are the combination of experience, assumptions, and gut feel. They can be very tactical, varying time to time, and customer to customer in some circumstances.
- Cost of goods sold/unit and fixed costs are unchanged at any volume or price.
Developing a simple model is just maths and a range of assumptions, but we use it too infrequently. Our instinct is usually to drop prices in a crisis to preserve market share, rather than thinking about the impact on profit. If you have a gross margin of 40%, for every $1 you drop your price, you have to gather in $2.50 in added revenue to break even.
|
Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Price/unit |
$15 |
$18 |
$21 |
$25 |
| Quantity/period |
100 |
85 |
80 |
55 |
| GOGS/unit |
$6.0 |
$6.0 |
$6.0 |
$6.0 |
| Fixed costs/period |
$400 |
$400 |
$400 |
$400 |
|
|
|
|
|
| The profit outcome of the various options can be seen below |
|
|
|
|
| Revenue Price X Quantity |
|
|
|
|
| Minus Total cost = ((COGS X Quantity) + fixed costs)) |
|
|
|
|
| Equals Net profit |
|
|
|
|
|
Option 1 |
Option 2 |
Option 3 |
Option 4 |
| Revenue |
$1,500 |
$1,530 |
$1,680 |
$1,375 |
| COGS |
$600 |
$510 |
$480 |
$330 |
| Total cost |
$1,000 |
$910 |
$880 |
$730 |
| Net Profit |
$500 |
$620 |
$800 |
$645 |
|
|
|
|
|
|
|
|
|
|
| Breakeven point. |
|
|
|
|
| Fixed costs/Unit Gross margin |
44 |
33 |
27 |
21 |
The break-even point also changes. This is one of the most under-rated but simple calculations available to businesses to gauge their financial health.
Whatever you do, there will be some for whom the price is too high and will not therefore buy.
There will be others for whom you are pricing below what they would have been prepared to pay.
Either way, you leave profitability on the table when you pick a single ‘Optimum price’ point.
This is represented by the left-hand graph in the header.
When you can have two price points, you tend to increase the profitability.
I.e., You drop one price below the ‘optimum’ single price, and pick up those ‘cheapskates’.
You have a second option with prices higher to capture those who are willing to pay the higher prices.
The challenge is, how do you effectively fence off the two, so you are not just delivering an extra reward to those prepared to pay the higher price, just to capture the cheapskates?
It is in the ‘Fencing’ that the creative strategic thinking must take place.
This is represented by the right-hand graph in the header.
The obvious example is economy airline seats. Every economy seat is almost identical, yet there are price fences based on time, and ticket flexibility. Book early, cheaper than in peak booking time. Book very late, you might get a very cheap price, or you might miss out altogether. This is in addition to loadings on location: aisle and window, forward and aft. This is also in addition to the fences that exist between economy, business and first class, which has similar demarcation, for time, as well as the premium to be there instead of cattle class.
A final thought. Many SME’s are not selling time, or input costs & materials, they are selling the results of knowledge and experience and the value they can deliver to their clients.
How do you put a price on experience?
We all have trouble with that, at least I do, and most people I have come across do also. There are three basic rules to follow as you consider how to price for a job.
- Price the client rather than the service. This means if you make them a million, shoot for a share of the outcome. This involves a ‘value conversation‘ early on. E.g., If I was able to deliver you added profit of 100k, how much would that be worth to you? This sets a benchmark, from which you can come to an arrangement. Remember, that a client asking you to do something for them is all about removing risk. You cannot offer guarantees with certainty, as there is always risk involved, but a bit of creativity can expose some useful ways to share the risk and reward. To quote Peter Drucker: ‘In business all profit comes from risk‘. Therefore, the answer to how much they are willing to pay would be tempered by the risk and reward to both parties.
A further example: A friend of mine is a hypnotherapist, and often helps smokers become non-smokers. The value conversation around her services should not be about the price/session, but by how many packets of cigarettes it was worth, in which case, success would mean an ROI in a couple of sessions. E.g., How much does a packet of ciggies cost? How many packets a week do you smoke? Quick mental arithmetic… that means that success here will save you $250/ month on cigarettes, and that is before you factor in the health benefits. What a great deal!!!
- Offer options. Where possible, offer more than one option at differing price points. A premium version, and one or more cheaper versions that have had some features removed. Think about the SAAS software options offered on the web. There are differing features listed for various price points, and it is always three.
- Anchor high. Three price options, start with the highest first, it acts as an ‘anchor’. This is opposite to what we do automatically, we tend to price low as it seems that will be more effective at closing, but the opposite is true. Price high, usually they will go in the middle. In addition, it is far easier to price high and give a discount than it is to price low and try to add features at an increased price.
None of this is easy, if it was, everyone would be doing it. However, it can be done with some creative thought, experience, domain knowledge, and good feedback mechanisms to enable ‘fine-tuning’
Note: Please excuse the dodgy graphs in the header. I am a strategic thinker, not a graphic artist! However, despite their dodgy state, I hope they convey the message.
