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No matter the industry or health of the economy, the most common complaint I hear from organizational leaders is, “I’m having trouble finding good people”. Even today, with unemployment at multiple-decade highs, I still hear it. Perhaps the problem is not the availability of good people, but something much broader in scope.

In this month’s issue, we’re going to take an overall look at this challenge.

For many employers, finding employees and then motivating them and getting them to do what the employer wants is a constant battle. Yet I know a handful of very successful business owners and entrepreneurs who appear quite relaxed in the overall employee hiring and relations sphere.

The answer isn’t quite as simple as hiring competent people and letting them execute their jobs. In working with successful organizations, I’ve found that there exists a multi-step process they use in “finding the right people”.

Step 1 - Create a sense of urgency. There is no employee problem unless a business identifies that there is one. Company leaders must objectively evaluate their current hiring practices and the types of employees, both good and bad, that they employ. Leadership must see its role as critical in formulating an ongoing plan to target good employees. Without this critical first step, consistently finding the right employee is largely a matter of chance.

Step 2 - Develop leadership skills. In order to hire and retain the right people, the leadership team must demonstrate competence in motivating and leading people. While the right leadership style varies by person and situation, there are benchmarks in excellence in leadership. Leaders have to be able to put themselves in the shoes of their employees and honestly ask, “Why should they care?” Most leaders in emerging companies miss this crucial step, and then wonder why they can’t get employees to perform their jobs in the desired manner.

Step 3 - Mold your culture/principles. Actively develop and hone the organization’s corporate culture and organizational principles. The good news is that every company already possesses a culture and set of principles. The bad news: most organizations never actively developed them or modified them over time as the business emerged. The resulting implied culture and principles can lead to employee confusion about actual expectations regarding their job performance and can contribute to ongoing “employee problems”.

Step 4 - Tirelessly bird dog and recruit the right people who share your principles according to “the right formula”. The search for good employees goes on 24/7. You never know where the right person might appear. Keep business cards on you all the time and talk openly of your culture and principles to any person who might make a good fit in your organization. Your next great employee might be standing across from you at the checkout line.

Step 5 - Educate employees to think like owners. Even if you don’t set up an Employee Stock Ownership Program (ESOP), the key to getting employees to think and act like owners is to educate them about the business side of your organization. The more employees know about key aspects of your business and how the success of the company will benefit them, the more likely they’ll act like owners on a day-by-day basis.

Step 6 - Continually educate. People forget. In the day-to-day operational battles, it is relatively easy to let organizational principles and expectations slip.  Find informal opportunities to re-educate everyone of your core principles and expectations. A simple five-minute exercise or story during a company meeting can do wonders.

Step 7 - Provide incentives and hold accountable. Develop programs to reward exceptional performance or effort. Hold yourself and employees accountable to your company principles. If a key organizational principle is to “continually educate ourselves”, then provide incentives for employees to do just that.

Step 8 - Make adjustments. Principles and culture, once set in place, shouldn’t change weekly, but can shift over time as the organization grows and/or faces new challenges within the industry they serve. If the methodology of operating the business changes, identify any applicable shift in your principles or culture and clearly communicate those changes to your employees. If the leadership team is struggling to follow consistently a certain principle, then either educate the team or get rid of the principle. There is nothing more ineffective than an organizational principle that is violated consistently by its leadership team.

Conclusion
Recruiting the right employee requires the identification and development of a formulaic process for recruiting the right individuals for your organization, consistently following that process, and duly modifying that process as any additional information is garnered as to what constitutes the right type of employee for your business.

In the next newsletter, we will further discuss organizational principles and how to create them.

People start and grow organizations for a myriad of reasons. One of the often stated reasons is to “make more money” and, in the case of nonprofits, “to grow and perpetuate the cause.” Financially-savvy sounding people might state “to improve ROE (Return on Equity)” or “ROI” (Return on Investment), yet a majority of these people have only a vague understanding of what this truly means.

The essence of my work with clients revolves around ROE by phrasing the question in simple terms: How do we get more out of what we have?

While each industry possesses its own ROE nuances, there are parallels with every organization whether it’s a retail store chain, educational institution, widget manufacturer or fitness club.

The Basics
Technically, ROE is simply net income divided by Equity (or investment). But do you know how it is derived? Basically, there are three elements that drive ROE:

Total Asset Turnover – the amount of sales derived from the company’s assets.
Net Profit Margin – how much the company keeps out of what it sells.
Equity Multiplier – how much debt the organization uses relative to owners’ investment in the company (equity).

I will address the first two drivers. I will take on the Equity Multiplier in a later issue since this is driven by funding choices more than anything else.

Total Asset Turnover
Total Asset Turnover is what finance people call an efficiency ratio, measuring how much production (revenue) an organization derives from its assets. While every industry has its own benchmark for success, the higher the ratio, the better.

To increase your total asset turnover, measure the effectiveness of your largest assets. For retailers, the goal is to rapidly sell inventory over and over again. For companies with investments in equipment and real estate, the idea is to maximize revenue from these fixed assets.
Another, less used method for maximizing total asset turnover is to actually decrease total assets while maintaining or increasing sales. For retailers, it means carrying less inventory in smaller locations. For manufacturers, it’s outsourcing certain production capacity to other companies with underutilized facilities. For restaurants, it’s opening less expensive locations or finding low-cost venues for selling food.

During these economically challenged times, this is becoming a popular strategy. A recent Wall Street Journal article even featured high-end chefs who are operating “lunch trucks” (you know, the ones that usually sell donuts, soda and old sandwiches) to sell their gourmet food. Whether by choice or not, there’s little doubt that this business model enjoys a higher ROE with the emphasis on reduce initial investment requirements. Another benefit of reducing assets is that the sale of assets can be used to increase cash flow or reduce outstanding debt.

The Masters of Total Asset Turnover – Some Examples
The master of total asset turnover is Trader Joe’s. Not only do their stores turn their inventory over an unheard of 7 days, their store’s small footprint requires less investment on a unit by unit basis.

Walmart takes it a step further. They don’t even own much of the inventory they keep in stock. Instead, the vendors own the inventory. This reduces Wal-Marts store investment and risk. They get the same sales with less investment in assets.

Southwest Airlines turns their airplanes rapidly, flying each plane full of passengers, several times per day. Planes don’t make money sitting on the tarmac.

Net Profit Margin
The second element of ROE is net profit margin, which is in essence, is what you keep out of what you sell.

Again, each industry is different. Consumers are often shocked to hear that the average grocery store only keeps $1.50 from each $100 sale. Most companies operate on razor thin margins.

Yet, for all its simplicity, many people lose focus here. No one goes out of business by increasing their profit margin, but many have gone under from increasing sales. Again, it’s what you keep, not what you sell.  Business leaders often obsess over total sales while giving little concern to the bottom line. The media is no help. During the holiday shopping season, all one hears is “sales are up over last year”. How about profits?

The Balancing Act – ROE Nirvana
Here’s where ROE gets challenging. Total asset turnover and net profit margin are often at war with each other. An easy way to increase total asset turnover is by lowering your prices. Great! The only problem is that you run the risk of hurting net profit margin.

So how do we find ROE nirvana? The answer is simple: Sell high-margin products at high volumes. Sounds simple, but the execution is far more difficult. It’s relatively easy to increase sales by lowering prices to increase total asset turnover, but then one’s margins get destroyed. The trick is finding the optimal balance between the two.

While there are no easy answers or secret formulas to maximizing ROE, the following tips should help bring your company a few steps closer to ROE nirvana.

ROE Tips

1.    The main driver for ROE? Always work to increase perceived value on the part of the customer. New Ferraris represent a good value because customers perceive them as containing superior exotic experience and prestige.
2.    A higher profit margin may be a good thing. Or not. If you’re a restaurant with a food cost of 25% while your industry average is 32%, how did you do it? If you did it by simply increasing prices, you may get into trouble if consumers perceive you as a poor value (see tip #1) and will say (to paraphrase Arnold) “I won’t be back”.
3.    Your core strategy should drive your ROE decisions. Trader Joe’s ROE strategy is to turn over inventory quickly by selling unique private-label food items at a small markup in small (low investment) locations. As of this writing, Apple Computer’s cheapest notebook computer is $1,000. They don’t care about market share; they care about higher gross profits for each sliver of market share.
4.    An easy way to increase ROE is to improve service quality. This increases customer purchase frequency, retention, gross sales and allows you to increase profit margins by raising prices. One of the reasons Apple is so profitable is that one gets the feeling that if you get into trouble with your iPod or MacBook, you can have one of the “geniuses” in their stores help you with a problem.
5.    Differentiate yourself. What can you provide that others can’t? Or, what can you do well that others will gladly pay a premium for?
6.    What assets should be liquidated (even at a loss) that could free up capital which could be invested more efficiently?
7.    Provide incentives for performance. Frederick Winslow Taylor, the original management consultant and author of Scientific Management in 1911, developed systems that would provide 60% more compensation to superior-performing workers.
8.    Analyze every product/service you sell against percentage of total sales, gross profit margin per item and synergy between items. Keep the best, dump the rest.
9.    Excess inventory reduces total asset turnover and leads to carrying assets that are depreciating before your eyes, thereby forcing the company to sell at a lower price later (and hence, lower profit margin).
10.    Conversely, little inventory (or immediate access to it) means your customer will go elsewhere, which means no sale at all.
11.    Carefully consider adding new products or services to your existing mix. Adding new items can increase operational complexity resulting in increased training costs, higher errors rates and potential degradation of your brand.

8 Things You Can Do Now To Survive and Prosper

Last month, using history as a guide, I made the argument that the best time to invest is during the worst economic times. The feedback I received from business leaders was essentially one of agreement followed by the question, “how do I survive and prosper in this environment?” Most cited the triple threat of customer belt-tightening, limited resources and tight capital markets.

And that’s the paradox. Great opportunities currently exist because of the dearth of reasonable capital. Case in point: Multi-family home prices in Providence, RI recently dropped 47% from a year ago. The contributing factor? Financing for these properties has essentially dried up for all but the most qualified buyers. With the most recent turmoil, this lack of available capital is spreading to additional sectors of the debt market.

Barring a suitcase of cash magically appearing, what can business leaders do to persevere and take advantage of today’s challenging business climate? The following list offers eight suggestions.

1. Service, service, service – Any company considering outside financing must demonstrate that management consistently addresses critical operational issues. Service quality is a great place to start.

Many companies let service quality erode over time, often imperceptibly. An outside perspective is critical. Ask others to shop your services (or better yet, hire an outside secret-shopper firm) and provide feedback. Don’t give your customers an easy excuse to no longer conduct business with you.

2. Streamline offerings – During good times, most companies tend to expand product and service offerings to build sales.
 
Attempting to be things to all people isn’t always the best strategy. Not only does added complexity sometimes hurt quality, but it can impact the bottom line through increased indirect overhead. Audit profit margins on individual products and services.

3. Review and rerun the numbers – For companies eyeing potential expansion, recalculate breakeven based off today’s economic conditions. Certain expenses have increased dramatically in recent years, but recessionary periods often bring lower costs. Retail space is dropping in certain markets, reducing breakeven for many companies.

4. Update/tweak your brand – Is your brand holding your company back?

Whole Foods is currently struggling with consumers’ “whole paycheck” perception even though their “365” house brand items are price-competitive against mass-market grocers’ offerings. Not a good place to be in these frugal times.

Make changes carefully. Markets can (and will) shift again. Just ask any company that added the letter “i” to their name back in 1999. It worked fine for Big Party’s transition to iParty, but where are the rest of “i-Companies” now?

5. Open communication channels – Sticking one’s head in the sand hoping the problems go away is not an effective strategy. Open a dialog with employees (and in some cases, customers) about the current environment. Most good ideas come from the trenches. Mine them.

6. Pump up the marketing – Most companies cut marketing budgets during bad times to cut costs. Not always the smartest move. Even if your company is running a lean marketing budget, dig for alternative, cost-effective marketing strategies to get the story out. Do you have a success story that contrasts with the doom and gloom permeating our lives? Grab some PR on it.

7. Ignore the negative chatter –The media has a tendency to dwell on negative stories. It’s what sells.

Take the beleaguered restaurant industry where the combination of rising food and energy costs and reduced consumers spending are battering many chains.

What has gained little attention is the increasing availability of affordable attractive restaurant space in some markets. The ability to find competent help, the bane of nearly every one of my clients, has eased a bit. Yet, these current “benefits” were reported as the worst problems three years ago when the restaurant industry was far healthier.

Is the glass is half full or half empty? You decide.

8. Network for money – If you have a profitable business model, the money will follow. It just might take a bit of legwork to find the alternative financing sources that are sitting on the sidelines waiting for the right opportunities.
 
Conclusion
When driving, we’re most out of control at the top of a hill looking down, versus at the bottom of the hill driving upward. We’re near the bottom of that hill. For those people willing to take calculated risks, now is the time to step on the gas and climb that mountain.

When I was building my home a few years ago, I would frequent local building supply stores. At one location, one thing that always struck me as odd was the “Parking Reserved for the President” sign conspicuously located right in the middle of customer parking (usually with the owner’s shiny white new Cadillac occupying the space).

So what’s wrong with this picture, you ask? Besides limiting space for customers during busy times, consider that it:

• Reeks of arrogance that the owner is far more important than customers and employees.
• Builds employee resentment to the owner’s success, which manifests itself in poor employee/customer interaction (experienced firsthand).
• Gives an impression that the company is making too much money off their customers (next time, maybe I should shop at the big-box home improvement warehouse down the street to save money).
• Reduces buy-in from employees, which could prove critical when asking for greater effort or sacrifice during lean times (which the company is probably facing right now).

Now, contrast this experience with a client who has headed an organization for the past few years. Every day, he parks his car farthest from the company’s building. The implied message: I’m no better than anyone else here. He has gained the admiration of employees resulting in a 20% decrease in employee turnover and 15% increase in revenue while under his stewardship. Qualitatively, he’s gained buy-in from employees to bring needed change into the organization.

Competition is tougher than ever. Don’t give your customers or employees an easy excuse to defect to your competitors.

Financial markets are in a near-panic. Oil and gas prices set new records, seemingly daily. Financing is drying up, whether for consumers or businesses. Real estate prices continue their record spiral downward. Plummeting truck sales paralyze what’s left of “The Big 3”, while boat sales are at a 40 year low.

What a perfect time to invest in growth.

The Worst of Times Were the Best Of Times

Horrific times like these don’t come along often. But when they do, history shows that brave investors willing to leave the harbor and navigate tumultuous waters are often generously rewarded over the long haul.

Early 1990’s New England Real Estate: At the time, condo prices and commercial properties had dropped 50% in value in most markets (including some of Boston’s ritziest neighborhoods). Yet, there were few takers because people had been burned at much higher prices. People who did manage to scrap some money together were greatly rewarded.

The Stock Market: 1981. Our economy was in the deepest recession since The Great Depression. Short term interest rates were 18%. The stock market was sitting at 800, 20% below where it sat in 1966. People hated stocks then. Stocks proceeded to triple over the next 9 years.

Gold/Precious Medals 2000. Gold had an annualized return of -1% over the past 20 years. “Experts” said, don’t buy gold. Gold has quadrupled since then.

Think Expansion

When times get tough, people get scared. You should be thinking expansion. Consider the following areas.

Airlines: For those airlines not teetering on bankruptcy, at the very least, maintain your level of service, or if possible, expand into markets that need your service. A reduction in industry capacity will bring higher prices to offset higher fuel costs. JetBlue, and particularly, Southwest, now is your time.

Franchising: Ironically, franchising is often counter-cyclical. During bad times, many people search for something new to do with their lives (or are forced to by early retirement in the financial services field or the above-mentioned fields). Is your concept positioned to take advantage of the times?

Construction: Same lesson. Ratchet up customer service (which you should have done in 2005 by the way). If you managed to save any money, buy up land and equipment at fire sale prices and hang in there. Your time will come after most of your competitors have left (fled) the building.

Retailers: With the demise of Linen N’ Things, The Sharper Image and others soon to come, now would not seem like the best time to expand. Au Contraire. As these companies fold, vacancies will rise and occupancy costs are sure to fall. In the not too distant future, it’s possible that you’ll be able to lock in that 10 year lease at low market rates or, buy real estate that suits your needs.

Real Estate Investors: Markets are likely to get even worse, before they get better for Florida, Nevada and California, but it’s worth sticking a toe (or foot) in the water. Already, sales are up dramatically in Detroit as prices have dropped something like 40% in the last year. Even with the auto industry implosion, that’s good news. The wild card here is long-term interest rates. If inflation rears its ugly head, then prices will go even lower.

New Venture/IPO Investors: During the dot-com bust of 2001-2002, most companies that conducted IPO’s during the late 90’s failed. A less known fact: the companies that went public during the recessionary times of the early 90’s survived as phenomenal successes. Why? They had stood the test of time during the worst of times. The same applies now.

U.S. Stock Market Investors: During the late 90’s, the average P/E (price-earnings) ratio hit 25, very expensive by historical standards where 17 has been the long term average over 80 years. We’re now at a P/E ratio of 15. While I do believe we may be in for some more rough years, prices of U.S. stocks are no longer expensive. We may be in for a number of years before hitting previous highs. Use dollar cost averaging and you’ll be fine.

While it is impossible to time market bottoms perfectly, it appears that the environment is becoming more favorable for those willing to take the risks.

People often ask me which is the best franchise system. That’s a difficult question since franchising is represented in so many industry sectors.

There is one company that rises above them all whether we compare unit sales, customer loyalty, frequency of visits, customer service, employee turnover or productivity. If they open a location next door to your competing franchise, your next and best logical action would be to lock the doors, buy some plywood and board up your building to stop the hemorrhaging. If this company offered you a franchise, you’d beg, borrow and steal to buy one.

There’s only one problem. This tightly controlled, family run chain has never franchised their system since their founding in 1948.

Yes, we are talking about In-N-Out Burger.

Even if the company doesn’t offer franchises, all is not lost. There are a few In-N-Out attributes worth applying to every business such as:

Delivering Consistently High Quality Offerings – The Company’s founders never sacrificed quality for quantity. This is one of the reasons that In-N-Burger has expanded slowly over the last 60 years to just over 200 units. The company sources their food products from local farms. You can see the actual potato that will shortly become your french fries. Try that at Burger King or McDonald’s.

Providing Greater Value – People buy value, not necessarily low prices. In-N-Out Burger doesn’t need a “99 cent menu”, as evidenced by the large crowds that gather during peak times and drive-thru lines that wrap around the building.

Hiring Right - Employees are pleasant and cheerful with a genuine interest in serving you. Employees actually work diligently and efficiently, which is a little off-putting the first time one witnesses this phenomena in person. Is there something in the water? 

Contrast this with employees at a ubiquitous east coast donut and coffee chain offer classic service lines like “What youz want? (English translation: May I take your order?)” and “Zat it? (Does this complete your order?)”.

In-N-Out burger selects the right employees, not just warm bodies.

Compensating For Competence – There is a reason why In-N-Out Burger attracts a superior pool of candidates. The company compensates the right people well and provides unheard of benefits in their industry. Managers are promoted from within and receive compensation that commonly approaches and exceeds 6 figures.

Actually Caring – This is a tough one to teach, because you either have it or you don’t. You can’t teach people to care. At In-N-Out Burger, one gets the sense that the owners sincerely care about their employees. And guess what, the employees care back, take care of the customer and are actually happy and proud to work there.

Keeping It Simple – The simple menu doesn’t try to be all things to all people. This is quite reassuring in this day where they typical casual dining restaurant menu require a table of contents to navigate.

Simplicity means easier execution, reduced process time and fewer errors, resulting in greater consistency and excellence.

Developing a Cult Following –As a result of the above attributes, the company has made going to In-N-Out Burger a near-religious experience for its followers. The company even offers a secret menu for In-N-Out aficionado’s to add to the mystique.

Conclusion
None of these attributes are “secret”. Yet, few companies apply few of In N’ Out Burger’s competitive advantages.
If visiting an In-N-Out Burger isn’t on the list of 1001 places you’ve got to visit before you die, it should be. Visit and see what lessons you can glean from the ultimate un-franchise.