YOU GET THE BUSINESS YOU DESERVE

Despite a strong turnover and great product, you'll still fail if you forget the business basics, says Robert Craven

On a winter’s day I visited a company with nice people, £4m turnover and a good product. But margins were too low, cashflow was too tight and the factory couldn’t keep up with the demand.

They seemed to have good management practices: performance indicators were in place (‘But we don’t get too wound up if we miss them’) and monthly management meetings happened ('Most of the meeting is about dealing with yesterday and today’).

They had even recruited managers to bring in structured thinking (‘After about a month, they go native and lose their direction’).

The directors were becoming aware that things weren’t quite right (‘If we keep on like this then we’ll run out of cash and will probably go bust’).

Clutching at straws, they decided to employ a new managimng director. Although he had no knowledge of the industry, armed with his MBA and a load of management speak, he wooed his future employers with his charm and pseudo-science. They agree to a £100,000 salary package with no performance targets.

‘Give me six months,' he said. ‘I'll look at the business and make a few changes.’ 

Luckily, before he was due to start, the directors bumped into Peter, an experienced business grower, with several success stories behind him. For a fraction of the MD's salary, he offered to sort the business out, quickly outlining what was needed: ‘Sort the operations, finance and marketing. And let’s do it now’.

ACTION 1: sort out the shop floor
The laid-back atmosphere meant targets were missed with no penalties for under-performance (and no rewards for over-performance). So re-jig reward structure to motivate all 50 factory workers and work with the team to understand how to get output up.

ACTION 2: Use the 80:20 rule
Identify the 20% of customers who deliver 80% of profit. List customers from most profitable to least profitable. Consider what would happen if you sacked the bottom, say, 50% of customers, staff and suppliers. Meanwhile, put up prices to increase margins and lose the pond-life customers. Sack the poor customers, staff and suppliers. Keep and reward all the raving fans and ambassadors.

ACTION 3: Bring discipline into the senior management team
Implement two-hour (maximum) monthly meetings with agendas and pre-reading. Use a traffic light or simple dashboard system to highlight good and bad performance indicators. Reward success; punish failure. If necessary, use professional/public humiliation to embarrass/coerce directors to deliver on their agreed targets.

CRISIS OVER

One phone call later, the new MD was back looking for a job. The new plan had to be managed by a detached outsider; a temporary member of the management team who wouldn’t get sucked into the detail and would keep the team focused on what matters, making the big decisions and not getting lost in the trivia.

Visiting just one day a month, Peter saved the day. He forced the directors to make the tough decisions and save the business. Within six weeks the financial model had been turned around, prices were up 10%, overheads down 6%, productivity up 25% - with five less employees - and unprofitable work was turned away. Better margins and better financial discipline started to cure the cashflow crisis. Within six months, there was talk of controlled expansion.

So, who was to blame? The directors, of course, for ignoring the business basics. Remember, you probably own the business you deserve.

About the author

©2008 Robert Craven

publication details

Growing Business, June 2008