Bad Chasing Out Good
There is a law in the field of economics called Gresham’s Law. This law simplified states that bad money chases out good money. This was first stated in the 1850′s when Henry MacLeod named if after Sir Thomas Gresham (1519-1579).
The law has application in business if we allow it.
Bad customers can chase out good customers. Bad customers can take up our time and energy and cause us not to focus on the good customers. The good customers get tired of this and then seek a new supplier. The business is then left with the bad customers.
Bad staff members can chase out good staff members. The average team members can frustrate the best with the result of the good staff members looking at alternatives.
We can stop this law taking affect if :-
1. we careful about the selection of clients and continually review the client base to remove the least desirable clients.
2. ensure we have performance standards in place that are enforced and rewarded.
So lets reverse Gresham’s law and make good customers and team members chase out bad customers and staff.
AIG Bonuses – Right & Wrong
Last night I was having a conversation with some colleagues about the economic situation and the issue of the AIG bonus payments came up. Of the 4 of us present, the other three all felt that the bonus payments should not have happened. Yes you guessed it, I don’t agree.
So let me explain. From what I understand these payments are made to approximately 200 people under contractual arrangements entered into when these people joined AIG. Also these bonus payments are only payable based upon certain criteria being met. Therefore with this as the basis I firmly believe that all economies are founded on the basis that contracts are enforceable and somebody can not get out the contract at a later date if they want to change the goal posts. Thus the payments must be met to honor the obligations. If you say that since everything has changed and therefore the bonus payments should not be payable then where do you stop. Who has the discretion to honor which legal contracts? Remember these people getting the bonuses are not as I understand it the board or the CEO. The people getting it are the revenue generators for AIG.
I believe that the payment is to be made, so why has it become a big issue. It is obvious if you are a politician it is easy to be antibusiness and whip this into a fever pitch issue. I am concerned about the antibusiness sentiment that is coming out of the government in the US.
Now one of my colleagues stated that whilst the legal contracts may be correct but morally these people should not get the payments. I believe that morally the leadership of AIG has to honor its commitments to the team – so it cuts both ways.
Let’s look at these items in the cold hard light of day and remove the political vested interests from the argument.
There is a salient issue here in that businesses need to measure what matters i.e. what matters to the customers and make these measures the ones which rewards and bonuses are paid. If this was case then the bonuses would possibly not be payable.
I would love to hear your comments on this.
KPI’s and Customer Focused businesses – are they connected.
There is a well worn saying that “what you measure you can manage”. I believe thatnot all things can be measured but I will leave that for another time. However I also am of the opinion that what a businesses measures can have a significant impact on what the true underlying focus is of the business.
For instance if the number one KPI is productivity or gross sales then this will be the focus of the team. This is particularly so if there is some connection between the KPI and their pay and bonus structure. Remember this connection may not be a direct connection (ie a particluar result in the KPI gets a particular bonus) but it can be indirect (ie. when it come to the performance review these KPI’s are taken into account).Now productivity and amount of sales are important but if we are to have a customer business which is highly profitable then we need to have the KPI’s that are measuring what is important to the customer.
With KPI’s that are measuring what matters in place these then need to be made the most important in the business. We can attached the performance review to these KPI’s.
With a customer focused business, customers will be happy, everybody in the team will enjoy the place and it will be significantly more profitable business.
The Problem with most Key Performance Indicators
Too often in business there are a number of indicators implemented but they are of little use. But wait a minute I hear you say there is valuable information in the KPi’s, particularly in the trend of the indicator.
The problem with most indicators is that they are not focused on what matters to the customer and they are lagging indicators. A large number of KPI’s measure lagging information which means that not a lot of action can be taken upon review of the indicator. Lagging indicators are necessary and should not be ignored but they should not be the prime focus either. Also they should not be used as part of a staff members or team’s pay and bonus.
These lagging indicators give us a sense of the overall performance but they do not get to the root cause upon which we can take action.
Lastly there needs to be indicators focused on the outcomes that customers are concerned about. We need to know what is important to the customer (not just the core product and service) and have measures that encompass this.
Do you have customer focused KPI’s that are predictive?
Is Revenue per employee a useful performance measure?
As you know I strongly believe that you must in a business measure what matters to your customers, so is Revenue per employee a useful measure? It is an internal measure in that it is not directly measuring something that is important to the customer. In managing a business it is always necessary to have some internal measures to ensure that the business is efficiently delivering the service to the customer.
The revenue obtained represents the customers perception of the value of the service being delivered. By dividing this number by the number of people in organisation shows the efficiency in delivering this value.
So in conclusion, the measure is of some use but is only a measure of efficiency, it does not directly measure what is important to the customer.
Do stimulus packages work? Are we spending the money wisely?
Whilst I don’t profess to be an economist (maybe that is a good thing) I have read and listened to a number of Nobel laurate economists the question is do the stimulus packages work? The USA have recently passed their second stimulus package since the crisis started, Australia has also passed their second package and China is looking at a second stimulus package. Japan in the 1990′s and early 2000′s passed NINE packages in 11 years to no avail.
Whilst there are some to who say they do work, there are plenty of qualified economists who doubt the impact of them.
From my personal viewpoint is that not enough of the stimulus packages (particularly in Australia where I live) is being spent on innovation. The future of our nations will not be built on cash handouts or tax cuts to spend but rather we need to invest in innovation so there is a long term legacy. The trouble is the handouts are politically easier, whereas innovation is harder to see. The country reaps the benefit of innovation down the track.
Do you think these stimulus packages should have been passed? Do you think the money is being spent in the right area?
Not all clients are good clients even in tough times.
In these times there is a massive temptation for some businesses to chase after all types of clients. Most service businesses feel the need to take on all potential clients when times are tougher. But this is wrong at the best of times but in a harder economic climate it can be the deathknell for a business.
The temptation is because it seems like all revenue is good revenue. If you couple this temptation with the urge to discount prices it will ensure trouble for business. Don’t sacrifice your long term brand for short term revenue.
Let me explain…
In a service business we can not be all things to all people. We must determine exactly what services we want to provide, to what specific client do we want to serve. Other clients than those we have specifically identified e not good clients becasue one or more of the following reasons:- less profit, more hassle, upset the existing systems. So in the tougher times the lure of the extra revenue is high but that will lead to having to deal with clients that the systems are not set up, dealing with low profit client, dealing with hger maintenance clients, having your team on a treadmill dealing with these marginal clients.
The worst possible outcome is that by taking on some of these marginal clients your service to the good clients is affected negatively to the point that you may lose some of these good clients.
So please remember that your long term brand (profit / business) is worth more than any short term revenue.
The need to manage growth (yes some businesses are experiencing growth)
Even in these tougher economic times there are still businesses that are experiencing significant growth. Whilst we always want growth it comes with its own set of challenges.
Systems and procedures come under stress. Often new procedures are added on an ad-hoc basis in reaction to situations arising. In isolation each of these procedures may make sense but taken together it may end up a mess. Also these ad-hoc systems can suck the life of the team morale. Given these potential problems it is necessary to sit down and look where the business is going and put in place the systems for the business necessary for when it is much bigger than now. By taking this time the impact of the systems on the culture of the firm can be properly considered. The hardest thing in business is to maintain the great culture that is place as the business grows.
In a growing business cashflow is king. (This is always the case in any business but in a growing business it becomes supercritical). So with this it is critical to know what is happening in the numbers. If all that is measured is the daily/weekly bank balance and then the monthly profit and loss statement / balance then the business can easily run into trouble. I do not propose that a business should measure everything that moves. What I am saying that in a growing business it is important to measure what is important to the client and also measure the items that affect working capital. So what it is that is important to a client and how do you measure it. This will vary from business to business however to give an illustration of a financial advising firm – the best ways to measure whether clients are happy is to measure the number of referrals. Unhappy clients will not refer, only happy clients will.
Unfortunately many small businesses do not know what their working capital needs are. It is necessary to measure debtors days, stock turns, creditors days, cash balances and whatever else in your business that impacts on working capital. How much working capital is needed to fund the sales growth? What happens if the customers become just a little slower in paying? As business growths because of the stress on the sytem it is an unfortunate consequence that debtors days can extend. This can be because not enough time is spent on chasing up outstanding income. However the greatest reason for the debtors extension is usually because there has not been enough screening of customers.
The measurement of working capital and it’s various component parts is not something to be done once a month but rather at a minimum every week.
There are other challenges that come from growth but these two (systems and cash) are the two most critical. Also these apply to any business even if due the current economic situation there is not a lot of growth.
Focus is the key to longevity
I have just read a great story on Buffalo News of a law firm that believes in maintaining focus. Below is a quote from the article that is particularly relevant.
“Over the years, we have faced enormous challenges. We weren’t always a 200-year-old firm with a solid book of well-respected, well-regarded clients with a brand name that everyone knows in the marketplace,” said Gary Schober, CEO of Hodgson Russ LLP, Buffalo’s largest and oldest law firm, which this year is 191 years old. “We were fledgling at one time, just like every other business.”
Now, as the nation faces a severe recession and economic crisis not seen in more than 70 years, their current leaders have found that the same traits that got their companies through past trials are helping them survive the current downturn.
“We found if you narrow the things that you think are important and execute them consistently, then you can stay relevant [to your customers],” said Mark Czarnecki, president of M&T Bank Corp., which was founded in 1856 as Manufacturers & Traders Trust Co. by a handful of Buffalo business leaders. “That doesn’t mean you don’t change. But if you understand the things that are important to you, your customers and your employees, and you stay focused on them, you’re going to be moving in the right direction.”
The full story can be found at :
http://www.buffalonews.com/145/story/593706.html
I strongly recommend you to this article.
The need for Focus in business.
If a business (of any size) is to succeed there must be focus. The owners / management need to be very clear as to were the business is going. What customers they are going to serve. What products or services they will delivering. With this clear then it is imperative that everybody in the business knows the focus. This does not mean that a business can not change direction if there is sufficient reason to do so. What it does mean is that there is clarity about what is expected from everybody in the business.
To often in business there is a fuzzy focus in the owners mind but this is not overly clear and certainly not explained to everybody in the business.
Also with focus it will become obvious what is important to do. Focus allows us to determine what can be done later and what is critical for the success of the business. Without focus the business drifts. Nobody exactly knows what is important.
Is your business focused?
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