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A boss has the position and authority to command compliance, but only a leader can inspire commitment.

It’s true. Some people are born leaders.  They are born with the right aptitudes and behaviors that pave the way for leadership.  They may have to work at it, but at least they have the right tools to develop their leadership style and abilities.  Others (probably most of us) have to work harder to develop leadership abilities.  But all of us, given the desire and the right opportunity, can serve in a leadership role.  So how do you stack up as a leader?  Below is a self-test you can take to help answer that question.  If you’re brave enough, you can ask others . . . others who know you well and whose judgement you trust . . . to use this test to evaluate your leadership abilities.  I should point out that there is no scientific basis for this test at all.  I can’t tell what strong leaders typically score on it because none have ever taken it.  These are attributes of great leaders that I have gleaned from some leadership books and articles as well as from my own experience.  The expectation is, by rating yourself on each of them, you will uncover areas of your leadership style and abilities that you can improve upon.  Please continue reading below, then score yourself at the end.

A boss has the position and authority to command compliance, but only a leader can inspire commitment.

Are you a boss or a leader? Contrary to popular belief, being a boss doesn’t necessarily make you a leader.  Some bosses are good leaders, but others are not.  Below we discuss some attributes commonly associated with good leadership.  Please rate yourself on each at the end.

Character.  Your character defines who you are.  Do you have a system of values and beliefs that guide your behavior?  Strong leaders do.  Character begets trust which is the foundation of leadership.

Relationships.  There isn’t much of importance that we accomplish all by ourselves.  Usually we need the help and support of others.  Good leaders are relationship-builders, not only with people in their own organizations, but with outsiders as well.

Knowledge.  Leaders are life-long learners.  They are constantly on the lookout for opportunities to learn or experience new things that will add to their leadership abilities.  Leaders recognize that they develop themselves, not by quick fix events, but by a process of continuous self-improvement.  Leadership is developed every day, not in a day.

Consistency.  A leader must be consistent . . . consistent in his own demeanor, consistent in the way he interacts with others, consistent in the way he applies performance standards, and consistent in the way he upholds corporate values.

Emotional Quotient (EQ).  Sometimes referred to as Emotional Intelligence, it’s the ability of a person to understand his or her own emotions and to make conscious choices about how to display and act on those emotions appropriately.  But more important is the ability of a person to recognize emotions in others and to respond in a way that is fitting to the situation.  Most students of leadership place a greater value on EQ than they do on IQ.

Vision.  Leaders have a compelling vision, not just of where they’re going, but of how they’re going to get there.  You might be a great guy in lots of other respects, but how can you expect anyone to follow you if you don’t know where you’re going?

Self-confidence.  Not to be confused with arrogance, strong leaders are simply comfortable in their ability to lead . . . comfortable enough to say, “I don’t know” when they don’t, and comfortable enough to ask for advice or help when they need it.

Communication.  Good leaders are good communicators.  They’re not necessarily gifted writers or orators, but they find effective ways to get their message across.  How else can you build relationships, demonstrate your knowledge, or describe your vision if you can’t communicate well?

It would be beyond ridiculous to say the above eight things completely define good leadership. They don’t.  However, most of the leadership attributes we have chosen not to discuss here would likely fit in as sub-sets of these eight.  And if you can rate yourself highly (and honestly) in each of these eight areas, you’re leading pretty darn well.  If you can’t, then you have a road map guiding you to the area(s) you need to work on.

Please rank yourself on each of the eight below, using a scale of 0 to 10.

  1. Character                                             _____
  2. Relationships                                      _____
  3. Knowledge                                           _____
  4. Consistency                                         _____
  5. Emotional Quotient (EQ)                 _____
  6. Vision                                                    _____
  7. Self-confidence                                   _____
  8. Communication                                  _____
 
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“The majority of meetings should be discussions that lead to decisions.”

“People who enjoy meetings should not be in charge of anything.”   ~  Thomas Sowell

“Has anyone ever said, ‘I wish I could go to more meetings today?’”  ~  Matt Mullenweg

“Meetings are indispensable when you don’t want to do anything.”  ~  John Kenneth Galbraith

I was going to say that meetings get a bad rap, but they really don’t.  If we’re honest with ourselves, too many meetings (way too many) are boring, pointless, and a waste of time.  But it doesn’t have to be that way.  Done correctly, meetings are an indispensable part of the way we do business.  They can be an essential tool for coordinating efforts, solving problems, making decisions, and reaching consensus, all of which lead to taking action.  So what’s the problem?  Why do so many meetings fail to achieve much?  For more on this, please continue reading below.

“The majority of meetings should be discussions that lead to decisions.”   ~ Patrick Lencioni

Meetings aren’t inherently bad, but we frequently conduct them in ways that are.  Consider a few examples.

  • Regularly scheduled meetings. As, for instance, the weekly staff meeting.  Too often these get to be a matter of habit with no expectation of any particular outcome.  So we review some of our key performance indicators (metrics), talk about what’s going to be happening this week, then we adjourn and everybody goes about their day with no decisions made, no problems solved, and no actions to be taken.  In short, these meetings  only disseminate information that could probably have been disseminated more efficiently by text message or email.  As Patrick Lencioni suggests above, if we aren’t here to solve a specific problem or to reach a specific decision, why are we wasting our time?
  • Too many cooks in the kitchen. Everyone complains about meetings, but no one wants to be left out for fear that their absence will signal a diminished importance to the organization.  As a result, we have nine people in a room to talk about something that affects only three of them.  We need to make sure meeting notices go only to those who really need to be there.  To the uninvited, we need to convey a message that they are so important to the organization, and their time is so valued, that we’re not going to waste their time by making them sit in on meetings that don’t concern them.
  • Too many rabbit holes. A well-conceived meeting should have a specific purpose with a specific outcome in mind . . . i.e., a problem solved or a decision made.  Whoever is leading the meeting must keep the group focused on the expected outcome and not allow the discussion to get sidetracked into unproductive rabbit holes.  If the discussion is too unfocused and wide-ranging, participants will start to feel that their time is being wasted and will wonder why they are there.
  • Insufficient conflict. Sometimes, in the name of keeping peace in the family, a leader will avoid discussions that might provoke conflict.  That’s a mistake.  When the members of a group are able to express and defend their ideas and opinions, even when the discussion becomes contentious, that’s when creative, innovative solutions are born.

There are lots of ideas about how often meetings should occur, how long they should be, how they should be structured, etc.  In fact, in his book, “Death by Meeting,” Patrick Lencioni offers some very specific advice about how to structure daily, weekly, monthly, and quarterly meetings, each with its own role in the company’s overall meeting schedule.  But the real secret to a good meeting, regardless of frequency or structure, is purpose.  It has to have a defined purpose, and that purpose has to have weight and importance . . . preferably, a problem to be solved or a decision to be made.  But a solution or decision doesn’t have much value unless it actually gets implemented.  So when everyone is packing up to leave the meeting, the leader has to say, “Whoa!  We’re not done here yet.  We still have to decide who’s going to do what to get this implemented, and we have to decide on a timeline for getting it done.”

So, when your people walk into a meeting, is it another ho-hum, business-as-usual, let’s-just-get-this-thing-over-with part of their day?  Or do they walk in with a feeling of anticipation that we’re going to be doing something that is interesting, important, and will result in actions that will move us forward?

The choice is yours.

 
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“Compensation is an equity issue. People want to know that they are being compensated fairly . . . “

The Overture Group is an executive search firm with an additional specialty in compensation consulting.  We recently heard a presentation by Bob Lindeman and Mark Reilly, both managing directors of that firm.  They reminded us that compensation is (or should be) a strategic issue, not a simple, tactical, what-are-we-gonna-pay-this-person issue.  And our strategy should consider not only the outcomes we hope to achieve, but also the compensation methods we intend to use.  That is, do we want pay a straight salary or do we want to use some combination of salary plus incentive (pay for performance)?  If we want to use incentives of some kind, should they be short-term or long-term incentives, or both?  We also need to consider what portion of our total compensation package should be salary and what portion should be incentive.  So there’s a lot to think about.  For more on this, please continue reading below.

“Compensation is an equity issue.  People want to know that they are being compensated fairly compared to others doing similar work within the company, and to others doing similar work in other companies.  After that it’s a non-issue.”       ~ Richard Teerlink, former CEO, Harley-Davidson

Mr. Teerlink is right as far as it goes . . . nothing ticks off an employee as much as learning that someone else is being paid more for the same work.  When pay practices pass the fairness test, that may make compensation a “non-issue” as far as employees are concerned, but not for managers.  As long as managers are pursuing, reviewing, amending and/or changing compensation strategies, compensation will continue to be an active issue for them.

Using compensation strategy as a starting point, let’s look at a few such strategies and the outcome each may be aimed at achieving.

  • If you are intent on attracting the best talent available . . . particularly if the market for key positions you need to fill is highly competitive . . . you may choose to pay a premium over the going rate for those positions.  On the other hand, if there is a glut in the market for the sort of people you need, you could actually consider a compensation package that is at or below the market rate.
  • Companies often use long-term incentives to retain their key people.  These programs, sometimes called “golden handcuffs,” set aside a pool of bonus money that require a participant to stay with the company for a prescribed length of time.  If the participant bolts early, the bonus is forfeit.
  • Better payroll control. Sales commissions have always been based on the idea that you only get paid a commission on what you sell.  It doesn’t matter how long or how hard you worked.  No sale, no commission.  When a similar incentive structure is applied to administrative and operational roles, participants are paid the incentive amounts only when certain specified goals are met.  In this way, payroll becomes more flexible in that it ebbs and flows as the participants achieve (or fail to achieve) the key goals that will move the company forward.
  • Improved communication. As they say, “Follow the money.”  A well-conceived incentive program shows the participants, in a clear, unambiguous way, where the company priorities are, where the company is trying to go, and the role he or she must play to help the company get there.
  • Not in the equal-pay-for-equal-work way Richard Teerlink referred to.  Here we’re talking about an incentive system that rewards, not just the CEO, but all the key players who helped achieve the company’s goals.

As you consider the compensation strategies and outcomes that would be most appropriate for your business, consider these do’s and don’ts:

  • Do keep it simple. If participants have to go to an Excel spreadsheet to figure out what the plan can do for them, forget it.  That will be a non-starter.
  • Don’t try to make an omnibus comp plan. It’s tempting to try to build in provisions aimed at governing all behaviors and all activities of the plan participants, but don’t do it.  That will only add a layer of complexity that will be unhelpful and will violate the bullet point above.  A lot of that stuff you’re just going to have to manage the old-fashioned way.
  • Do make goals that are tied to compensation as specific as possible. Sometimes tough to do when the goal is qualitative rather than quantitative, but it can be done.  It will be very detrimental to your plan if there are misunderstandings and disagreements about whether or not a goal was accomplished.
  • Don’t confuse a discretionary bonus program with an incentive program. It’s nice to hand out $500 checks because the company had a good year and you want to share the wealth, but there was no “incentive” involved.  And there’s a dark side to discretionary bonuses.  They can get to be entitlements.  People will begin to expect bonus checks at the end of the year regardless of the company’s performance.
  • Do put an expiration date on all comp plans . . . annually often works best. Even the most carefully crafted plan can have unintended consequences, sometimes bad for the company, sometimes bad for the employee.  Or maybe the company’s priorities have changed requiring a different compensation strategy.  In any case, there needs to be a specific point in time when the plan can be reviewed and, if necessary, changed.

Our purpose here is two-fold:

  1. To convince you that compensation is an enormous and complex topic with lots of moving parts. This blog doesn’t even begin to scratch the surface.  If you doubt your internal resources to deal with it effectively, seek outside help.  Messing around with people’s pay will get you in a lot of trouble if you don’t handle it properly.
  2. To convince you that compensation planning is a strategic issue and merits the time and attention you would devote to any other strategic issue.  That means you should be looking for specific goals with specific outcomes, and compensation negotiations should be guided by that strategy.
 
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“Prioritizing causes us to do things that are, at the least, uncomfortable and sometimes downright painful.”

Setting priorities.  That’s something many entrepreneurs struggle with.  In fact, entrepreneurs are sometimes likened to crows who get distracted by every new shiny thing that comes along.  Unfortunately, this creates confusion as employees try to keep up with ever-shifting priorities.  In other cases, instead of setting priorities vertically with the most important at the top and the least important at the bottom, some entrepreneurs set them horizontally so that everything has equal importance.  Or said another way, these entrepreneurs are deep into instant gratification . . . everything becomes a “top priority.”  This also causes a lot of confusion as employees try to figure which “top priority” to attack first.  So what’s a priority-challenged entrepreneur to do?  For some thoughts on this, please continue reading below.

“Prioritizing causes us to do things that are, at the least, uncomfortable and sometimes downright painful.”     ~ John Maxwell, author and speaker

Prioritizing is hard work.  It forces us to choose what’s most important among many important things, to decide which of these very important things will have the greatest impact on getting us where we want to go.  Worse, according to John Maxwell, if we’re honest about it, some of the things that should be among our top priorities are things that may be a bit scary . . . things that will take us way outside of our comfort zone.

John Maxwell recommends a few things that may make prioritizing easier . . . although not necessarily more comfortable.

First, he says, ask yourself, “What must I do that nobody can or should do for me?”  If you’re doing something that is not necessary, you should eliminate it.  He further advises that if you’re doing something that is necessary, but could be competently done by someone further down on the food chain, you should delegate it.  You might ask, “Why would I be doing something that isn’t necessary or something that someone else could do?”  Several reasons.

  • You’ve always done this activity.
  • You enjoy doing this activity.
  • You can use this activity to hide from other activities that you really don’t want to do.

The idea here is to remove from your plate those things that are either unnecessary or that could be done by someone else.  Although you still have to prioritize the remaining stuff on your plate, at least the list is now a little smaller.

Second, your top priorities should be a reflection of your unique gifts and talents.  In his book, “Now, Discover Your Strengths,” researcher and author Marcus Buckingham makes a powerful argument against wasting time pursuing activities for which you have no natural strength or ability.  He suggests shedding such activities in favor of those that truly are a good fit for your talents.  Done correctly, you get a double bump out of this.

  1. You get rid of activities that aren’t a good fit for you, and you put them in the hands of someone who has the right talents and abilities to handle them efficiently and effectively.
  2. You free up your own time to address priorities for which your strengths and abilities create the most leverage and do the most to propel the company toward its goals.

Third, as you ponder your priorities, consider Pareto’s Law that advises you to focus your attention on areas of the business where you can achieve 80 percent of your results from 20 percent of your efforts.  That’s counter-intuitive, isn’t it?  Our natural instinct is to work on those areas of the business that aren’t performing well, but Pareto’s Law suggests instead that we identify the people and processes in our business that are responsible for the majority of our success, and work with them to make them even better. In practice, that means if you want to reinforce your sales effort, you should spend the bulk of your available time with the 20 percent of your sales force that produce 80 percent of your sales.

John Wooden, legendary basketball coach at UCLA, was a master at setting priorities.   In his 40 seasons of coaching at UCLA, his only losing season was his first, yet his priorities did not include winning basketball games.  He led his team to four undefeated seasons and a record ten NCAA championships, yet winning championships was not one of his priorities.  His priorities were entirely about getting the most from his players, getting them to play to their potential, and putting the best possible team on the court.  The winning seasons and the championships were byproducts of those priorities, but not the priorities themselves.

Strong leaders like John Wooden recognize the value of prioritizing.  They see it as an effective and efficient way to get the most out of the resources available to them.  Successful leaders in all walks of life . . . business people, coaches, pastors, lawyers, soldiers . . . all owe their success to establishing, and keeping their organization focused on, a clear set of priorities.  Be that kind of leader.

Be like John Wooden.

 
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“A key to achieving success is to assemble a strong and stable management team.”

Almost everything that gets done in business gets done by teams.  Even the road warrior sales person who is out there, far from the office and hunting his next prey, needs the support of a sales team.  Keynote speaker and best-selling business author, Patrick Lencioni, talks extensively about teams in his book, “The Ideal Team Player.”  In that book, he describes the characteristics of people who will help to make a team strong and effective as well as those that will make a team weak and dysfunctional.  To learn more about what Lencioni says are the three hallmarks of a great team player, please continue reading below.

“A key to achieving success is to assemble a strong and stable management team.”          ~ Vivek Wadhwa

According to Lencioni, the three essential characteristics (he calls them “virtues”) of a great team player are:

  • Humility
  • Hunger
  • People smarts

The most important of these is humility, so we’ll deal with that one first.

Humility.  We sometimes may equate a “humble” person with someone who is shy, withdrawn, or weak.  Not so here.  In this context, being humble is simply not being arrogant.  A team player who shows humility is demonstrating an ability to subordinate his or her ego to the greater good of the group.  Great team players are unconcerned about status or about who gets credit.  They are generous in giving credit for success to the entire team.  Their language is peppered with “we” and “us” rather than “I” and “me.”

It’s important to note that “humility” and “self-confidence” are not mutually exclusive terms.  On the contrary, a humble person can also be extremely self-confident.  Or said another way, a humble person may simply be so confident in her abilities that she doesn’t feel the need to prove herself to anybody.  As C.S. Lewis once said, “Humility isn’t thinking less of yourself, but thinking of yourself less.”

Hunger.  Think drive, determination, and motivation.  It’s continuous improvement, an unending quest to make the team, its tools and processes, better.  Hungry people rarely need to be pushed by their team leader because they are already on the prowl for that next big challenge, and they will pounce on it when they find it.  We’re not talking here about a hunger that would drive a person and his or her teammates to exhaustion.  We’re talking about a healthy level of hunger that recognizes, and celebrates, that there’s always more to do, more to learn, and more to improve.

People smarts.  Lencioni says this is nothing more than using common sense to guide your interactions with other people.  Some of us refer to this as “emotional intelligence.”  It’s being aware of, and sensitive to, actions and language that could cause a negative response from another team member or from the entire team at large.  This isn’t to say that we can’t have disagreements within the team.  In fact, robust discussions with differing points of view are essential to a high-functioning team.  But those discussions and disagreements must use language that is tolerant and respectful, and that does not impugn the integrity of anyone on the team.

 As individual attributes . . . humility, hunger, and people smarts . . . all are worthy and desirable.  But when we put these into the context of a team, we see that the real power is in the combination of all three.  Two out of three won’t cut it.  If, for example, a team member shows the requisite amount of humility and people smarts, but is lacking a fire in the belly (drive, self-motivation), he or she will bring the whole team down.

In his best-selling book, “Good to Great,” Jim Collins talks about the need to get the right people on the bus, meaning hiring the people who are a good fit with the company’s culture.  So if you want to build great teams, make sure humility, hunger, and people smarts are embraced within your culture and within your hiring practices.

 
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“Management is doing things right; leadership is doing the right things.” ~ Peter Drucker

We have used this space to talk about leadership many times in the past, and no doubt, will continue to talk about it in the future.  It is, after all, a critically important topic.  If you go to the business section of a bookstore or a library, you’ll find the shelves are packed with books on leadership.  There are endless opinions about the characteristics of a great leader and the components of great leadership.  And all this dialogue about leadership stems from one inescapable fact: no organization . . . political, military, civic, business, religious, educational, or any other kind of organization . . . can succeed without it.  It’s the glue that holds an organization together and gives it purpose, direction, and energy.  Yet despite its enormous importance, most privately held businesses devote little or no resources to developing leadership skills among their managers who are in, or will soon be in, key leadership positions.  So collectively, we small business people must believe:

  • that leadership skills can’t be taught or learned;
  • that a manager with a title automatically has leadership skills; or
  • that small businesses can’t afford leadership training.

False, false, and false.  For more on this, please continue reading below.

 “Management is doing things right; leadership is doing the right things.”    ~ Peter Drucker

As we have said, there are thousands upon thousands of quotations on leadership uttered by famous leaders, but Drucker’s is as good as any, so let’s go with his.

The problem with Drucker’s quotation . . . a problem shared by most of the other quotations on leadership . . . is that it implies we already know the “right things” to do.  But we don’t.  When we’re in uncharted territory, and we come to a fork in the path, which direction is the “right” one for us to choose?  This is where leaders really earn their keep, when they must lead the way down a path that is not very well marked.  Still, where do these leadership skills come from?  Are good leaders born with them?

A few are, but most are not.  That is, some people seemingly have good natural instincts that guide them when leadership is required, but they are in the minority.  For most of us in the world of small business, particularly those of us who are younger and less experienced, we’re suddenly thrust into leadership situations unprepared, and we just have to figure it out as we go, tripping and stubbing a lot of toes along the way.  Unfortunately, some of those trips and stubs can be both costly and damaging to the organization.

This is where training or coaching or mentoring comes in.  Before we throw them into the deep end of the pool, we really need to take our up-and-comers who are in line for a leadership role and give them some basic leadership tools to work with.  For instance:

  • Communication skills. When there’s bad news to be delivered or a dilemma to be solved, how do we do that in a way that enlists the help of our team members and energizes them to want to push forward?
  • Building trust. People won’t follow someone they don’t trust, so where do we begin to build that trust?
  • Continuous improvement. Great leaders are never satisfied with the status quo.  They need to challenge their team to be creative and to innovate ways to do things better/faster/cheaper.
  • Building accountability. Leaders need to hold themselves and their team accountable to do the things they’ve promised to do.
  • Goal-setting. Improperly set goals can be demotivating to a team.  Good leaders need to know how to set goals that are achievable, appropriate, and will have the effect of exciting and energizing his or her team.
  • Delegating effectively. It’s difficult to earn a team’s respect if the leader is always doing things that the team members could be doing for themselves.  Leaders need to use good delegation practices.
  • Resolving conflict. Conflict is necessary, even desirable, in a healthy, high-functioning, energized team.  However, the leader must know how to channel that conflict in a useful, productive way.

So yeah, good leadership is more than saying a few motivational words and telling the team to “take that hill.”  A lot more.  It takes some very specific skills that most of us did not learn while we were still in the womb.

Then how do we train our people in these skills?

Check with junior colleges in your area.  Many of them offer courses in basic leadership that are both effective and affordable.  Or, it might even be more cost-effective to take a “train the trainer” approach by sending just one of your leadership candidates to the class and let him or her train the others.  Or, if you have more experienced members of your staff who are already skilled leaders, ask them to establish mentoring relationships with your up-and-comers.  Of course, there are also consultants who offer themselves as leadership coaches, and while that may be the most expensive option, it might also give you the best result.

The point is, if you just throw would-be leaders into the deep end of the pool and let them flounder around trying to figure it all out, they may become discouraged, lose the confidence of the people they’re supposed to lead, and lose an opportunity to play a starring role in your company.  Don’t let that happen.  Good leaders are just too hard to find.  A little training, coaching, or mentoring will do wonders and will pay big dividends.

 
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“I found success becomes a catalyst for failure because it leads to what Jim Collins called the ‘undisciplined pursuit of more.’ “

Greg McKeown is a leadership and business consultant, public speaker, and author.  His most recent book is, “Essentialism: The Disciplined Pursuit of Less.”  In that book, he puts forward his very unusual belief that success in business can be its own worst enemy.  In his view, success doesn’t necessarily beget more success.  In fact, an initial success can actually prevent that success from advancing to the next level and from achieving its full potential.  To find out why, please continue reading below.

“I found success becomes a catalyst for failure because it leads to what Jim Collins called the ‘undisciplined pursuit of more.’ “               ~ Greg McKeown

In the interest of full disclosure, I have not read McKeown’s book . . . only a few excerpts from it.  So in the remainder of this posting is a little bit of McKeown, but it’s mostly my reactions to his thesis that one success may hinder further success.

Central to McKeown’s thesis is the notion that an initial success comes from an intense, unwavering focus on a specific goal, and that our success can be threatened if we lose sight of the singular focus that brought us success in the first place.  There are probably a number of situations that would support McKeown’s thesis.  Here are several of them:

  1. The “Shiny New Thing Syndrome.”  When you think about it, entrepreneurs can be a little like crows . . . we can get distracted by every shiny new thing that comes along.  And when we enjoy a level of success that generates some recognition within our marketplace, opportunities (read shiny new things) will start to seek us out.  There will be ideas for new products or services which may or may not have anything to do with our existing products or services.  There will be those who want to buy our company as well as those who want to sell us theirs.  So while these opportunities may be legitimate and attractive, they nonetheless diffuse our attention and distract us from the very thing that brought us success.
  2. Proof of Concept.  For many entrepreneurs, the thrill is in the chase, proving to the world that their idea has merit and can be a commercial success.  But having achieved that, the entrepreneur may be bored with (or inept at) the mundane management activities that the business needs to sustain itself.  So off he goes to his next BIG IDEA, leaving his staff to figure out what to do with the old BIG IDEA.  As a result, no BIG IDEA reaches its potential because the boss loses his focus and moves on too quickly.
  3. Visions of Grandeur.  Sometimes an entrepreneur wants what he wants because he wants it.  There is the case of a friend and colleague who started a very successful business here in Chicago, and subsequently opened offices in New York and Los Angeles.  Opening the offices on the coasts seemed a little odd since the Chicago market is so vast, he could probably spend several lifetimes here and never scratch the surface of it.  But he wanted to be a “national” company and felt that a presence in Los Angeles, Chicago, and New York would give him that.  There was no illusion that this would make his company more efficient, or serve his market better, or be more profitable.  In fact, opening the two additional offices probably made him less efficient and less profitable than he would have been with only the Chicago office.  But maximizing efficiency and profitability was not his vision . . . claiming to be a “national” company was.
  4. Growth for the Sake of Growth. . . . is a fool’s errand, often driven by an owner’s ego.  There are all sorts of sound business reasons to grow a company, but “just because” is not one of them.  There seems to be a mindset among many small business owners that “we gotta grow this thing” without much thought as to why, or how, or what the benefit of being big would be.  As a wise man once said (although we don’t know who this wise guy was), “Bigger isn’t better.  Better is better.”  Just look around and you’ll see all kinds of examples of large companies struggling while their smaller competitors are thriving.

There’s a story about the CEO of a large pharmaceutical company staring out a window at his sprawling corporate campus and watching some of his employees cutting the grass, tending the gardens, and trimming the trees.  He asked one of his staff, “What do we know about landscaping?  Wouldn’t we be better off contracting with someone who’s actually in that business?  I’ll bet a qualified landscaping company could do that work better, faster, and cheaper than we can.”  That started him on a quest to look into every activity within the company, searching for activities that were outside of his company’s core competencies.  His guiding principle was, “If an activity isn’t essential to the design, production, and marketing of our products, we should outsource it to a contractor who can do it better/faster/cheaper than we can.”

On a larger scale, we see conglomerates with fingers into just about everything and gobbling up even more.  Then, one day, a new CEO comes aboard, takes a look at the company’s vast holdings, and says, “I don’t think we know what we’re doing with half of our subsidiaries, so we’re going to do some housecleaning.  We’re going to assess where our strengths are, where we can add value, and where we have the best opportunities for success.  In short, we’re going to define our sweet spot and get rid of everything that doesn’t meet that definition.”

So the real message here is to protect your intense, singular, unwavering focus on a specific goal.  Don’t allow yourself to become distracted by everything that comes your way.  Does that mean we should ignore or be blind to opportunities that do coming knocking on our door?  No, of course not.  But you should give such opportunities a quick and honest assessment before you waste a lot of time on them.  Ask yourself:

  • Is this opportunity a good fit for our core strengths and for the markets we serve?
  • Is this such a wonderful opportunity that we must take advantage of it, even if it means slowing or idling work on our previous goal?
 
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Don’t produce a budget. Map out a Profit Plan. (Part II)

We have been talking about an annual planning process.  It began two postings ago when we talked about laying out three to five strategic initiatives aimed at moving the company forward.  Then with our last posting, we began a 2-part discussion on what some call a “budget,” but what we prefer to call a “profit plan.”  Part 1 dealt with the revenue side of things.  How do we forecast what we expect to sell next year?  Now we’ll deal with the cost side of things.  We need a spending plan that anticipates what we expect our costs to be next near.  If you’re interested in our discussion about projecting costs, please continue reading Profit Plan (Part II) below.

Don’t produce a budget.  Map out a Profit Plan. (Part 1I)

The basic problem we see with forecasting the cost side of the business is people trying to take shortcuts in the name of being expedient.  Most shortcuts create two problems:

  1. They can rob you of the level of detail you need to spot waste, inefficiency, or irregularities.
  2. If your Plan starts to falter, they can make it difficult to analyze what’s going wrong, and even more difficult to figure out how to fix it.

Here are a few examples of shortcuts you should not take.

Bad shortcut #1

Breaking down all our sales and expense projections by month is a real pain.  Can’t we make do with just the annual numbers?

Nope.  You’ll want to break down everything by month so that when your actual financial statements are available each month, you’ll be able to compare them to your Profit Plan.  If your Plan is made up of only annual numbers, you may not realize it’s off target until it’s too late in the year the do much about it.

Bad shortcut #2

We know what our overall Cost of Goods is as a percentage of sales.  Can’t we just use that instead of calculating a separate Cost of Goods for each of our products or service lines?

If you’ve got multiple products or service lines, each with its own unique Cost of Goods structure, you’ll need to know how much of each you expect to sell, and then do a separate Cost of Goods calculation on each.  Otherwise, if your Cost of Goods starts going out of whack, how will you know which of your products or service lines is the culprit?

Bad shortcut #3

Do we really have to analyze our fixed costs.  After all, they are “fixed,” right?  Can’t we just use last year’s costs as a percent of sales and go with that?

No, we can’t.  Our fixed costs (usually referred to as SG&A or Overhead) are “fixed” only in the sense that we have to pay them no matter what.  Even if we’re having a dismal sales month, we still have to pay salaries, utilities, bank debt, etc.  But these so-called “fixed” costs do change.  We may hire new office people or grant salary increases to existing employees, the lease agreement for our office space may have a rent escalation clause, some of our vendors might put through price increases, etc.  Besides, if we just base our spending on historical trends, we eliminate opportunities to improve . . . to eliminate waste and improve efficiency.

Throughout this process, for both revenue and expenses, you should be recording assumptions for each line item, i.e. “We plan to put in an across-the-board 5% price increase in April,” or “We expect our energy costs to be flat.”  During the year, as you compare your actual results to the results you expected in your Profit Plan, you’ll be looking for variances or deviations.  When you find them, if they are significant, you’ll ask yourself, “What the heck were we thinking when we forecast that number?”  If you recorded your assumptions properly, they will remind you what you were thinking.  If the assumption is flawed in some way, then you may have to make a correction to your Profit Plan.  But if the assumption still seems valid, then we apparently failed to execute on that particular item and we’ll need to find out if there’s some corrective action we can take to get back on track.

Now for the tough part.  You’ve projected your sales and expenses for next year, so now you can see your projected profit.  If that number meets your expectations, then good, we’re done.  But if not, you have a choice to make: you can either except the profit level the Plan projects (even though it’s lower than what you expected); or you can go back to the Plan, tweeking it here and there to produce the profit result you want.  The danger here is that your sound business judgement gets replaced by hope and unreasonable optimism, and the tweeks you make are nothing more than wishful thinking.  Obviously, you want to avoid that.

In summary of this posting and the previous two postings:

  • Begin building your annual plan by laying out the three to five strategic initiatives you expect to implement to move the company forward during the coming year.
  • Forecast sales and expenses for the coming year to produce a Profit Plan, noting all the assumptions you make during that process.
  • As you set your strategic goals and build your Profit Plan, be as inclusive as possible.  The more people you are able to involve in the process, the more support you’ll have when the new year starts and it’s time to execute your plans.
  • Throughout the process, immerse yourself in the details of your business, and avoid shortcuts that may undermine your annual plan’s usefulness as a valuable management tool.
 
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Don’t produce a budget. Map out a Profit Plan. (Part 1)

In our last posting, we talked about building an annual plan around three to five strategic initiatives.  We also suggested that you open up your planning process to as many of your employees as possible . . . don’t restrict it to only you and your top managers.  Make your planning process as inclusive as you can.  However, these strategic initiatives are activity-based  . . . these are the things we’re going to be doing to move the company forward.  But the plan also needs a financial component.  It needs what many people call a budget, but what we prefer to call a “profit plan.”  A “budget” sounds restrictive, confining.  It sets the boundaries for what we can and cannot do.  A “profit plan” on the other hand, says “This is our target for profitability next year, and here’s how we intend to achieve it.”  The Profit Plan probably looks identical to a traditional budget, but instead of a document that sets up boundaries, it’s a road map to the financial outcomes we expect to achieve next year.  For a few thoughts on how to build your Profit Plan, please continue reading below.

Don’t produce a budget.  Map out a Profit Plan. (Part 1)

The starting point for a Profit Plan is also the most difficult part . . . that is, a sales projection for the year.  It’s difficult because in most cases, we don’t know with certainty who is going to buy from us, what they’re going to buy, or in what quantity they’re going to buy.  So it’s a lot of guesswork.  Educated guesswork perhaps, but guesswork nonetheless.  Still, we can’t have a Profit Plan without some sort of sales target.

The best, most reliable way to project sales is customer-by-customer.  If you’ve got thousands upon thousands of customers, this approach may not be practical, but for most small businesses, that’s not the case.  So take a look at each customer (probably with the help of your sales people) and ask yourself:

  • What did they buy from us last year?
  • Was there some event last year (one that won’t be repeated) that caused them to buy more or less from us than they normally would?
  • Do we have any intelligence that would suggest they’ll do more or less business with us the coming year than they did this year?  That is, are they trying to acquire other businesses, open new locations, roll out new products or services, etc.?
  • Thinking of our existing customer base, do we have opportunities to sell them more of what they’re already buying from us?  Do we have opportunities to sell them additional products or services that they are not currently buying from us?
  • How many new customers are in our sales funnel and how many of those can we reasonably expect to start doing business with us this year?  For each of those that we think will be new customers for us, when will they start and at what volume?
  • What about attrition?  Nobody keeps every customer forever . . . they retire, move away, close their doors, all sorts of stuff that may or may not have anything to do with us.  So how much business can we reasonably expect to fall off during the year?
  • Are we anticipating any change in our pricing strategy that may cause our volume to go up or down?
  • Do we expect the strategic goals (discussed in our previous post) to have an impact on  sales.  If so, we need to build that into our projection.

Obviously, this is an exhaustive process, but one that forces us to closely examine our customers and understand their evolving needs.  It also takes our guesswork out of the realm of total speculation.  It’s still guesswork, but as noted earlier, it’s at least educated guesswork.

Some companies may try to avoid this customer-by-customer approach using some sort of trend analysis.  For instance, they may say, “Over the past three years, our sales have averaged an annual 10% increase, so we’ll just assume that trend will continue.”  While this approach is better than nothing, it doesn’t offer any insights into the dynamics of the company’s customer base or market segment.  But for some, it may be the only way to do it.  For instance, a divorce attorney may have a good referral network, but doesn’t really have a customer base that will produce reliable repeat business.  He or she can’t really count on the people who divorced last year, divorcing again this year.

At the risk of making this sales projection process even more burdensome, we need to footnote everything.  At some point in the year, it will become obvious that some of our assumptions are way off base.  We will say, “Wow!  ABC Company isn’t doing one tenth of the volume we expected it to do.  What we’re we thinking?”  It’s unlikely we’ll be able to remember what we were thinking when we came up with our projection for ABC Company, but if we footnoted why we projected what we did, we can determine whether or not there’s a way to get it back on track.  If not, we may have to revise our projection for that company.

OK, so we’ve got the sales projection component of our Profit Plan complete, or at least our first swing at it.  In our next post, we’ll talk about the fixed and variable cost components of our Plan.

 
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“The nicest thing about not planning is that failure always comes as a complete surprise and is not preceded by a period of worry and desperation.”

About this time every year . . . somewhere around the beginning of the 4th quarter . . . is a good time to begin planning for next year.  Unfortunately, planning is not an activity that most small businesses engage in . . . at least, not in any meaningful way.  The owner may have in mind some sales and profit targets, but no real plan for how to achieve them.  The prevailing attitude seems to be, “We’ll just work real hard and hope we get there.”  But as they say, hope is a poor strategy.  Or, as author and explorer Jeff Rich tells us, “A goal without a plan is just a wish.”  Yet planning does have its detractors.  Mike Tyson has famously said, “Everybody’s got a plan   . . . until they get punched in the mouth.”  And Woody Allen weighs in with, “If you want to make God laugh, tell him about your plans.”  So if you’re in the same camp as Mike and Woody, and believe that planning is a waste of time, you should stop reading here.  But if you’re willing to be convinced that putting together an annual plan just might have some merit, please continue reading below.

 “The nicest thing about not planning is that failure always comes as a complete surprise and is not preceded by a period of worry and desperation.”     ~ Richard Palmer

If you truly have no expectations or goals for next year and are content to take whatever results fate chooses to give you, then fine, don’t plan.  Under those circumstances, what would be the point?  But if you do have aspirations and goals for next year (and of course, you do), then to claim that you can achieve those without at least a rudimentary plan is indefensible.

To be honest, it’s amazing that there’s any resistance at all to planning in a small business.  After all, we do plan for all sorts of other stuff.  We plan for vacations.  We plan for weddings (ugh, down to the last napkin).  We use financial planners to help us plan our future.  Yet, even though a business is usually the owner’s largest asset, many still resist the idea of an annual plan.  Yeah, it takes time and it takes effort, but done correctly, the result is a roadmap for where you’re going and how you’re going to get there.

The first step is to identify the major strategic goals you want to achieve next year.  Set SMART goals . . . goals that are Specific, Measurable, Achievable, Results-oriented, and Time-based. Vague goals that don’t include measurements or deadlines are doomed from the start.  Consider limiting yourself to three.  If you undertake more than three, you risk stretching yourself too thin.  It’s better to achieve the results you want with three goals than to achieve only so-so results with five.  And don’t set these goals all by yourself, locked away in your office.  Involve the managers on whom you will depend to implement these goals.  They probably have their own ideas about what the company should be undertaking next year, and you should hear those ideas.  Besides, they will be more supportive of goals they helped to set than they would be of goals in which they had no input.

Make sure your goals are focused on the outcomes or results that you expect.  For instance, “Buy and install a new computer system” is not a goal.  “Developing more detailed, timely business intelligence,” is a goal . . . it may be necessary to buy a new computer system to achieve this goal, but buying a new computer system is only the means to an end, not a goal.

Commit the goals to writing, taking care to word them clearly and concisely.  Confirm everyone has the same understanding of what we’re trying to achieve with each goal.

Next we have to do a little number crunching to make sure there’s an acceptable ROI for each goal.  That is, we need to identify a benefit to the company in terms of improved productivity, reduced cost, or higher profit.  If we can’t prove such a benefit (or if the benefit is significantly less than we hoped it would be), we either re-work the goal in a way that will achieve a better result, or we toss it out and substitute a different goal.

Now comes the hard part.

Each manager who has helped craft your goals must now present them to his or her direct reports and solicit their reactions/feedback.  Just as you needed your managers participation in the goal-setting process to secure their support, now you need the support of everyone else.  You can’t fake this.  You can’t go through the motions of being “inclusive” in this goal-setting process if you have no intention of listening to what anyone may have to say.  So you need to make an honest effort to get people to voice their questions, concerns, opinions, and suggestions.  We’re not running a democracy here, so you’re not obligated to act on what they say, but you are obligated to listen, to hear, and appreciate what they are telling you.  Besides, these are the folks who are immersed in the nitty-gritty details of your business every day, so it’s just possible they will spot something in your proposed goals that you and your managers overlooked.

Finally, we need to put metrics on each goal so they can be tracked and measured (remember the M in SMART goals?).  No question, some goals are easier to measure than others, but if a particular goal defies measurement of any kind, then it doesn’t really qualify as a goal.  After all, if we can’t measure it, we won’t know if or when we’ve achieved it.

If you think all this planning stuff is a waste of time and would prefer to “just work real hard and hope for the best,” that’s your choice.  However, if building an annual plan makes sense to you but you haven’t done one before and don’t quite know where to start, email or call me.  I’ll be happy to help.

 
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