Accountability vs. Guilt

Posted on May 10, 2010 by John F. Dini

While discussing oil rig disaster in the Golf Of Mexico the other day a friend exclaimed “Someone needs to go to jail for this!”

While I understand his anger about the massive economic and environmental damage involved, his comment illustrates the assumption we so often make about any problem. If it is big enough, then someone needs to be punished proportionately. That isn’t always the case.

Of course, we will have the “perp walk” in congress. I’m sure the executives of British Petroleum will be called to grovel in front of a Congressional subcommittee. Like the CEOs of Toyota, GM and Goldman Sachs, they will be chastised for allowing something so terrible to happen. But that doesn’t mean it’s any one’s fault.

Drilling is a dangerous activity. The gas pressure bubble that blew through the rig is a normal occurrence in that business. Blowout preventers are installed for just such events. They may have been defective, or installed incorrectly, but there are also a bunch of reasons why they could have failed even if everything was done right.

There are a lot of business owners who suffer from the same misconception- that because someone is accountable for a problem, that means they are guilty. An employee makes a poor decision that costs you a lot of money. You are understandably angry, and your first instinct is to punish him for being so stupid.

There are many reasons for making the wrong decision. If it is due to lack of training, lack of information, lack of checks, or lack of systems the employee could be accountable without being guilty. If it is due to lack of attention, or lack of care, then perhaps there should be penalties involved. Your anger shouldn’t result in punishment merely because you are in a position of power.

I know two business owners who have a lot of trouble with small tools. They are expensive, and disappear regularly. One punishes employees by having them sign a statement of responsibility, and docking their paycheck for every tool that has to be replaced. He accepts no excuses. The employees bring back broken tools for examination, and to get a sign-off exempting them from financial responsibility. They point fingers (” I lent it to Bob.”) They work without the necessary tools, hiding the fact that they are under-equipped to do the job right.

The other employer has a monthly amount set aside for each employee’s typical tool replacement. If at the end of the month the employee needs less than the budgeted allocation for missing or broken tools, the balance of the replacement budget is his to keep.

Which employer do you think has a lower tool replacement cost? One is teaching accountability, the other is punishing behavior. One has a crew that is always fully equipped. The other has employees spending time and energy hiding the problem.

The next time an employee causes you a problem, look forward, not backwards. The better solution is to determine how the problem can be avoided in the future. There is little point, and no profit, in punishing the past.

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Ready…Set…Wait? Leading Indicators and small business

Posted on May 2, 2010 by John F. Dini

In the last few weeks I’ve talked to a score of small business owners who say that things are improving for their companies. Several have been involved in trade shows that had record attendance. A few manufacturers are seeing a strong uptick in orders. Retailers are experiencing increased traffic.

We all know that the businesses who are positioned to move early in a growing market get the jump on those who aren’t, but how do you know whether this is the time to move? Most entrepreneurs behave like “retail” or individual investors in the stock market. They are too late into a bull market to capture most of the profitability, and too slow to get out in a down slide to avoid most of the losses.

The stock market professionals say that when huge volumes of retail money (from IRAs, 401Ks and other self-directed sources) begin pouring in, the rally is probably over. What worries me is that in the last 60 days I’ve met 5 people who told me they “didn’t need the income” from their job or business, because trading their personal portfolio was making them enough money to live on. They have apparently forgotten 2000. I know several successful individuals who would have retired years ago if they hadn’t been suckered into the tech bubble right at the end.

So do you start looking at expansion of your small business now, or wait until you are completely certain, and probably miss the bulk of the opportunity? How do you know when it is the right time to bet on the economy?

The first rule is to stop reading the newspaper, and turn off the financial news stations. For the vast majority of small business owners, what happens in “the economy” means nothing compared to what happens in your local market.

I have a client who owns a machine shop. Nationwide there is clearly a surplus of manufacturing employees. In our local market, a new plant by a big publicly traded corporation has begun recruiting. It doesn’t matter to my client whether manufacturing unemployment nationally  is 10% or 13% or 20%. Locally, there aren’t any skilled employees available. Would this be a smart time for him to cut wages or benefits? Of course not. Regardless of the national situation, he is in a dog fight for good workers.

Business owners need local measurements of what is happening in their industry. These are typically not published anywhere. You need to develop and track your own. Establish relationships with other business owners who are “upstream” of you in the food chain. They may not be a precise predictor, but they can give you a better idea of whether an uptick in business is an anomaly or a trend.

For example, a subcontractor to residential subdivision builders maintains a relationship with a civil engineering firm that serves the same market. While his contracts for home construction vary according to monthly sales, when the civil engineer starts platting whole new subdivisions the trend is longer term. The civil engineer talks to the real estate agents who represent large parcels. He wants to know when the residential developers are negotiating for new tracts of land. It doesn’t matter much to either of them what the national numbers are. They don’t do business nationally.

A fast-service restaurateur of light (frankly- hip) food follows approval of financing for new apartment complexes. An office furniture dealer tracks leasing rates. A pest control company tracks the backlog in residential sales. A cash register dealer tracks announcements of new retail centers.

Most small businesses thrive according to the skills of the owner. If you have 1% market share, you can grow to 2% market share and do well even in a shrinking market. Leading indicators can tell you when it is time to focus on taking existing business from competitors, and when it is time to put your efforts towards chasing new business.

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Penny wise

Posted on April 25, 2010 by John F. Dini

A client who provides Information Technology services to small and midi-sized clients was expressing frustration the other day. His company has a relationship with a business to support their employees’ technology needs. They were constantly delayed, however, by the network administrator’s buying process for new hardware. After all, how tough can it be? The company gets the specifications from the technology vendor; so much RAM, or this many ports, and the in-house IT guy goes online to search for the best deals.

Technology is one of those areas where we’ve come to accept commodity pricing as a fact of life. Most of us are aware of Moore’s law, that processing capabilities will double every nine months. Many small business owners also know that the trailing edge of current technology is adequate for our basic business needs. Why not save a hundred dollars just for investing an hour or two of an employee’s time?

Let’s say the netowrk administrator in question makes $60,000 a year, with normal benefits. Total cost to the employer is around $80,0000 annually. Subtract paid time off for vacation, sick leave and holidays and that employee works about 1,920 hours, for a real cost of $41.67 an hour. If he spends 2 hours to save $100, the net benefit to the company is less than 20 bucks.

If you add in the cost of another employee who is currently unproductive while working without a computer, or who is calling on the internal IT person for regular fixes, the savings goes negative in an eye blink. If that person uses even 30 minutes extra of outside technician’s time, the negative costs far outstrip any potential savings.

Ironically, the IT vendor also offers commodity pricing on hardware. Like most such companies, they make between 10% and 15% margin on basic computers, routers, firewalls and the like. For that amount the technician also gets a product he is familiar with, saving substantial time when he integrates it into the client’s system.

We trust our tech vendors with our two most important assets; our data and our employees’ productivity. They have more access to our proprietary information than our CPA, and are the key vendor whose errors could bring our employees to a shuddering halt. Why don’t we trust them to provide a low-margin commodity that they are most qualified to deliver?

Because we can. Because we started out buying our own technology when support companies were scarce, and we had to do it for ourselves. Because we all know that competitive pricing is out there. I just looked at my Sunday advertising supplements. Dell, Best Buy, Office Max, Staples and Office Depot have deals on computers. In a few weeks, when graduation gifts get hotter, Wal Mart, Target and Sears will jump in.

Here’s a news flash. None of those companies make only 15% margins. You wouldn’t trust them to make your employees more productive, or to keep your financial information secure. When was the last time you boasted about the price you paid for an employee’s new PC? Nobody cares, because it isn’t enough to make a difference.

Maybe it’s time we figured out that saving a hundred bucks on a piece of hardware isn’t a brilliant business decision.

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Do you understand where this is going? Four

Posted on April 16, 2010 by John F. Dini

I ran into a friend in the gym the other day. he is the President of a tech company providing IT services to the government. What they do is highly skilled and highly sensitive.I asked him how his business was doing.

“Terrible” he said, “We are scrambling for every dollar of revenue.” This surprised me. After all, there is clearly a lot of Federal money gushing out of Washington D.C. I just assumed that government contractors were laughing at the recession.

“Contracts that come up for renewal keep disappearing.” He went on to explain that Federal agencies were under instructions to take as much work in-house as they could, hiring new employees to do the jobs that formerly went into the private sector. “It’s happening fast.” he said. “Every time one of our long term agreements expire, it just never goes out for bid again.”

I wanted to limit this series to four quick blogs, not change this space into a political platform. Both the anecdotes and my concerns are still focused on small businesses. I can’t nail down the impact, and I don’t know if anyone can. It is happening at all levels, and I get the feeling that it is happening much faster than most of us realize.

I know that the administration has stated that they favor union membership for American workers. That they believe the government needs to take on a more active role in our society and the economy.

The health care bill made the college loan program a 100% government run organization again. More civil servants.The financial industry claims that it will cost 30,000 private sector jobs. Presumably that means at least 30,000 new public sector jobs.

Collecting these anecdotes and others in one place:

  • The health reform bill will drive tens of millions of people quickly into government controlled care
  • Financial incentives the will cause employers to accelerate the shift from private insurance to public
  • New laws to “ferret out” independent contractors
  • Increased DOL enforcement of labor standards
  • Increased IRS audits of small businesses (announced last month)
  • Nationalization of the automobile industry
  • Capture of large portions of the financial industry (e.g. Sallie Mae)
  • Nationalization of the home mortgage market (Freddie Mac, Fannie Mae)
  • Rapid reduction of the private sector in government services

To repeat, this is a small business advice blog, not a political platform. I’ll leaving railing about creeping socialism to those who do it for a living. What I am pointing out is that the massive resources of the Federal government are being used to rapidly change the face of business. We can talk about a change in Congress, or a one-term president, but no administration in the last 100 years had successfully reduced the size of government.

These changes are done. The average government employee now earns more than the average private sector worker. Civil service is increasingly attractive to workers for its compensation, benefits and job security. As business owners, we have to understand that the game has changed, and it will continue to do so. We need to figure out how we are going to compete on a new playing field.

Perhaps we shouldn’t worry. As one Congressman said “Small  business owners will still figure out how to make money. It’s what they do.”

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Do you understand where this is going? Three

Posted on April 15, 2010 by John F. Dini

We worked on an interesting hypothesis with a client the other day. He has 100 employees (or close enough to make the math easy.) The company pays for 75% of each employee’s health insurance. Additional coverage for the family is at the employee’s expense. How does the math work under health reform?

Right now premiums average $370 per month. About 60% of the workers take insurance, so the company pays $277.50, or right at $200,000 per year in premiums. Let’s say that once premiums are balanced to comply with the 3:1 risk premium ratio (see post number One) the workers who decline coverage presently can have insurance for $175 monthly. Their cost would be about $10 a week.

But their cost is zero if they choose to opt out into the government exchange. If they have a family of 4, and make less than $88,000, their cost would be subsidized for the whole family. Of course the employer can raise his contribution to keep them in the plan, but the math gets too complex for this example. (How much is each increase in employer cost worth vs. having them opt out?) So for simplicity, let’s say that the same 40 employees choose to opt out and save themselves at least $10 a week.

The penalty to the employer is $3,000 annually per uncovered employee. That adds $120,000 to the current premium, for a total of $320,000.

But there is another option to paying all those penalties. The company can cancel health insurance entirely. The penalty for that is $2,000 per employee. Moreover, there is an exemption for the first 30 employees.

Now let’s do the math. Should the employer pay $4,320 for 60 employees, plus a $3,000 penalty for each of the other 40 employees, or just pay $2,000 per employee for 70 of them and let all 100 go to the exchange? $320,000 a year vs. $140,000 per year?

Make no mistake. While the public option was removed from the bill, the financial structure is designed to drive huge numbers of people who are currently covered by their employers into the government exchange. I’m not making a political claim. I’m just looking at the numbers.

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