Are your best employees leaving to join competitors or to start their own companies? Stephen Reuning has a solution
DIEDRE MOIRE CORP. IS not without its imperfections. Typical for its age, the seven-year-old company relies far too much on the talents and energy of its founder, who, in the course of a quarter-hour one Monday morning: repaired a laser printer, debated with New Jersey Bell over underused WATS lines, manned a switchboard during the operator's unexplained absence, and interrupted a meeting to take a message that the office refrigerator was broken.
So what? As he and his firm mature, Stephen Reuning will probably learn to be more executive and less handyman. For now, what's more interesting than Diedre Moire's rough edges is the shape Reuning has given it. He's experimenting with an organizational innovation that, if successful, could make the company a significant force in a service industry -- employee recruiting -- that is full of tiny firms that tend to stay small.
But it's not just in employee recruiting that Reuning's experiment is potentially useful. The East Brunswick, N.J., firm could be a model for other businesses in which the selling of a service and its delivery are closely linked. Insurance and travel agencies, for instance, or financial planning firms, spring to mind. They are all businesses in which the employee who performs or delivers the service or product also sells. His or her performance is easily quantified.
The overarching effect of such a system for service industry employees is that while most firms can provide only a job, albeit a well-paying job, Diedre Moire (mo-RAY) offers a career. Consequently, people who at practically any other recruiting firm would have burned out and left tend instead to remain at Diedre Moire and move up within the organization. Reuning believes that lower turnover will enable him to expand the company by building on the capital that accumulates in the employees he has already trained and nurtured.
A new idea? Not at all. But it's an apparently unique adaptation of a powerful old idea to a new use. Others in the industry say they've not seen it tried before.
REUNING, 31, IS A COLLEGE dropout who devours ideas like a kid eating popcorn. He's read every self-help, sales management, and motivational book on the shelves and listened to the audiotapes, too. Heavily sales oriented, Reuning nonetheless pursues eclectic interests. "Most young, single guys go home on the weekend and party. Steve, on the other hand," recalls a former business partner, "would go home and build a television set and in the process teach himself electronics." More recently, when he needed a computer programmer, Reuning learned programming himself from books. Spanish and basic German, too. And how to structure his business so that it wouldn't peak out prematurely like other companies in the employee-recruiting field.
Reuning left Rutgers University at Newark after a year because, he says, it was too slow. "I could have learned in three weeks what they spent a year teaching me." After two other jobs, he answered an ad and was hired in 1979 by Richard Southern, who operated a small recruiting firm in New Jersey. This company, like Diedre Moire today, occupied a middle spot in the spectrum of recruiting firms. On one end are the high-volume employment agencies whose fees are paid by the job applicants they place in, for the most part, clerical and line jobs. On the other end are high-priced executive recruiters who work on retainer for the company seeking to fill senior positions.
Diedre Moire makes its money by filling technical and line-management positions. It, too, is paid by the company doing the hiring -- usually 30% of the annual salary that goes with the job. But unlike retained search firms, such personnel consultants as Diedre Moire work on contingency -- no match, no money. And they rarely work on exclusive contracts, which means they're competing with other firms on both sides of the deal: for clients with jobs to fill and for candidates qualified (and willing) to fill them. Each deal means closing at least two sales. "When you sell a product," says Michael Randazza, who works for Reuning, "you put it in a box and it goes out the door. In this business, you've got to talk the suit into the suit bag."
Recruiters at Diedre Moire work at small desks in crowded offices. The din of dozens of simultaneous telephone pitches is punctuated frequently by impatient intercom messages -- "Mike Randazza to your desk. Mike to your desk." When a consultant is having a problem closing either part of a sale, he -- most Diedre Moire consultants are men -- may switch the call to a speakerphone so that his manager or colleagues can coach him. It adds to the cacophony. On the walls are charts and pushpins in various colors to track activity. Every morning brings a fresh start, a blank sheet to fill before the day ends. Typically in the industry, recruiters burn out in a few years; the average recruiter holds his job for 33.7 months.
The problem, Reuning saw after working in the business with Southern, is that good people have no place to go in a two-tiered company in which the owner manages and everyone else sells. Poor performers become discouraged and leave. Good performers leave too, often to start their own firms. It's their only escape, the only way they can stay in the business but get off the phone.
That's what Reuning did. He had learned the business quickly while working for Southern, and in 1980 he opened R.M.S. Systems Inc., his own recruiting firm, with Southern as a shareholder. There was nothing remarkable about the firm. It was a clone of the business he was leaving. And eventually its growth stalled, too. Reuning decided to find a solution to the growth problem.
He might have franchised. The only really large firms in the industry, Snelling & Snelling Inc. and Dunhill Personnel System Inc., grew by franchising their operations in hundreds of locations. But franchising doesn't pretend to solve the root problem behind slow growth -- burnout. It simply multiplies revenues by multiplying locations; each franchise of these larger firms tends to be much smaller than the typical independent recruiting firm.
Reuning did what he always does when he doesn't know what to do. He turned to books. He pulled back from the business, giving it just enough time to keep it going, and spent six months studying and talking to people. There had to be a way, he thought, to interrupt the vicious cycle that continually stripped firms like his of their best recruiters, who would themselves become competitors only to spawn yet another generation of ambitious deserters.
He called nearby Rutgers and other university business schools. He devoured the books they suggested. No one book held the answer he was seeking, but together they helped him formulate a strategic concept. It had its roots in three very different companies -- Procter & Gamble, First Jersey Securities (now owned by Sherwood Capital Inc.), and Mary Kay Cosmetics.
From P&G, Reuning took the notion of internal competition -- that no existing company product (or service) should enjoy exclusive call on a company's capital or exclusive rights to one of the company's markets. If product managers within P&G can compete for the same diaper buyer, selling groups within Diedre Moire can compete for the same clients. Intergroup rivalry, he figured, would stimulate performance.
From First Jersey Securities he took to heart lessons about training and motivating salespeople. Notwithstanding the company's problems with federal regulators, says Reuning, its sales force was very good. "First Jersey had pumped-up salespeople who were gung-ho First Jersey. Bob [Brennan, the director] was a showman." Brennan built great company loyalty and esprit into his salespeople, says Reuning. They weren't just individuals working for their own gain. They understood that when First Jersey made money, they all made money.
Reuning wanted that attitude to inform his own organization. Today Reuning's employees and managers testify that it does, partly because Diedre Moire provides its salespeople with opportunity to expand with the business. And partly because Reuning does play the showman, always hyping the company and dramatizing the role that the individual plays within it.
From Mary Kay, however, came Reuning's radical innovation. He took the cosmetic company's multilevel marketing scheme and transformed it into multilevel management. Mary Kay uses the pyramid sales structure because, besides selling product, it motivates salespeople to recruit and train other salespeople. The motivation is straightforward: senior sales reps share in the commissions earned by those they recruit. Mary Kay uses the pyramid sales system to build a large, active outside sales force. Reuning uses the principles of the same system to build a stable, self-managing inside sales organization. It's an intriguing adaptation.
In 1982, when he had finished his six-month sabbatical and was ready to put his new strategy in place, Reuning changed his company's name. R.M.S. Systems became Diedre Moire Corp., a name Reuning says sounds nothing like an agency. (Diedre and Moire were the first two proper nouns in a novel, The Seventh Moon of Saturn, that Reuning had seen on an employee's desk.) But the new company was much more than R.M.S. with a different name.
Conceptually, multilevel management is simple. Employees at Diedre Moire advance through four levels of sales and management responsibility, their potential compensation and their management responsibilities growing at each level. Promotion depends largely but not exclusively on an individual's ability to sustain certain sales levels for a prescribed time. And the option of whether to advance always rests with the employee. When he or she satisfies the promotion requirements, the decision to move up or stay put, permanently or for the time being, belongs exclusively to him or her. At the highest of the four management levels, the individual becomes Reuning's partner -- the 50% owner of a branch office. If it weren't for that possibility, say several of the highest-earning employees, they wouldn't stay at the company.
Here's how multilevel management at Diedre Moire is supposed to work.
You come aboard as a consultant, a worker bee in the business, earning a 30% commission on the client fees you generate. At Diedre Moire, if you're reasonably good, you can expect to make $30,000 or more per year. Jim Busch, a Diedre Moire consultant, made about $40,000 in 1987.
Let's say that you are as good as Busch. When you get to the point where your fees average $7,400 per month for six consecutive months (that's $26,640 per year income to you), you qualify for a promotion -- to group leader. Group leaders hire and train their own consultants, and they collect a 7% override on those consultants' commissions. Further, once you're a group leader, if one of your consultants becomes a group leader himself, you continue to collect an override on his sales and on the sales of all the consultants in his group as well. The override -- up to 3% -- depends on the subgroup's production level. Now, you're in the chips -- earning $40,000 or more per year. Lance Hilfman, a group leader, projected his earnings at $60,000 last year. But you can do better still.
To get to the third level, floor leader, you must have at least five consultants working for you. Their output must average $7,400 per month or more for three consecutive months. Moreover, two of them must themselves be group leaders, each supervising at least two consultants. Now, you earn the same commissions and overrides as a group leader -- plus a 1% commission on the sales of any subgroup headed by a floor leader that you hired and trained. Michael Randazza, a senior floor manager, collected close to $80,000 in commission and overrides last year.
Sound complicated? It isn't, really. Besides, you don't need to conquer the numbers to grasp the idea.
There's still one additional level, the fourth, remaining in Reuning's system. He calls it office manager-partner. To qualify, a floor leader must have eight consultants working in his or her personal group, oversee two subgroups of at least four consultants each, and have had one of his or her group leaders advance to floor leader. When that happens, Reuning wants to make you his partner and give you an office of your own to run. You may take half of your consultants with you.
Diedre Moire will finance the office start-up costs and own all the expansion venture's stock, which you'll begin to purchase with your profits until you hold 50% of the shares. Five years after Reuning initiated the concept, there still are no office manager-partners at Diedre Moire, a surprise and disappointment to the founder. "Maybe they're making too much money as floor leaders to make the extra effort," he theorizes. He is not, however, discouraged.
That is how the system is supposed to work. Here's why Reuning thinks it will.
First, and most obviously, multilevel management allows employees to build equity in the business without diluting Reuning's own ownership or control. Reuning gives up only half of the additional business that an office manager-partner builds, and anyway he gets paid for that half. But even before employees get to that fourth rung on the management hierarchy, they acquire equity of another sort. They "own" part of the earnings of the employees they have recruited. "Most companies don't give people a piece of the action. Here," says Reuning, "if you go for it, you can have it."
Second, and more significantly, it puts employees in control of their own incomes and rates of advancement by removing the usual subjective points of evaluation. Promotions depend exclusively on employees' measurable production -- and on whether and when they want to advance. "Eighty percent of the people in a group, if you ask them," says Reuning, "would put themselves in the top 20% of the group. So if you don't promote them, you're going to have a problem. With a numerical system, it's up to the employee to rationalize his failure to advance. 'Maybe I didn't want to work that hard this year,' he might say, 'but I know I could if I wanted to.' He can also say, 'I won't be ready until I'm 30.' If he does, he's not looked down upon."
Reuning wanted a system that would say to a person, "This is your company, not mine. I'm going to give you leadership and facilities. I'm going to make sure the systems are here. How far you go is up to you."
Did he get such a system? And does it work?
"I got the standard you-can-go-as-far-as-you-want routine when I came," says group leader Hilfman, 29, who has been with the company for three years. His complaint is that when he arrived, there was opportunity but no training to help him seize it. "Any salesperson could be a group leader," he says, and people without training -- including himself -- often made poor group leaders.
Here was a problem that Reuning hadn't fully anticipated. It may have removed unfair subjective barriers to advancement, but the multilevel-management system also incorporated two assumptions that turned out not to be entirely valid. One was that good salespeople would necessarily make good sales managers. Not true, at least not all of the time.
Group leaders at Diedre Moire are expected to train junior consultants in effective selling techniques. How do you get inside a company to find the individual who's ready to make a move? How do you get to the hiring decision maker? Group leaders also must help new consultants learn to pace their days. Too much time spent on candidate searches and not enough on finding slots to fill may boost production this week but leave a consultant with no jobs to offer in weeks ahead. Effective closing techniques? Effective interviewing techniques? It's the manager's responsibility to pass them on -- and to see that paperwork gets done and that the company's database is constantly updated.
People who are untrained as managers probably won't perform these duties well. Promoting untrained people to group leader, says Steve's younger brother Gregory Reuning, 30, often meant that the performance of their groups suffered. Gregory himself joined the company as a consultant and has advanced to floor leader.
The second assumption implicit in Reuning's original plan was that anyone who qualified for advancement would want to advance. There was, according to consultant Jim Busch, pressure on people to move up before they were necessarily ready -- resulting, again, in managers not yet capable of managing.
The fallacy of both assumptions became apparent when people like Hilfman, who was terrific at sales but not so terrific at managing people, were promoted to group leader. Hilfman's group didn't perform well. He has had several consultants work for him but fail to blossom until they were moved to someone else's care.
Extensive and pervasive management training appears to have solved one problem. Reuning inaugurated a daily training meeting, attendance mandatory and participation spirited, running from 8:15 until 9:00. People attend off-site seminars, and the impressive library of audiotapes and books gets heavy use. The absence of training, apparently, is no longer an issue, and neither is pressure to advance.
"My strength," says Busch, 29, "is that I'm an excellent salesman. My weakness is that I'm not well organized." He has been eligible to be a group leader for months, but he's held himself back. "I get management tapes, management training. They encourage me to take stuff home. . . . Taking on somebody [as a group leader] now would not be a service to them, because I'm not organized enough to be able to help them. Soon, though, I should be able to manage it."
The multilevel management system has another attractive characteristic: the effects of bad management, whether from inexperience or inability, are locally contained. A poor manager can affect the performance only of the people in his own group. A single managerial misfit cannot poison the rest of the organization. Nor is there any conceivable way that he will be promoted and given broader responsibility.
Other system problems?
Jay Earl earned $37,000 as a group leader in 1986 and expected to do much, much better in '87 but didn't. It's the turnover rate, he complains. In a 15-month period, Earl had to hire 10 consultants to end up with 3. "The turnover takes away some of the incentive to be a manager," he says.
But Reuning points to the same attrition rate, and instead of seeing a problem sees progress. "If I want to add one person now," he says, "I have to hire 3. But I used to have to hire 10." In his opinion, shared widely, the turnover rate will continue to come down as the training produces better managers. "People won't be quitting because they think their managers are incompetent," Gregory Reuning says.
They would be quitting if the multilevel management system weren't in place.
"The system? That's exactly why I came to the company," says Busch.
If he weren't managing three other people, says Earl, he wouldn't be here, "because I'd be burned out being a recruiter on my own. Besides the override incentive, managing gives you a break from the daily grind of working the phone."
Reuning, by and large, is pleased. Multi-level management clearly gives the company advantages in recruiting and retention, but it doesn't pressure the company's margains. The total commission Diedre Moire pays on fees produced comes to a maximum of 41% (30% to the consultant, 7% to the group leader, as much as another 4% to those whose consultants have started subgroups). Diedre Moire also offers a benefits package worth 23% of compensation. In contrast, other recruiting firms may pay straight commissions of 30% or more with some benefits or 50% commission with no benefits, both without the opportunity to move up in the managerial hierarchy.
The failure of the system to produce an office manager-partner probably will be remedied soon. Michael Randazza, at 34 a veteran floor leader, qualifies for the move. In 1986 he earned $79,000. "Why haven't I become a partner yet? I enjoy going home. If I had a company, I'd live there. I'm a single man with other interests." But Gregory Reuning expects to be running his own office in 1988; he's now a floor leader earning $60,000. And Jay Earl expects to be a partner, too, though he doesn't know when. "If he didn't offer that option, I'd have been gone a long time ago."
Diedre Moire, with its unique shape, is already larger by sales and number of employees after just five years than the majority of firms in its industry. It employs 45 people, including support staff, nearly four times the work force of the typical firm. Reuning projects 1987-1988 sales at $3.6 million, up 47% from the year before. Net income, he says, should be about 10%.
Its organizational structure does impose some limits on Diedre Moire's rate of growth. Reuning says it's constrained mostly by the rate at which the company can train managers -- a process that takes a minimum of 6 to 18 months. "If I had $1 billion in capital," he adds, "I couldn't grow any faster than I am." Still, he expects the number of operating employees -- consultants and managers -- to double to 60 or more within the next 12 months and to double again the following year. The nice thing, he says, is that beyond expanding his support services, he doesn't have to plan for 120. Given the multilevel management system, the growth just happens -- so long, that is, as the company's market, which is closely related to the business cycle, holds up. A recession would hurt, but Reuning is working on diversification tactics.
Expansion through franchising would allow faster growth. But Reuning believes that franchising would cost him control of service quality and that the multilevel management system is not easily replicated by a franchisee who hasn't been bred within the system.
MULTILEVEL MANAGEMENT IS Reuning's attempt at changing -- and, he hopes, improving -- the performance of an organization by altering its structure. He didn't set out simply to do a better job of running a company with the aim of achieving superior results. Diedre Moire is organically different from the conventional recruiting firm. The people employed there work within a different motivational framework intended to produce a different set of responses.
Reuning is ready to apply multilevel management to a new data-entry department. Reuning will calculate an average cost per entry -- say, 75?. Then he'll pay the clerk a salary, but at the end of the month he'll multiply the clerk's entries by .75. If that product is greater than the salary, the clerk gets the difference as a bonus.
Clerks who consistently meet production goals will over time become supervisors, earning an override on the production of people under them. The idea here, as in sales, is not to create a chain of command. Supervisors aren't bosses so much as they are mentors. "The idea," Reuning says, "is to have someone with wisdom working next to you and to give that persons an incentive to see you succeed."
A big advantage to multilevel management, as practiced at Diedre Moire, seems to be that it makes personal and company goals congruent. "Here," says Hilfman, "my professional growth is in my hands. The same for the money I make. I don't know anywhere else I could say that."