Don't be sentimental about any parts of your operation. One of the hardest things for a business owner to do is to take a clear-eyed look at his or her own company. Especially after investing lots of time and money in a product -- and so much of yourself -- it's natural to think that problems are fixable. Truth is, however, that your emotions may be getting in the way.
About 18 months ago Andy Plata, CEO of Computer Output Printing Inc., was having trouble sorting out some of the recent reversals in his business. For almost a decade Houston-based COPI had been involved in virtually all aspects of computer printing -- everything from $300,000 printer sales to $200 printing jobs and supply sales. For a long time, this comprehensive approach seemed to work; in 1987 the business earned 15% on sales of $4.2 million. But more recently those margins had all but vanished. On secondhand-equipment sales, which had been a major profit center, "we were running into all kinds of pressure on pricing," Plata says. He and his managers had always thought serving customers, no matter what size, was the basis of the company's success. But the evidence suggested they were wrong.
Different managers had different theories about what needed to done. Some said it was time to develop new high-value services; others thought they should simply hire some commissioned salespeople and promote their current services. To get an outside view, the company hired consultants to analyze the business. "We really wanted somebody who would challenge our thinking," Plata says.
For a month he and his seven managers kept track of virtually every minute of their working day. They compared where individuals spent time with where the business made money. The results confirmed some of their suspicions. A lot of time and effort went into selling low-profit items like envelopes, for example, which accounted for just 1% of total sales. "And most of those sales didn't lead to anything else," Plata says. Similar mismatches came to light in other parts of the business. "The phrase we used around here was that we were majoring in minors."
As might be expected, these discoveries were a bit unsettling for a lot of people. Plata, for his part, felt that COPI needed to create major new profit centers fast, even if it meant walking away from some of its existing core business. But not everyone agreed. One vice-president, for example, argued that the changes needed to be gradual so as not to exclude short-term opportunities. Employees, some of whom feared for their jobs, expressed their own concerns; to open up discussion, COPI set up a special computer message system where people could ask questions and make comments anonymously.
It hasn't been easy by any means, says Plata, but over the past year the company has taken a series of big steps. "We've had to really sell people on the idea that we could no longer afford to do business as we were," he says. Using every available source of money (internal cash flow, credit lines, and so on), COPI bought $150,000 worth of new computers and hired five new people with specialized software experience. Meanwhile, it let six employees go who couldn't -- or didn't want to -- develop the necessary skills the business needed. (Plata helped each of them find new jobs.)
It's too early to know how long the changes will sustain the company, but people are encouraged by recent progress. "We've been winning consulting contracts several times larger than the ones we used to get," Plata says. The new business is enabling COPI to generate profits and pay down loans. And in the process, Plata adds, everyone has learned something. "Unless you're finding ways to generate profitable business," he explains, "you put everything in jeopardy."
Cash worries are best left to management, right? Wrong. A lot of well-meaning company owners don't like to go into detail about cost-related problems. A common concern is that employees will panic about the future of the company, maybe even jump ship. But many others have found that when employees are informed about what's going on, they're willing to help out. If you set up credible channels for expressing ideas -- meetings, suggestion boxes, whatever -- employees will come through.
Early in 1989 George and Jim De Marco, two brothers who own the Greater Alarm Co., in Huntington Beach, Calif., saw their cash become so tight that they had to borrow against their credit line. Bloated inventory -- parts that wouldn't be used for several weeks -- was responsible for some of the problem. But a bigger worry was the amount of overtime they paid employees who installed their security systems. Based on information from their own installers, they bid jobs with a set number of labor hours. But it wasn't unusual for the experienced technicians (who earned $12 to $15 an hour, plus benefits) to go over. And not by a little. "It was often 50% over," says George De Marco. Needless to say, overtime was digging into profits. He and his brother decided to confront the issue head on.
At a dinner meeting last fall, the De Marcos brought up the problem to their employees. They wanted to control labor expenses, they said, but not by compromising the quality of the work. They'd considered turning jobs over to independent contractors and paying them flat rates. But for a few reasons -- quality for one -- they wanted a better solution. They asked employees for ideas, and two installers proposed an approach the De Marcos liked so much that they adopted it with only minor modifications.
Essentially, it works like this: instead of paying installers hourly for however long the job takes, they give them a labor budget for every job. If they're budgeted for 20 hours and they finish in 12 or 15 (as many do), they're paid for the full amount. If they need more time, they don't get any more money. Once installers have completed a job, they can go right to the next, so the system provides an opportunity for the most efficient people to earn more. And Greater Alarm gets to fix its labor costs. "The great thing about it," De Marco says, "is that it's self-motivating." To keep installers from compromising quality, it's up to them to fix problems on their own time.
In effect since February, the new system is making a considerable difference in how people operate. "Many employees who used to handle two installations a week are now doing three," says George De Marco. To inject a little competition, $4-million Greater Alarm posts a chart on a big board that compares all 24 installers on a monthly basis. It tracks their budgeted versus actual time and shows the percentages over or under.
And what has it meant for the company? For one, it means that Greater Alarm has been able to operate with fewer employees; 10 installers have left, and they haven't been replaced. The company has cut about 15% from its labor costs. In March, for instance, the labor expense was $68,000, compared with $80,000 the year before. "And the savings," De Marco says, "go right into our profit."
