Taming the Beast
Paul Eldrenkamp held all the equity and got all the profits, but his business owned him anyway. Sound familiar?
Some might see it as evidence of neurosis that Paul Eldrenkamp came to the first meeting of his peer-consulting group in 1989 half expecting to get his ego stroked. He had founded Byggmeister Associates, a home-remodeling company in Newton, Mass., six years before. Sales during the current fiscal year were up 25%, closing in on half a million dollars, yet Byggmeister was not a gold mine. Eldrenkamp would pay himself $27,149 that year, leaving net profits of $270.
Eldrenkamp wasn't complaining. He got his rewards elsewhere -- from being his own boss, from doing challenging work with his own hands (Byggmeister means "master builder" in Swedish), from providing a living for six loyal employees, and from pleasing his roster of devoted clients, who loved him so much they called him Saint Paul.
On the other hand, Byggmeister's founder was working 60-hour weeks. Tired as he was at the end of the day, he was having trouble sleeping through the night. He and his wife, Anne Bark, had recently had their first child. Anne's job as a consultant with Arthur Andersen gave them an income, but now that they had a child, Eldrenkamp found himself thinking about obligations he had beyond those to his employees, his clients, and his craft. He was making less money than some of the people working for him. One of the questions that kept him awake at night was "Am I providing better service to my clients than I am to my family?" He became preoccupied with "the vague idea that something was wrong."
The group met at a Howard Johnson's hotel in Boston, not far from Eldrenkamp's home. As host of the meeting -- run by Business Networks, an organization of industry-specific networking groups that offer support, guidance, and constructive criticism to business owners (see "The 5% Difference," below) -- Eldrenkamp was in the hot seat. His inquisitors, all remodelers like himself but in other geographic markets, had studied Byggmeister's books. They had visited Eldrenkamp's home office. They had talked to his clients, his subcontractors, and his employees. Then they rendered their honest opinions.
"This is ridiculous," Eldrenkamp remembers hearing. "What are you doing to yourself? You've got all these people working for you, and you don't make any effort to make sure they're as productive as possible. You hire people because you like them, and you don't hold them to any standards of accountability. You have no idea what your numbers are. You have no idea what you really need to charge your customers. You're running on cash flow and using customer deposits to pay off past jobs. It's gotta stop."
Eldrenkamp sat there and took the blows, each one right on the mark. "What really hit me was how totally unsustainable our efforts had been," he says now. "Here was an endeavor that I was so close to, that I had spent so much of my adult life on, and that I was doing so miserably at. We were going to go under if I didn't take some action."
Eldrenkamp took sustained action over the next six years, with remarkable effect. Since 1989 Byggmeister's sales have risen by 200%; profits, by 48,000%. Eldrenkamp now takes home double his old salary, and with his draw on earnings makes what he calls a "professional living." He sleeps better at night, works fewer hours, and spends more time with his kids -- Kristina, 7, and Erika, 3 -- than most fathers do.
Some things haven't changed. Byggmeister still has devoted clients and loyal employees (lead carpenters Peter Monius and Dick Galyon have been with Byggmeister 7 and 10 years, respectively), and Eldrenkamp is no less committed to his work. But his job description has changed, and that's the key.
Carpenters speak of putting down the tools. Occasional jobs aside, Eldrenkamp put his down some time ago, the better to apply himself to his new job. "There's as much artistry involved in building a business as there is in building a cabinet or a house," he says now. Business management had always been a mysterious concept to him, and overwhelming. Now he sees it, in carpenter's terms, as a "sophisticated, intricate power tool." Tool in hand, Eldrenkamp today is an entrepreneur who owns his business -- no longer one whose business owns him.* * *
What does it mean to own your business? It's not just equity. Look at why people choose the entrepreneurial life in the first place. Every year Inc. asks the owners of the fastest-growing private companies in America, "What was the most important reason for starting your own business?" In 1995, a typical year, only 2% chose "layoff from former job." Another 9% checked "to make money." But if it's not the money, what is it?
Nearly half of those surveyed said that what drove them to start businesses of their own, above all else, was the desire either to "control your life" (31%) or "to be your own boss" (18%). Together those basic wants speak to a powerful myth about entrepreneurship: that owning your own business is synonymous with being in control -- of your career, your life, everything.
Too often, of course, it's just the opposite. The business takes over, leaving the entrepreneur at the mercy of his or her creation, like young Frankenstein and his monster. If "Who's in control?" is the test of true ownership, then entrepreneurs like Eldrenkamp are in the minority. Few would-be owners really command a thorough knowledge of how their business makes money; a clear understanding of their unique role in the process; an appreciation of the contributions made by others; and a conviction that business management is a discipline like any other -- something you can get better at.
What did Eldrenkamp learn? How did he learn it? Let's see.* * *
The night after his vivisection, Eldrenkamp stayed home alone with his computer, crunching numbers. The first question he asked himself: "How much income do I need to meet payroll?"
New England's booming economy had been good to Byggmeister, but business was slowing down. Eldrenkamp had managed to ignore the warning signs, thanks to the elixir of customer deposits, but it was getting hard to keep everybody busy. Two members of his staff might be expendable, but he had never laid anybody off before; the idea was loathsome. What would it take to keep everybody working, he wondered?
The answer had been there in the numbers all along; he'd just never bothered to look for it. To generate $750,000 in revenues in the coming year, he would need $2 million in leads. No way.
Recognizing the need to act was one thing; following through was another. Eldrenkamp struggled. To lay people off "would be a confession of failure," he believed. "Failure to hire properly, failure to generate enough work, failure to plan ahead." But the more he thought about it, the more he recognized his reluctance to be "just a refusal to be frank with myself." He knew what had to be done and who had to do it. To pretend otherwise would be to put himself, his family, and his remaining employees at risk.
"This sounds heartless," Eldrenkamp says, "but the overwhelming sense of liberation, the weight off my shoulders, is still vivid. I realized how much it was hurting the business to keep them on, and how much it was hurting me. I also realized that they're capable people, they're going to find work somewhere else, and everyone will be better off for it. I was doing no one a favor by hanging on to them."
What he had realized was that if you take care of the business, the business will take care of you, your family, and your employees. Eldrenkamp was on his way to owning his business.
Learning the discipline of management
The carpenter-turned-businessman wasn't going to reverse Byggmeister's fortunes without a struggle. The company was in deep trouble -- just how deep, Eldrenkamp was only beginning to grasp. To see the problems clearly, he first had to learn the language of business.
Eldrenkamp's confusion over fundamental issues is evident (in retrospect) in the way he used to bid on jobs, an activity he called "playing with the numbers." Total estimated hours times $5 gave him a number he called "gross profit," which was supposed to cover his overhead. By adding estimated labor and materials costs to gross profit and multiplying by 1.1, he arrived at his bid.
Because he never analyzed completed jobs to check his assumptions, Eldrenkamp's time estimates were no better than guesses. The allowance for overhead, also a guess, was "woefully inadequate," he says. To assume that the 1.1 multiplier gave him a 10% profit was simply wrong. "It was the difference between markup and margin that I didn't understand," he says now.
Consequently, Eldrenkamp would go into negotiations toting a bid derived from "emotions, feelings, even my own sense of self-worth." He couldn't defend it because he couldn't explain it -- not even to himself, much less to the client. So he'd cut the price if he had to get the job, and profits suffered. Of the two dozen projects Byggmeister undertook each year, Eldrenkamp admits, he has "no idea" how many were profitable -- "by today's standards, probably none." No wonder clients called him Saint Paul.
These days Eldrenkamp is intensely aware of profits. Like all members of Business Networks, his goal is "10 plus 10" -- meaning that 10% of sales should be personal compensation and 10%, net profit. To get there, he knows he needs a gross margin of at least 30% -- more on labor-intensive jobs that would otherwise generate less profit than he thinks his employees' time is worth. His slippage rate (the difference between estimated and actual production costs), once as high as 100% on small jobs, has all but disappeared, thanks to a computerized database of task-completion times. Detailed forms he developed himself help him track jobs in progress and spot overruns early, before margins disappear. He holds regular meetings to go over Byggmeister's books with his employees. And last fall he bought PowerBooks for both of his lead carpenters, the better to gather data from the field and keep everybody in the loop.
Eldrenkamp largely taught himself those management skills. He is smart, broadly curious, and inclined toward numbers. On the bookshelf in his living room, alongside works by Greek philosophers, medieval historians, and obscure Swedish novelists, are several volumes by Bill James, who raised the statistical analysis of baseball to a new level. Eldrenkamp is a self-described "propeller head." He bought his first computer -- an Apple Mac SE -- in 1989 and has hardly looked up from the screen since. If the birth of his first child helped him step back from his business, the computer allowed him to see what was going on inside it. The process of entering data, trying out various accounting programs (he settled on BestWare's MYOB), encountering gaps in his knowledge, and endeavoring to fill them has taught him that business, like carpentry, is a craft with a language he can learn and relationships he can puzzle out. Business, he's decided, is "endlessly fascinating."* * *
Discovering the owner's role
Learning the numbers taught Eldrenkamp how to construct smarter bids. It didn't make him a better salesman. That was another leap altogether. He came to realize that he simply wasn't comfortable selling, not as he understood the role of a salesperson. A Methodist minister's son, born and raised in rural Iowa, Eldrenkamp at 14 won a paperboy's scholarship from the Des Moines Register to attend an elite Eastern boarding school. He went on to Harvard and graduated after seven blissful years -- not all of them spent in academic pursuits -- with a degree in medieval history. He thought about becoming a college professor or a minister, but nothing matched the pleasure or fulfillment he found in carpentry -- in building things, that is, and in pleasing clients with the results. The selling, he despised.
Because he's naturally empathetic, Eldrenkamp tended to cave in at the first sign of client discomfort. Because he wanted to please at any cost, too often he charged customers for a Ford and delivered a Cadillac. And maybe, he admits, he was just a little embarrassed. "You don't go to Andover and Harvard to become a remodeling salesman," he says.
To get comfortable with selling, Eldrenkamp had to understand that as the owner of a small company with a handful of production employees, "one of my most important roles was to bring in the work. If I didn't, there was going to be no company."
Selling is not the critical task in every business, but every business has a critical task. Getting that task done is the owner's job. Seeing the logic and necessity of sales helped Eldrenkamp get past his aversion to chasing work. His breakthrough insight was that clients "will pay anything if they feel it represents good value for them." He found he was good at defining value for potential clients. It played to his strengths: empathy, intelligence, the ability to express himself. He found he could ask prospects for a 30% margin and not only get it more often than he used to get his 10% markup but actually feel good about the experience. Selling didn't have to be distasteful, he realized, not when it was really about building relationships, developing trust, managing expectations, underpromising, and overdelivering. Yes, those were catchphrases, but they began to resonate for Eldrenkamp once he understood their place in the big picture. In time, a part of business he used to dread became a source of pleasure and of pride in accomplishment.
And something else: Eldrenkamp stopped feeling so helpless. His sales weren't commodity transactions any longer. There was no more getting hammered on price and then waiting by the phone while the client collected bids. Instead of price, value was the variable. Eldrenkamp had learned the difference between "managing the sales process and just letting it happen."* * *
Understanding how the business makes money
Building a business, Eldrenkamp says now, is like "trying to do a jigsaw puzzle on top of a giant blower. You've got to work at putting the pieces together, but you've also got to work at keeping them in place so they don't all blow away."
Recession descended on New England in the early 1990s, nearly blowing Byggmeister away. In hard times, Eldrenkamp found it even harder to avoid bad habits. He kept employees on too long after the work ran out, because he feared for their welfare. He sold jobs at too-tight margins because he was desperate for cash. Sales plummeted 25% from 1991 to 1992, and profits disappeared.
In the depths of that dark period Eldrenkamp found himself standing again before his Business Networks peers at one of their semiannual meetings. Byggmeister had just one money-losing project going and nothing else in the works. "I was staring into the abyss," Eldrenkamp says. The topic was marketing -- where to look for new business, how to get it. In filling out his data sheet before the meeting, he had been struck by what a good source of leads architects had been for Byggmeister. He was explaining that to the group, telling them how hard he had worked on cultivating relationships with architects and that his effort was finally paying off, when someone pointed out that although he'd gotten 30 leads from architects, those leads had produced only two jobs. "Almost all your jobs," the other CEO noted, "came from past clients or their referrals."
It was a small truth, but it rang like a gong in Eldrenkamp's head. ("I didn't hear a word that was said after that," he says.) Architects were not his customers. It turns out they weren't even much good at helping him find customers. All that time he'd been selling to the wrong market. Eldrenkamp decided it was time to rethink his marketing strategy, because selling is harder than it has to be when you don't know who your customers are .
"We wrote this letter," Eldrenkamp explains. "I think it went out to 40 people. It was very gentle. It said, 'We're thinking of instituting a five-year warranty. We want to come look at your job and see how it's held up over time." Over the next few weeks he visited former clients in their homes. Immediately, Byggmeister started getting work. "Small stuff, at first," Eldrenkamp says, "and then it built."
The first clue he had that he might be onto something was the sharp increase in leads -- they went up 30% in the first nine months. But the quality of the leads, more than the volume, was what really made Eldrenkamp pay attention. In the past, roughly two-thirds of his leads involved competitive bids. Typically, an architect would recommend Byggmeister, along with two or three other contractors, to a client. The client, trusting the architect, would view the contractors as interchangeable, and the job would go to the lowest bidder. But once Eldrenkamp began marketing his services directly to past clients, the trust was all his, and the ratio flip-flopped. Now two-thirds of his leads were exclusives; Byggmeister was the only contractor in the picture.
The results were so impressive that Eldrenkamp used the experience as the basis for a new marketing program. He no longer advertises in newspapers or the yellow pages. Instead, he spends his marketing dollars where he knows now they'll do the most good: on past clients. When Byggmeister completes a job, Eldrenkamp promises the client that if anything goes wrong, he'll take care of it. If a year goes by and Eldrenkamp hasn't heard anything, he checks in anyway. If there's a problem -- say, the floor needs buffing or a cabinet door needs adjusting -- he takes care of it, no charge. The cost is minimal -- about $6,000 a year, or less than Eldrenkamp used to spend on advertising. The payoff, in repeat business and rave referrals, is huge.
The beauty of Byggmeister's new marketing strategy, of course, is that it works. But more than that, it works for Eldrenkamp, giving him an excuse to be thoughtful and caring, a nice guy, and yet not go broke in the process. "I've been able to direct a tendency I had -- one that, without a business justification, could be the death of me -- into something that really works for us. Staying in touch with clients, becoming friends, doing things for them, making them happy -- it's a lot of fun. That's how I've grown comfortable with the role of myself as a remodeling salesperson."* * *
Appreciating the contributions of others
Eldrenkamp was a manager now, caring for his business, nurturing it, attending to its health and well-being. He had picked up a foreign language -- the language of numbers -- and understanding more, he appreciated more. He had found the one task within Byggmeister so vital to the company's survival it could not be delegated, and he had learned to perform it with grace, enthusiasm, and skill. He knew how his business made money, understood who his customers were, and had learned the best way to reach them. He had, along the way, achieved a pretty good definition of bliss -- doing work he enjoyed with people he enjoyed, in command of sufficient resources to go wherever life seemed to be leading him. In short, he had come to own his business.
Ironically, while Eldrenkamp was moving closer to an ideal of true ownership, he found himself moving away from the concept of control. He was learning that ownership and control may not be synonymous after all, that if you try to control everything, you lower the ceiling on what you can accomplish.
In the early days, Eldrenkamp had played, in his words, the role of "benign father." Byggmeister had been teetering on the brink of insolvency, and Eldrenkamp had done all he could to keep it a secret from his employees -- the very people who could have helped him the most. For example, Eldrenkamp might have improved his estimating skill had he been willing to review unprofitable jobs with his employees. But he was afraid that they would see how bad things really were. "I was protecting them," he says. "I didn't want them to have to get their hands dirty in the messy business stuff, to feel the disappointment I was feeling. They were supposed to do the work and be happy. I was trying to buffer them from reality."
There's a fine line between protection and control, Eldrenkamp can admit now. By erecting walls between his employees and the truth, he was stifling their growth, and Byggmeister's, too. He had to let go so they could grow, affording Byggmeister the full benefit of their skills. "His personal management behavior wasn't aligned with his philosophy," says Jeanette Millard, a management consultant who has worked with the company. "He believed in empowerment, but when you're a really responsible manager, it's hard to let go."
Eldrenkamp has undergone what he calls "a subtle change" in his understanding of the responsibilities of an entrepreneur for his employees. He used to think he was "providing for them"; that he was responsible for "giving their lives meaning." Now he believes that such an attitude reflects not selfless goodwill so much as a controlling ego.
"When I tried to do these things for my employees, I was imposing my will on them," he says, "and I was never going to reap the benefits of their full potential. But if I set up a business where employees feel they can create their own jobs, and I encourage them to stretch in the directions they've chosen, that's going to pay dividends for me. It not only has a positive impact on the bottom line but also makes my job easier. There's less work for me in the long run."* * *
Last November Eldrenkamp's Business Networks group returned to Boston for another crack at Byggmeister. It was obvious from the deference shown Eldrenkamp during the sessions ("I'm interested in whatever Paul has to say," said one member) that his standing among his peers had risen. When a member from New Jersey who was struggling with losses outlined a new marketing proposal, Eldrenkamp gave blunt advice, the kind he would have received six years ago: "My perception is that you're feeling uncomfortable about what you're charging. Those marketing numbers are interesting, but they're beside the point."
Eldrenkamp's presentation focused less on his achievements -- sales were up 50% over the comparable period a year before, profits were running at 10%, and slippage was 0% -- than on his plans for leading Byggmeister into the next stage of growth. Some of the phrases he used were vertical integration, shared information, and maximum flexibility. He spoke of involving his lead carpenters more in sales and follow-up warranty calls, and of finding more time to run jobs himself. By shaking up traditional roles, he said, he hoped to overcome "the traditional discontinuity between sales and production that Byggmeister has struggled with for so long." He also said, not incidentally, that he saw those changes as the keys to unlocking "previously unimaginable profits."
On the last day, Brad Cruickshank, the only member of the present group who had been a part of Eldrenkamp's hazing six years before, took the opportunity to reflect on the difference between then and now. Byggmeister in 1989 was "a confused but not new company," Cruickshank told the group, with a "convoluted estimating system," a "communal work atmosphere," and a "liberal-minded benefits plan" it clearly could not afford. Dollars were "gushing out," and the company was in danger of going under. Eldrenkamp was guilty of "failing to be assertive." He appeared to have "a sense of being unworthy of success and its rewards," and showed "discomfort as a leader."
Happily, though, "the bleeding stopped, profitability became routine, systems were put in place, owner's compensation rose to appropriate levels," and it became clear that "Paul was leading." Moreover, Byggmeister had developed a core of able, loyal employees "who are comfortable with their roles and responsibilities."
But now, Cruickshank warned, Eldrenkamp was in danger of "reverting to communal ways." He was appalled that Eldrenkamp seemed to want to share tasks with employees. To Cruickshank, that suggested a desire to "suppress yourself and uplift them." It was "getting past all that" that had allowed Eldrenkamp to turn his company around, Cruickshank said; now he risked "slipping back."
"Well said," offered another member of the group, breaking the silence that followed Cruickshank's speech. All around the conference table, heads nodded in agreement.* * *
Eldrenkamp didn't get a chance to respond to Cruickshank directly. It was his job that day to listen and absorb. Later, though, he recalled a story Cruickshank had told at dinner one night, about how he comes to work each day and imagines tossing six balls into the air at once and then struggling all day to keep them up; Cruickshank likes it that way.
Eldrenkamp still has those days, too, days when he feels like the proverbial juggler. That's the nature of business. But during the past six years, Eldrenkamp believes he has made a start, at least, toward aligning his business with his own nature in a way that feels right for him. He wouldn't expect it to feel right for Cruickshank. "Half the balls I hand off to other people," Eldrenkamp says, "and the balls are lighter -- like soap bubbles."
Hard work, becoming an owner -- but then, owning the business is not so hard.
THEN AND NOW
Four-year average (1989-1992), when the business owned Eldrenkamp
Eldrenkamp's salary $28,925
Four-year average (1993-1996), after Eldrenkamp owned the business
Eldrenkamp's salary $41,567
THE 5% DIFFERENCE
Like many small-business owners, Kathy and Gary Wheatley occasionally need to talk to someone who understands. As co-owners of Wheatley Associates, a $1.2-million home-remodeling company in Monkton, Md., they belong to the National Association of Homebuilders (NAHB). Both are active in the local NAHB Remodelers Council, and Gary has a friend in town, another remodeler, with whom he gets together periodically to talk shop. Because the two remodelers rarely compete for the same jobs, Gary feels comfortable telling his friend a lot about his business. But a lot is not the same as everything. "I give him about 95%," Gary says.
Invariably, somewhere in that most private 5% lies the truth; keep it a secret, and you may never get the help you need. Providing that help is the idea behind CEO networking groups that promise peer guidance in exchange for a pledge of confidentiality and a willingness to tell all.
Best known is TEC (800-274-2367), an international organization that combines peer counseling and interaction with outside experts. To encourage openness, each local TEC chapter, composed of 12 to 14 noncompeting CEOs, is organized across industries, an approach that lends itself more to the discussion of management issues than operational concerns. Each chapter is led by a professional facilitator who also meets individually with members. (For a listing of other multi-industry CEO peer groups, see the Inc. Network, June 1994, [Article link].)
Business Networks (BN; 800-525-1009) aims for the next level of intimacy, possible only when group members are in the same business but not as competitors. BN groups are geographically diverse and industry-specific, organized around the building trades. (They're for "entrepreneurs too busy to work on their businesses because they're working in their businesses," says BN's founder and roving facilitator, Les Cunningham.) Groups meet twice a year for three days, moving from one member's hometown to the next. The host, whose turn comes up every six years, is the focus of the group's tough love, but no one is ever completely spared. Members share financials, disclose goals (everything from "learn to play the piano" to "increase sales by 20%"), and hold themselves accountable. They offer support, guidance, and constructive criticism.
Between dues and travel expenses, the Wheatleys, BN group members since 1991, spend from $5,500 to $6,000 a year, but that's because Gary likes to go early and stay late. "Every year I've been in it," he says, "I've grossed more and paid myself more."