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STREET SMARTS

Bring 'em On!

Bring 'em on! Our fearless columnist gives his readers a chance to disagree (but how could they?).

Norm Brodsky is a veteran entrepreneur.

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You may find this hard to believe, but there are actually people out there who occasionally disagree with the views expressed in this column. Some people even have the audacity to send me e-mail messages--very good ones, too--pointing out the error of my ways! These critics are entitled to their opinions, and I thought it only fair to let them have their say, although I can't resist getting in the last word.

Let's start with a column I still get complaints about even though it appeared more than a year ago. It was the one explaining why I think sales commissions are bad for business ("The Sales Commission Dilemma," May 2003). James Baldanza, the chief operating officer of Smart Sensors Inc. in Houston, did a particularly nice job of presenting the opposing view:

You don't watch a lot of sports, do you? Let me ask you a multiple-choice question. Superstars--those who hit more home runs, throw more touchdown passes, score more baskets--get treated differently because:

  1. They are well liked by all members of the organization.
  2. The owner's wife thinks they are cute.
  3. They always make bed check.
  4. They put fans in the seats.

Yes, Norm, superstars get treated differently because they are a direct link to revenue. They get treated differently because they have to manage their time more efficiently than anyone else in the organization, and if they don't, they won't eat. Do you think George Steinbrenner likes making millionaires with his money? No, he likes people in the seats and is willing to make the investment to bring them in. Why don't you try firing all your salespeople and sending your customers a catalog and a price sheet? If it works, let me know. I would be happy to follow your lead. Until then, I'll keep treating my salespeople differently and paying them differently--because they are different.

Of course, salespeople are different and have to be treated somewhat differently, but that doesn't mean you should pay them on commission. To be successful in today's business world, you need a team of people working together. Sales commissions make it difficult, if not impossible, to build such a team because they encourage salespeople to focus on individual sales goals rather than doing what's necessary to maximize the company's profits. There are times, after all, when a company needs salespeople to do something other than selling--training new hires, or covering for other salespeople who aren't available, or working with operations to fix problems and improve service. It's harder to get salespeople to do those tasks if their livelihood depends entirely on closing the next sale.

That said, James is right that some salespeople thrive on commissions. I wouldn't necessarily call them superstars, however. Most of them are hotshots who know all the tricks for pumping up individual sales figures and who insist on playing by their own rules. If you happen to have a pure sales organization like the one profiled in last month's Inc. ("The Ultimate Sales Force"), and you have experience in dealing with hotshots, you may do all right with a commission-based system. For everybody else, salespeople like that spell trouble, and sales commissions bring out their worst instincts. In my mind, the real superstars are those who work effectively as members of a team and still bring in great numbers.

As for George Steinbrenner, it's worth noting that he doesn't pay his superstars on commission, either. Nor does he pay them per home run or stolen base. Why not? Maybe he understands that individuals don't win the World Series. Teams do.

The column on excess capacity ("The Capacity Trap II," December 2003) also raised some hackles. Raymond D. Matkowsky, CEO of Data Stats in Old Bridge, N.J., was unconvinced by my argument that it's usually better to let unused capacity remain idle rather than fill it by cutting prices:

Why don't you try firing all your sales-people and sending your customers a catalog and a price sheet?

I wholeheartedly agree that it's unwise to reduce margins in your core business because of excess capacity, but that doesn't mean you should leave excess capacity just sitting there. I think there's a better way, which I can best describe by giving you an example. Many years ago, I worked in the starch division of a large multinational. The entire product line consisted of high-margin specialty starches custom-engineered for manufacturing. Although the company did not want to be in the consumer starch market, from time to time it would have excess capacity, which it would almost always fill by refining food-grade starch for noncompeting companies. The work was low margin, but the profits from it augmented cash flow and covered a significant portion of the plant's overhead (electricity, water, taxes, etc.). Seems to me it generally makes more sense to use excess capacity to reduce overhead costs than to allow it to sit idle. Every penny of reduced overhead goes directly to the bottom line, making all your core products that much more profitable. What's wrong with that?

It sounds logical, but there's actually plenty wrong with it. To begin with, I think Raymond is making a false distinction between core and noncore. I don't agree that the division he mentions was in the business of processing specialty starches. It processed starch. Period. The question was, would it use its capacity on high-margin or low-margin jobs? I don't know for sure, but I suspect that by taking on low-margin business it opened up a can of worms.

Here's what happens: Instead of focusing on getting high-margin orders, salespeople realize it's all right to bring in a low-margin order now and then, so they waste their time doing just that. Management, accounting, and technical people also waste their time on low-margin accounts instead of supporting efforts to get more high-margin sales. Low-margin jobs result in as much wear and tear on equipment as high-margin jobs, shortening the life of the equipment without delivering comparable profit. The low-margin jobs also create pressure to raise wages for frontline employees, who are working hard even though the company isn't making money. The company uses its credit on jobs that don't provide the return it needs to justify the risk of not getting paid. At the same time, the company develops a reputation for taking low-margin jobs, thereby opening itself up to demands from high-margin customers to handle their low-margin work as well.

The point is that there's a limited amount of time, energy, and capital in any company, and you should be using them to get the kind of business you really want. If the low-margin jobs are so great, then open another company to handle them and make it stand on its own. As I noted in the column, there are exceptions to the rule, but this isn't one of them.

Another column brought this response from Jeep Hauser, who didn't disagree with what I said about JetBlue ("Learning From JetBlue," March 2004) but feels that--in one area at least--its performance left something to be desired:

I no longer fly JetBlue, even though its fares and customer service still beat the competition. Why? Because of the way it handled the revelation that it had violated its privacy policy by giving away its customer database [to the federal government]. I can understand that, at the time, people may have felt they were doing a service to the country, but I can't justify their behavior after the news broke. All they had to do was apologize. It would have been easy. Like many others, I put my name on JetBlue's e-mail list when I flew, and I still receive its notices in my in box. Each time I'm hoping it's an apology, but it never comes. I heard that the company did send out apologies to people who complained. I didn't complain directly to JetBlue. I feel it should have been proactive enough to contact me anyway. I have an upcoming trip to New York, and I'd like to take advantage of JetBlue's fares, but I won't until I see that it has apologized to all of its passengers. Instead, I'll spend the extra money on other airlines and suffer in their cramped quarters.

I admire a man of principle, but if my customers were as unforgiving of me as Jeep is of JetBlue, I'd be in trouble. As a customer myself, I doubt I could afford to take such a stand with my suppliers, nor do I necessarily think it's justified. After all, JetBlue did publish a general apology to all its passengers on its website, as well as in a full-page New York Times ad. Customers who wrote in to complain got personalized versions of the apology--many of them written by CEO David Neeleman himself.

On the broader issue, Jeep is saying that he's willing to pay more for inferior service provided by suppliers who might well have made the same mistake. That's harsh. If it were me, I'd write a letter and let people there know my feelings, then see how they respond. Then again, we all have to do what we think is right, and if Jeep feels so strongly that JetBlue owes him a personal e-mail apology even if he didn't ask for one, well, it's his nickel, and his knees.

Norm Brodsky (brodsky13@aol.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.

Last updated: Jul 1, 2004

Street Smarts columnist and senior contributing editor NORM BRODSKY is a veteran entrepreneur who has founded and grown six businesses.
@NormBrodsky




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