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STREET SMARTS

Pennies From Heaven

Simple formula: You take care of your employees, they'll take care of your company.

Norm Brodsky is a veteran entrepreneur.

If you have a business that's been around a few years, you're probably familiar with the phenomenon of creeping expenses -- that is, the tendency of all expenses to rise over time. You may also be aware of another closely related phenomenon: the evolution of luxuries into necessities.

Chances are you had very few luxuries when you started out. New companies that waste money on them don't get very far. Those of us who survive know that we have to make our start-up capital last as long as possible. So we lease used furniture instead of buying new. We fly Southwest or JetBlue and stay at Motel 6. We watch our telephone, postal, and office expenses like hawks. We do all that reflexively because we realize that every dollar we save will help us meet the next payroll and give us the breathing room we need to get the business up and running.

But the habit of frugality tends to erode as time goes by. We begin to spend more freely. We start investing in things -- computers, telephone systems, and advertising -- that will help us maximize our potential to grow. At the same time, we let down our guard in other areas. We have the leeway to spend money on stuff we don't really need, and so we do. Salespeople start thinking they have to use cabs rather than take the subway. Office clerks have to send packages by Federal Express instead of by regular mail. Executives have to fly business class and stay in the best hotels. Expenses creep, and overhead balloons.

The danger, of course, is that something unexpected will happen -- it always does -- and the company will find itself desperately short of cash. At that point, many companies are forced to do what should be a last resort: They lay people off. Layoffs are the costliest way of dealing with cash-flow problems. Although the employees who lose their jobs are the most visible victims, the whole organization suffers as the people who are left worry that they'll be next and start making contingency plans.

By the time you're in a cash crisis, however, it's often too late to start thinking about alternatives like cutting back on the luxuries that have become necessities. The damage has already been done. The cash has been spent. There simply aren't enough cuts available for the company to get by without a layoff. That's why the fight against creeping expenses has to be an ongoing battle.

I believe there are two elements to that battle, and they're equally important. The first involves creating an environment in which people care about the company's welfare and go out of their way to help control costs. It's not enough to set budgets and hold your top executives accountable for them. That's part of the equation, but you can't overlook employees down the ladder. Money can be wasted in more ways than you can count, and savings can come from places you'd never dream of looking. You need to get everyone involved, which won't happen unless people care enough about the company to lend a hand. And that won't happen unless they know the company cares about them.

Let me tell you about Patty Lightfoot, our executive assistant. She'd been on the job for about three months when my wife, Elaine -- who is also our senior vice president -- mentioned to me that Patty had a second job cleaning offices. "She earns $75 a week," Elaine said. "She says she's saving to go back to school."

Patty had already impressed us with her reliability, resourcefulness, and intelligence. Normally she wouldn't have come up for a raise until she'd been with us for six months, but I saw an opportunity to send a message. "Listen," I said to the other executives, "if we give her a raise three months from now, it will be nice. If we give it to her now, she'll never forget it." They agreed.

The next day, I called Patty into my office. "I understand that you have a second job you do at night," I said.

"Yes, that's right," she replied tentatively.

"Well, I'm afraid we can't allow that," I said. "We need you to be fresh and well rested when you come here in the morning." She slumped in her chair. "I also understand that this other job pays you $75 a week. We're going to raise your salary by that amount so you won't lose any income."

"Oh, thank you," she said.

"And one other thing," I said. "You should know about a policy we have. Anybody who works here for a year can go to school and we'll pay for it, as long as you earn a B or better." Patty was beaming as she left my office. I had no doubt she knew we cared about her.

But that is, as I noted, only half the battle. The other half falls directly on the CEO's shoulders. People have to understand that saving money is a priority, and the message has to come from the top. You can't just talk about it, either. How you act will convey your concerns far more effectively than anything you say.

I'll give you an example from the early years of my messenger business, Perfect Courier, an Inc. 500 company. As our growth accelerated, I began to see more and more signs of sloppiness and waste. My concern reached the boiling point one day when I found out how much we were spending on new pens. We had 40 employees, and we were buying pens at a rate of 40 per week. That was nuts, I said to my staff. They gave me strange looks. "Is it really such a big deal?" someone asked.

"Forty pens at $1 a pen is $40 a week," I said. "That's $2,000 a year. For pens! What else are we wasting money on?"

Now I have to confess that I was probably one of the worst offenders as far as pens go. If I borrow your pen, it almost always winds up in my pocket. I don't even realize I'm taking it. I just slip it in and forget about it. At the end of the day, I'll have six or seven and no idea where they came from.

Still, I was concerned about creeping expenses and determined to do something about them. So I decreed that henceforth no one could get a new pen from the office without turning in an old one. Guess what. The policy flopped. People would show up in need of a pen and have all kinds of excuses for why they didn't have an old one to turn in. They'd left it at home and would bring it in tomorrow. It was in their car, and they'd get it later. Norm took it. Whatever. Two months later, we were still buying 40 pens a week. "That's it," I said. "Everyone has a pen, right? From this day forward, we will never buy another pen. We'll take the money we save and put it in a special fund for employees. At the end of the year, we'll figure out what to do with it."

My staff went crazy. "You can't do that," they said. "People will spend all their time looking for pens."

"Don't worry," I said. "There'll be pens."

And there were. As it turned out, we got along just fine without buying pens. It became part of our culture, a perennial joke -- especially whenever I showed up for a meeting without a pen. "Are you kidding?" people would say. "You came to work without a pen?" I'd have to go back to my office to get one.

By going cold turkey on pens, we sent a big message.

The company didn't buy another pen for 20 years, until we moved from Manhattan to Brooklyn. Although the policy didn't completely solve the problem of creeping expenses, it helped. By going cold turkey on pens, we eliminated a little waste and sent a big message. The mere mention of pens became a reminder that we really cared about controlling costs.

It wouldn't have worked, however, without the first half of the formula -- the part about letting employees know the company cares about them. If they have the desire to help the company and know how you feel about creeping expenses, they will not only cut down on waste, but will also come up with savings that'll knock your socks off.

Which brings me back to Patty. A couple of months ago, I noticed that our Nextel sales representative was in the office talking to Louis, our company president. After the sales rep left, Louis came to see me. "Wow, we just got a great deal from Nextel," he said. "We got $24 off our monthly rate." That was impressive. We have about 125 two-way radios, and we'd been paying a monthly fee of between $35 and $45 per phone. But apparently Nextel had a special going on whereby we could pay $15 per month and get 10,000 minutes collectively. "That's more minutes than we use," Louis said. "We'd have to go up to something like 30,000 minutes before we'd pay what we do now." We'd be saving $3,000 a month, $36,000 a year.

"Great job," I said.

"It wasn't me," Louis said. "It was Patty."

One of Patty's responsibilities was to check our Nextel usage. In the course of doing that, she'd learned about the special. I don't mean to suggest that Patty found the savings because we'd given her a raise. She's been a conscientious employee from the day she started. She might well have figured out how we could save money on our Nextel bill even if we'd done nothing more than pay her salary. But by showing how much we cared about her, we may have given her a little extra incentive to do something good for the company. And who knows? If we hadn't made it possible for her to quit her other job, she might have been so tired that she would have missed the Nextel special. In any case, it all goes to show that with cost control, as with most other things in business, you get what you give.

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

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Last updated: Dec 1, 2004

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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