The Fallacy of Across-the-Board Cuts

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One of the most commonly used practices by business leaders during a downturn is across-the-board budget cuts. Within the last year, a large number of public and private organizations announced comprehensive cuts in an effort to demonstrate action to address the drop in revenues. As a business tactic, however, across-the-board cuts demonstrate nothing more than an absence of imagination, a lack of control over the business, and an unwillingness to take the time to dig in and make the difficult decisions.

Implementing consistent budget cuts in every area of the company assumes the organization is running perfectly consistent across all departments, which as we all know, is never the case. Forcing cuts across all areas punishes an demoralizes those in departments that are running well. If one team has put a lot of hard work and effort into continually improving the quality and productivity of its processes while another has historically run inefficiently, both shold not be treated equally in a downturn. The leader of the inefficient area should be forced to reduce his or her budget by a larger amount and implement immediate improvements. Plus, a manager or supervisor who has resisted efforts to continually improve processes in his or her area of responsibility should be included at the top of any list of headcount reductions.

Another problem with across-the-board cuts is that there are certain products or services that, for strategic reasons, may require additional funding, thereby necessitating a budget increase. An across-the-board reduction not only consumes the attention of those leading the strategically important areas to reduce spending, but it also misses an important opportunity for the company to pull itself out of the crisis in a way that actually strengthens the organization.

What's the Alternative?

Instead of implementing across-the-board cuts, the organization's leadership team really needs to conduct a strategic planning session to establish a consistent, in-depth understanding of its current situation and develop a limited set (two or three, at the most) of critical initiatives to pull the company out of the downturn.

The entire company needs to become focused on productivity improvements - without sacrificing quality - to assure any spending that does not add value is reduced (which actually should be done whether the organization is facing a downturn or not). Some areas of the organization will undoubtedly face cuts and leaders will need to identify ways to reduce spending immediately in a way that does not negatively affect the company's overall health. As mentioned above though, some departments, locations, or projects will need to receive additional focus and investment to speed up developments or increase capacity.

Avoid the Easy Solution

It is not difficult for an organization to be profitable during the good times. The true test of leadership occurs, however, when the economy contracts and the market for a company's products or services shrinks. When a crisis does occur, leaders must mobilize their teams to analyze the situation and determine the actions necessary to pull out of the downturn as quickly as possible. Responsible leadership dictates that the plan consider the need to survive along with the need to strengthen the organization for the future. This means avoiding the temptation to implement easy solutions, including across-the-board cuts.

Taking Your Eye Off the Ball

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Nothing can get you back to your roots faster than a significant and unexpected drop in profits. As the worst economic year in recent history starts to wind down and companies begin to think about budgets and plans for next year, it is a perfect time to reflect on several items, including how to be ready for growth when the economy rebounds, and how to strengthen the organization to avoid significant damage when the next downturn occurs. The best way to begin assessing these issues is to return to the fundamentals and assess whether or not the organization has strayed from its stated purpose.

Many companies are finding that the success they experienced in the years preceding the recession actually led them to unintentionally deviate from their intended purpose. Some of these organizations are now refocusing on their missions as a way to emerge from the current downturn and return to long-term profitability.

TOYOTA

When people lose - or are afraid of losing - their jobs, one would fully expect a drop in automobile sales. Because of this, it is not surprising to see Toyota's revenues and profits to fall during the current recession. What is surprising, however, is the extent of the losses incurred. For a company recognized as one of the best run over the last 50 years, the large loss Toyota incurred over the last year or so has been staggering.

So what really led to Toyota's decline? How can the company that invented lean, treats its suppliers as partners, and has been so successful for so long go from earning almost $22 billion in operating income to losing more than $5 billion within one year?

I believe that the problems at Toyota resulted from the company's leaders taking their eyes off the ball over the last 1-2 years. Overtaking General Motors as the world's largest automaker seemed to become their main objective. In the race to be number one, they forgot what got them to that point in the first place: making high quality cars that people want to buy (or, as their mission states, to enrich society through car making).

I regularly read about CEO Akio Toyoda and other Toyota executives working to get the company back on track. Back on track means that they were off track - and off track means that they strayed from the path that made them successful.

For years recognized as the producer of the highest quality cars in the industry, Toyota has experienced a fairly large number of quality problems over the last few years, which may be a result of the enormous growth the company has experienced recently. In the past, managers would rise up through the ranks and be well-versed in the Toyota way, which meant they understood the systems and process for assuring (and continually improving) quality and productivity. As they battled GM for the top spot in the auto industry, however, their growth exceeded their ability to develop leaders and their quality suffered.

Recent comments made by the company's senior leaders means that they recognize the need to refocus before things got out of control. It is very common in business for companies to lose their way and not realize that anything is wrong until the organization is in severe trouble - which can take several years. Understanding the need to refocus now means that Toyota can fix things before significant damage occurs.

WHOLE FOODS MARKET

Whole Foods started as a modest grocery store in Austin, Texas and, within 25 years, grew into a major chain with more than 250 stores in the U.S. and U.K. Throughout the last few decades, the company became synonymous with healthy, organic and unaltered whole foods. Customers paid more to shop at Whole Foods, but were usually guaranteed to find a wide variety of healthy items in return.

Just like many businesses offering premium priced products over the last year two years, however, Whole Foods experienced a drop in revenues and profits. Rather than cut costs, close stores, and lay off workers, however, company CEO John Mackey decided to revisit the company's roots to return to profitability. As with Toyota, it appears that Whole Foods got caught up in its own success and strayed from its purpose during a period of high growth.

In an August 5, 2009 article in the Wall Street Journal, Mackey admitted that the company sells, "a bunch of junk." He went on to say, "we've decided if Whole Foods doesn't take a leadership role in educating people about a healthy diet, who the heck is going to do it?"

As Whole Foods grew into more of a mainstream supermarket, it replaced much of its healthier fare with gourmet foods. When the recession hit and people became less willing to pay more for gourmet foods, however, the company suffered. This, along with a few other factors, led Mackey to look closely at the reasons for the company's problems and come to the conclusion that Whole Foods had strayed from its purpose.

By definition, whole foods are foods that are unrefined, unprocessed, and resemble what they were in nature. What Mackey found when he recently walked through one of the company's stores was a large selection of white bread, gourmet desserts, and refined oils - in other words, foods that are not even close to being whole - the company's roots.

I'm betting that Whole Foods will succeed in returning to its purpose - and profitability - because Mackey realized that the company lost its focus before too much damage was done. The company has not strayed for very long and, like Toyota, can fix itself by reminding its team members why the company was created in the first place and what made it successful.

IT'S NOT ROCKET SCIENCE

The point of all this is that companies must regularly take time to reflect on their purpose to keep from taking their eyes off the ball. Consumer tastes change, technology changes, economic conditions change, but a company's fundamental purpose - it's raison d'etre - should not.

Cars will continually change in terms of technology and design, but Toyota's commitment to enriching society through car making cannot change or its employees will become confused and its customers will cease to see a difference between a Toyota and any other brand of automobile. If Whole Foods strays from its purpose of providing healthy, organic, and unrefined foods, it will lose the customers who will begin to question why they are paying more for the same products offered at Kroger or Safeway.

Do you run the risk of straying? If it can happen at companies like Toyota or Whole Foods, it can pretty much happen anywhere.

The Role of Business in the Swine Flu Outbreak

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With concerns over a global swine flu epidemic growing, it will be interesting to see the role that businesses take in dealing with and preventing the spread of the disease. Although there is no doubt that companies can help the situation, I am hoping that business leaders at least cease some of the common practices that encourage the spread of illness among employees.

It is not unusual for organizations to award some type of bonus to people who do not use their sick days over a defined period. the bonus may be in the form of a direct payout for not using sick days or indirectly combined with some other type of reward (e.g., a bonus which, to be eligible, requires perfect attendance during the period). However the payout is packaged, it is basically an incentive to discourage people from using (or abusing) sick days.

This type of incentive makes perfect sense when you do not trust some employees. Offering a bonus to those who do not abuse sick days seems logical because it rewards the reliable workers while punishing irresponsible employees. What I have found, however, that this type of incentive actually results in increasing - rather than decreasing - the number of sick days taken by employees; especially during cold and flu season.

Some companies distinguish between excused and unexcused absences by limiting incentives to only those who present a note from a doctor after calling in sick. Besides creating a patriarchal culture within the company where managers are believed to be more trustworthy than workers, this type of policy forces ill employees to take the time, energy and expense to see a doctor when all they may need is to rest for a day or two to recover sufficiently to return to work.

Rewarded for Spreading Colds & Flu

Rewarding people for perfect attendance encourages employees to come into work when they are sick and need to stay home and rest. This results in spreading the cold or flu to other employees, thereby increasing the number of people who either take sick days or come into work when they, like the person who first came into work when he or she was sick, should stay at home. in a small company, this can be devastating because a large percentage of the workforce can end up sick. In one large company, I witnessed infections spread quickly - even to facilities in other countries - because sick employees were encouraged to come into work instead of staying home to recover.

One can imaging the effect this type of behavior can have on a swine flu epidemic. Whether faced with a worldwide epidemic or the common cold, however, managers need to understand that encouraging sick people to come into work shows a lack of regard for the health of all employees and can result in large costs for the company.

Why We Think It Works

Over the years, this type of incentive program has been very common among American companies for a variety of reasons.

1. Frustration:
   
   It is frustrating when someone calls in sick. We hire people because we need them to do a job and when they miss work without advance notice, it can cause problems with productivity, customer service, and scheduling, in addition to putting pressure on co-workers.
   
   An incentive to reduce absenteeism is an attempt to deal with the frustration that unfortunately can make the situation worse.
   
   
2. School Perfect Attendance Awards:
   
   
   Rewarding perfect attendance is a concept that many of us were first exposed to during our school days. Schools commonly award certificates to students who do not miss any days during the school year. As with companies, though, this type of incentive often results in sick students coming to school and spreading the sickness to other children - thereby increasing the total number of days missed by the student body (and teachers), as a whole.
   
   
3. Focus on Direct/Easy to Measure Costs:
   
   Determining the cost of absenteeism by measuring the number of sick days taken is easy, but unfortunately inaccurate. It is impossible to determine the costs associated with the lower productivity that results from sick employees coming into work. When multiplied by the number of employees who were infected by a person who came into work sick, the total drop in productivity can be staggering.
   
   
4. Hero Worship:
   
   Whether the result of a direct incentive or positive reinforcement, the American business culture tends to make a hero out of the employee who comes into work even when he or she is sick. We tend to look at anyone who is more committed to the company than their own health as a valued employee.
   
   I once worked with a company where the CEO publicly praised managers in the corporate office for coming into work when they were ill. As a result, people became afraid to call in sick and only did so when they were physically unable to come into the office. During flu season, infections spread quickly through the office resulting in a number of problems for the company.
   
   
5. Lack of Trust:
   
   If managers trusted the motives of the workers, they would believe them when they called in sick. This can be a reflection of the company's hiring practices and its process for screening employees. If the organization's values are clear and job candidates are carefully screened before hiring to assure they possess common values, management can trust the motives of those who are hired.
   
   Dealing with employees who appear to be abusing the company's attendance policy should be done immediately and on a case-by-case basis rather than through company-wide policy changes.

What Can Be Done?

There are a number of things that can be done to reduce absenteeism at a company. The most obvious is proactive health planning, which includes nutritional and health counseling to help employees strengthen their immune systems - especially during flu season. In addition to reducing employee sickness within the company, this type of initiative can improve productivity (by having healthier employees) and morale (by demonstrating that management cares about employees).

Another action that has been shown to help reduce absenteeism is to offer unlimited sick days to employees. When a specific number of sick days are offered, people think of them as something they are owed by the company and tend to believe they need to use them or lose them before the end of the year. An unlimited sick leave policy does not give the impression that people will lose days that they do not take.

As an example, a company I once worked with changed its sick leave policy from 10 days per year to unlimited days. Within the first year, the average number of sick days taken per employee was significantly reduced. [As mentioned earlier, care must be taken in any measure used to evaluate results from a change in sick leave policy]

Focus on Health

Basically, the way to reduce absenteeism due to sickness - including a flu epidemic - is to focus on health instead of sickness. Attempting to improve the situation through artificial means like monetary incentives will not help people get sick less often. On the other hand, providing information, counseling, and a healthier work environment can give those who are willing to change the ability to do so, leading to sustained improvement.

Some of the steps businesses can take to help prevent an H1N1 epidemic (and reduce the financial impact if one does occur) are as follows:

• Telecommuting: Encourage and help those employees who can work from home to do so. This obviously involved a certain level of trust that employees will, in fact, work when they are not in the office;
  
  
• Stress Management: Implement stress management and reduction programs for employees. Studies have shown that stress depresses the immune system and anything the company can do to help employees deal with stress can help to prevent (or reduce the effects of) the flu;
  
  
• Nutritional Counseling: Diet can help or hinder the effectiveness of a person's immune system. Counseling people on food choices and eating habits can help them strengthen their immune systems to fight off infections and disease, as well as improve their overall health;
  
  
• Education: Educate people on the ways to prevent the spread of disease. Provide hand cleaners and anti-bacterial wipes in convenient locations throughout the workplace;
  
  
• Stay at Home! Implement a policy that requires people to stay home when they are sick. Send people home when they are ill and come into work. Do not penalize people for using sick days and consider implementing an unlimited sick leave policy at least until the swine flu scare has passed. Also, eliminate the monetary incentives that encourage people to come into work when they are sick.

Executives have the responsibility to take a role in preventing the spread of swine flu - not only for the health of their employees (and themselves), but also to help reduce financial impact that a flu epidemic can have on an organization. Implementing the above actions will not be easy for American companies because they require a fundamental change in the way managers think. The fear of an H1N1 global pandemic, however, may be just the thing that stimulates this type of change in thinking.

The Role of Business in Preventing a Swine Flu Epidemic

Tweet

With concerns over a global swine flu epidemic growing, it will be interesting to see the role that businesses take in dealing with and preventing the spread of the disease. Although there is no doubt that companies can help the situation, I am hoping that business leaders at least cease some of the common practices that encourage the spread of illness among employees.

It is not unusual for organizations to award some type of bonus to people who do not use their sick days over a defined period. The bonus may be in the form of a direct payout for not using sick days or indirectly combined with some other type of reward (e.g., a bonus which, to be eligible, requires perfect attendance during the period). However the payout is packaged, it is basically an incentive to discourage people from using (or abusing) sick days.

This type of incentive makes perfect sense when you do not trust some employees. Offering a bonus to those who do not abuse sick days seems logical because it rewards the reliable workers while punishing the irresponsible employees. What I have found with this type of incentive, however, is that it actually results in increasing – rather than decreasing - the number of sick days taken by employees; especially during cold and flu season.

Some companies distinguish between “excused” and “unexcused” absences by limiting incentives to only those who present a note from a doctor after calling in sick. Besides creating a patriarchal culture within the company where managers are believed to be more trustworthy than workers, this type of policy forces ill employees to take the time, energy and expense to see a doctor when all they may need is to rest for a day or two to recover sufficiently enough to return to work.

Rewarded for Spreading Colds & Flu

Rewarding people for perfect attendance encourages employees to come into work when they are sick and need to stay home and rest. This results in spreading the cold or flu to other employees, thereby increasing the number of people who either take sick days or come into work when they, like the person who first came into work when he or she was sick, should stay at home. In a small company, this can be devastating because a large percentage of the workforce can end up sick. In one large company, I saw infections spread quickly – even to facilities in other countries – because sick employees were encouraged to come into work instead of staying home to recover.

One can imagine the effect this type of behavior can have on a swine flu epidemic. Whether faced with a worldwide epidemic or the common cold, however, managers need to understand that encouraging sick people to come into work shows a lack of regard for the health of all employees and can result in large costs for the company.

Why We Think It Works

Over the years, this type of incentive program has been very common among American companies for a variety of reasons.

1. Frustration It is frustrating when someone calls in sick. We hire people because we need them to do a job and when they miss work without advance notice, it can cause problems with productivity, customer service, and scheduling, in addition to putting pressure on other employees.
   
   An incentive to reduce absenteeism is an attempt to deal with the frustration that unfortunately can make the situation worse.
   

2. School Perfect Attendance Awards Rewarding perfect attendance is a concept that many of us were first exposed to during our school days. It is very common for schools to award certificates to students who do not miss any days during the school year. As is does with companies, though, this type of incentive often results in sick students coming to school and spreading the sickness to other children – thereby increasing the total number of days missed by the student body (and teachers), as a whole.
   

3. Focus on Direct/Easy to Measure Costs Determining the cost of absenteeism by measuring the number of sick days taken is easy, but unfortunately inaccurate. It is impossible to determine the costs associated with the lower productivity that results from employees coming into work sick. When multiplied by the number of employees who were infected by a person who came into work sick, the total drop in productivity can be staggering.
   

4. Hero Worship Whether the result of an direct incentive or positive reinforcement, the American business culture tends to make a hero out of the employee who comes into work even when he or she is sick. We tend to look at anyone who is more committed to the company than their own health as a valued employee.
   I once worked with a company where the CEO publicly praised managers in the corporate office for coming into work when they were ill. As a result, people became afraid to call in sick and only did so when they were physically unable to come into the office. During flu season, infections spread quickly through the office resulting in a number of problems for the company.
   

5. Lack of Trust Offering an incentive that discourages the use of sick days shows a lack of trust in employees because if you trust their motives, you would believe them when they called in sick. This can be a reflection of the company’s hiring practices and its process for screening employees. If the company’s values are clear and job candidates are carefully screened before hiring to assure they possess these values, you should be able to trust the motives of individuals.
   
   Dealing with employees who appear to be abusing the company’s attendance policy should be done immediately and on a case-by-case basis and not through companywide policy changes.
   

What Can Be Done?

There are a number of things that can be done to reduce absenteeism at a company. The most obvious is proactive health planning, which includes nutritional and health counseling to help employees strengthen their immune systems – especially during flu season. In addition to reducing employee sickness within the company, this type of initiative can improve productivity (by having healthier employees) and morale (by demonstrating that management cares about employees).

Another action that has been shown to help reduce absenteeism is to offer unlimited sick days to employees. When a specific number of sick days are offered, people think of them as something they are owed by the company and tend to believe they need to use them or lose them before the end of the year. An unlimited sick leave policy does not give the impression that people will lose days that they do not take.

As an example, a company I once worked with changed its sick leave policy from 10 days per year to unlimited days. Within the first year, the average number of sick days taken per employee was significantly reduced. [As mentioned earlier, though, care must be taken in any measure used to evaluate the results from a change in sick leave policy]

Focus on Health

Basically, the way to reduce absenteeism due to sickness – including a flu epidemic – is to focus on health instead of sickness. Attempting to improve the situation through artificial means like monetary incentives will not help people get sick less often. On the other hand, providing information, counseling, and a healthier work environment can give those who are willing to change the ability to do so, leading to sustained improvement.

Some of the steps businesses can take to help prevent an H1N1 epidemic (and reduce the financial impact if it does occur) are as follows:

• Telecommuting: Encourage those employees who can work from home to do so. This obviously involves a certain level of trust that employees will, in fact, work when they are not in the office;
  

• Stress Management: Implement stress management and reduction programs for employees. Studies have shown that stress depresses the immune system and anything the company can do to help employees deal with stress can help to prevent (or reduce the effects of) the flu;
  

• Nutritional Counseling: Diet can help or hinder the effectiveness of a person’s immune system. Counseling people on food choices and eating habits can help them strengthen their immune systems to fight off infections, as well as improve their overall health;
  

• Education: Educate people on the ways to prevent the spread of disease. Provide hand cleaners and anti-bacterial wipes in convenient locations throughout the workplace;
  

• Stay Home! Implement a policy for people to stay home when they are sick. Send people home when they are sick and come into work. Do not penalize people for using sick days and consider implementing an unlimited sick leave policy at least until the swine flu scare has passed. Also, eliminate monetary incentives that encourage people to come into work when they are sick.
  

Executives have the responsibility to take a role in preventing the spread of swine flu – not only for the health of their employees (and themselves), but also to help reduce the financial impact that a flu epidemic can have on an organization. Implementing the above actions, however, will not be easy for American companies because they require a fundamental change in the way managers think. The fear of an H1N1 global pandemic, however, may be just thing that stimulates this type of change in thinking.

Breaking Down the Silos

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GETTING PEOPLE TO WORK TOGETHER & SHARE BEST PRACTICES

One of the biggest issues facing leaders today is figuring out how to get people in different areas of the company to work together and share best practices. Whether the people are in different departments or locations, a lack of teamwork is a frequent problem and is difficult to resolve.

Whenever I am asked to help with this type of problem, I ask the following questions to the leaders to probe into the organization’s culture and leadership practices.

· How do you evaluate the performance of people and regions?

· What do you do if a particular location or person does not seem to be meeting objectives?

· When meeting with people or visiting different locations, what do you generally talk about?

· What is the company’s purpose? Is it clearly understood throughout the company – i.e., in different locations? How do you know?

In many cases, the answers to these questions point to the company’s leadership practices as the main cause of the problem of a lack of teamwork and sharing. The company’s system for evaluating performance, in addition to the actions and behaviors of management tends to inadvertently create barriers that interfere with the desire and ability of people to share information and/or accept ideas from others.

Evaluating Performance

It is important to exercise care when using measures to drive behavior because it just might work – although not necessarily in the way you intended. Holding a sales manager accountable for sales in his region tends to drive him to focus on sales in his region – even if it hurts sales in another region.

The following are actual examples of failed attempts to improve performance by holding people accountable to goals based on individual or localized measures.

· In a mid-sized global manufacturing and service company, the CEO measured the revenues generated in each region and made it clear to the sales managers that they were responsible for increasing sales in their assigned territories. Bonuses were based on exceeding forecasts and whenever he visited the different regions, he would meet with the team and review their YTD results and plans for growth.

The sales manager in Slovakia was an expert in a particular application of one of the company’s products. Although there were similar opportunities in other regions, the other sales managers needed the support of this person to capitalize on them. Because of pressure from the CEO, however, the Slovakian sales manager could not afford to take time away from his region to help others. He was aware (and frustrated) that this type of behavior did not benefit the company as a whole, but he felt he was doing what was necessary to meet his objectives and keep his job. As a result, he met his targets (as did the other regional sales managers), but the company missed out on a fairly easy opportunity to grow revenues.

Other companies I have worked with experienced similar results. Salespeople fighting over credit for cross-regional accounts, and different regions of the same company competing with each other for business are common results from the pressure to meet targets set by leaders.

· A purchasing agent in a manufacturing company was evaluated on containing costs for the products she purchased. Her main responsibility was to purchase pipe used by the production department for one of the company’s main products. She met her goal by procuring pipe from a variety of sources which saved on material costs, but resulted in a great deal of variation in the quality of pipe, as well as late deliveries. As a result, the production department experienced late shipments, increased cycle times, and additional labor costs to process the pipe. The situation hampered the ability of the production people to meet their targets and resulted in a deterioration of teamwork between procurement and production.

Organizations are far too complex to assume that evaluating performance of people or regions based on isolated or localized measures will result in optimizing the results of the whole. The issue has psychological and sociological ramifications which results in complications that have to be dealt with carefully.

If you take a cat apart to see how it works, the first thing you have in your hands is a non-working cat. – Douglas Adams

It is not possible to effectively lead an organization by breaking it into pieces and setting goals for each piece. What matters is the performance of the entire organization . . . not the individual people or departments.

In the sales manager example above, the CEO needed to stop worrying about the individual salespeople and focus instead on the sales of the entire organization. The objective of the regional sales managers should be to increase revenues for the entire organization – which by the way also involves procurement, production, engineering, and finance, as well as all sales managers. If the CEO made it clear to the team that their objective was to increase sales for the entire organization, the sales manager in Slovakia would feel empowered to help sales managers in other regions increase business. He would also feel better about his job knowing that he is helping other salespeople improve overall company’s results.

It’s About the Team

Getting people to work as a team requires treating them as a team. On the other hand, when you measure and hold people accountable as individuals they will act as individuals.

Although it seems simple, this premise tends to be difficult for many leaders because we are taught in business schools about the importance of performance reviews and increasing accountability to improve performance. Getting people to work together, however, requires holding the team – and ultimately the team’s leader – accountable for achieving results.

What About the Stars?

When you begin to manage and reward the team instead of individuals, there is a chance you will lose the “superstars” who like to work alone and be rewarded for individual effort. In every instance where I have seen this happen, however, the company actually improved performance after a superstar left. In the right environment, teams are much more effective than individuals – even if those individuals are superstars. Ridding the organization of those who put their own needs ahead of the company as a whole tends to unleash the talents of the team, enabling amazing things to occur. Superstars tend to shine in dysfunctional organizations where people do not work well together. Once teamwork starts to improve, the superstar starts to hamper, more than help performance.

Try It . . . It Really Does Work

When I work with organizations on teamwork-related issues, I suggest initially implementing changes in a pilot area to help reduce the apprehension of the leaders to change the way the organization is managed. In the sales example, the CEO agreed to change the high-level measures for the European business unit and focus on revenues and EBIT for all of Europe instead of country-by country. Regional measures remained, but were only used by sales managers and their teams to determine what was happening at the local level and to determine if action needed to be taken to improve results.

As a result, the level of teamwork between sales managers improved, and by year-end, revenues exceeded forecast by 27%. Sales actually declined in some regions because the team decided to focus on the areas where the biggest growth opportunities and higher margins existed – which contributed to EBIT surpassing budget by 57%. Customer satisfaction also increased because people in different regions were now working together to serve needs and resolve problems.

Strong From The Start

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The Six Elements of a Healthy Organization

In my book, Avoiding the Corporate Death Spiral, I outlined the six warning signs that an organization’s leaders must continually identify and address in order to avoid a crisis. Since writing the book, I have been approached on several occasions by entrepreneurs asking what they can do during the startup phase of a company to prevent a future death spiral. In other words, can the signs of decline be reversed to become the elements of a healthy and strong organization?

It is actually much easier to do things correctly from the start than to fix problems within an existing organization. Knowing the elements of a healthy company can help many problems be avoided, which is critical during the organization’s fragile startup phase.

Along these lines, I have put a positive spin on the warning signs and revised them to become the elements of a strong organization. These elements are:

1. Clear & Consistent Purpose
2. People/Process/Customer First - Numbers Second
3. Strong Supplier Relationships
4. Valued Employees
5. Clean and Well-Organized Workplace
6. Holistic Management

Keeping these elements in mind during the startup of a business can help to embed them into the culture early on, helping to assure they last many years into the future. Although there is always a certain level of cultural drift within an organization that requires the attention and action of leaders to keep the company on-track, it is much easier to address problems before they become engrained into the culture. The key for leaders is to understand that they need to continually be on the lookout for problems – during the good times as well as the bad. Strangely enough, it is actually when the organization becomes highly successful that it becomes the most susceptible to bad habits. It is very easy to take your eye off the ball when business is good.

Focusing on the Elements

1. Clear & Consistent Purpose

The most important aspect of starting and operating a business is having a clear and unchanging purpose. This means creating a simple and clear, but detailed description of why the business was created. It describes the value provided to customers – not necessarily in terms of a product, but the specific value that the product provides (see simple examples below).

Automobile Manufacturer:
YES: Provide safe, comfortable, reliable, and efficient transportation
NO: Build and sell cars

Call Center
YES: Helping companies provide high quality service to their customers better
and more efficiently than they can themselves
NO: Provide low cost call center services

Pressure Relief Valves
YES: Provide effective protection for people, equipment and the environment
NO: Provide pressure relief valves

Focusing on the value enables the company to keep up with changes and advances in technology instead of getting stuck with an obsolete product or service (e.g., typewriter manufacturers).

Having clarity on the purpose will enable you and the others in your organization to stay focused on the market(s) you serve and products/services you offer. Without this level of clarity, you run the risk of getting into areas where you do not belong, or attempting to take on more than you are able.

2. People/Process/Customers First; Numbers Second

As the leader of a startup, it is easy to get wrapped up in spreadsheets analyzing the financial aspects of the company. Although it is important to understand the numbers, it is even more important to understand that the numbers are merely the effect of taking care of your people, processes and customers. In meetings with the people on your team, it is a good idea to start with people, process, and customer issues first and close with financial discussions.

Also, do not get caught up in the idea that everything can be measured. In fact, the most important aspects of leading an organization cannot be accurately measured, but will require a great deal of your attention. This includes the costs associated with employee satisfaction, poor planning, lack of teamwork, etc. As an example, you may be able to put some type of measure on the level of employee satisfaction, but estimating the cost of a one point increase or decrease is impossible.

3. Strong Supplier Relationships

Your suppliers are a part of your system and as such, have just as much of an effect on your success as does your own team. The key is to find suppliers who have the same philosophy on business as you do and evaluate them based on the total cost of doing business (which includes price, payment terms, leadtimes, defects/reject rate, cost of inspection/appraisal, variation in materials, level of technical support, etc.).

4. Valued Employees

Without enthusiastic and happy employees, you have no chance of having happy customers. It is the workers who provide the products and services to satisfy customers and if they are not actively engaged in the business, it will show up in the quality of the work they do. This may seem like an obvious point, but it is so often forgotten that it bears repeating. Getting the correct people on your team is a critical first step, but keeping them enthusiastic and proud of what they do is just as important.

5. Clean & Well-Organized Workplace

This element includes setting up the workplace so needed equipment and information is readily available to people. This involves regular 5S efforts (Sort, Set in order, Scrub, Standardize, and Sustain) to assure that workplace setup continues to help, rather than hinder the work being performed.

Also included in this element is putting processes in place to effectively maintain the company’s assets (i.e., preventive maintenance), so they continue to perform as intended well into the future.

6. Holistic Management

An organization is an interdependent system that works to serve customers. Every person either serves the customer directly or serves someone in the organization who eventually serves customers. Because of this, it is important to understand how the entire system operates, including how materials and information flow from concept to customer and especially how they are handed off between processes.

It is very risky to set goals for individuals or functions because it is pretty much guaranteed that people will meet virtually any goal set for them (especially when money is involved) - whether it helps or hurts the company is secondary. As an example, if you set a goal for the procurement team to keep purchased costs down and another for the production people to meet the shipping forecast, chances are that both will meet their goals. The procurement team will bring in sub-standard materials with little regard to quality, and the production team will be forced to use poor quality materials and produce sub-standard products (at a higher cost) in order to meet the schedule. Both teams have met their goals while the company and its customers suffer.

These six elements will help assure that the company starts off with a strong foundation that will help it succeed, even when faced with negative external events. This assumes, of course, that there is a market for the products and/or services offered by the company, and that the company has solid financial strength. Given these two assumptions, the organization has a much greater chance of growing and succeeding well into the future if the leader assures the six elements are present from the start.

Reinventing the Automakers

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It’s refreshing to hear President Obama talk about the need for the American automakers to reinvent themselves to become more competitive. Politicians, business leaders, writers and newscasters continue to talk about the need for General Motors and Chrysler to fundamentally change in order to survive. My concern from what I have seen so far, however, is the idea that “getting smaller” is considered fundamental change.

If we look at the dictionary, the term fundamental is defined as, “serving as, or being an essential part of, a foundation or basis.” Following this definition, selling off divisions, laying off workers, closing plants, and shedding dealers does not constitute fundamental change. They are ways to cut costs, and may be necessary because of decisions made and actions taken in the past, but it has nothing to do with changing the philosophy and basic approach to business.

In my opinion, fundamental change for American automakers begins with getting back to the basics by clarifying and communicating the purpose of these companies. At one time, the Big 3 had very clear missions that involved offering safe transportation that provided value for their customers. Somewhere along the way they forgot about this and got the idea that their purpose was financial – e.g., related to profit or earnings for shareholders. When this happens in any business, decisions become much more focused on the short-term and the company’s overall health begins to break down.

Valuing Employees

Another area requiring fundamental change is the relationship between management and workers. There have been problems for years between the union and management, and it appears that the problems are still not being addressed. Unions don’t trust the intentions of management and the situation needs to be addressed immediately. And recent conversations with the union have been completely focused on concessions, with little or no discussion about improving the relationship.

If the relationship is to improve, the union needs to be involved in planning at the highest level and management needs to improve its communication with the workers throughout the company. This may work itself out because of the large stake unions are taking in the companies, but it can’t be assumed – it must be acted upon quickly.


Supplier Relationships

Another relationship that has been severely strained over the years is the one between the automakers and their suppliers. Surveys of tier 1 suppliers have shown a very small percentage of them feel they have a “good” or “very good” relationship with the Detroit 3. These surveys also show that suppliers feel that the automakers have little or no concern in the success of their supply chain. Lengthened payment terms and continual pressure to reduce prices has left many suppliers on the verge of bankruptcy and forced others into other industries because they just could not afford to continue to do business with the U.S. automobile manufacturers.

From a business perspective, it is crazy for any company to disrespect its suppliers. Unfortunately, large organizations in the U.S. and Europe have somehow come to believe that pressuring suppliers and shifting business around to keep prices down is good practice. Suppliers are a part of a company’s overall system – they just happen to be external to the organization. The effect they have on the quality, cost and delivery of the company’s products are just as important as employees inside the company. In this way, it would seem crazy to pressure employees to reduce their pay, increase the time between paychecks, and continually look for new workers in order to reduce pay by getting people to compete with each other for existing jobs. This is exactly how suppliers are treated.

Any supplier relationship must be based on mutual success. Analyzing suppliers must be done on the total cost of doing business with them; not just price and payment terms. In this way, all costs must be included – including inspection costs, inventory costs (due to defects, late deliveries and leadtimes), defects, design support, and extra labor due to variation in incoming products, in addition to price and payment terms. Unfortunately, price and payment terms seem to be the only components measured.

Better Cars

Whatever the change looks like for the U.S. automakers, it absolutely has to include offering better cars. The latest J.D. Power survey results regarding initial quality have been released and American cars are the noticeable minorities on the list. With all the publicity surrounding the improved quality of American cars, the survey results show that, unfortunately, they still lag behind those from Japan, South Korea, and Germany. This has got to change.

The processes for designing and building cars requires overhaul to give U.S. producers a better chance against foreign competitors. Anyone who has read, The Toyota Way by Jeffrey Liker has to wonder what it must be like to compete against a company like Toyota. Their methods are so different from traditional Western manufacturers, that it’s difficult to know where to start. What is important, though, is that the Detroit 3 actually “start.” They have got to start doing things differently and not believe that survival will come from cutting back.

Will it Work?

I know that something had to be done to keep the Detroit automakers afloat during the recession. Letting GM or Chrysler close down at this time would be devastating to the unemployment rate, the economy, the automotive supply chain, and the auto industry, in general. What I can’t help but wonder, though, is that giving GM and Chrysler billions is just delaying the inevitable and they are going to disappear anyway. The fundamental change that is needed to stave off closure just doesn’t seem to be happening . . . or happening quickly enough.

I hope I am wrong.