Metrics and incentives for employees

One of the more difficult tasks, but also one of the more potentially beneficial for a company, is the development of employee incentives.

The first step is developing a baseline of the company's performance. This means that you should be tracking as many of the key attributes of success as possible. Given what your company does will obviously determine what you should track, but there are some consistent areas to track based on your income statement:

1) Sales - are your sales/revenues growing
2) Operations - cost of producing/servicing by unit
3) Operations - rework (or customer service levels)
4) Overhead as a % of sales


The second step is to then determine what are the overall goals for the company, i.e. increase revenues by 20%, improve profitability to 15%, etc.

Then determine what are the underlying metrics that would need to change to make these overall goals possible, i.e. increase customer base by 10%, decrease customer turnover by 20%, improve direct labor output by 15%, decrease employee turnover by 10%, decrease supply cost by 10%.

The third step is to then look at each department and the company goals and determine what impacts each department has on the key metrics. For the metrics that each department has a direct (and in some cases indirect) impact on, you need to see what improvements would have to be achieved against the baseline metrics to hit the overall company goals. This can be your first attempt at incentives.

The fourth step is to share these goals with the managers of each of the departments asking for their feedback. Be careful, human nature says that the initial response might likely be, "Those targets are much too hard to hit." But, on the other hand, listen to the comments coming back. You might want to ratchet down the expectations, especially on the first go-around. (NOTE: Incentives should consistently be reviewed to see if they are actually achieving what you want.)

The fifth step is to use your financial model to then figure out how much you can pay (in terms of incentives) if different levels of achievement occur.

Try not to have a 0 or 1 type incentive structure - meaning that the person/department achieves the incentive if they hit a specific number otherwise they get nothing. What this will create is a mentality that focuses only on that number; and one of two things will happen:

1) At some point, when it is determined that the number can't be achieved, the group is totally disincentivized. Performance will actually drop further.

2) The number is achieved and then work stops or drops. (A great example is monthly sales goals. You will always see a push at the end of the month to hit the number. If the number is hit early, watch those days after, the productivity usually drops drastically if there is only a 1 or 0 type incentive.)

ALWAYS HAVE MULTI-LEVELS OF INCENTIVE ACHIEVEMENT PER METRIC

Make sure that the incentive program pays for itself when the goals are achieved.

The sixth step is to make sure that the different departmental incentives do not work against each other. (NOTE: This is the biggest issue concerning incentives.)

A great example is from a manufacturing firm that I consulted for:
The sales department was incented to increase revenues (nothing else)
The buying/raw materials department was incented to buy the lowest cost materials (nothing else)
The manufacturing department was incented to produce products at the lowest cost possible (nothing else)

Do you see where this is going.... the sales group ended up selling the lowest priced products, and since the raw materials coming in weren't always high quality and since the manufacturing group was focused on always working (to drive down the product unit cost) and not focused on quality, the product quality deteriorated and this forced the sales group to price the products lower and the death spiral started. More price cutting to hit sales targets, less quality in the products, and the brand's image went down.

What this means - make sure the incentives work together in the aggregate/company-level.

The way that I solved this in my last company was to set up a three-tier incentive program (it's more work, but well worth it):

Company-level incentives (worth 40% of the total incentive program by department)
Department-level incentives (worth 40% of the total incentive program by department)
Individual-level incentives (worth 20%)

Finally incentive rewards need to occur often enough to be consistently on the minds of the employees (and the results should be communicated clearly).

Issues to discuss further in another posting:

1) How do you incentivize the overhead departments (i.e. HR, Accounting)
2) How about groups that don't work in piecemeal (i.e. Internal software development)

Mergers & Acquisitions

Mergers and acquisitions

Many people know the stats - most M&A deals in the U.S. have been shown to lose value for the buying shareholders. There are many reasons for this.

In my last company, I managed to buy two companies and integrate them into my company. There were many lessons from this experience. I will focus on the negotiation aspect first, then discuss the actual integration on companies later.

Targeting & Negotiating

1) Understand why your company is acquiring companies.
- Is it to solely to grow the revenues?
- Do you have a target that you believe will perform better on your platform/using your processes and procedures?
- Are you trying to expand your product/service into other areas?

2) Coupled with this question is the next step - is it better to buy then make
- Is organic growth not good enough
- Is there a large benefit to an acquisition that will outweigh the efforts and risks of going through the buying process, because the buying process is usually very long and fraught with downfalls (which is why most M&A deals fail for the shareholders)

3) Once you have gone through these initial questions and decided that an acquisition makes sense, then the next step is targeting.
How do you find the company/ies that you want to buy?
Depending on the size of the company you are looking to buy, there are a few channels:
1) broker/dealers
2) investment banks
3) industry associations

Broker/dealers are a tough bunch. Think of some of them as car salesmen. Sometimes you can find one that is knowledgeable and willing to help you find a great deal. But in many cases, you, as the buyer, are not whom they are concerned with. The dealer's focus will either be with the seller or will be on just getting a deal done. When that happens, be AWARE!

Investment banks are only an option if you're looking at much large companies or a major roll up of an industry.

Industry associations are a good source in some cases, but if you're viewed as an outsider, you won't get as much help. Build these relationships. Attend the events.

4) Calling targets
Obviously make sure that you have a solid script/message when you call. Get the right person. Establish trust. Get an initial meeting set up.

5) Negotiations
This is usually the longest (and most important) aspect of M&A. Depending on what you leave on the table (and how long the process takes) will ultimately decide the success or failure of the whole deal. Have lawyers that are familiar with M&A deals (I have a few suggestions if you want them), that are careful, but will help get the deal done. Try and meet with the lawyers and accountants of the targets (obviously with your potential partners there). Set the tone. Make sure that everyone knows that what is trying to be accomplished is a win-win. You want the negotiation to go as efficiently as possible and as positively as possible. When it is all said and done, you are still going to need to rely on the people whose company you just bought. You do not want unhappy or frustrated partners.

6) Get a term sheet done and get as many of the major issues completed there. Don't leave it until the actual contract.

Once you've got a contract done, meet with your team and have a review of the process. What went right, what went wrong. Make the next time even better.

One of the next issues/topics - the integration

Raising money in an early-stage company

Raising money for an early-stage company has changed drastically over the last 10 years. I was on both sides of the bubble. Overall I was able to raise $23M in equity and debt for the two companies that I was COO for.

Here are some of the learnings:

1) ALWAYS get more money than you (or your financial model says you) need

2) Point 1 means build a realistic financial model

A realistic model should tie completely to your business plan. If you update one, the other one better be updated too. Potential investors are always looking for reasons not to invest. If there are inconsistencies, they'll jump all over it.

What is a realistic financial model?
A) Have a detailed monthly revenue page with all the sales channels (You will spend a lot of time discussing this information)
B) Think of all the costs of goods/service components. What will it take to actually service all of the revenues, i.e. customer service, manufacturing, etc.
C) Finally what's your overhead going to be/extra labor needed to run the company. Do you have an internal software team? How much space are you going to need? Do you have marketing programs/team to support the sales? What other hard assets will you need? How many computers/printers/scanners, etc will you need?

3) And finally once you have your business plan and your financial model completed, you need to do the most difficult task, value your company. Depending on what stage of funding (and growth) your company is at will dictate whom you have to negotiate with (i.e. current investors, founders, new investors, employees).

One of the next topics - who to go after and how to go after them

Outsourcing Internal Activities to off-shore companies

A very popular cost-savings activity called outsourcing has impacted many different industries in the world, specifically the U.S. Though the history of this activity is very long and interesting, suffice it to say that a majority of the activity has taken place over the last 5 years. It has now impacted manufacturing and service industries.

I was responsible for outsourcing some main activities of the last company where I was COO. This company was a service-based technology company.

Here are the following steps and some issues that you should be prepared to look at if you are going to pursue this activity.

1) If it is a service-related industry - Control the information!
Many outsourcing companies take over one part (potentially the most redundant, low-value activity) of your company's value chain. Even though it might be the lowest value, in most cases, it still has to do with information important to your company. Be very aware of how that information can be used and control it. (This could entail system changes or password-based policies.)

2) Perform many levels of due diligence on your potential outsource partners
This action could have lasting impact on your customers. Make sure that you:
- get a client list from the outsourcing company,
- visit the outsource clients and the outsourcing company (if possible),
- interview a few of the people from the outsource company that are going to be doing the work (not just the managers of the work),
- check with any associations your company might be a part of and see if others have dealt with your outsourcing companies.

3) Have 2-3 backup partners ready to go.
This is not pessimistic and certainly not a waste of time. There will come a time when one outsourcing company cannot handle what you need (it could be they can't handle the actual activity needed or can't handle the volumes or can't handle the quality expected). At that point, you need to be able to take that whole activity and give it to one, possible two, other backup partners. If you haven't planned for this quick transition completely with your backup partners, you are in trouble. You could be held hostage at the point when you can least afford it.

4) Have a rapid transition plan ready to go before you even start up with your first partner.
As part of #3, have that plan of transition clearing written out and understood by everyone necessary within your company (but also possibly with your backup partners).

5) COMMUNICATE !!
It sounds obvious, but definitely communicate all the time with your outsourcing partner. Have a regular meeting (either every day or at least every week). Think about communicating to your customers and if so, how and when to communicate with them.

At my company, a group met everyday to review the status and quality of the work from the past day. We also provided a memo to customers detailing out the plan and benefits (for our company and our customers) to making this action.

6) Try a small rollout/test if possible.
In the best case scenario, perform a test (use an understanding customer account) with your outsource partners and backup partners if possible. This will allow you to work out all the kinks - technology/system, communications, timings, processes and procedures.

7) Finally prepare for legal issues if there are going to be layoffs.
In most cases when an outsourcer is used, to get the best financial impact, layoffs of current staff must occur (or reallocation to other activities within the company). Layoffs at any time are very difficult and litigiously dangerous. When it has to do with outsourcing, the emotions tend to be higher and therefore the threat of legal action also higher. Have your HR lawyers connected to the plans as early on as possible.

Management transition

When facing management transitions, especially those in senior management, many issues should be considered:

1) is the organization correctly set up
2) are there people within the organization that you should consider moving into other (higher-level) positions
3) are the people moving into new positions properly trained
4) are the company's processes fully understood by senior management and documented correctly
5) what are the financial implications of the transitions (one-time and ongoing)
6) have you prepared an announcement to clearly explain what is happening and how it will affect all those in the company?

Having just helped a company through this process, I see that when you are going to make a change at the top, it is also an opportune time to consider making many changes (I believe in getting the pain over all at once as opposed to incrementally).