by Peter Hunter

     This article was originally published in The Productivity Institute (PI) Newsletter

Have you ever noticed when you are in traffic and in a hurry to get somewhere, it is almost impossible not to creep up closer to the person in front of you?  It is as if by this act of creeping, it is possible to make the car in front move faster so that we can get where we want to go quicker.
 
But, have you ever thought what happens when someone starts to creep up too close behind your own car.  Do you accelerate away smartly leaving them to catch up or do you slow down?
 
The fact is, we are all human beings and the human reaction to being pushed in one direction is to resist and (frequently) push back in the opposite direction.  (Remember what happens when a teenager is told to clean their room?)
 
If someone is trying to make us hurry up by driving too close, we will almost invariably resist by slowing down.   Even with this realization, we frequently still drive too close to the person in front when we want them to go faster and as a result become even more frustrated when they slow down.
 
In short, our own behaviour is creating the conditions for our failure.
 
Fifty Years ago there was an American Business Guru called Douglas McGregor who was in the vanguard of a growing band of enlightened management savants.  They appreciated this aspect of our behaviour and realised that most of the problems involving the lack of morale and performance at work are directly related to the way managers behave towards their respective workforce.
 
To explain how this works, McGregor coined the two terms, “Theory X” and “Theory Y”.
 
Theory X is the model that describes the management behaviour that creates problems.  Theory Y is the model that, recognising the problems created by the Theory X manager, creates the environment for the workforce that allows them the space they need to work as well as they can.
 
Here is an example that will help explain these models, Theory X management assumes that the workforce is lazy and ignorant and would rather do anything except work.  The job of the Theory X manager therefore is to drive the workforce to do their work, to create an environment in which it is so difficult for the workforce to avoid work that they have no option but to work. This is seen as the traditional role of the manager by both the manager and the work force.

Theory Y on the other hand, assumes that the workforce is skilled and experienced, is willing to share that experience and take pride in what they do.  The job of the Theory Y manager is therefore no longer to tell the workforce what he thinks they ought to be doing. Instead, it’s to create a positive work environment that will support the workforce, allow it to take pride in their efforts and thereby improve productivity.
 
The difference between the two models is the treatment of the workforce and the environment in which they work – both of which affects the motivation to do their jobs.
 
The problems occur when a creative and motivated workforce, is treated as if they are lazy and ignorant by a Theory X type of manager.  This is the predominant management behaviour, learned from our peers or from schools; how managers need to do to drive better workforce performance.
 
What Douglas McGregor shows us is that “Driving” performance is actually the management behaviour that causes poor performance and bad attitude.  This Theory Y lesson is: if you want to get there quicker, if you want to increase the performance of your own organisation, stop pushing the people who actually control your organisations ability to perform, the workforce and instead help support their efforts.  The results may be dramatic.
 
If you want to go faster, Slow down!
 
Try the Theory Y approach next time you are stuck in traffic.
 
The more space you give to the people in front the quicker they will go. When we slow down we give the driver of the car front more space. He will stop feeling as if he is being pushed and will therefore speed up.  By allowing the driver in front to feel that he is not being pushed we will get where we want to go quicker.
 
At work it is the same.  The less direction and control the manager imposes on the workforce, the better they will perform.
 
Give people the space they need to do their jobs.  You will be amazed at what happens.
 
Peter A Hunter
Author of Breaking the Mould.
www.BreakingTheMould.Co.UK
www.Hunter-Consultants.Co.UK

by Bruce Newman

   This article was originally published in The Productivity Institute (PI) Newsletter

It is next to impossible to impartially evaluate all aspects of a business.  Whether that business is a non-profit organization or a for-profit business is irrelevant - it must still run as a business.  As such, both entities must generate income, manage expenses and deal with a gamut of business issues every day.

Determining productive and non-productive costs can greatly affect a company’s positive cash flow.  Productive costs are those functions that produce revenues that are essential to the operation of a business.  One such example is the cost of research and development.  Conversely, non-productive costs are simply expenses.  A company car or unused rental space are simple examples of non-productive costs.

Often, companies are loath to reduce or even acknowledge these non-productive costs.  Usually born in better economic times, they nonetheless remain as vestiges of that foregone era.  This was readily apparent the first time the CEO’s of all three major American automobile companies flew to Washington DC on their company’s corporate jets to ask for bailout money (at a cost per flight of over $20,000, each).  It was merely a function of just how they do business.

Possessing feelings is a part of human nature.  From the time we are infants until our death (hopefully after many years), emotions and feelings are a part of our behavior and the basis for much of our interactions.  Given these innate and learned sensibilities, is it any wonder that we are unable to be impartial when evaluating our employer’s business?

When employees are asked to assess a business, an additional factor may appear: the desire to inflate that person’s value, often to the detriment of someone else.  This inherent conflict of interest requires further explanation.  Let’s say the person doing the evaluation is a senior vice president who has not been particularly effective in his job.  An impartial evaluation will denote his shortcomings, possibly resulting in his termination.  However, a biased evaluation may report his performance as exceptional, depending on how the assessment and report is structured – with another employee receiving the blame.

Impartiality also requires the expertise and knowledge to develop probing questions when evaluating a company.  Asking the question to a CEO and upper management (individually), “What does your company do?” for example, will usually elicit a surprisingly wide range of responses that require further study.  It is unlikely that a high level employee would ask this seemingly simple question to his co-workers and possibly his boss and impartially report and interpret the results.

To more closely examine this issue, consider the different levels of responses you would likely receive to the following statement with the only difference being whether the questioner was an impartial expert or an employee: 

Please rate and comment: The organization has a clearly defined strategy for adding outstanding and unique value in its selected markets.

Would a person suffering from job insecurity or afraid of a – potentially harmful - answer really respond truthfully? 

This raises my final point: the interpretation of the results.  An unbiased, experienced evaluator may look at the study results and draw vastly different conclusions from a company employee, primarily as a result of his perspective and experience - which might also become the basis for further study in determining the cause of a problem and its resolution.

Evaluating a company can greatly affect its positive cash flow and financial flexibility.  It can uncover huge non-productive costs – which are usually recurring, and make recommendations that can enormously benefit the company both in the present and the future.  To accomplish this requires the systematic efforts of an impartial and experienced evaluator.

Bruce Newman is the Vice President at The Productivity Institute, LLC, an acknowledged leader in locating, evaluating and matching the specific areas of expertise of consultants to the needs of its clients.  Bruce also specializes in evaluating companies to improve their productivity and positive cashflow using CFNA. He is also the editor of the Productivity Institute Newsletter, a free content-is-king newsletter and thought leader.  Follow him on LinkedIn, Twitter and the Productivity Institute blog.

by Douglas Castle and Bruce Newman

   This article was originally published in The Productivity Institute (PI) Newsletter

Every business generates its profits, subject to the same basic methods and constraints - regardless of the nature of the products it sells or the services which it renders.

It takes in revenues from sales or service activity, pays out variable costs, meets (by paying) its fixed cost obligations, and ends up with either a pre-tax profit, or a pre-tax loss. In a Not-For-Profit organization, the same dynamics apply, but the nomenclature is different: they collect contributions or donations (in lieu of revenues), and pay out variable and fixed costs. For the purposes of this article, we will address all organizations as if they functioned in a For-Profit environment.

The objective of every going concern is to collect more money than it pays out. Simply put, this means maximizing revenues and minimizing costs, thereby increasing the spread.  As business organizations evolve, they become so filled with complexities, diversions and conflicts, that they lose sight of these simple basics.

There is a need to re-evaluate these business basics periodically – to take a fresh look at the business of the organization instead of at the entire organization as a socially complex entity with a variety of objectives, many of which conflict with or constrain profitability. Stripped of all these factors, one can examine the inherent profitability structure of the business.

At the risk of being politically incorrect, and of sounding callous, CFNA™ (Critical Factor Needs Analysis) does not focus any of its energies on corporate citizenship, environmentalism, jobs creation, and the like. CFNA works precisely because it deliberately eliminates all of these largely qualitative factors from its evaluation approach, working to effectively evaluate a corporation’s well-being and make accurate recommendations.

CNFA also looks at cash inflows and outflows, rather than theoretical accounting constructs such as accruals, amortization and the like. These are good tools for properly matching expenses to the revenue-generating process, but they are not representative of “in the trenches” reality. CFNA™ does not delve into the world of best accounting practices.

The thought here is that substantial stakeholders and directors must understand the nature of a) their market, revenues, price sensitivity, and contribution margins, and b) the structure and nature of their fixed costs.   People are not in business to cover overhead – especially accumulated, non-productive “legacy” overhead.  Rather, they are in business to generate profits by exerting control on every possible and reasonable variable.

Another important thought is that, generally speaking, the more established a business becomes, the more fixed costs are perceived as if they were actually the bottom line – especially where matters of personnel costs, perquisites, esthetically-pleasing offices and other categories of fixed costs are seen as compensatory to some of the business’ management. These fixed costs begin to take over the priority position of actual profits. Companies begin seeing revenues as a way to merely subsidize continued wastefulness or excess.

How businesspersons look at business

Businesspersons have several ways of looking at business, and these mindsets ultimately will affect potential profitability. Here are the several different “schools” of thought:

• We have high fixed costs. We have to generate enough contribution to cover them. We had better generate enough cash flow to meet these “given” costs. Bottom line: We work to pay fixed costs.
• We have high revenues. We don’t have to monitor fixed costs too closely…in fact we can afford the luxury of a growing fixed cost threshold as we become a bigger revenue-generator. Let’s get bigger offices. Let’s get some corporate aircraft (to make a good impression when traveling to meet financiers and [gulp] legislators in Washington, D.C. Life is good. The business should exist to support our improved standard of living (e.g., our growing fixed-cost structure). Bottom line: We will continue to generate increasing revenues, so fixed costs (even a bit of excess) will not hurt us.
• We have to make a profit. Let’s keep the fixed costs to a minimum just in case revenues take a dive. In fact, to be conservative, let’s accumulate some reserves of liquidity in the event that revenues decline significantly. But whatever we do, let’s not get obligated to a high contractual fixed-cost structure. After all, every dollar that goes toward paying off fixed costs would be better if it could be part of profit. The lower the fixed cost threshold, the greater our profit. Bottom line: We should minimize our fixed cost structure, so that we have latitude if revenues decline, and increased profits if revenues increase.

Each of these schools of thought actually exists, but the CFNA™ evaluative model requires that we think in the third way. Fixed costs must continually be evaluated and controlled – especially if we are in a business where:

1. Our product or service is price-sensitive, and we must be prepared to cut prices (and decrease revenues) in order to compete in our marketplace. We are not a monopoly, and cannot exert pressure on prices. Revenues are sensitive, and only partially under our control.

2. Our product or service is considered a luxury or discretionary expenditure by our client or customer base, and we may sell fewer units (and decrease revenues) if market demand decreases. Revenues are sensitive, and, price notwithstanding, are not under our control if the economy turns downward or if our product loses its market share, or market desirability.

3. Our contribution margin is thin (the price per unit is not much greater than the variable cost per unit). Revenues are doubly-sensitive, in that if we lose either some sales, or if prices drop, we will be victimized.

4. Our profit is significant.  However, because of market factors – including increased costs, an economic downturn and/or increased competition, we might not be able to maintain this margin – which can quickly decrease.  To maintain this cushion and not be victimized, we must maximize profits and remain agile.

The thought here is that substantial stakeholders and directors must understand the nature of a) their market, revenues, price sensitivity, and contribution margins, and b) the structure and nature of their fixed costs. We are not in business to cover overhead – especially accumulated, non-productive “legacy” overhead. We are in business to generate profits by exerting control on every possible variable upon which we may reasonably do so.

Another important thought is that, generally speaking, the more established a business becomes, the more fixed costs are perceived as if they were actually the bottom line – especially where matters of personnel costs, perquisites, esthetically-pleasing offices and other categories of fixed costs are seen as compensatory to some of the business’ management. These fixed costs begin to take over the priority position of actual profits. Companies begin seeing revenues as a way to merely subsidize continued wastefulness or excess.

Conclusion

We cannot heal until we know that we are ill, and until we understand the nature of the illness. In all circumstances, objectivity is required, fixed costs must be perceived as an enemy, and not as a hurdle to be met, or as a target objective. This pattern of thinking and associated conduct leads to a mere “breakeven” or “minimal survivalist” conduct that destroys companies. Companies are not in business to cover overhead: the core objective is to be profitable – in both the short and long term, for without profitability everything else becomes merely academic.

Douglas Castle (http://aboutdouglascastle.blogspot.com) operates The Castle Consultancy and is an advisor, managing member and a director of several companies in diverse industries.
Bruce Newman is the Vice President at The Productivity Institute, LLC: www.prodinst.com .