The Hiring Decision – Costs, Risks and Growth Plans

How do you determine whether it makes financial sense to hire a new employee?

Let’s look at an example:

Cost of investment: The main cost of the new hire will be the monthly wage costs times the number of months it will take the new hire productive.  If you pay someone $4,000 a month and it take them 6 months to become productive, the base investment is $24,000.  There will be employee benefit costs as well as direct training costs. I would add 20% more to the base investment for estimated training, benefits, uniforms, etc. so the total investment in one employee could be $30,000.

What are the risks?

What if they quit after 5 months? What if you have to fire them after 3 months?

This is a big risk. It seems even bigger if it’s happened to you before. The fear of dealing with a bad hire can stop you from hiring even when you should be.

You can mitigate the hiring risks in a number of ways:

1)     Invest sufficient time in the selection process.  Involve other employee in the selection process – they will be involved in training and working with the new person – if they helped pick them, they will naturally be more open to working with them.

2)     Invest sufficient time and effort in the induction and training process. Make sure the first day is a good first impression. Make sure the team is available to train and mentor the new hire. The owner should make time to welcome the new hire and support their training.

3)     Hire for attitude, train for skill. If the new hire is not a good ‘cultural’ fit, I recommend not hiring them.

In summary, hire slow, fire fast.

What is the return on investment?

A good rule of thumb is to make sure an employee can produce 2 to 3 times their base pay. The $4,000 per month employee should produce $10,000 a month in productivity. Your industry may be different, but there needs to be some measurable target of productivity as a goal. If the new employee is an administrative position or indirectly involved in sales or production, you can still look at how much they can increase the sales or production efforts with their support.  If your good producers are bogged down by inefficient administration, the return on investment comes from freeing them up to do what they are good at.

Growing into the new employee

It doesn’t always make sense to wait until you are so jammed with work with your existing team to make an investment in a new employee. Making the investment during a slower period and then ‘growing into’ the new employee is more manageable. You can compare this concept to buying inventory for a retail store – you need to buy inventory and put in on the shelves in order to make any sales. Hiring a new employee is similar. You need to hire them and train them before you can look for growth the make them productive. In summary, the hiring decision usually goes like this:

1)     Mitigate the risks by hiring for attitude and overcome the fears in order to make the necessary investment in good potential.

2)     Make time to train them properly.

3)     Grow the business to keep them productive. Making the investment in the new hire will be your motivation to get the growth!

In summary, you can’t wait for the perfect time. There is an investment and risk for hiring new people. When it works though, it becomes the best idea you ever had!

Related Articles:

Why is it Hard to Find Good Employees?

Improving the Hiring Process – The Induction Plan

How to Hire Employees – 3 Tips

What is Your Website Doing For You?

Recently we’ve heard from several business owners that their websites simply aren’t working for them. It seems that just having a website is ‘so 10 years ago’. Pro-active business owners want their websites to work harder for them.

Where to start? Try viewing your website from your customer’s perspective.

Review the spelling and grammar on your website. Poor language can reflect poorly on your business.

There seems to be a trend of more ‘cleaner’ appearing websites. Flashy and busy websites can distract customers from the purpose of their visit and leave users overwhelmed.

Is your website well branded? All your social media sites should reflect the look and feel of your website. If your brand is not well represented across the Internet, it can create brand confusion for the customer.

So, what can your website do for you?

Is it easy for customers to find the relevant information they’re searching for? This can be determined by regularly reviewing the most popular page-views. For example, if you learn that most visitors to your website are viewing the contact page, then perhaps enhance the user’s experience by adding that important information to your home page.

With proper analytics in place, and developing a system for consistent reporting, your website should be telling you how customers (or prospective customers) found your site via the search terms used. Your website statistics should help you better understand the needs of these customers, and your service offerings can be changed to reflect these needs. 

“Businesses don’t blog anymore, right?” - Not true. Many businesses see the value in sharing their culture and values online, and this can be done in just a few short sentences once a week. Regular updates, for example, can prove to the prospective customer that your business is a proactive member of the community.

When implementing changes to your website, be sure to discuss with your webmaster the fees upfront, to avoid invoice shock. Commit to regular updates about your business. Be consistent reviewing website statistics and analytics, and make your website work for you!

Enjoying Your Life

I recently found this picture that I took in St. Maarten a few years ago which made me stop and think. I wondered how hard the owner of  the 120’ yacht would have worked to buy it? What sacrifices did he make? Did he feel like the ‘king of the hill’ when he bought it?

So I made up the following commentary for the picture:

Joe Business Owner had a dream. He wanted to one day own a 120’ yacht and sail it to St. Maarten in his retirement. He worked for thirty years, made many sacrifices and compared to most, having an extra 10 million to buy his yacht at age 67 was a great accomplishment. When he bought it, he was truly ‘the winner’ – or he thought he was…

Until the day Joe Business Owner parked his 120’ yacht in paradise and Another Business Man pulled up in his yacht – who, at age 49, acquired his 300 plus foot yacht and had enough money left to buy a 70’  sailboat to park on the back deck!

The moral of the story is that big boats are very nice – but if  your ego is involved in owning it – it usually doesn’t take very long for a bigger one to show up.

I guess that’s why we should enjoy the journey as well as the destination.

Business Plan vs Business Model Canvas

Why do most business owners create a business plan?  The vast majority reluctantly prepare one as a requirement to get financing.

Is a business plan a good management tool?  I don’t think so.

I will agree that preparing a business plan can help a business owner think strategically about their business. A business plan will also provide some structure as it requires a business owner to document their current assumptions and guesses about the future of their business.

Compared to ‘doing nothing’, the business plan process is valuable.  But I think the Business Model Canvas developed by Alexander Osterwalder is an option worthy of consideration for existing small business owners. The Business Model Canvas was developed to be used in conjunction with the Lean Startup methods that are described very well in Steve Blank’s Harvard Business Review article I mentioned last week.

Here are the reasons why I think the Business Model Canvas is a better fit for existing small business owners rather than a business plan:

1)     It’s more visual – Most business owners I know think visually. Planning their strategy seems to work better moving sticky notes around a wall than writing out a ten page document.

2)     It’s more dynamic – The business plan is a static document, but the business model canvas evolves as the business owner experiences the world around them.

3)     It’s about actions as well as thinking – The activity of ‘validating’ the static guesses is more about actions and experiences than just thinking. While thinking is important, I find the following statement to be more applicable: “You can’t think your way into a new way of acting, but you can act your way into a new way of thinking.” The experiential learning obtained from ‘getting out of the building’ and validating assumptions is key.

4)     It’s about key activities more than results – A business plan usually includes a projected income statement.  Income Statements report the results after the activity of business takes place.  Business owners need to focus on activities in order to get better results.

Since the Business Model Canvas is not a common tool in the business owners’ toolbox, you probably haven’t seen one in action.  It’s a pretty good guess that your business plan hasn’t seen much action lately either!  My guess is that a more visual, more dynamic, more action focused and more activity driven tool would be valuable to business owners.

In true Lean Startup fashion, as of today, I am accepting that my above statement is just a guess or hypothesis only in my mind. Now should I write that statement down into my business plan and file it away or should I go out and validate my hypothesis with some real small business owner customers?

Proud of The Lean Startup Progress

Last week I received a great blog post by Steve Blank, who is considered the father of the Lean Startup movement.  He announced the publication of his article as the cover story of the May, 2013 issue of the Harvard Business Review. While many of us, including the team here at The Business Therapist®, have been ‘drinking the Lean Startup koolaid’ already, this cover story is quite important.

It means the Lean Startup movement is becoming less of a fad for its cult members and more of a ‘mainstream’ methodology that is being shared among leading business thinkers for consideration.

It’s a great article and you can read it yourself here.

We have another important Lean Startup development at our firm. I will be travelling to Stanford University in June to participate in the Lean Launchpad Educators course with business and engineering professors from the University of Windsor. I participate in my role as Entrepreneur in Residence at the Odette Business School and will be supporting the effort to bring the Lean Startup methodologies into the curriculum at the University.

The University of Windsor is really developing a strong entrepreneurial culture in the region and I am happy to have a small role in moving things along.

At first glance, you might think the Lean Startup is just for startups, but it is useful for any existing business looking to innovate or to tweak their business model.

For those of you interested in finding out what this methodology is really about, the Harvard Business Review article is a great place to start.

Value vs Time – A Tip for Business Owners

As business owners, we sometimes forget how many years of school, real life experience or both are involved in being able to share our talent in only in a few short minutes.  The following old story makes a great point:

A young woman was strolling along the street in Paris when she recognized Pablo Picasso sitting having a coffee at a café. She stopped and asked if he was really Picasso and he confirmed he was.

She boldly asked him if he wouldn’t mind doing a quick pencil sketch of her. He obliged and in a couple minutes completed the sketch.

She was delighted and kindly offered to pay him for the item.

“Thank you, that will be $10,000 francs.” said Picasso.

The woman was dumbfounded. “But that only took you a couple minutes?” she exclaimed.

Picasso correctly replied, “Actually, that took me my whole life! ”

How could this example apply to your business?

• A real estate appraiser with 30 years of experience is asked to give a value estimate over a coffee
• An experienced tent rental professional is asked how to lay out an event site before being awarded the job

There are many times when it only takes a few minutes to provide huge value to a potential customer and we often forget how long it actually took us to obtain that knowledge.

How do we unlock the value? First we need to understand how much value we can provide to a potential customer in only a couple minutes. Secondly, we need to share the story of Picasso with them.

While we may not always be offered to be paid for our talents, our potential customers who now understand and appreciate the value, are far more likely to do business with us.

Experimental Mobile Business Advisory Unit

The picture above is EMBAU1. This is an experimental mobile business advisory unit for The Business Therapist®. After over 10 years of searching, we were able to locate a 1970 Country Squire Station Wagon with a factory 429 engine and a towing package. The Country Squire features original paint and original green interior and the car hails from California.

The trailer is a 1990 Airstream that is 34’ long. We are currently reviewing options for the interior configuration. We are considering this type of mobile advisory unit for clients across North America with large parking lots.

Initial testing of EMBAU1 seems to bring unusual memory recovery from childhood. We’ve heard responses like:

-          I remember sitting in the back seat looking out the back window.

-          I remember my dad saying, “If I have to stop this car” and trying in vain to reach back to the seat with one hand while driving with the other.

-          One client remembers his dad could actually get hold of his knee from the drivers seat – Ouch!

The Airstream is a great piece of Americana – manufactured in Jackson Centre, Ohio and pretty much hand built in the factory there.

We are currently looking for suggestions and feedback on how best to deploy this experimental unit for the benefit of our valued clients and potential clients.

Well, what do you think?

Determining the Market for Your Business Versus Customer Development

When you start a new business, it is suggested sometimes to determine your ‘market’.

There is often confusion on the definition of a ‘market’. I think the wrong area to focus on is the macro – economic approach where you determine, for example, that China is the biggest and best ‘market’ for your new business.

I think the better question is:

“Which people in this large marketplace will be your actual customers?”

The more you can drill down in the marketplace to determine the specific groups of customers that have similar needs and frustrations, the better.

The best method to develop your ‘market’ or ‘customers’, is to explore the needs and wants of particular customer segments and then match your business offering to their needs. In business lingo this is what we call matching your ‘value proposition‘ to your ‘target customer segment‘.

Rather than stating:

“I have a great business idea, let’s find a market for it.”

A better starting point is:

“I have discovered a real need in a specific customer segment, let’s develop a good value proposition to fill that need.”

In summary, this approach focuses on what the potential customer wants or needs instead of taking your great idea on a plane to China expecting the whole country to be there at the airport waiting to buy your product!

Slight cynical exaggeration, but I hope it helps you see my point!

The Pareto Principle for Profit Improvement

The Pareto Principle (also known as the 80-20 rule) is named after an Italian economist named Vilfredo Pareto. While this principle can apply to many areas of business, let’s look at two possible applications in your small business:

Possibility 1) 80% of your profits come from the top 20% of your customer base.

Possibility 2) 80% of your customer frustrations come from the top 20% most frustrating customers (better known as the bottom 20% of your customer base).

If the second possibility exists in your business, the reality is that your bottom 20% of customers provide you with no profit at all and in fact are likely costing you money!

How do we check this?

We can do a Pareto Analysis on your customer base.  Here’s a simple step by step process:

Step 1) Make a list of your current customers.

Step 2) Determine a ranking system for your customers.  A sample system would be to score each customer from 1 to 5 on the following attributes:

•      Payment history – 1 for a quick payer to a 5 for a delinquent.
•      Hassle factor – 1 for never a problem to a 5 for continuous hassle.
•      Likability – 1 for we really like working with them to a 5 for we hate them.
•      Value for price fit – Score a 1 if they appreciate and really value what you do for them and to a 5 for no appreciation and less desire to pay for your value.
•      Risk – Evaluate the business risk of doing business with each customer – 1 is for lowest risk and 5 would be the highest.

The above are just examples. You decide the correct attributes of a good or bad customer.

Step 3) Rank the customers according to the ranking scheme.

Step 4) Consider the top 20% of the customer ranking.  If Pareto was right, the top 20% of your customers are where you make most of your profits. Don’t forget to thank these customers!

Step 5) Review the bottom 20% of the customer ranking. Ask your accountant, bookkeeper or business advisor to help you determine your profit from these customers.

Even though Vilfredo Pareto has been dead for almost 90 years, he might be able to help you improve your profits:  Consider firing or politely discouraging any one of the bottom 20% from being your customers.

Even without applying this principle to your specific business, we know there is not only the potential for profit improvement, there will be quality of life improvement to be enjoyed by you and your employees who won’t have to deal with as many frustrations any more!

Dealing With Rejection – A Change in Perspective

I was just fired by my first editor/publisher for a book I am working on!

 She explained it like this:

“You are no Seth Godin!”

Ouch.  We had been working together for over a week!

Now I could just quit and sulk over my misfortune but that would not be beneficial. Instead, I have decided to turn this rejection into a challenge. Why not? I have heard other stories of successful authors who were rejected many times before finally being published.

I think many business owners can relate to this type of rejection. If we were discouraged and gave up every time someone said we couldn’t do something, we would never get anywhere.

This is not my first time turning a rejection into a motivator.  Back when I worked for a national accounting firm I was being considered for partnership, and I had to go to the ‘assessment centre’ in Toronto.  Guess what? I failed the assessment for partnership.

They not only recommended I not become a partner, they suggested I reconsider my future in public accounting all together!

It was a really big Ouch for me.

Well, ten years later, I framed that rejection letter and put in on the wall of  the commercial building I had just purchased. The interesting thing is that I purchased the building from the same accounting firm that rejected me. I had started my own firm after being rejected and had outgrown our original office space.

In some ways, it was a blessing in disguise. I should thank them now.

I am going to frame this rejection letter from this editor/publisher and place it on the wall above my desk and use it as an inspiration.

In summary, getting fired can be a good thing, it just depends on how you look at it.

Yours in bad writing and an optimistic future,

Paul Foster (not Seth Godin )

Related Posts:

Self-Limiting Beliefs

Implementing a Change in Your Business

Burn The Ships! Take Courageous Action In Advancing Your Business Strategic Plan