Posts Tagged ‘leaders’

We’ve all heard this many times in our workplaces – “The customer is always right” and “All customers are equally important”. Well… I am going to challenge these in this post and will focus more on the latter one. This topic came up in one of my recent conversations with a publishing industry thought leader, Gordon Tibbitts, President, Atypon Systems where both of us were talking about the capacity of individuals and the choices we, as individuals, have to make in order to utilize our limited capacities effectively. At a point in the conversation Gordon said “You know what Himanshu, before you fight them… you have to choose your battles wisely”. One might ask how do you qualify what’s wise Vs. what’s not and the quick answer is – One that you think will produce the results you are after is the wise one to take.

Not all customers are made equal. Some customers are very rewarding, whereas some are pretty much a drain on your resources. For instance, I had a customer once who did not understand the value of Quality Assurance; as a result of that they did not have a clear QA management, a QA team or even any QA processes. The impact of that alone was that the project had many delays and not only impacted the customer in a negative way but even the vendors (us being one of them) felt the reverberations of the impact to a point where it affected (negatively) our bottom-line. If someone were to ask me about if the customer was a beneficial one for us as a vendor, the answer would, most unequivocally, be a resounding NO. These are the kind of customers that you don’t want!

Another very insightful point that Gordon made during our conversation was that it is a good thing not to ruffle any feathers if you see your competitor serving a high cost client. What made this insightful for me was the observation that Mr. competitor would face a lack of capacity if they are busy servicing high cost clients, and you don’t want to burn the midnight oil to get these clients from your competitors as this would almost be counter-intuitive to your productivity (and you’d be helping Mr. Competitor, too).

This also reminds me of a quote by Napolean Bonaparte:

“Never interrupt your enemy when he is making a mistake”

I’d like to acknowledge Mr. Tibbits for the pearls of wisdom he shared with me and I am more likely (than before) to think twice (or maybe even thrice) before I choose where I invest my resources… and I suggest you do, too!

This article was contributed by Himanshu Jhamb, co-founder of Active Garage and co-author of the upcoming book "ProjectManagementTweets". You can follow Himanshu on Twitter at himjhamb.

Tagged as: active garage, atypon systems, battles, clients, competitors, customers, equal, gordon tibbitts, himanshu jhamb, leaders, Leadership, wise, workplace

Is your change leadership transforming your company into a front-runner in your market niche or turning it into aversion of Dr. Frankenstein’s monster? How do you even go about answering this question? What’s your reference point? Is it reliable?

Mary Shelley’s protagonist, Victor Frankenstein, combined with three project management principles, scope management, quality management and risk management, can help answer these questions and keep you and your organization on the right track. By following these principles your organization’s performance will have two important characteristics – Sustainability and Stability.

Frankenstein

Victor Frankenstein suffered from an extreme case of hubris. He was caught up in appearances. He wanted all the glory. He pulled pieces and parts together to create something that breathed and moved and ended up being a demented testament to his limited genius. The monster lacked human spirit. In the end, his creation was the source of his downfall.

Scope Management

The human spirit that was missing in the monster stands out clearly when examined in terms of leadership (see the Leadership post, the first in this series.)

From that blog you may recall the magnetic north for the executive compass comprises the leader’s beliefs and values. For Dr. Frankenstein they were ego, pride, and vainglory. The team (society) was shut out. His only worry was about what he would get from the situation. With that attitude no matter how hard he worked failure was certain.

To be successful the needs of all relevant stakeholders must be included when creating a scope of work that is going to transform your company. This includes competitors as well as clients. Knowing the competition is just as important as knowing your customers.  Success also includes your needs being met as part of the outflow of providing opportunity for others.

Quality Management

So how do you know if changes are moving in the right direction? The answer is simple. Your work must be sustainable. A synonym for “sustainable” is “quality management.” With quality management deliverables are defined in measurable terms consistent with the scope of work. This is the same scope of work that includes all stakeholders.

Going back to the Leadership post, the plan is the arrow on the executive compass that points the way. Quality underpins the plans credibility. It is incorporated into the overall change strategy as well as day-to-day management.

Dr. Frankenstein’s compass was useless. It was unable to provide meaningful direction. His plan was unsustainable.

Risk Management

The final component needed is stability. A synonym for stability is “risk management.”

Dr. Frankenstein’s work lacked stability. He worked in isolation. He lost his connection with society. All his work was self-referencing.

Why is this so important? Recall the dancing terrain from the Leadership post. Complex situations have a terrain that is constantly shape-shifting. There is too much for one person to map reliably and keep current.

Success requires everyone in the organization to be eyes and ears for new, changing information that can keep the map current.

With an accurate map the organization, under your leadership, can plan how best to deal with threats and opportunities present. This is risk management. Executing the risk management plans provides stability.

In the next blog we will look at process management’s place in change management. If this blog has been beneficial and you would like more information or care to comment send me an e-mail at gwmonti@mac.com or visit www.ctrchg.com.

—

With over 30 years experience, Gary Monti consults/teaches/mentors/speaks in change management and project management with a focus on compassion and respect in the workplace. The work is grounded in project management, chaos and complexity theories combined with Myers-Briggs Type Indicator

Tagged as: active garage, business, Business Management, business planning, Business Strategy, Frankenstein, leaders, Leadership, management, possibilities, quality, Quality Management, Risk Management, Scope Management

Your journey through change can have a great deal in common with the experiences of Dr. Jekyll’s friend, Mr. Utterson from Robert Louis Stevenson’s The Mysterious Case of Dr. Jekyll and Mr. Hyde. Like Utterson, you see strange behaviors emanate from areas managed by people whom you’ve come to know and trust. At first there is a wondering if some outside force is affecting the person. A concern, a desire to check in and offer help sets in. Eventually the awareness develops that the strange behavior is coming from the trusted person himself.

Your plate was already full with external challenges. Now the human terrain in your organization is changing as well! (For more on terrain changes see the Leadership blog ). Let’s briefly explore this human terrain and examine Dr. Jekyll, Mr. Hyde, their dilemma, and possible solutions.

Dr. Jekyll

Normally, we all want to do well and fit in socially. We are wired that way at birth. An interesting twist to that wiring is it varies from person to person. We each are whole and have free will but we have a neurological bias towards how we see the world and process information. This means some tasks we take to naturally and others are more challenging.

For example, one person may be great with big ideas while another person excels at running things on a day-to-day basis. If we are lucky the parts of our psyche where we excel are consistent with what our parents, teachers, etc., consider good and get emphasized. That is Dr. Jekyll. He feels complete.

We launch our career and settle down to a particular life style through which we move as Dr. Jekyll. But what about those other parts? Do they just lie around? Hmmm…let’s explore.

Mr. Hyde

While Dr. Jekyll is developing, the undesirable or more challenging parts get pushed into the shadows as if they never existed. That is the Mr. Hyde. The longer Mr. Hyde is pushed down the greater the fear associated with using those traits.  Remember, Dr. Jekyll feels complete and in control. To compound things, the developing Mr. Hyde takes extra effort since traits are weak from under-development. The stage is set for the dilemma.

The Dilemma

People tend to migrate to positions emphasizing their Dr. Jekyll. It can be very upsetting when the business demands complex changes requiring Mr. Hyde to be invited to join the team.

Take the Dr. Jekyll examples from before. A team member may simply want to know what the rules are and his eyes glaze over at the thought of a strategy meeting. A manager excellent at strategizing gets bored with details.  Neither cares much for how the other operates. This aggravates you because with complex terrain changes you need associates to understand and work with each other – to at least see things through the other person’s eyes.

The Solution

The solution lies in your leadership. You may recall the executive map, compass and navigation method from the previously-mentioned Leadership blog. Navigating changing business terrains require everyone’s eyes and ears to build a credible map and plan. There is no telling what will be the source of valuable information. Blind spots are the kiss of death. Cross-training will help immensely.

Using the magnetic north of your executive compass, values and beliefs, can help. If associates have the same magnetic north then tap the bond present. Use the positive stress of what they can achieve to encourage them to overcome the negative stress of bringing Mr. Hyde out of the shadows.

Timing is important. Decisions must be made. Similar to the samurai in Morphing Organizations post your best decisions flow from a detached, empathetic awareness of the overall picture.

Determine the limits of what you can risk. With limited resources the solution will probably comprise some combination of:

• Supporting individuals in bringing more of the positive aspects of Mr. Hyde’s skills to the table;
• Adjusting the timetable for achieving goals to match the rate of change people can sustain;
• Bringing in outside resources to replace or augment current team members;
• Deciding to cancel or delay achieving some goals because the terrain is shifting too fast or the opportunity will disappear by the time the team is ready to work;
• What could be most harrowing and exciting, jumping to a new business terrain.

There are threats and opportunities associated with all these strategies. By sticking with your values and beliefs a plan will show itself.

In the next blog tips will be presented for creating a successful project.

I find this topic fascinating. If you do too and would care to comment or would like more information send me an e-mail at gwmonti@mac.com or go to www.ctrchg.com.

With over 30 years experience, Gary Monti consults/teaches/mentors/speaks in change management and project management with a focus on compassion and respect in the workplace. The work is grounded in project management, chaos and complexity theories combined with Myers-Briggs Type Indicator

Tagged as: Action, active garage, business, Business Management, business planning, Business Strategy, Dr. Jekyll, leaders, Leadership, management, Mr. Hyde, possibilities, Strategy

Executives leading change are in a situation much like Moses’ when leading the Israelites through the desert to the Promised Land. There is the desire for relief from the constant complaining. The loss of resolve or simply being tired can create a yearning for a quick fix or a simple solution. One of the most common forms of giving in to this temptation is clinging to misconceptions regarding technology and its benefits.

Two of the deadliest misconceptions are the belief technology by itself solves problems and the belief human nature changes with new technology. Sales agents can play upon this by proposing something that has the phrase, “All you have to do is…”

So, before you part with your hard-earned money for the latest-and-greatest system let’s look closer at these sweet, deadly poisons and their remedies.

Misconception: Technology Solves Problems

The assumption with this misconception is the problem and the solution are external to the people and organization. Somehow the problem and solution are separate from individual ownership of risks and responsibilities associated with change. Problems will go away by signing a purchase order or contract. A false sense of confidence develops proportional to the blindness present. The situation is similar to the person speeding down the freeway without a map. They don’t know where they are going but they sure are making great time! Typically, in the end everyone is miserable and unhappy. The client scapegoats the vendor and the vendor says the client provided no direction and needs change orders.

Remedy: Solve the Problem First

Technology doesn’t solve problems, people solve problems. For a successful implementation of technology in a changing environment first focus on the principles discussed in the previous two blogs:

1. Change Management #1: Leadership: Navigating with an executive map and compass
2. Change Management #2: Morphing Organizations: The executive samurai and complexity theory

Work with your teams to know where you want to go, build a map of the business terrain, build a plan, and organize your people to move towards the goals.

This begs the question, “If it’s not the solution just what is technology?” The answer is in the word itself. The root for “technology” is the Greek word “techne,” which means, “to craft, to build, to put form to, to bring into existence.” In other words it’s a means to an end not an end in itself. It is a tool for building the solution.

Briefly, what you want to do is solve the problem first (functional specification) then pick the vehicle for expressing it (technical design specification).

Misconception: Technology Changes Human Nature

This misconception assumes providing an external something will improve people’s attitudes, sense of responsibility, and performance.  Cooperation will spontaneously increase with new technology.

Remedying: Resolve Political Problems First

The reality is most people resist change and want to hold on to their personal agendas. I discovered this in the first few years of operating my business. Networks were at its heart. Some clients were a dream and others were nightmares. These differences influenced my answer to an apparently simple question, “What is a network?” The best answer, the one that made the most sense and was immediately understood was, “A network is a hard-wired political system.” Laughter ensued.

With change the concern for self increases and people become stressed. Stress can lead to unpredictable behavior. Even small, unpredictable behaviors can be quite serious in complex, changing situations. Why? Small behaviors can have a disproportionately large impact on a complex system by pushing it past a tipping point. For example, in November, 2001, at the largest airport in the world, Atlanta Hartsfield, a Georgia college student passed through security then ran back through it and down an escalator to get a camera bag left in a coffee shop. September 11, 2001, was two, short months ago. Security reacted quickly, shutting down the terminal. The domino effect shut down almost all flying in the United States for the rest of the day.

This brings up a second answer to the question, “What is technology?” The answer is, “Technology is an amplifier. Applied properly it can make a good situation better. Misapplied, it can make a bad situation worse.” In the end, the more time spent getting everyone on board with the change management process and associated technology the better.

In the next blog we will look at team building and dealing with the challenges of human nature.

If you benefited from reading this, have any comments, would like more information or are simply as interested in change management as I am send an e-mail at gwmonti@mac.com or visit www.ctrchg.com.

With over 30 years experience, Gary Monti consults/teaches/mentors/speaks in change management and project management with a focus on compassion and respect in the workplace. The work is grounded in project management, chaos and complexity theories combined with Myers-Briggs Type Indicator

Tagged as: active garage, Branding, business, Business Management, business planning, Business Strategy, leaders, management, possibilities, Rajesh Setty, Strategy, technology, www.activegarage.com

My article this week is about timing. There is an old saying “Experience is what you get, right after you needed it”.

There are things that you can time, the coffee maker, the bus schedule and so forth. There are many more things that you cannot time and attempting to time them is a mistake.

For Example: timing the stock market, similar to gambling in Las Vegas, where everyone knows the game is rigged and plays anyway. Attempting to time the stock market will eventually get you if you are playing alone. That’s why successful stock brokers get paid no matter the outcome of your transaction with them.

Timing certain types of projects is also a mistake. I work in the large scale software industry and if a project is an addition to an existing product, timing makes sense and indeed is necessary. If, on the other hand, we are building something completely new to the world, we cannot time it, and we are almost never able to resist the urge.

For things that are new to the world, much must be learned, therefor the time required is the time needed to acquire the knowledge to complete the project; be that brain surgery or a new software product. The knowledge and the skill must be acquired over time, a practice must be developed that retains that skill and then the project can be timed. Usually at that point you have completed at least the first pass and are ready to move on. Only after you have the experience can you time the next iteration, and even then, if you are doing something that is new to you, your team or the world, you need to take the time to learn.

I’ve said is almost all of my articles, you will not get where you are going alone, you need help. Help can come in many forms: parents, friends, acquaintances, government structures, business structures, etc. The number one thing that, as business people, we can find to help us are teachers. Find someone better at what you do than you are and learn from them. Learn everything you can, from everyone you can. Be discriminating in your teachers though, find the best, if you find someone better, switch. Move fast and learn to learn fast.

With learning comes obligation. As I said before, you need to learn from great teachers, you must have something to offer them in return like money, time, etc. In return you must spend some of your human capital to learn: time, lost opportunity, money etc. Education comes with a price, you must pay it. When you stop learning you are finished.

Another point about the obligation of learning; you must teach. There is a Buddhist maxim “To know and to not do is to not know”. Teaching cements your knowledge, it is a mechanism of our minds that when we teach we learn as well, the subject we are teaching. So to learn, you must teach, find a student, and be a student.

Go find something new to learn! Stretch your mind and teach someone else something new! Do it for yourself.

This article was contributed by Thomas Frasher, co-founder of Active Garage. You can follow Thomas on Twitter at tfrasher.

Tagged as: Action, Branding, Communication, execution, Intellectual Property, leaders, Leadership, possibilities, purpose, Return on Investment

Welcome to the final post in this 12-part series on QUALITY, titled #QUALITYtweet – 12 Ideas to Build a Quality Culture.

Here are the first eleven posts, in case you would like to go back and take a look:

1. Quality #1: Quality is a long term differentiator
2. Quality #2: Cure Precedes Prevention
3. Quality #3: Great People + Good Processes = Great Quality
4. Quality #4: Simplifying Processes
5. Quality #5: Customers are your “Quality Partners”
6. Quality #6: Knowing what needs improvement
7. Quality #7: Productivity and Quality
8. Quality #8: Best Practices are Contextual
9. Quality #9: Quality of Relationship and Communication
10. Quality #10: Inspection can be a waste if…
11. Quality #11: Driving Change Through Leadership

#QUALITYtweet Middle management is the glue

joins long-term organizational goals with short-term

improvement actions.

Strategies for growth and improvement that take a shape in corporate boardrooms are implemented on the floor by people at all levels. Middle managers translate these larger goals and vision into actionable tasks that teams execute. Middle management of your organization plays a pivotal role in mobilizing people to execute tasks in line with larger goals and values.

Most “Quality Improvement” literature focuses on “commitment from the top”. That is the first step. I would also like to emphasize on “commitment from the middle management” because they are a very important link between the top and the bottom.

The primary focus of the top management should be on nurturing the middle layer of management, for they can make a huge difference in organization’s growth. They form the culture and set the tone and behavior for people who execute. A strong middle management means strong organization.

Typically, the role of middle managers in quality management is:

• To ensure that all actions, tasks and behaviors are aligned to the broader vision and goals.
• To build a strong customer oriented culture by setting right examples.
• Not just to manage people, but truly lead them.
• To have a strong business acumen to facilitate right decision-making
• To be oriented to and driven by customer needs, hence building a customer-oriented culture.
• To take accountability of culture-building and not always look at the top for directions.
• To mobilize people to drive quality.
• To involve people at all level in team in process improvement
• To ensure right flow of information at all levels
• To manage employee behaviors and focus on team effort to deliver quality

Top management should formally delegate responsibility of process improvement to a group or an individual. If quality improvement isn’t anybody’s job, it is not surprising that it doesn’t get done.

People look at their leaders as role models who are expected to be setting right examples. Middle management behavior and attitude ultimately ends up shaping the overall organization culture. If you want to get a pulse of an organization, just observe how middle managers communicate and the content of communication. With positive communication and motivation, employees can be truly engaged to the mission of the project and hence the organization. Quality of communication and leadership with internal customers (people) is as important as that with external customers.

Managers tell stories that people believe in and adopt. Challenge for people at the top is to ensure that middle managers tell right stories, which ultimately builds the right culture.

Keep your middle management focused, and rest of the culture building activity becomes much easier.

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Tanmay is a Software Quality Management professional based out of India. He hosts QAspire Blog and tweets as @tnvora. He is also an author of the book #QUALITYtweet – 140 Bite-Sized Ideas to Deliver Quality in Every Project

Tagged as: active garage, boardrooms, corporate, growth, improvement, leaders, middle management, qaspire, quality, quality culture, role models, strategies, tanmay vora, tnvora

All companies have politics, but how you handle them can make or break your career.  In a sales organization where the atmosphere can be intense and stressful, politics within this segment can make or break a company if not handled properly.

There are the “How To Play Office Politics” rules, such as:

• Surround yourself with other ambitious colleagues in your organization and build a strong network of help.
• Find a good mentor.
• Ask for help and reciprocate.
• Perception is more important than reality.

And the list goes on.  Politics is something we can’t avoid, but in a sales organization, it is important to minimize it and instead work on having your sales professionals foster and build not only their relationships within your organization, but more importantly, their relationships with their customers to help grow the business.  Office politics can distract your sales professionals from focusing on their goals when they should instead be making offers in the marketplace to your customers.  Reducing politics within a sales organization and creating a clear vision for your salespeople can be done by:

-          Setting goals for your sales teams in a timely manner

There is nothing worse for salespeople to sell in to a marketplace without understanding what their goals are.  If you want salespeople to be productive, give them their sales goals sooner than later and have them be realistic.  Include them in this decision making process and get their input as well to help provide a line of sight that they understand and believe in.  If you’re late in providing sales goals to your team, you will quickly de-motivate them and they will lose trust in you as you are unable to keep your commitments to them.

-          Be clear on your compensation plan

Don’t complicate the compensation plan for your salespeople.  Unless you have multiple products and/or services with different margins that require a different payout for each, try to keep your compensation plan as simple as possible.  Salespeople should be focused on selling and not on trying to decipher their compensation plan.  If you have to change your sales goals or your compensation plan, reveal the reasons for the decision.  If you hide the reasons why their compensation plan has changed or you are unable to provide a clear understanding as to why  it changed you will start creating an us versus them environment.  Be open and honest.

-          Measure and publicize performance data

Salespeople tend to respect what is being measured and publicized for their peers to see.  Not only is it important to measure and publicize it, but meet with your salespeople on a regular basis and tell them how they are performing against their goals.  Provide constructive criticism that will help them grow.  Beat them down and disrespect them and they will not respect you or their goals.

-          Eliminate back-office tasks for your salespeople and let them focus more on selling

Sounds  obvious, but a report done by the The Dartnell Group in 1992 showed that salespeople only spent 50% of their time selling with the remainder of their time traveling and/or waiting for and doing paperwork.  In 2007, a survey done by Robert Nadeau of Industrial Performance Group found that this figure had dropped to 38 percent.  Granted some of the other 62 percent is spent on account management and relationship building with their existing customers, but too often it’s dealing with internal processes and procedures (i.e. correcting billing errors, dealing with internal processes/procedures to get pricing or contracts approved).  With companies expecting more from their employees today and demanding they take on more responsibilities, this figure may continue to fall.  Eliminate some of these responsibilities from them by either automating some of the processes or hiring extra help.  Free up their time to meet with their customers and sell.  It will pay off in the long run.

Sales success also depends on intangible factors that are difficult to quantify such as the salespersons ability to build relationships and connect with their customers.  Salespeople are a major factor in determining if an organization will fail or succeed.  Eliminating as many barriers for them and creating an environment where their input is valued will minimize the politics and in turn create a powerful sales organization.

This article was contributed by Robert Driscoll, co-founder of Active Garage. You can follow Robert on Twitter at rsdriscoll.

Tagged as: active garage, business, Business Management, business planning, execution, http://activegarage.com, leaders, Leadership, management, Robert Driscoll, sales, Sales and Marketing, Strategy, www.activegarage.com

Open-book management (OBM) has been around for over 25 years since Jack Stack implemented it at Springfield ReManufacturing Corporation in 1983 and wrote, “The Great Game of Business”.  The concept is simple, yet implementing it can be overwhelming and it could be years before a company starts seeing significant results.  Some have called OBM the most important management trend in the country.  Others see it as a possible threat to their business as proprietary information is shared with employees that could be spread to rivals, and if business is bad, could be demoralizing to employees.

So what is OBM and why implement it?

Open-book management is:

Giving employees all relevant financial information about the company so they can make better decisions as workers.  This information includes, but is not limited to, revenue, profit, cost of goods, cash flow and expenses.

The basic rules for Open-Book Management are as follows:

• Give employees training to understand the financial information
• Give employees all relevant financial information
• Give employees responsibility for the numbers under their control.
• Give employees a financial stake in how the company performs.

Companies that practice OBM teach their employees how to read and understand the company’s financials and get them to think like owners.  Not only are employees focused on increasing top line revenue, but decreasing expenses that are under their control, in turn having a more significant impact on the company’s bottom line.  A study done by The National Center for Employee Ownership in 1998 showed that companies that implemented OBM grew 1.66% faster than their competitors, and 2.2% faster if the companies created an employee stock ownership program (ESOP). 

Simply providing your employees with an ESOP will not guarantee increased revenues or profits.  Think of how many companies that have done this with little success such as United Airlines, Enron and WorldCom.  Granted, there were several breakdowns in all of these companies, but most of them operated in the labor tradition where most executives believed their employees disliked their work, were task oriented and couldn’t think for themselves, worked for only pay and security, felt they needed to be closely monitored and told what to do.  In this type of environment it’s an us versus them atmosphere between management and the company’s employees. 

There are four critical steps if you are wanting to implement OBM within your company:

1. Develop trust between management and the company’s employees.  Trust by management that their employees will make sound decisions with the information that is provided to them and trust by employees that their management is providing them with accurate information. 
2. Determine what the critical numbers that need to be measured are, both on a macro and micro level, and create a line-of-sight for what the company is striving for.  This will help employees understand how they individually can impact the organization as a whole. 
3. Eliminate the bureaucracy that can develop within organizations and in turn flatten it as much as possible to allow for employees to be heard, for information to flow more efficiently between management and employees and more importantly, for decisions to be made quickly.
4. Both the company’s management and its employees need to be patient and persistent as improvements will not be seen overnight.  Both sides will also need to be diligent in ensuring that in order for OBM to continue to prosper and succeed, they must keep their commitments to each other in improving the company’s financials and work as a team.   

I’ve had the pleasure of working for a company that implemented OBM, Atlas Container Corporation, and when implemented properly as it was there, it is an amazing thing to see and be a part of.  OBM is not for every company, but in today’s tough marketplace, it is something that, in my opinion, every company should look at.

To learn more about OBM and how it might help your company, please visit the following websites:

http://www.greatgame.com/

http://www.inc.com/guides/finance/23178.html

This article was contributed by Robert Driscoll, co-founder of Active Garage. You can follow Robert on Twitter at rsdriscoll.

Tagged as: active garage, Business Management, business planning, entrepreneur, execution, http://activegarage.com, leaders, Leadership, management, open-book management, Robert Driscoll, sales, Strategy, www.activegarage.com

The most frequent approach to valuing a sole practitioner’s private practice is the “Excess Earnings” Method.  In this method, excess earnings represent Total Practice Earnings (salary + bonus + company profit) in excess of the sum of “reasonable compensation” and a reasonable return on the practice’s Net Worth (Assets minus Liabilities.)  When the estimated value of excess earnings is multiplied by a factor (the multiple) reflecting the relative risk of the earnings stream, the result is goodwill.  Goodwill plus Net Worth equals the total value of the practice.

While the excess earnings method itself is quite straightforward, determining what constitutes reasonable compensation is anything but.  Even “experts” can draw vastly different conclusions on this topic.  Clearly, if there is no agreement on what level of compensation is reasonable, there can be no agreement on what is excess.  This post will seek to demystify this question and clarify the process.

The Excess Earnings Method is based on the principle that the vast majority of the value of a sole practitioner’s private practice is the capacity of the practice (the practitioner) to generate net income after all expenses.  This principle is common to virtually all types of businesses. The difference here is that this method requires that the earnings of the practice be compared to those of “comparable” practices.  The following scenario will help to illustrate the fundamental issue in this comparison.

You, the sole practitioner, have decided to take a year off and sail around the world on your boat.  {To simplify this example, we will assume that Net Worth = $0}  Your task as CEO is to hire a person with identical skills and experience to manage your business, and to provide all the services your clients require.  This individual would be neither an owner nor a partner in your firm.  What would you have to pay this person?

Let’s assume that you could hire an equally competent replacement for yourself for $150,000 per year.  If your Total Practice Earnings = $400,000, Excess Earnings = $250,000.  The difference between the non-owner’s compensation and your Total Practice Earnings reflects the benefits of ownership.  In other words, you compensate yourself at the $400,000 level not because that reflects market rates, but simply because you own the company, and you can.

While the concept and the basic calculation are easy to grasp and implement, the problem arises in determining precisely what constitutes market rates.  There are two ways to do so.

1. Find at least one economically similar practice that employs a practitioner of comparable skills and experience to you.  Where such arms-length financial arrangements exist, they represent best evidence.  Unfortunately, such direct comparisons are typically few and far between.
2. Much more common is to rely on the estimates of other sole practitioners in your field as to what such a non-owner employee would earn in their practices.

The lynchpin of both avenues of inquiry is the identification of one or more economically comparable practices.  By what standards does one determine comparability?

First, the practitioners must be practicing in the same or closely related specialty, however unusual or thinly populated.  To compare a transplant specialist with a cross section of general surgeons would be of little help.

Second, the backgrounds and credentials of the practitioners must be quite similar.  This does not mean that they went to the same medical school or had virtually identical residencies.  However, one cannot very well compare someone who is board certified in a specialty with one who is not.  Nor is one likely to find a helpful comparison between individuals whose time in practice varies by 15-20 years.

Third, economically comparable practitioners must function at about the same skill level, and be so recognized by their peers.  Fortunately, the narrower the specialty, the better known are the few leading practitioners and, therefore, the easier it is to obtain such judgments from colleagues.

It is important to keep in mind that we are not comparing the Total Practice Earnings of similar practice owners.  That would defeat the basic objective, which is to determine the incremental increase in Total Practice Earnings resulting from self-employment.  Only by making that determination can we determine the value of ownership in the private practice and, as a result, the value of the practice itself.

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This article has been contributed by Steven D. Popell CMC (Certified Management Consultant.) Steve has been qualified as a business valuation expert since 1974, and has published extensively on this topic. CMC, a certification mark awarded by the Institute of Management Consultants USA, represents evidence of the highest standards of consulting and adherence to the ethical canons of the profession. Steve was a 2007 winner Collaborative Practice California Eureka Award for contributions to Collaborative Practice in this state.

Tagged as: active garage, assets, Business Strategy, Business Valuation, CEO, Compensation, excess earnings method, leaders, liabilities, practices, Reasonable compensation, renumeration, salary, steve poppell, valuation

We’ve all heard the saying of how it costs more to find a new customer than it does to keep one.  Every wonder why?  If you just made the first sale for your company to a new customer, think about how much time and effort you put in to your sale and how many meetings you had with your client.  Now think about the amount of effort required to make a sale to your existing customers, but more importantly, the ones that see you as a trusted partner.  Considerably less because your customers not only see your company’s products and services as a vital part of their business’ success, but your opinion as well, because you’ve taken care of past breakdowns for them and eliminated future ones.

Too often, we salespeople feel that once we make a sale to a customer, we’ve opened a space of possibilities for future sales.  This is partly true, but you need to understand what kind of relationship you have with your customers as well.  A white paper written by CSO Insights called, “Keeping Up With The Buyers: The Impact of a Great First Impression,” does a great job of defining the five levels of customer relationships that vendors have with their customers.  They are:

1. Approved Vendor:  We are seen by the majority of our customers as a legitimate provider of the products or services we offer, but are not recognized for having any significant sustainable competitive edge over alternative offerings.
2. Preferred Supplier:  Based on our marketplace reputation and past dealings with our customers, while competitors may offer alternatives, we are normally seen as the preferred vendor to do business with. 
3. Solutions Consultant:  Based on a specific set of product-related, value-added knowledge or services we offer, our customers view us not only as a vendor, but also as a consulting resource on how to best use our product s or services.
4. Strategic Contributor:  Above and beyond the products and services we offer, our customers view us as a source of strategic planning assistance for dealing with broader-based challenges they are currently facing.
5. Trusted Partner:  At this highest level we are seen as a long-term partner whose contributions – products, insights, processes, etc…-are seen as critical to the client’s long-term success.

While many of us might think we are strategic contributors or even trusted partners, we might actually not be one even though the products or services you are providing to your customers are key or critical to their business.  You might just simply be the low-cost provider.  If your customers continue to tell you that it’s part of their company’s “business policy” to bid out the services to a minimum of 3 vendors, you’re either only an approved vendor or preferred supplier.  Until your customers start including you in meetings and asking for your advice on how to craft a solution while it’s still an idea or concept to them, you haven’t moved up the sales ladder. 

Becoming a strategic contributor or trusted partner to your customers takes time.  If you continue to offer them uncommon and powerful solutions that take care of their business concerns, they will start trusting you more and will think of you first as concerns arise.  As a relationship of trust is developed and continues to grow between you and your customers, you will find that the effort on making sales to them will diminish.  More importantly, your customers will seek you out as their trusted partner because the cost of doing business and the time for you to develop a meaningful offer that addresses their concerns has decreased.  This is when you’ve moved up the sales ladder.

This article was contributed by Robert Driscoll, co-founder of Active Garage. You can follow Robert on Twitter at rsdriscoll.

Tagged as: active garage, Business Management, Entrepreneurship, execution, http://activegarage.com, leaders, Leadership, management, possibilities, Robert Driscoll, sales, Sales and Marketing, Strategy, www.activegarage.com