By Josh Patrick, CFP®
As a business grows and matures, functional systems are put in place. In a vending operation, some of these areas might include bookkeeping, maintenance or route service. Each one of them has a very specific purpose-to help the company run its mission on an effective and efficient basis.
Adam Aardvark has spent the past five years putting together very detailed operation plans for each of the areas of his company. He has instituted route commissions for his drivers and has manuals for operations in each of the functional areas of the company. Recently he’s noticed that his functional areas are not working well together.
Adam’s problem could stem from what I call “silo mentality”. This is where people in a company are more concerned about the efficient functioning of their particular area than how the company provides service to its Customers or how the company as a whole functions.
This issue stems from three areas. First, we often evaluate and reward our employees on how their individual area functions. Second, there is no economic incentive to have the company as a whole work better. Finally, it’s often inconvenient for people to work with others in different areas of the company.
A goal then becomes one of getting the different functional areas to work together on a day to day basis.
Adam realized that his bookkeepers could help in improving productivity in the company. They were the ones who saw how much merchandise was being put into his companies machines. For some reason, they never volunteered ideas on changing route schedules for better company productivity.
We all want to think our employees always have our best interest at heart. In many cases they do have the company’s best interest at heart, but they haven’t been given information or a forum to help the company get better. In addition, there is often no economic incentive for your people to make operations better.
Some companies share economic information with their employees. I have always been a huge proponent of sharing financial information. I also know that the information has to be both meaningful for the employee as well as have an economic incentive tied to it. If you want to make your company better you must have both information to share and a reason for your people to pay attention to that information.
Adam had decided to share financial information with his people last year. He was holding quarterly employee meetings where he was reviewing the company’s profit and loss statement as well as its balance sheet. He was pleased to see that some of his people were paying some attention to how the company was doing, but he was disappointed with the lack of specific suggestions on things that could be done to make the company more profitable. Adam had heard that he should integrate a bonus program with sharing information, but he hadn’t done so yet.
Adam has four problems. First, the information that he’s sharing is important but not meaningful to the majority of the people in his company. Second, there was no advantage for his people to inconvenience themselves by working with other areas of the company. Third, there was no economic reason for his employees to use their brains to make the company better. Finally, there was no forum established in the company for making it better on a regular basis.
I believe you do want to share your profit and loss numbers with your employees. There are some key numbers in your basic financial statement that are important for a company. For example, gross profit in many companies is a key driving number. For others, gross sales could be a key number. In monthly or quarterly review meetings you want to continually reinforce why these numbers are important and what it means for the company to have improvement in these areas.
The challenge with only talking about profit and loss or balance sheet numbers is that most people in your company won’t feel they have any control over those areas. Or, they will feel that there is nothing they can do about it.
In our example with our office workers, they may understand that a route driver putting thirty dollars worth of merchandise in a machine is a problem. They will also often see that as a problem they have no control over. An office person may have made a suggestion about improving route productivity, but had no response from another area of the company.
It’s important for Adam to set up a system within his company where inter department communication happens on a regular basis. The best way for this to occur is to start developing metrics (measurements) that are drivers for improving company P&L and balance sheet areas. For example, if Adam started measuring dollars of merchandise put in vending machines per service, he could start a program to decrease direct labor costs.
The office and route department could work on this project together. The office would be involved because they see the raw information. The route department would take that information and institute changes that would then be sent back to the office for changes in route schedules.
To make this program a reality it’s necessary to have regular communication between the two areas of the company. This allows both parts of the company to work together to make the entire operation better. Charting and posting information allows you to show the results to your people.
Adam realized that by setting up this program he would see a significant improvement in productivity which would positively impact his bottom line. When he announced the cross area programs he was disappointed by the lack of enthusiasm for the program. When he explained how it would have a positive impact on the bottom line he saw no enthusiasm from his employees.
Adam had forgotten two things when he designed his project. He was making life more difficult for his employees and there was no economic reward for them. After talking with several of his key people Adam realized that no one in the company was really excited about making more money for him. He realized that he was going to have to share some of the company’s improvements through monetary rewards for his staff to get on board and give their best effort towards the changes he hoped to see.
Your employees are happy to make the company better. They will even sometimes go out of their way to make their life more difficult to do so. But, to get their attention and full cooperation they need to have an economic incentive to make the company better.
In our example above the office will have to work harder to track and make suggestions about route productivity. Adam is going to ask his office people to pay more attention to the amount of merchandise the route drivers place into each machine. If an economic incentive is tied to that request, he has a much higher probability of having the needed actions taken.
When designing the bonus system think about doing it on a company wide basis. You will find that when bonuses are based on company wide performance, the silos start to get broken down. In addition, peer pressure comes to bear. If the office people don’t see changes in route service to have higher productivity they are likely to pressure the route managers to start making changes. Remember, better productivity means better profits for the company which provides more money for everyone.
Adam and his management team developed metrics that led to improvements in the company’s profits and loss and balance sheets. He also developed a bonus program that included everyone in the company based on key company wide numbers. A year after he put the programs in place he saw his route cost decrease by 15% which added 1.5% in additional profits to his bottom line.
The steps that Adam took were as follows:
- He developed a new set of measurements to track that led into improved company wide performance.
- He put together weekly meetings to track and develop action steps that improved the performance.
- He communicated through charts and graphs the improvements that were being made.
- He tied the improvements into conversations about the economic performance for the company.
- He instituted a company wide bonus program that rewarded improvements in profits and balance sheet areas.
- He encouraged the silos in his company to be broken down by fostering regular communication between different areas of his company.
When Adam took the steps listed above he saw improvements in his bottom line. In addition he now found that the different parts of his company were communicating on projects much better. He even saw his office people going out of their way to improve company performance. If you employ the steps above, you too could see the same type of improvements.