The Best School of Leadership

Periodically, I get asked where I think the best place is for someone to learn leadership.  Is it Harvard?  Stanford?  The U.S. Army?

Without hesitation, I tell them "spend a year running a volunteer organization, any volunteer organization with more than ten people."

People management has two sets of incentives, the proverbial carrot and stick.  On the carrot side we have pay, rewards, etc.  On the stick side we have things like authority, the ability to fire, etc. 

As I've mentioned before, my son, Alex, is in the Boy Scouts.  In my experience, the Scouts are one of the best groups around for teaching 11-18 year old boys how to lead.  In working with the Scouts, it's always interesting to watch boys who have just been elected to their first patrol leader position.  Almost always, when he wants his patrol mates to do something, the new patrol leader starts by issuing orders.  This rarely never results in compliance at which point  the Scout shifts to the "do it or else" approach.  The Scout is then often shocked and frustrated when this doesn't work either at which point he experiences a sinking feeling as it dawns on him that he has absolutely no way of forcing the other Scouts to obey him and they know it!

This pattern is not just confined to the boys.  I've seen the same pattern in companies, but with a little different outcome.  In this case a new supervisor issues orders and gets partial compliance.  Any resistance or lagging is quickly overcome by a "do it or else" conversation.  The result:  it works!  And that's too bad because that person never gets to experience the sinking feeling that the Scouts do that ultimately sets them on the path to good leadership.

Consciously or not, the advantage the new supervisor has over that Scout is the authority of the company to back up his orders.  In spite of the move towards more egalitarian organizations, at the end of the day, the supervisor is evaluating the employees and through this process, controls raises and assignments, his means of ultimately forcing his employees to obey him and they know it.  Unfortunately, because it works, many new supervisors become overly reliant on wielding the stick and little practiced at dangling the carrot except in the crudest, clumsiest way.

My first chance to experience that sinking feeling was leading a volunteer organization in college, as president of our student chapter of the American Institute of Chemical Engineers (AIChE).  We had a real budget, some real goals that the university wanted to have us accomplish, and a bunch of very busy student volunteers.  There was no stick to be applied and precious little carrot (i.e. no pay or benefits).  Our volunteers were a mix of the highly motivated and barely present, exceedingly competent and the struggling to make it.  We didn't have the luxury of a rigorous selection process that would only admit the world-class, self-motivated, best and the brightest.

Honestly, I can't even remember what we ended up accomplishing that year, but what I do remember is how much I struggled, sweated, and really learned the art of motivating people without having the crutches of authority, pay, and promotions to lean on.  They are the same lessons the smart Scouts learn bit by bit once the shock and despair have left them.  And they are, unfortunately, lessons that some working managers never learn because wielding authority, pay, and promotions work well enough for them to get their job done (although how well they work for their employees is another matter).

So what are some of these secrets?

• Remember that your job is not to control, it is to motivate and enable your team to win - In a volunteer organization, you need them at least as much if not more than they need you.
• Assume the best in people until proven otherwise - We all like to be thought of in the best light, even if our efforts don't quite live up to our ideals.  Or in the words of motivational speaker Ian Percy, "We judge everyone by their behavior.  We judge ourselves by our intentions."  Part of being a leader is helping others live up to their ideals, not rub their noses in their faults.  But if and when the flaws appear, depending on what these are, these become the basis for a either a personal development plan...or termination (see below).
• Show appreciation for efforts, not just results - Do you believe that the only thing that matters is the result? Well call me soft, but I don't buy it. End results depend on a variety of factors, not all of which are within your team's control.  What your people do control is their efforts.
• Keep everyone in touch with the common mission and values of the organization - When your people are head down, disagreements are brewing, and tempers running hot, you need to pull everyone back to the organizations goals and the values.  Which means you have to have some.
• Maintain your sense of humor - No one wants to work in a cheerless, grim environment day after day under a prickly boss.  And volunteers won't; they'll vote with their feet.
• Be clear about the desired results; be flexible about means & methods - I.e. don't micromanage.  The onus is on the leader, to offer a clear vision of what needs to be done; those that do a poor job of this, end up having to micromanage. People need to be able to interject a bit of themselves into their work or they don't own it.
• Let people make mistakes if it helps them learn - Improvements come when people are not afraid to reach out.  Give them room to try.
• If when the mistakes happen, don't punish - Instead, get on the same side of the table and problem solve.

But lest you think this is all sweetness and light, my last lesson:

• If at the end of the day, if someone is not working out, remove them with as much dignity as possible, but do it ASAP - Unfortunately, for a variety of reasons, even in a volunteer organization, some people don't work out.  It could be a lack of skills, a conflicting vision, a poor fit, or even worse (e.g. theft, lack of integrity).  If it gets to the point where they are doing more harm then good, you need to remove them.  At the end of the day, as a leader, your duty is to the team as a whole.

I close this post with a quote I heard over the weekend at a Scoutmaster leadership training session:

A leader is best when people barely know he exists, not so good when people obey and acclaim him, worse when they despise him....But of a good leader who talks little when his work is done, his aim fulfilled, they will say, "We did it ourselves." - Lao Tzu

Service Not Surveys

Lately it seems like you can't shop anywhere without being asked to fill out some survey.  The ones that drive me crazy are "Customer Satisfaction" surveys.  Maybe I'm cynical, but I swear there is an inverse correlation between the length of the survey versus the quality of service delivered.

A case in point: I own a Subaru SUV and overall I'm pretty happy with both the car and the the dealer.  In fact, this is my second Subaru from this dealer.  They had a nice no nonsense sales process.  No "I have to get approval from the sales manager" baloney.  But happy as I am with the sales side, I'm less than impressed by their service department.

A few weeks ago, I was driving down Highway 101 when my "check engine" light flashed on.  Normally, I ignore these as it usually turn out to be something minor, like a malfunctioning knock sensor.  But in this case, Subaru tied it to several other idiot lights. The end result was my dashboard flashing like a Macy's Christmas display.

Fortunately (or so I thought), I was only two exits from the dealer.  What luck!  They should be able to figure out quickly whether or not this is a real issue or the usual trivia. For those of you familiar with the "check engine" light problem, you know that it takes a mechanic about a minute to plug a handheld device into the car and diagnose what the potential causes are.

I pulled into the dealer service department.  Now this is the same group that advertises its concierge type service, white glove treatment, free car wash after every service etc. to justify their premium prices.  This is also the dealership that routinely sends out an annual "customer satisfaction" survey.

The service representative was busy so it took several minutes to get his attention.  No big deal;  after all I'm a drop in.  But once I finally got his attention and described the problem, instead of just plugging a handheld device into the car and figuring out whether I was going to need real service or not, I got some sob story about how busy they were and did I want to be scheduled for an appointment next week? "Maybe, " I replied but first I wanted to know if it was potentially something for which is was worth scheduling an appointment.  The dealer is ten miles from my house; an appointment involves dropping the car off for the day and arranging for a ride to and from work.  I also have to find a day when I don't have any off-site meetings.  This is not something I want to do if it turns out to be a faulty knock sensor or some other triviality.

No luck.  The guy wouldn't budge.  So I didn't schedule an appointment and drove off.

Later that day, I decided to visit the Jiffy Lube four blocks from my house, where I get most of my routine (and substantially cheaper) service done, on the off chance they might be able to diagnose the "check engine" light.  Again, all the mechanics were busy, but the manager took the time to stop what he was doing and talk to me.  Thirty seconds later, he has a handheld plugged into my car.  A minute later he asks me to pop the gas cap cover.  He twists the gas cap into the fully locked position and resets the light.  Problem solved.  He then explains how a missing or loose gas cap is a common cause of a false "check engine" lights without once even implying that I'm idiot for leaving the gas cap loose.

Talk about two totally different ten minute interactions.

Being in the service business myself, it once again reminded me that customers are PEOPLE, not an abstract marketing profile, how important it is to treat people as you with to be treated and how important these little interactions are to keeping customers (i.e. PEOPLE) happy. In Subaru's case, while I love the cars, you can bet I'll continue to look for alternatives to their very expensive service department.  In the case of Jiffy Lube, that manager once again cemented a 15+ year customer relationship.  I should mention, that this is not the first time this group has done some little extra for me that keeps me coming back (on top of their quality work and fair prices).

And its not just in service businesses where this is important.  It is the rare product that requires zero support.  If you analyze your product from a whole product standpoint, you'll see lots of places where a support person at your company needs to interact with a real live human being that is a customer.  SaaS ("software as a service") has been touted as one area where everything is customer self service, but I've found that nothing is further from the truth.  The good SaaS companies understand this.  For example, one of the reasons I like Intuit Payroll (formerly Paycycle) is that their chat help line is great (and I hate chat and instant messaging).  It's convenient, timely, and so far, they've always been able to solve my issues. Think about that if you're a SaaS company striving to reach that magic +90-95% renewal rate that seems to be a threshold for survival.  And in addition to being critical to retaining customers, good service can be a formidable barrier to entry for smaller companies, difficult to replicate by a larger, more bureaucratic competitor.

Now in this case, both Jiffy Lube and Subaru have customer satisfaction surveys.  Jiffy Lube's was a quick online thing which I was happy to fill out.  Subaru's is an annual booklet and bubble chart questionnaire that I expect will arrive in the next few months.

I've scheduled it for an appointment  with my round file.

Determining Your "Natural" Growth Rate

4th and final post in a series on Strategic Growth

As we close this series on Strategic Growth, the question arises, how does one determine a company's inherent growth rate?  While the answer "it depends" is accurate, it's not terribly useful.  To get a useful answer, let's ask the question "what typically constrains company growth?"

In most cases, the answer is hiring and growth capital, with the latter often, but not always, being the restriction on the former.  Given this, there is a financial planning tool called the Sales Sustainable Growth Rate Model that can be used, under certain conditions, to give a rough estimate of the funds required for growth,

******** ALGEBRA ALERT! ********

The Sales Sustainable Growth Rate (SSGR) Model

The model stems from the premise that the supply of funds must equal or exceed the demand.  Demand for funds is caused by growth (SSGR).  Dissecting equation (3), the sources of funds are retained earnings, invested assets, debt, and new equity.  All figures are calculated as percentages.

The main limitations of the model are that the ratio of sales to assets (or investments) is relatively stable over the planning horizon.  This means that the model degrades if there is a large build up in capital assets (causes the model to overestimate SSGR), high inflation, or time horizons over five years. Note that this model is most useful for a company with existing operations and operating cashflow vs. an early stage company still trying to reach cashflow breakeven.

The net upshot of the model is that the growth in the total equity base must meet or exceed the growth in sales.

Equation (1) shows that SSGR can be financed from two sources:  funds raised from equity (NER) and "internal" funds (earnings and debt). 

The Internally Sustainable Growth Rate (ISGR) in Equation (2) represents the sustainable growth that the company can get without giving up control to external shareholders.

Equation (3) shows how ROE is related to profit after taxes, debt financing level, and interest paid on the debt.  Debt is commonly used to lever up ROE. (Because debt does not result in ownership transfer, it is considered internal financing.)

Internally Sustainable Growth Rate
For reasons that will be made clear, growth funds for an early stage startup almost always need to come from a new equity infusion, whether it is "friends and family" or institutional money.  But for cash generating businesses, growth can potentially be funded internally.

Focusing on ISGR and rearranging key terms as in equations (4) to (7), ISGR can be increased by:

• Increasing profit after tax
• Decreasing or eliminating dividend payouts
• Increase financial leverage (more debt)
• Increase operating leverage (e.g. improving inventory turns)

Obviously except for operating leverage, none of this works for early stage startups running a loss without access to debt (and consequently not making dividend payouts), hence the need for new equity issuances.

How Google Stacks Up:  An Example
To show you how it works, I've plugged Google's numbers into the model.

From a financial perspective at least, Google has sufficient resources to fund its projected growth without needing to issue additional stock with perhaps a bit of headroom.  Does this indicate that Google could be more aggressive or that some other constraint is holding them back?  Maybe.  Or maybe Google management is just erring on the conservative side in preserving cash for downside risk management in the still uncertain economy or to retain flexibility in its acquisition strategy.

Strategic Growth in Summary
To conclude, the question you should be asked yourself is what is the right growth rate for my company?

• What are my industry competitive dynamics?  Do they require fast growth? Or do we have a decision to make?
• If controlled growth is an option, what are our barriers to entry?  Or what barriers do we need to erect?
• Is controlled growth desirable?  Why or why not?
• If controlled growth is our objective, how will we limit customer acquisition?
• If fast growth is our objective, are our business systems, people, and finances adequate to support it?  What plan is in place to ensure that we don't allow product/service quality to fall apart?

Finally, remember to revisit this question periodically.  Your company and your industry will evolve over time.

"Freedom from Labor" Day

In the last two weeks, we've gotten the kid's back in school and taken our final summer outing, a Boy Scout and family camping trip to Lake Del Valle.  Now I'm tired and look like this (although with less fur and shorter ears):

The 5th member of the Oh Family:  Cottonball Oh

Thank God for what I call the "Freedom from" Labor Day holiday.

No post this week.

Hope you enjoy the long weekend as well.