In May 2012, I “challenged” my team to cut costs and increase revenue. Actually, I flat-out demanded that they do it. Because of my commitment to my company’s mission, vision, and values, I like to think I can be pretty tough when I need to be. At least, I thought that was the case. Which is why it came as such a surprise to me to realize that I had recently let the company down by being…timid.
Let me go back a bit. At the end of 2010, my team and I came to the erroneous conclusion that we’d be profitable if we could just make a little more revenue in 2011. Always one to try to learn from mistakes, I revised my stance when we earned $1 million more in 2011 and still broke even, because we had spent it all. When, at the beginning of 2012, I started to hear echoes of the past about needing a little more revenue, I started to worry.
About that time, I had an enlightening dinner with a retired Army general who now runs a steel company. After hearing me lament about trying to earn a profit, he surprised me by saying something so obvious that had just never occurred to me. It was profound in its simplicity. He said that If a company was at break-even making 3 percent net, for example, in order to make one extra dollar of profit, it would either have to sell $33 more or cut the cost of goods sold by $1. It’s simple math: $1 is 3 percent of $33. So, if I wanted my company to make more profit, we’d have to sell 33 times the amount of profit that we want to earn, or we could just cut our expenses by $1. The general asked me, “What’s easier to do, Ralph? Raise sales by $33 or reduce expenses by $1?” Stunned, I asked myself, “Why didn’t I think of that?”
With a flash of inspiration, I came into the office the next day all fired up and insisted that my team cut expenses. I essentially said that if they didn’t do it effectively, I would do it myself. I did not mince my words, tiptoe around the bush, or skirt the issue. I was fierce! Over the next couple of months, under my scrutinizing gaze, expenses were cut…in some areas. For instance, the discretionary spend decreased from $42,000 to $23,000. That $19,000 less a month in expenses indeed made us more profitable.
Spurred on by the results, I encouraged my team to look for more places to save money. Meanwhile, I found the next cut in the form of a problem-causing salesperson with whom it was difficult for most people to work. The manager reflexively defended him and the importance of his work, even while admitting that the scope and content of such work was unclear. In the end, I basically had to order the manager to let the salesperson go. It turned out, as I suspected, that the salesperson didn’t need to be replaced—another large expense completely nixed with no repercussions.
Both of these events, amounting to more than $25,000 in savings, had occurred by June. It’s staggering, really, to think of how easy it was to cut the unnecessary salary and decrease discretionary spending versus the challenge of increasing sales by the same amount.
Then the complacency crept back in. We stopped looking for more savings, as if shaving off that little bit from our expenses was all we needed to do. Both the cut in discretionary spending and the removal of the team member were acts of commission by me and my team, but it was just one step, and then we basically sat back and got comfortable. We weren’t looking for more ways to save.
But the surprises, and the lessons, didn’t stop. In July, we unexpectedly had three team members turn in their notice all at once. Each of them was considered to be quite valuable to our team, and we were nervous about how the company would be affected by their departure. Well, we paid all four of those team members for the last time at the beginning of August, and guess what? Our team easily filled in any perceived gaps in functionality, further evidence of our needless spending. Moreover, for the first time in two years, we made a decent monthly profit. It was the highest profit we had earned in two years, because now we’re talking about hundreds of thousands of dollars. And, going forward, the projections are a lot more positive because of the changes that we’ve made. The record profit is not happening because of record revenue. We didn’t need to increase our sales by even one dollar. The record profit is happening because of a drop in expenses to the tune of many thousands of dollars.
It is eye-opening to me that the sudden absence of four team members does not impact our ability to produce revenue. We didn’t need them. The self-removal of the three team members was serendipitous, but in the case of the salesperson, I had only allowed him to stay with the company out of fear. And that is my confession, my apology, to you.
I could blame my managers for refusing to do the “dirty work,” but that would be hypocritical—They were only unwilling to do what I was also unwilling to do. How can I solely blame them? My managers were afraid to look hard at their team to determine if someone needed to be let go. I was craven for failing to order that a team member be removed after I had already made that determination. Going forward, I challenge all of us to learn from this mistake. I’ve long been aware that my managers have a hard time even constructively criticizing team members, let alone removing them, because it doesn’t seem like a “nice” thing to do to “good” people. But we must be willing to muster the courage to do what is best for my company. Right now, that means discontinuing the practice of paying team members who are not needed because we are fearful of being disliked.
In my business, the bulk of the expense that we incur every month is labor, because we’re a professional services firm. And yet, when we think about cutting expenses, labor is the last place we think to look. Not a single recommendation came from anyone else to save money by reducing labor costs. We’ve since come up with The Brazil Test, a way to analyze where there is excess labor in a professional services team.
The insight that I received as a CEO and as a manager is that I feel ashamed for not having the guts to remove those individuals earlier. How would you feel if you realized that you had basically been throwing away hundreds of thousands of dollars? It’s not just my money I’m talking about—I’m talking about my company, whose mission, visions, and values are so near my own because they are my own. I’ve been wasteful, distracted, and remiss. It wasn’t because I didn’t know better. I did. In fact, I’ve been writing about it and talking about for quite a while. But confronting someone with the hard truth is daunting, and I just didn’t want to do it. That is not okay. It is my job as CEO to make those tough decisions, and to ensure that all the people under me are also willing to step up to the plate and do what’s right for my company. It is unfair to team members who contribute a great deal to be damaged by people who don’t. We can’t afford to take them along for the ride. A lot of people are depending upon me to keep this company viable, and I’m not about to let them down. As I’ve said, I try to learn from my mistakes, and I’m not going to panic and run next time I need to consider whether someone belongs in our organization. All I’ll have to do to give me the courage is to think about the capital I wasted by not eliminating those four employees 12 months earlier.
It’s not just asking the hard questions, either. In fact, it may be even more so the following up on them. I did ask my managers if we needed all the people in our organization. It seemed like a lot. But I got the answer, “Yes, we need all these people.” Then I asked of someone in particular, “Do we need this person?” (It sure didn’t look like it.) And I’d get, “Well, we don’t want to let anyone go because it will ruin morale.” And I turned a blind eye. Well, you know what? Some of those people left, and our morale is fine. So, all the rather expensive fears of ruining morale, or offending people, or striking fear into the hearts of the remaining employees were unfounded. That’s precisely why people recoil when asked to let someone go—they don’t want to deal with any negative consequences, real or imagined. It’s easier to just let things continue as they are, even if they are hurting the company. Not so! And not anymore.
As an owner of the company, if I can’t admit to my mistakes, how can I ask anyone else to do so? I failed to do something that I needed to do, and now I’m publicly challenging myself to have more courage in that regard. The reality is that I was craven in my responsibilities as an executive, sworn to defend the viability of the company. It’s not an overstatement, in my opinion, to say that I was somewhat derelict in not asking or following through aggressively on those tough questions when I got feeble responses. I was a squanderer, and as a result, my company racked up a bunch of losses earlier this year.
My failure to act was the difference between profit and loss. And we are profitable this month not because of what I did, but in spite of what I failed to do. We are profitable because a few individuals gave my company a gift by voluntarily removing themselves from our employ and cluing us in to the fact that they weren’t needed in the first place. I’d rather be profitable because our costs are in alignment with our revenue.
From now on, I’m resolving to ask the tough questions and get the right answers for the health of the business and our continued profitability. One question I must ask myself every day when I go into the office: Am I going to be craven or courageous?
© 2012 Ralph Dandrea. All rights reserved.