Bates Creek Consulting – Page 2 – Helping growth firms succeed

The map is not the territory – Setting up a Chart of Accounts

Accounting is a numerical history of a business. We summarize the millions of transactions into a cogent one page document that tells the status of the business. The financial statements however, are not the same as the business. Alfred Korzybski said that “the map is not the territory”, referring to the object and its’ representation. A financial statement summarizes, and a summary leaves out details. Tracking which data goes where is the job of the general ledger and chart of accounts.

The core of reporting is the chart of accounts. Financial statements summarize sales into one line. Accounting might have half a dozen sales accounts and hundreds of departments, which all roll up to one single number – sales. These accounts are used to better understand the summarized information. Sales are reported net of returns, but accounting departments track the returns in a separate account so that department heads can see if return rate is trending up or down. If your ERP or sales software tracks returns, you probably don’t need a separate account for tracking that information.

However, accounts seem to proliferate. Charts of accounts grow over time – someone wants to know some summary fact of the business and the systems that generate that data don’t supply the summarized data to management. Commonly at retailers it is a POS (Point of Sale) system that runs the cash registers and reports summary data to a sales data warehouse or general ledger. Usually they only report data to the general ledger, so operating data is sourced from accounting records.

In an e-commerce firm it is the order entry and fulfillment systems, which may not be connected with purchasing or payroll systems. In addition, management has come to rely on the controls put in place in a general ledger system. In the 1990s we used a lot of database query tools that would often give different answers based on query design, so one meeting might have three different set of numbers based on who’d written the query.

The use of data warehouses should decrease demand for general ledger detail. Sales splits can be done in more detail using a database with all the relevant sales data, rather than the general ledger which might contain only weekly summary data. However as the needs of the company change, often it is easier to just add an account number than reconfigure a reporting system. Data warehouses – an idea that dates back 20 years – still don’t function as well as they should. So the g/l becomes a stand in.

I’ve typically used a couple of hundred “natural” accounts for businesses from $5m to $500b in revenue. An account like “sales” or “payroll” are called natural accounts. These are modified by department code and sometimes other codes for cost accounting or for projects. This can result in thousands of combinations. In a typical retailer with 100 stores they would support 60-70 natural accounts, for 6-7,000 combinations. Add in district and regional codes you could reach another 1-2,000 combinations. Designed right that level of detail is easily handled by your accounting team. Designed wrong and you spend hours trying to reconcile the source systems to the general ledger. Which adds cost without benefit.

Manufacturers sometimes have additional codes for production cost allocations. If you are running the same line in two buildings, under one department, you might also use a location code. All these codes end up making a chart of accounts pretty complicated. This is worsened if you end up layering on the complexity as you go, rather than plan it in. Knowing going in you will likely need a location or a production line code and planning for it makes a big difference later.

Much of the complexity of the chart of accounts depends on what information you will want to retrieve. Simple natural accounts and department codes can get a business a long way. Accounting codes begin to change if you are running project-level or fund accounting. Sometimes you can keep the reporting structure out of the chart of accounts. For instance, if you have a district manager with 10 units, you likely don’t track the district code in each transaction, but roll up the district report by selecting which units are in a district when you summarize the data. This is the default mode for most firms who report with excel. Changing the unit roll-up when a district manager leaves the firm is not Excel’s strength. Excel’s data summarization and analytical tools have improved, but realistically, converting from a trial balance to report is an area ripe for errors.

If you have online reports, managing the access in an ERP system can be a hassle, unless you have some hierarchy built into the system. Imagine allocating 600 units amongst 60 district and 10 regional managers? If each of the units had an assigned district and regional code, the reporting would be much easier to manage and control. With the rise of reporting dashboards, this feature is almost always built in.

The general ledger and financial statements are summaries but useful ones, where similar data is grouped, analyzed and decisions can be made. Too big a chart of accounts and you will spend hours managing complexity rather than providing information. Too small a chart and you will your time breaking out the details you need. A map is a representation of a territory which can be held in your hand and used to navigate. Good design and a thought for the future of the business will help develop a solid organization for your accounting data so that it will supply you the information you need to navigate.

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Dr. John Zott is the Principal consultant at Bates Creek Consulting. John is the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect consumer businesses. If you are looking for a CFO for your e-commerce/retail/consumer company, or are a former student, colleague or would just like to connect – reach out.

Uber and Reality.

A friend recently interviewed with a startup where the senior management group was upset that the CFO was requiring receipts and documentation for the use of company credit cards. They had decided to replace the CFO because they didn’t want to be troubled by providing receipts.

Sooner or later this company – like so many others – will face reality. When and how they will face reality is unknown. They may run out of cash, suffer a major defalcation or the company is sold, goes public or matures and profits become tougher to obtain. Providing receipts will be the least of their problems.

Facing reality is what Uber is doing now. The Board finds itself without much of a senior management team, no back-up plan and a rapidly sinking investment valuation. Changing CEO’s isn’t easy – I’ve been through the drill a couple of times. Planning is essential and thinking probabilistically is critical.

Thinking probabilistically isn’t hard. Using a decision tree is a good way to start. The tree in this case might have had three branches depending on the outcome of the investigation. Branch 1 would be no or only a minor finding, branch 2 would be a significant finding and branch 3 a major finding. The odds of branch 1, no or a minor finding would be low, they’ve had steady turnover in the ranks and there have been a lot of negative disclosures, I’d estimate 15%. The odds of branch 2 “significant” would be high, I guess 60% . A significant finding would require some senior turnover and changes in the culture.

Hiring a big deal law firm and a consulting firm to probe 3 million documents and survey employees anonymously isn’t cheap. A significant finding is most likely. Finally the third leg would be a major finding where the top management team needs to be fired or a significant restructuring undertaken. That accounts for the remaining 25%.

When the CEO decided to have an investigation of sexual harassment claims in February, there was a distinct possibility that the result would be significant or worse. Facing a 25% potential turnover in the top management group should have focused the Board on a backup plan. When Mr. Kalanick’s mom passed in a boating accident at the end of last month the odds of turnover increased.

Review Covington & Burling’s report recommendations (see here) and then guess at what facts justified these recommendations. The first set of recommendations states that the CEO’s responsibilities need to be reassigned. The second set aims at Board governance; which should have figured out the problem in the first place. The recommendations suggest that they found significant problems with leadership. Uber is facing reality now.

We used to joke about managers who’d used the “force”. The “force” was an unreality field that surrounded the manager, and within that field they could manipulate facts and time to justify whatever they wanted to do. Eventually since there are not Jedi’s in business, reality catches up. I worked for a CEO who ran the business by anecdote even when we had facts. We spent months on the wrong strategies based on incomplete understandings. He’d repeat the same anecdotes in every meeting, certain of his rightness, even as the business crumbled. Reality didn’t penetrate until he was fired in a crisis. The company never recovered.

I am unhappy when capital is wasted, but I really dislike the toll the failure to face reality takes on the people who work for these businesses.

I worked for a company that opened up a Texas operations center, reproducing it’s California central office. The strategy was to be more local in sourcing. After a year or two, the CEO realized this was a bad strategy, and ended up shutting down the office. The sad part was one of the junior people who’d moved their life to Texas was so upset by the closing and the layoff, committed suicide. Obviously there were other issues in this person’s life, but as senior executives, we shouldn’t forget that decisions have consequences beyond return on capital.

VC’s and PE firms are focused on return of capital. Board members are usually required to do what is right for the company. VC and PE firms have come up with investment vehicles which absolve themselves of any fiduciary responsibility to the company. They are held accountable only to investors in their funds, not to other investors or stakeholders. Uber’s board had full confidence in Mr. Kalanick (see here) in March even while turnover of senior executives and the search for the COO continued. The company never hired a COO or a CFO and turnover still continues. All that being said, the “money” Board seats appear to be more rational than the founder’s board seats.

Uber’s board is dominated by the founders with super-voting shares (see here). This structure supports founders regardless of competence. Facebook and Google have this structure but they are primarily technology businesses. Uber is challenged because it is a people business, like Target or McDonald’s and the founders are not competent executives. Uber has 5-10x more employee/drivers than Facebook has employee/contractors, yet Uber is run like it is some sort of “two guys in a garage” startup. The non-founder portion of the Board has as little control as the drivers or employees do. The Board’s failure to take action makes sense, they are powerless. The board can either support Mr. Kalanick or be ignored.

Founderitis is a destructive disease to businesses. When a business outgrows it’s entrenched founder (through special voting shares) there will be a lot of pain, both for capital and for people. The VC’s and PE firms are well compensated for the pain and they don’t want or need my sympathy. My concern is saved for the thousands of drivers, workers, vendors and customers who will deal with the fallout.

Uber has been great for thousands of people. I like the service and it’s made the world a better place. But, I can make an argument that it has been poorly run from the perspective of: capital, management, stakeholders and ethics. Screwing up a company doesn’t just mean you’ve screwed the investors, it also means you’ve screwed customers, employees and vendors.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

He is also the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.

Millenials and Baby Boomers Can Get Along…

Millennial in natural habitat – a craft beer garden

When I started my career we were debating theory “X” vs theory “Y”, baby boomers and the nature of people. Today we debate about what millennial’s want. Millennials are the people who became adults in the early 21st century, so basically they are 18 to 35 right now. The debate about how to manage them reminds me of the debates we used to have about working with the baby boomer generation.

A great bunch of the stuff written about how to manage millennials is so general it is useless. It is slightly more scientific than astrology. For instance, millennials want meaningful work and work life balance. They want to be listened to, they want to dress casually. I am not sure what workers don’t want those things. Fortune has noted that millennials are not all the same in their November 1st 2016 “Millennials are not Monolithic” edition (see here). Fortune says we are more alike than different but spends a whole magazine repeating the same generalizations.

Being treated as a part of the baby boomer generation never described me and I bet at least some of the millennials out there that are being managed via the latest and greatest theory dislike it too.

I never saw big advantages of being a baby boomer. The era of cheap college ended with advent of tuition inflation in the 1970s (1970-1985 12.4% annually). The era of large protests pretty much ended while I was still a boy scout. There were some small advantages to following the bulk of the baby boomers. By the time I came to high school, we could wear our hair past our collars and the assistant principal couldn’t hit us with a paddle.

One thing they used to say about baby boomers was that they lacked loyalty as employees. I graduated from college in Detroit with a shiny degree in accounting and an MBA (accounting graduate fellow) the same year GM laid off 70,000 workers with an estimated 15,000 people in finance. My main clients at KPMG were the city government and a series of weak and getting weaker manufacturers. I left for better climes after I put my time in for my CPA license. A couple of years after I’d moved to California, my father got laid off from a job he’d been at for 20 years. Lesson learned, loyalty was not a two way street.

Millennials are supposedly quick to quit a job. I think this is due to the confidence that they will find another, and realistically, most will find another. They don’t expect a lot of loyalty from an employer, and they show little.

Managing people via a theory has had a long history of failure. I have never been a huge fan of scientific management and Frederick Taylor. My dislike is how Taylor perceived workers. Treating the worker like a machine, transferring control from worker to management and a general sense of contempt of the work force were his key viewpoints . Yes, work flow improvement is important, and the quality initiatives such as six sigma can be traced back to his research, but for the most part, it is the idea of applying science to work, rather than his specific ideas that he is known for. He was virulently anti-union, while the way scientific management was implemented almost assuredly pushed more workers into joining a union.

Henri Fayol was a contemporary of Mr. Taylor. Unfortunately he wrote his book in 1916, in French in the midst of World War One. His book didn’t get translated until 1949, but if you read about his ideas today, they’d make a good primer on how to be a manager. Fayol had the advantage of actually working with people successfully. Something Frederick Taylor struggled with.

Millennials aren’t a different species of worker. They want what we all want, meaningful work, a laugh now and again, decent pay and a convivial office. We get that taken care of and we can stop worrying about what year our staff was born.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

I am the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and I comment regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.

Bad Growth vs. Good Growth

I believe there are two kinds of sales growth, good and bad. Bad sales growth is unsustainable, and in the end counterproductive. Bad growth maximizes sales growth over optimizing the factors which can lead to good sustainable growth.

Maximum sales growth seems great (who doesn’t want sales?) but it can lead to bad outcomes. A few examples, because the most instructive examples are the bad ones. I was working with a window covering manufacturing company that had a shot at landing a national big-box retailer. The CEO wanted the business and bid hard for the work. His company immediately increased by 50% but within 18 months went bankrupt. In his eagerness to get the business he bid below his fully loaded cost for the product and began to lose money quickly.

Under investing in systems and accounting kept the client from knowing their costs or how deeply they could cut prices. I met them about 8 months after the fateful bid, when I was brought in to purchase a high volume wood blind finisher to support their growth. While doing due diligence, I compared the costs for the target to the base company. Given that the target was specialized, 10x bigger and extensively automated, I was surprised that the target reported 15% higher costs than the base company. Digging into the internal cost data identified a problem in booking inventory that caused this discrepancy. The person in charge of inventory tracking (the owner’s sister) had no accounting training and wasn’t relieving inventory accurately. Her husband ran the manufacturing operation and he’d continually boasted about efficiency he’d gained. Those gains turned out to be spurious. It took only weeks to figure out that the base company inventory was overstated and that the new “big box” business had lost so much money that the equity was wiped out.

I once worked with an insurance company offering our customers the option of purchasing their product. The company was eager to grow the book of business quickly. They suffered adverse selection as the bad risks switched insurance to get the low introductory prices. Risk was significantly under-priced and profits, which were planned for year 2, ended up in year 4. Growing fast meant taking on unqualified and riskier clients. Bigness doesn’t overcome crappyness.

I was the lead auditor on a large auto company’s financing arm. At lunch one day, the top executive at the finance subsidiary said that the front office wanted more loans written and more cars sold. Since the financing division couldn’t access funds cheaply, the loans they offered had higher interest rates than average. Low risk borrowers weren’t interested in high cost loans as they had low cost options. Consequently the only way the company could increase loans was to take on riskier borrowers. Another example of adverse selection. I asked how this would play out. He said they’d write a lot of loans (and sell cars) but in a year a higher than average portion of the new loans would stop performing. Eventually the front office would ask that he clean up these delinquencies. He then would repossess enough cars to drop his delinquency rate to average. Repossessing cars is expensive and after the increase in losses due to the disposition of these vehicles he’d then be asked to limit these losses. If the scenario worked out as he’d foretold, he would likely obtain a bonus every year for achieving his objectives.

Creating growth like this is counter-productive. Yet lots of firms think it is as simple as the CEO ordering growth to happen. Smart growth is about balancing the factors of growth. People, resources, systems, processes, time and management must be balanced against sales growth. The factors must be optimized so that growth and profits continue. Optimization can be complicated, as there can be multiple successful solutions at varying levels of profitability. Some solutions are oriented to throwing bodies at the problem, other solutions might include implementing a computer system. Both ways will work, one way offers more flexibility and the other cheaper long term costs.

Most of the factors of growth can be quantified into costs, so there is a basic cost vs. profit model that needs to be managed, but time is the factor that determines the rate of growth. A firm that grows 10% and 9% in two years is roughly equal to a firm that grows 20% and 0%. The cost vs profit trade-off has to be seen over multiple years as costs often come as a steps. Investing in a new manufacturing facility or a new computer system is a step that will need to be cost justified over five or more years. Finding ways to minimize the height of the steps, planning on when to take the steps and grouping the steps into logical order are a big part of dealing with optimizing the growth rate.

It is easy to delay investment in these factors, but eventually the problem worsens which brings growth to a halt and sometimes worse. I am not suggesting that everything will be perfect before you can start growing – and growing fast. But as much as it is wanted or needed, when the car is doing 180 mph around Le Mans, you can’t change the tires. You can fix a foundation after the building is built, but it won’t be cheap or easy. Smart growth is about about balancing and managing these trade-offs.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

Paying a Price for Certainty

We all want certainty. We want our investments to average 5% return a year (7.375% if you are in the state of California), our children to grow up strong and healthy and it to only rain at night. However, life is uncertain.

Insurance is about creating certainty. A small cost is paid, instead of a small chance at a large loss. Health insurance is part pre-paid services (check-ups) and part joining a purchasing cooperative (in-network pricing is a lot cheaper than out-of-network) and part real insurance. Car insurance doesn’t include oil changes, although they do control where certain repairs are made. Not just insurance companies make money on reducing uncertainty.

I once had a competitor that sold a tuning service for radios and electronics. This advantage was a significant part of his marketing and brand value. At some time in the past, there might have been some value in swapping out vacuum tubes but since the 1960s most marine electronics were solid state. By the 1990’s there was nothing to be done to a solid state radio, and if they didn’t work out of the box, they had to go back to the manufacturer. He sold fear, uncertainty and doubt or FUD.

FUD was made famous by IBM, who would meet every new competitor in the computer industry with comments about reliability, threats of the loss of warranty coverage, rumors of financial difficulty and vague hints about losing purchasing status. For the longest time I’d hear the comment “no one got fired for buying IBM”. FUD works.

People will pay for security – even if the math suggests it is a bad bet. My firm started selling extended warranties on our products. This was a big money maker for Circuit City as electronics extended warranties had a 90-95% margin. For a while the staff wouldn’t sell them, they thought the extended warranties were a rip-off of the customers, and we had a no-hassle money back guarantee. Buying an extended warranty is not a good bet, but people appreciated the certainty and paid for it.

Eating at McDonald’s is not normally a “treat”. We select fast food because of the consistent product, price and convenience. We know what we are getting – uncertainty is reduced. Retailers who reduce uncertainty increase sales. Zappo’s can sell you shoes because they agree to take all returns. I doubt Zappo’s makes much profit on its shoes, the freight has to be killing them (see here) but given that Amazon owns them and Amazon is the worlds largest capital destroyer it is ok.

I see the problems with seeking certainty as a function of information asymmetry, competition and add-ons. The retailer that offers a money back guarantee knows how often goods are returned and when they sell you an extended warranty, the likelihood of your using the warranty. You can’t judge if it is a good deal or not. Those situations are referred to as information asymmetry, where one side knows more than the other. Learning more about failure rates can give you confidence to skip paying an extra 15% for a product, knowing the chance of fault might be 0.02%. A phone with a one year warranty and a three year overall life doesn’t present much time for a failure.

Your car insurance company knows more than you do about the likeliness of an accident and they price the insurance so that they make a profit. The car insurance company is kept honest by a competitive market place and regulators. Competitors push prices towards an equilibrium, which is lower in price than an un-competitive market.

The least competitive market is one where you have little time and no access to competitive prices or data about risk. This happens while standing in line, or in the midst of a transaction when an add-on is offered. Rental car companies are good at offering you several levels of insurance-like services (one full priced for 100% coverage, a second with a deductible, a third with a collision damage waiver) while all levels of coverage are priced extremely high. It is not unusual to pay $5-6 a day for coverage for your new car, and $40 a day for insurance for a rental car. The extended warranty is pitched to you at the register without any time to calculate the costs, benefits or risks.

Seeking security isn’t a problem, and reducing uncertainty isn’t bad. One consequence of a population that doesn’t understand probability is that we will be taken advantage of by providers of certainty. Be a smart consumer, do your research before you buy.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.

Six Challenges for Investor Relations

Investor relations is broken. It isn’t the people, it is the process. Most senior executive see it as a department designed to help the company put their best foot forward. The skills needed are someone who is good with powerpoint, knows numbers and can talk to analysts all day long without going crazy. I think this definition misses six key challenges for Investor Relations.

Challenge #1 Investors have no time

Investors are limited by time and attention. Investing is based on financial reports which are both long and redundant, and the amounts of disclosure are not improving investor knowledge (read this). The SEC and the FASB have turned a simple financial statement into a career generating stack of paper. A typical 10k runs 100+ pages and is stuffed with disclosures, reconciliations and accruals.

A typical financial model will go back 10 years and ideally, all the 10k’s & q’s should be read from the entire history. Most are not. I bet that fewer than 50 people outside the company conceivably completely read any 10k document. Most analysts look at changed pages from the previous document, skim the management discussion and update the models with the key data. If you own 50 stocks, your reading load might be the same as knocking off three books a week in SEC filings alone, not including the other material you read to know what is going on in the economy.

Time pressure causes investors to look for shortcuts to the intellectual rigor of a complete and detailed review. Pattern recognition conserves time and brain power. Investments are selected that are similar to past successes. Investors classify stocks by lots of methods (growth, value, etc) to eliminate the time memorizing details about every company. The intellectual demands to obtaining, sorting and absorbing the material means that complicated stories are often ignored or missed. Complicated analysis, the use of a lot of jargon just make the analysts job harder, and therefore less likely to expend the energy to invest in your firm.

Clarity increases comprehension and makes the job of an investor easier. Easier means better analysis and better communication and a better stock price.

Investor relations has to recognize the time pressure and focus on a coherent set of facts that allow a potential investor to understand the business and make a prudent investment.

Challenge #2 It’s not just numbers

For the last fifty years we’ve been training executives in quantitative analysis, and today’s MBA’s know how to deconstruct a business. Because of our emphasis on numbers, today’s executives tend to manage rather than lead. CEO’s and CFO’s certify that the financial reports to the best of their knowledge do not include misstatements, or are misleading. Making both CEO’s and CFO’s more involved in the data and detail.

Investors do not have access to the details of the business, and realistically we can’t share them. Analysts are trying to make meaning out of disclosures, so they ask a lot of questions about management’s impressions or thoughts (or my least favorite “add some color to the numbers”). When analysts ask these questions, they are asking for help understanding the bigger picture and cannot tie in the numbers to a direction or theme.

Santa Cruz cows out standing in their field

They are looking for the story behind the numbers. When a senior management team that generates and lives on numbersis selling to someone who is looking for a story, there is a disconnect.

Humans like stories (see here for Paul Zak’s HBR article) and we remember them better than the numbers. The story provides structure to our understanding and helps add meaning and relevance.

Investor relations has to communicate a story that makes sense. It has to be reasonably based on history and explain a direction and purpose for the company. It is more than the just the numbers.

Challenge #3 An Outside Perspective

Investors have one huge advantage in valuing firms that senior managers lack. They have an outsider’s perspective. Working at a hedge fund meant sorting through 2-3 firms a week. You hear what the other firm’s have been saying, you can compare this quarters disclosure to the last 15 quarters, you aren’t sitting on half a million options that are underwater. The outside perspective is very valuable, I have written about it before (see here). Outsiders haven’t drunk the company Kool-aid, they aren’t convinced of the company’s invincibility and they aren’t incentivized to worship the company mission. This perspective is valuable to CEO’s and Boards, but the criticism is dismissed because the outside view often is working off of fewer facts and CEO’s reject criticism of their strategic plans.

In a capitalist system, the investment community is the owners of the business, and we should listen to the owner, even if they are sometimes wacky.

Investor relations needs to be a vital conduit about market perspectives on company strategy. That message has to come back to senior management the board and the CEO in actionable and understandable ways.

Challenge #4 It can’t be delegated.

Management gets a chance a couple of times a year to tell their stories to the investment audience. The simplest way to tell of a management team lacks a coherent strategy is if they can’t get the message across in the 25 minute talk they give before the break-out session. If in 25 minutes you can’t get the message across to the 40 or so MBA clones that make up the ranks of stock analysts, how did you get that message across to the 10,000 high school graduates that make up your workforce? Whenever I hear jargon and business-speak when a senior executive is discussing strategy, I know that strategy is dead on arrival when it gets to the front-line worker.

All presentations should be practiced prior to being given. If we work for the investors, what message do we send when we arrive at our meeting and our report is fumbled and ill prepared? I’ve never believed the stats about how much of meaning in a conversation is non-verbal, but I respect it is very high. Stumbling through a presentation reduces personal and firm credibility.

Investor relations is the responsibility of the CEO and CFO, and hiring a director or VP does not absolve you of the responsibility of being prepared, practiced and ready when reporting to the investors.

Challenge #5 – Authenticity = Credibility

George Burns was quoted “sincerity – if you can fake that you’ve got it made”. Senior executives think of IR as a something that can be faked. After reviewing 100+ companies a year for 12+ years, I’ve seen a lot of pitches. Figuring out what the management team does and doesn’t know is how we made money. If you state that you are #1 in something, you’d better be prepared for us to check.

Most Investor relations staff get the compliance problem. All the numbers are verified, everything is properly sourced. Then the CEO or CFO make an off-hand comment that will end up on a transcript and will be fact checked. I’ve written before about the average experience of stock analysts (see here). New analysts spend a lot of time reconciling cognitive dissonance, which is a fancy way of saying, does management “walk the talk”.

I’d rather a management team was perceived accurately, even if that perception was negative, for example as aloof or uncommunicative, rather than as something they are not.

Investor relations stands for authenticity and accuracy. Senior executives aren’t clones, and should be respected as individuals. Don’t write speeches full of bafflegab and resist the use of jargon.

Challenge #6 – Everyone is an Investor

Most companies incentivize with stock options and most stock option grants are small. Outside of a relatively small circle of high paid executives, most option grants hold little perceived value. They have a cost, but the perception is that they don’t have any value until they are vested and are deeply in the money. The staff needs to hear the story as much as the analysts do. Vendors may make million dollar commitments for a new product line and they need to hear your strategy. Customers, especially when they are making a commitment to a product, need to know whether the company is viable.

The reality of today’s connected society is that the number of people who “care” about what IR has to say is much greater than before, and those listeners have much more influence the firms success.

Investor relations material should be prepared for all the stakeholders, based on their needs. The delivery of employee oriented material may be through HR, but that disclosure should be focused on the key story and theme set by the strategic plan.

Conclusion

Investor Relations needs to play a bigger role within your firm. Helping develop the strategic plan, communicating a coherent story with numbers that provide clarity and understanding. It is time that IR is more than someone who talks to analysts and comes up with a quote.

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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting. I am the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and I comment regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.

Three Thoughts on Balancing Profit and Uncertainty

Life is uncertain. Any entrepreneur knows that to start a business, you have to take a chance. You can calculate the risks, manage what factors you can, work as hard as you want, plan as extensively as possible, but there is always uncertainty and risk. Frank H. Knight defined risk as events that have a probability and a severity and are calculatable. Uncertainty is defined as those events without a probability and a severity. We face both uncertain outcomes and risk in our lives.

As a professional CFO, I’ve worked to limit uncertainty and manage risk. Eliminating risk and uncertainty however is impossible and will kill a business. The very nature of profit comes from taking a chance and offering a solution for a customer. A risk-free (and low uncertainty) business doesn’t exist. The closest we have to a risk-free return is a 10 year bond, which is trading today at about 2.2%. If you want to make more than 2.2% you are going to have to take on risk.

Running a business is about balancing all the factors: risk and uncertainty, the operations and the market so at the end there is a profit and a return on capital.

Profit comes from risk taking. The risk taking must be commensurate with the return, or it is foolish. Steven Crist wrote a chapter (see here) on value in the book: Bet with the Best: Strategies from America’s Leading Handicappers. Crist points out that even bets that are likely to lose (betting on a 4:1 horse, when the payoff is 12:1) can be a good investment.

Managing risk (and opportunity) sometimes means thinking about what could change. What assumptions are foundational to the business model which if changed would result in a serious impact to the firm? Although you think that there are relatively few of these, there are many, but thankfully they are relatively rare.

Many retailers were well aware of the impact of e-commerce, but few generated a capable response. Most dumped their catalogs and full product line on the internet and waited for customers. Worse yet, few planned for the inevitable loss of market share or the increase in new competitive business models (Stichfix, Frank + Oak, Thred-up) that might arise on-line.

Nassim Taleb talks about the four largest potential losses in Las Vegas, one of which became real: Siegfried and Roy’s magic and wild animal act was ended when a tiger attacked Roy. Roy later went on to say that he had high blood pressure and believed he had a stroke during the show and the tiger sensed that and was dragging him to safety. If Roy had died from the stroke and not the tiger attack, the result would have been the same, cancellation of the show. When a great deal of income depends on the health of one man, then there is a big assumption of risk.

Business decisions can increase or decrease risk and uncertainty.

Every decision we make creates new risks and uncertainty. Selecting a new ERP system? Hiring a new executive? Changing a key purchase policy? All will create both a primary effect and secondary effects that are unknown. Not making a decision, often called strategic dithering, creates additional uncertainties. Mark Fields was recently replaced as CEO of Ford, apparently because he wasn’t moving fast enough on self-driving cars (see here). I am not certain that a faster approach to self driving cars creates a lot more value than being second with a better product. But either way is uncertain.

Too often executive teams ignore risk and uncertainty factors in making their decisions. Anecdotes are easy to understand and are compelling although they are often sample sizes of 1. In the hedge fund business we used to say “beware the narrative” as we were afraid of being seduced by the simplicity of a good story. Balancing the trade-off between customers and operations without assessing the change in risk will likely lead to increased risky behavior and calamity.

Invert the decision making model – think about increasing risk.

Risk is necessary for profit, but risk as I’ve noted is calculable. Can you decrease risk for a customer and create greater sales and profits? Grouping uncertainty and risk can decrease overall risk. That is what insurance companies do. Offering a money back guarantee on products for a retailer is simple. If you realize you can return the product, you are more likely to buy, even if you are extremely unlikely to return the product. The highest margin item I’ve ever sold was warranties on electronics. Most are never used.

If you are a SaaS business, how can you lower the customer uncertainty and increase your payout? Most firms find buying a new system a major endeavor. They’d like to be married, without the process of getting married (which is a hassle). The risks are centered in the conversion, implementation, training and the first 90 days of the new system. Firms will pay to have implementation risk decreased.

Playing safe isn’t always a good option (see here). My local community has half a dozen businesses that are clever, deliver great value and could have a national presence. They don’t because the owners are happy enough with a small local business. Every couple of years change comes to the community or one of the owners and one of these businesses dies. I am not arguing all small businesses should become Staples, but as John Shedd wrote “A ship in harbor is safe — but that is not what ships are built for.”

Conclusion

I think a lot about balancing risk and returns. If you bet the long shot that is undervalued, you may win big, but you will most likely lose. Losing isn’t bad in this case, it is just one iteration of a process that brings a profit. Avoiding risk isn’t possible, but whatever approach you take, keep an eye on the tiger.

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Retail Apocalypse or Just Another Cycle?

Bricks & Mortar retail is suffering. People are shifting their shopping habits from in person to on-line. The on-line selection is greater, the prices are better and the shopping experience is relatively easy (in comparison to parking at the mall). Peter Drucker said that “What customers – at least a good many of them – want is not shopping that is enjoyable, but shopping that is painless.”

Although e-commerce will continue to grow, I suspect that on-line shopping will top out in the 20-30% range of total retail sales. The drawbacks of e-commerce (freight, timeliness, inability to touch or try-on) will limit sales to only a portion (although a very significant portion) of total sales. However, just losing another 10-15% of market share to e-commerce will make bricks & mortar returns even less attractive. It doesn’t matter if your retail chain is cannibalizing itself with a web site or it is Amazon, stores will continue to generate worse returns on investment. With lower returns, there will be less capital invested, fewer stores and fewer malls. The New York Times calls them Zombie Malls, the escalators are running but no customers.

There have been many, many articles on how the US is overstored. In 1990 the ICSC reported (Billboard 6/2/90) shopping central growth was dropping due to the country being overstored. ICSC reports the millions of net square feet added to U.S. Shopping Center space in their report “America Marketplace”. You can easily see the post 1980 recession slow down and the post 2008 recession collapse of growth. The dot.com era of 1999-2001 didn’t appear to matter. One conclusion is that the overstored retail space has gotten less overstored in the last seven years.

I don’t know what the right amount of retail space is in the US, but given this trajectory we will eventually reach an equilibrium where demand closer matches supply. However, when equilibrium is reached, a lot of today’s retailers will be gone.

Life Cycle

The usual life cycle for retail bankruptcies is a recession which weakens the retailer, a recovery which allows some breathing room and then another recession which puts the retailer out of business. This is the retailers’ version of the Eldredge & Gould “punctuated equilibrium”, where a significant event creates the opportunity for species growth (or death) followed by a long period of relative calm. Eventually another significant event punctuates the equilibrium and the game changes. This cycle is only slightly different from the normal recession/recovery/recession, as the punctuation now is the on-going loss of market share to e-commerce. If we get another recession, then we should expect even greater industry turnover.

The total profit of a transaction is split between the manufacturers (the product), real estate (the space), staff (the labor) and the retailer (the operator & the capital). This is an uneasy relationship, as total profitability is limited by the market. Each player takes the steps that create the most long-term value for their portion. The losers in the movement online so far have been staff and retailers. Next the cycle will impact real estate prices.

Tim Harford, who wrote “The Undercover Economist” suggests that over time, the landlord obtains most the profits of the relationship due to lack of substitution. Retailers combat this by negotiating long leases with renewals to lock in the lease costs. If business slows, those long leases can burden the parent company enough to cause bankruptcy. When retailers stop making money, they close stores, vacancies rise, the real estate centers stop making money and the price of retail space falls. Stores are closing at a record pace, and rents are beginning to drop (see here). Lower rents allow retailers a chance to recover and begin growth. However, things are a little different this time as e-commerce will still gobble up market share and retailers have loaded up on debt.

Debt!

One factor that is worsening the crisis is debt. Low interest rates and high equity valuations have caused growth companies to borrow funds to drive growth. When I was a student, we were told that carrying debt would lower the cost of capital as interest on debt is deductible and interest rates are usually lower than the cost of equity. This is an accepted part of finance theory and is used extensively by CFO’s to generate equity returns. Whenever you can invest at a rate of return that is higher than borrowed funds, you create a return to equity (see WACC). So if you can open units that generate a 40% return and are limited to 3 outlets due to limited equity capital versus opening 6 outlets with a mix of equity and debt you generate almost twice as much cash return. The only drawback is a subtle increase in risk and interest costs that comes with additional debt.

The risks aren’t always apparent. Low interest rates are great, but they don’t always stay low. When interest rates normalize, payouts will squeeze profits and options. Most loan agreements are based on covenants that call for enough earnings to pay a multiple of the interest and principal payments. Earnings in a growth company can be volatile as expansion, even if investment oriented, is accounted as expenses by GAAP. Banks use GAAP, not “reported” earnings.

Theoretically financing should not matter. Modigliani-Miller came up with a concept of capital structure irrelevance. They believed outside the tax effects of interest (vs. dividends which are rare), how you financed the company shouldn’t affect the intrinsic value. M-M’s insight was that you could imagine an investment pool that is half debt and half equity buying a company with no debt. The total investment would be leveraged, 50/50. If you bought the stock of a company that was half debt/half equity with a fund that was all equity, the pool together will still be 50/50 leveraged. Whether debt is held at the company level or at the portfolio level is irrelevant. However, the relative amount of debt in the system remains.

CFO’s that leverage their firms (as I did) find themselves taking on risk that may be better placed at the portfolio level. If the investors want leverage, they should borrow to make their investments. I’ve come full circle and consider debt a serious problem for growth companies. Yes, there are some instances when it makes sense, but in general it should be avoided.

The other big debt factor that will grow is lease debt. The great lease debate is now settled for the next decade. The FASB agrees that leases are debt. The new rules further muddy the financials as the value of the liability won’t represent the true value of the asset, and it will put another confusing and inaccurate calculation on the balance sheet. Retailers are readying to put trillions of debt on their balance sheets, drawing further attention to the risk.

Fear is the mind killer – Frank Herbert. Debt is the company killer – The Market.

Conclusion

The future is clear, malls are going to struggle and they are not going to turn into apartments (sorry Sears). The e-commerce story is only half over. Further retail consolidation is likely and we should be looking for new concepts that will be able to use that (now lower cost) space to deliver a product/service package that will compete with the convenience and prices of e-commerce.

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SaaS – Churn, Ansoff and Unit Economics

Unit economics is the name for the analyis of an investment at a detailed level based on the customer, store or unit. This is the analysis we do when we are approving a capital project. A good recap of unit economics by Cleverism is here. This article uses Ansoff’s matrix and SaaS metrics to compare different businesses to illuminate the gaps between current business metrics and what different sectors can learn from each other.

I’ve written about Ansoff before (see here). Ansoff says that there are two axis to growth, product and customers. Ansoff’s matrix splits the opportunities into four segments. Selling current products to current customers, finding new customers for current products, selling new products to current customers and finally, selling new products to new customers. For different kinds of businesses, each of these segments are tracked by different metrics.

Turnover or churn is the statistic that tracks how long customers use your services or purchase your product. Different concepts result in different levels of churn. Parents buy diapers only as long as their babies need them, a couple of years. Certain B2B services might stay with a company for the life of the business. Even this, however, is not forever.

You can classify consumer businesses by their lifecycle, basically the length the product remains relevant to the customer. Churn works along Ansoff’s customer axis, and begins with the square titled market penetration and moves towards product development. When a customer signs up a for a service, their potential to stay is not always apparent. Some will stay for a long time. Some will not. Some concepts have very wide age range (McDonald’s) others are much shorter (say Rue21).

I am on the board of a small company that teaches music to 1-4 year old children and their parents. Every year a new cohort of 1 year old’s join and four years later they graduate out of the program. Annual customer turnover is over 25% based on the business model. Real turnover is higher because some families move and some families quit, and some children join at age 2 or later. I’ve calculate the churn by individual children, but if you saw the basic unit as the family, then churn would be lower, as some families have two or more children.

Defining the unit in different ways offers new ways to thinking about your business. For example, retailers usually define the unit as a store, while Wal-Mart saw the primary unit as the distribution center and the related regional stores. They wouldn’t open one store in a market, but would open one distribution hub, and many stores.

Subscription businesses like SaaS track churn as a way of monitoring customer lifecycle, see here for a great outline of SaaS metrics by David Skok. Selling only current product to current customers results in a slow decline in sales, because customers will eventually leave for one reason or another. Corporations have unlimited lifespans in theory, but in actuality they don’t. Innosight suggests the average S&P 500 company listing lasts about 18 years now (see here). Although a lot of firms last 100 years, even then firms aren’t immune to change, Radio Shack was over 115 years old when it declared bankruptcy.

Defining the implicit natural churn rate helps define the business model and SaaS firms should use that data to better identify add-on products or additional services to be offered. As client firms move through their lifecycle, SaaS can be a responsive force, focusing the solution so that software, service or solution remains relevant. This is moving across to the product development side of Ansoff’s model, offering different product to the current customer . In the case of the pre-school company, we are working on programs that extend our reach to 5-6-7 year olds. Adding additional years means that the churn rate will decline, but it will never get to zero.

If you can convince your current customer to buy more, typically subscribing additional services or purchasing more products, you increase the value of the customer relationship. Ansoff would call this selling current customers new products. Sales growth for a cohort of customers could grow, rather than decline. SaaS businesses call this negative churn. If churn is low enough and the service supports a rising price (either it was underpriced or continues to add value) then you can achieve negative churn without selling additional goods or services. Negative churn is very profitable because no additional selling costs are required, yet sales and margin increase.

Retailers would call negative churn an increasing “share of wallet”. Increasing your share of wallet was about selling more stuff to the same customers. Retailers have a concept called “same store sales”, which tracks the change in y/y sales through the same number of outlets. This is not the same as negative churn, but it is close. Same store sales could increase due to increasing customer count (new customers for current goods) or sell more new goods to the same customer (share of wallet) or higher prices. Positive comp sales also have a very strong impact on profits, as store location costs and location overhead are leveraged. Retailers focus extensively on the store as the unit, and would benefit from seeing customers as a unit also as SaaS businesses do. Recognizing that some segment of a population is aging out of your sweet spot gives direction to marketing and customer acquisition efforts.

In the wholesale business we track sales by dollar churn and by customer wins. Dollar churn is the similar to churn but instead of using number of clients, we use dollars of sales. That way big customers are more relevant. Wins relate to obtaining business from new customers. If it is a technology solution, a win would imply agreement by an organization to use a specific tool or platform, which as adopted through the business will result in additional seats and sales growth. Sometimes a win is just an initial “test” order from a customer which uses many suppliers. Either way this can be a significant step to increasing sales.

SaaS businesses offer fremiums or lower cost options, which like wholesale’s initial test order, start the customer getting familiar with the product or service. Given the value of a customer it seems obvious that most wholesalers/retailers should consider this strategy.

Investment and Life Time Value

The average selling price (ASP or average transaction size) and annual volume (also known as Annual Recurring Revenue – ARR – for SaaS) define a business model. If ASP is low, then the amount of service given at the transaction must be low. McDonald’s has an average transaction in the $5 range. This is why there is no service. The ASP for a Mercedes is $50,000, which means you get service at the point of sale.

The lifetime value of the customer (LTV) is a calculation of the total operating margin of all the sales to the customer. Obviously the higher ARR, the longer the customer remains, the higher the margin, all result in a higher LTV. If the LTV is low, then the amount you can spend obtaining a customer is low. A higher LTV allows for more investment in the customer. Obtaining a business customer that pays $20,000 a year in service fees could result in a typical SaaS LTV of $150,000 or more. That allows for a number of sales calls and demonstrations. If you are selling a $100 annual subscription, pretty much it has to be handled via email and on-line, with automated responses.

SaaS firms often use margin for the LTV calculation while “four wall” profits are used for retailers. Having the LTV can help you define how much money you can spend to obtain a customer (normally, cost of acquiring customers, CAC or CoCA). The CAC is the total investment required to acquire a new customer. In a retailer it would be the cost of a new store, in a catalog firm, the cost of a new catalog. Four wall profits are the variable costs driven by the addition of a new unit and typically don’t include any headquarters or regional management costs.

Although margin is a good proxy for profitability, it isn’t perfect. Skok recommends (see here) deducting the cost of the retention and expansion teams and the cost of service from margin. This would make the net margin SaaS calculation the achievement of the steady state of the business. Normally I’d have the cost of expansion in the cost of customer acquisition calculation, and leave it out of the net margin calculation. Theoretically it should only be in one place because the cost of service and cost of retention (the account managers) are variable costs driven by customers, while the cost of expansion (sales team) is discretionary. This isn’t unusual and it treats the account managers the same as the sales team. A lot of retail new store models also include some costs on both the investment side and the operating expense side. As long as you are consistent in assessing projects, it is fine.

The rule of thumb for SaaS is a 3x return on CAC. This is similar to the typical unit economic model of a retail store, which over it’s first ten years should generate 3.5x-4x the investment cost of the unit. SaaS companies ideally should discount the long term cash flows (DCF) of the expected life of the relationship to better reflect the LTV to CAC comparison. Most of the SaaS business models have been developed in a low interest rate environment, with relatively cheap capital so this hasn’t been an issue. As SaaS relationships extend out, a DCF makes a lot more sense. If you do use a DCF, the rule of thumb isn’t valid, and LTV/CAC ratios less than 3x can be profitable.

Retail is a little different because it fulfilled a demand for a product line in a geographic area. So if you are selling car parts, you cared about the vehicles owned in the area, not so much who owned them. As long as cars were owned, they will need parts. The CAC for retail is the cost of opening the store and stocking it. Unit economic slides for years boasted 40% ROI’s on stores by hiding inventory investment and other relevant costs. Sales forecasts were often suspect too. Hiding costs may look good in the short term, but overall ROI is driven by the accumulation of unit ROI’s, and smart analysts generally ignore unit economics that don’t aggregate to company economics.

The aggregation of LTV minus overhead costs should approximate the economic value of the business (debt + market priced equity). Usually there is an additional “option value” for the on-going business and the opportunity to enter new markets and develop new products. Standard DCF calculations that Wall Street analysts use attempt to convert the stream of profits over 10 years to an economic value. Unfortunately, usually 50% + of the value is wrapped up in the “in perpetuity” assumption, which is dropped in the 11th year to cover for the expected future stream of income. A good LTV model with realistic assumptions will help a CEO/CFO better plan for the long term value of the business, and communicate that value to investors.

Winning a loyal customer is valuable, but understanding the math is even more valuable. Returning to the diaper business, when you can calculate the number of diapers a child will use you can calculate the lifetime value of obtaining the parent’s diaper business. This gives a place to begin budgeting marketing expenditures, planning sales efforts and valuing the business. You can do this while still knowing that one day the parent will no longer purchase diapers and you will need to find a new customer. Thankfully people keep having babies.

There is a lot of similarity in unit economic calculations and enough differences to create some interesting ways of analyzing, displaying and investing in new operations.

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Dr. John Zott is the principal consultant at Bates Creek Consulting and works as a CFO for growth oriented businesses. John is the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect consumer businesses. If you are looking for a CFO for your e-commerce/SaaS/retail/consumer company, or are a former student, colleague or would just like to connect – reach out.

R-E-S-P-E-C-T

Mark Zuckerberg recently spent a day working in an F-150 assembly factory in Dearborn, Michigan. I don’t know why he did it, but his experience, I am sure, was valuable. I worked in a factory for a summer in between my sophomore and junior year in college, where I also learned some valuable lessons.

My factory was in Whitmore Lake, Michigan and I was a temporary summer employee. The plant is gone now, just a large piece a of concrete in a field. The company that owned the plan is gone too (and the company that owned it after that) and the plant address is listed as a superfund site.

My first lesson was when I found out that joining the union wasn’t the same as getting union representation. The UAW and the auto parts manufacturers had a deal where the temporary worker would pay union dues and a union “sign-up” fee and get union wages, but wasn’t represented by the union until after 90 days. Good for the auto companies, good for the UAW, just not as good for the temp worker. At the time the job paid pretty good, in the $7 an hour range, ~2.5x minimum wage, or inflation adjusted $25.60 an hour. Current automobile company UAW temporary wages are $15.68 an hour about 1.75x minimum wage. The current contract has two tiers, higher one for most the union voters, lower ones for new people, so things there haven’t changed.

Getting hired was easy, I took a drug test (pee’d in a cup), answered a few questions and started a couple of days later. I found myself on the line with several other fellow students from the University of Michigan working as temp’s in addition to the “permanent” staff. We manufactured bucket and bench foam seats Liquid foam was placed in an aluminum mold which a conveyor took through a large oven where the foam expanded and set. The foam seats were removed from the mold, cleaned up and then packed for shipping. My station was tucked behind the oven up against a wall, separated from the main work area by a wooden bridge that passed over the conveyor system. The mold’s exited the ovens at over 150° and the work was hot and repetitive. We worked in pairs. We had about five seconds to twist off the little foam buttons that had flowed out of the mold bleeder holes before the mold was cracked open. If we had time, we carried a wire in our hands to snake out the bleeder holes. If the bleeder holes were blocked the next seat made in the mold would be ruined.

There were a hundred petty insults at work. During a line stoppage, we swept up the floor in our area. The scrap was 2-3 inches deep around our ankles. When the foreman found out, he yelled at us. Cleaning up was the sweeper’s job (a different job class) and we weren’t supposed to sweep. The sweeper team was always working up front, since it was air conditioned, and not in the back of the factory. After that we still swept but we never swept it clean so we couldn’t get yelled at.

Management had a weak relationship with the UAW and there were a lot of arguments about the contract. For instance, the contract said when it was over 90 degrees outside for more than four hours we got free sodas. It was a hot summer and the first time we qualified, the union steward went to management and demanded our free drinks. The foreman returned with cases of off-brand drinks from a closet in the tool crib. The surprise was on us, they were undrinkable, as the temperature in the tool crib closet was easily over 100 degrees.

Toward the end of the summer the company went to a new cleaning process for the molds. The cleaner used was carbon tetrachloride (at the time used in dry cleaners and in refrigeration). One afternoon the line stopped and we were told to sit and wait. We waited 15 minutes, which was a long time for the line to be down. Finally the foreman showed up wearing an oxygen mask and tank told us there had been a dangerous spill and we were to evacuate the area. Apparently no one thought to just yell over the bridge to evacuate as soon as the spill was identified.

The carbon-tet and the heat began to cause problems for the workers. When I’d get off work, I’d see a halo around the parking lot lights. This effect went away the next morning. After a couple of weeks the effect didn’t go away until the weekend. We were then warned not to wear contact lenses to work, as the chemicals were softening our corneas. I was off for a couple of days and the company installed big fans to push fresh air down into the building. The air still smelled of course, because the fans intake was right next to the exhaust ports for the ovens. The front office staff rarely came into the factory – it was hot, uncomfortable and it smelled. When I reached my 88^th day as per the UAW contract, I was let go, which was fine with me, it was time to return to college.

My coworkers didn’t care about management or the company or self-actualization. They worked in the factory for one reason, money. In the factory, you worked to live. They didn’t want a career, they weren’t willing to eat hours so that the boss would look good, they didn’t study for professional exams or spend hours trying to figure out how to get promoted. Some of my co-workers were lazy and spent more time hiding from work rather than working, and some were high pretty much all day. However, most were focused on their life outside of work and they just wanted a good paying job, do good work, avoid hassle and go home at the end of the day. A little respect would have been nice.

A great example of modern worker motivation is shown in the movie “The Circle”. People are working long hours to make a difference and to be a part of the in-crowd. Firms expect staff to put the company first in all things, socialize with co-workers, to work diligently to meet some arbitrary performance goal, and to pour their lives into the business. Home Depot called it bleeding orange. This isn’t a new sentiment. Frank Borman, the Apollo 8 Commander, lectured at the University of Michigan about putting the company first in his executives lives. He stated that he hoped their family or their church was second, but Eastern Airlines should be first. Eastern Air Lines is long gone (sold three times), Borman, on the other hand, is still going strong at 89. I wonder if he still believes that Eastern should come first in his life?

Although “The Circle” is satire, you can’t help but recognize a lot of today’s work environment. Late night texts, work flowing into personal time, privacy disappearing and a lot of double speak covering up the pressure to work harder and get more things done. Working in a factory is simpler, you show up to work, you get paid. The results are clear, they are stacked in the warehouse. Work today is more complicated, and does not always result in clear outcomes. Respect is even more important as the assets aren’t molds and ovens sitting in a factory, but brains and know-how which goes home every night.

While working at the factory, I learned about the value of respect. CEO’s forget that people are sometimes motivated by different things. Sometimes, the staff just wants a job. In the end, all effective motivation is internal. You can’t add it on by yelling at your staff, motivational speeches, clever bonus plans or free cold drinks (although that would have been nice). You need to connect with the staff by what motivates them, not you. Respect goes a long way in business. I hope Mr. Zuckerman got that from his time at the factory.

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