ChangeAbility: Are You Ready for Succession?
The Newsletter of Redpoint Coaching
Volume 9, No. 3, September 2010
We are proud to bring you the September issue of our ChangeAbility Newsletter published under our new brand, Redpoint Succession and Leadership Coaching. ChangeAbility provides you with hands-on tips and cool resources for growing your business and making you a better leader.
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Lauren and Urs
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Tackling the personal challenges of handing over leadership
by Urs Koenig, PhD, MBA
The technical aspects of succession planning are covered at length in both the academic literature and in the work of ‘real life’ consultants. Less explored are the very real and equally influential personal struggles and strong emotions that often unfold during the succession process.
Anyone who has ever been in charge of an organization knows the kind of personal investment this work requires. After a while, being the CEO is not what you do but who you are. This is even more true for founders. So transitioning out of the top spot and handing over the role that has essentially become ‘You’ is a very personal process indeed.
Even as you continue to lead your organization, you need to prepare for your departure. You might think that this will be easy. You will likely be wrong! Handing over leadership to the next generation will be tougher than you think.
Letting go is hard to do
Any successful transition starts with coming to terms with the fact that it is probably going to be hard for you to let go. Leaders who realistically face the personal challenges of transitions are much better prepared to leave than those who deny the difficulties.
In addition to leaving significant monetary benefits and perks behind, what makes it so hard to leave what is after all a highly stressful job. What can you do to ease the transition?
The mind-set that served you well going into the job (or founding the company) will make it challenging for you to transition out--in all likelihood, you have become the job. Going into the job you had to be convinced that you were the one who could do the best job at leading the organization. You also must have either convinced a board and/or numerous lenders and investors that you were the absolute perfect person for the job. For most leaders, pulling this off requires a very healthy ego when it comes to work performance. Even if you are modest and not a show-off, transitioning from being in the midst of it all, making it all happen, to taking a background mentoring role and getting your kicks out of your successors' successes (versus your own) can be very challenging.
Along with the proverbial corner office, here's what you're likely to miss most:
Status: When we hear status, we often think of corporate CEOs with all their perks, name recognition and corporate jets. But status can come in a lot of different forms. Successful business owners in small town America, for example, enjoy a fair share of status as well. They are admired by their community and receive a lot of recognition for their position. Even if you were never seeking status, losing it and becoming a ‘used to be’ can be very difficult. Many studies have shown that losing something (e.g., status) creates significantly more pain than the amount of pleasure we enjoyed when we originally obtained it.
Power: When you're in charge, you know your job matters! Every single day you are making a difference in people’s lives. Not many people have as much influence as you. Power might simply be defined as being able to influence. No one in any managerial position gets anything done without power. Top leaders have a high need for power. Throughout your career you have gradually gained more and more power. When you leave your job you will suddenly feel a loss of power. Marshall Goldsmith recounts one executive's perspective: “It was like falling off a cliff. My loss of power: ‘They are not bothering to return my phone calls.’ When I was the CEO, my phone calls always were immediately returned!”
Meaning: Most CEOs find true meaning in their work. They truly care about what their organization is doing for their clients. They value their workforce and are passionate about the mission of the business. You might fear that nothing you will do in the future do will ever make as much of a difference and create as much meaning for you as being CEO. You might be right. Often one of the most challenging parts of the succession process is to find new and uncharted ways to create meaning in your life.
Relationships: Unless you are working in a family business, you will have spent significantly more time with your co-workers, clients and suppliers than with your friends and family. As the leader, you like most of your co-workers - otherwise they would not be working for you anymore. You have been through highs and lows and have seen the best and worst in each other. The more you have been through together the closer you will be. Some of your co-workers will have become close friends and some feel like family. It can be very hard to leave your workplace friends and family.
Picking the Right Time
It will almost certainly be hard for you to choose the right time to slow down and hand over leadership. If your organization is achieving wonderful things, growing, making a difference for more people every year, adding cash to the bottom line and providing a wonderful work environment, why in the world would you want to leave?
If, on the other hand, you are falling behind or not achieving what you set out to do, your competitive drive won’t let you quit. After all, a lot of what you achieved was due to the fact that you kept going against all odds. You persevered when a lot of other people would have thrown in the towel. You will be convinced that you will be able to turn the ship around if only you are given a bit more time.
When deciding on the right time to leave, consider these two useful principles:
- You make the call - leave while you can still make the decision rather than having the decision made for you. Remember that being able to choose the right time to leave is a privilege. Many leaders are not that lucky. They either get pushed out of their position (by the board, other family members, or their successor) or their health forces them to step down. Treat this choice as the privilege it is and don’t simply bury your head in denial about your eventual departure.
- Go when you feel pulled towards something rather than when you feel pushed out of the business - While it will be difficult to leave your current position, try to make the move at least in part because you have ‘something better’ to do afterwards. Move while you are attracted to and intrigued by (and in demand for!) a different opportunity and before you are pushed out of your leadership position either by higher forces or by the fact that you have tired of the top job.
Building a Great Rest of Your Life
‘Who am I going to be?’ and 'What am I going to do?’ are the all-important questions you have to ask yourself as you prepare for succession.
Most retiring leaders leave their positions in their sixties when they are in good health and have twenty + years ahead of them. For the majority, a leisurely retirement spent sampling cruises and chipping away at their golf handicap is not an option. Many have tried it. Most realize that the desire to just rest and relax won’t last very long and that their drive and ambition did not simply disappear with their job. Simply stopping might therefore not be an option.
Today’s retiring leaders are looking to continue to make a contribution and pursue something that has true meaning. Instead of becoming a person who used to make a difference, they want to remain a person who still is making a difference.
They are also looking for happiness realized by living lives full of meaning and contribution, and enjoying close relationships with friends, family and the new team members in the ‘after job.’
If you are nearing succession, think about the rest of your life. Now is a great time to start planning and challenging yourself. How can you make a contribution? What makes you really happy? How can you find meaning?
You might have 20-30 years left. How can you make this time count for yourself and for the people around you?
If you have a path beyond your current leadership role that you believe will give you meaning and make you happy, it will be much easier for you to let go. If on the other hand, you see no options that excite you, you are more likely to hang on much longer than you should.
Three concrete things we encourage our clients to do when we're coaching them through handing over the baton of leadership of their business:
- Learn from others who have been in your shoes. Seek out peers who have gone through the process. Find out what has worked for them and what has not. Remember: a smart person learns from her mistakes. An even smarter person learns from the mistakes of others.
- ‘Interview’ the people who know you best about potential pitfalls and opportunities of the succession process. Treat this as a research project: What do your friends and family think? What are they most excited and most worried about for you? If they could give you once piece of advice, what would it be?
- In thinking about how to build a great rest of your life, fast-forward 5 years and write a holiday letter for 2015 to your friends and family. What did your life look like this year? How did you spend your time? What got you excited? What were the challenges? What are you looking forward to in 2016?
Note: this article was inspired by the writing of Marshall Goldsmith, in particular his book: Succession. Are You Ready? Harvard Business Press 2009.
Top 10 ways to build profit (and value) in your business when raising prices isn’t an option
By Lauren Owen, MBA
Today’s economy has resulted in some brutal price wars that make it difficult, if not impossible, for many companies to raise prices. Revenues have decreased dramatically in many cases. As a result, profits have taken a hit and some owners who were expecting to transition out of their businesses over the next several years have had to delay their exit plans.
Many of us have done as much cost cutting as possible. (Does the phrase “to the bone” ring a bell?) But based on the evidence we’re seeing from around the country in many different types of industries, we believe that opportunities to build profits remain. And profits are more important than ever for your company’s day-to-day survival and long-term health, and for laying the foundation for a successful ownership transition.
If you plan to sell your business to a third party, the majority of its appraised value will be based on its ability to generate profits and cash flow. Higher profits and cash flow generally equal higher value.
If you are going to sell or gift part of your business to family members, you might be thinking about seeking a lower appraised value to minimize your tax impact. But keep in mind that the company’s future survivability will ultimately depend on its profitability. Assuming that you are not one of the fortunate people whose retirement funds are securely in place, a large part of your estate is tied up in your business. You’ll likely be serving as “the bank” for at least part of the deal. The better the profits, the better your chances are of getting paid off and reaching your retirement goals.
While there are a lot of factors that affect profitability, we’re going to focus on gross profit--that is, what’s left after you subtract from your sales the costs of selling your product (called cost of goods sold) or delivering your service (cost of sales). While it is critical to keep an eye on all costs, in almost every business model the largest percentage of costs are tied up the company’s costs of goods sold. Because of this, even small changes in margin can have huge impacts.
Let’s say your sales are $1,000,000 million and your gross profit is $340,000. Stated as a percentage, you have a gross margin of 34%, which means that after you’ve paid for the goods that you sold, 34 cents out of every dollar you make in sales is “left over” to cover all of your other operating expenses. However, your industry peers’ gross margin is 35%. That 1% difference might not seem like a lot, until you realize that if you had achieved that same 35% margin in your company, your gross profit would have been $350,000. That’s $10,000 more that could have gone straight to your bottom line, assuming none of your other operating costs change.
Here’s my top 10 list for increasing profit and company value when there’s downward pressure on prices.
1. Set A Gross Profit Goal. Measure It Properly. Watch It Like Crazy.
Start by ensuring that your accounting system is categorizing the right costs in this area. You’ll need the ability to compare your company to others in your industry, and to do so, you’ve got to compare apples to apples. Be sure your cost of goods categories match your industry peers'. Industry benchmark studies, sometimes available from your trade association or Risk Management Association (RMA), can provide comparative data so you can learn what type of gross margins the profit leaders in your industry achieve and set appropriate gross margin goals. Get profit and loss statements with columns that show your numbers in both dollars and percentages. That way you can see changes in gross profit in absolute terms, not just changes due to sales increases or decreases. You should track your gross margin on at least a monthly, if not weekly, basis so you can take quick action.
2. Tune Up Your Product Mix
Once you have your costs in the right buckets, you have the “high level” view of gross profits--your company’s overall gross profit, which is made up of the gross profit of each of the items you sold. This, in turn, adds up to the total gross profit of each of your product lines. This adds up to the gross profit in area, or department, of products or services. While you can measure your historical gross profit this way, ultimately the only way to really manage it going forward is to drill down backwards:
Total Gross Margin
Gross Margin by Department
Gross Margin by Product (or Service) Line
Gross margin of each SKU (or Stock Unit) or Job
Breaking down your gross margins in this way can help you identify which aspects of your business are helping you meet your goals and which might be getting in the way. For example, I once coached a jeweler who was a member of an industry performance group. He was distressed about his low gross margin percentage as compared to his group peers. He was also proud of his large watch department and the number of watches he carried in each product line. But when we took a look at the gross margins of each of his watch lines, we found that there were only a few that generated what he considered an acceptable margin. And in each line, there were even fewer styles in each watch line that sold on a regular basis and produced a good margin. Although his margins in his other departments were higher than the group’s average, his low watch margins served to drag down his company-wide gross margin. As a result, he trimmed his watch department way back to only the top selling lines and in those lines, only the top margin producing and selling styles. As an extra bonus, he generated more cash from carrying a lot less inventory.
To do this type of analysis, you’ll need a good accounting system that can generate historical data that shows gross margin by department, by product or service line and by SKU (or job). A capable accounting professional should be able to get you set up to do this.
3. Look at Pricing and Product Strategy
As we noted earlier, economic conditions have resulted in downward price pressures that can make it very difficult to raise prices, especially if you carry goods or deliver services that are identical to everyone else’s. Customers can and will shop the competition in town and on the web for cheaper options. When you offer unique products and services, it’s a lot harder for them to price compare. You can’t be all things to all people. When thinking about adjusting your mix, think about what your company, and your company alone, can do particularly well.
Find other ways to add value to or customize your product or service. For example, some community pharmacies offer home delivery, a service that automatically coordinates prescription refills, and custom compounded formulations (with higher margins). Some retailers are creating more custom designs and offering first dibs on new products. Others offer other “add-on” products: warranties, cleaning, or “tune-ups” as part of their selling price. Small wineries are selling direct to market via wine clubs, thereby taking back margin that previously went to distributors. All of these strategies have helped other businesses, at the very least, hold their prices, retain or even increase market share, and at times increase prices. The result: higher margins.
4. Discount With Purpose Not from Habit
If you need to discount to stay alive, by all means do so. But do it strategically by knowing how much more you’ll need to sell at the lower price to make up for the discount. Also, don’t make it too easy for your sales people to automatically discount to make a sale: if you pay your sales people on commission, base it on gross margin, not top line sales, so that if they discount to make the sale, they’ll feel the pain as well.
5. Buy Better and Smarter
Buy products with your target margin and your customers' price points in mind. For example, your target margin is 50%, and your research shows that $200 is the average selling price point at which your customers buy. Find products that you can buy for $100 and that your customers will think are a good value at that $200 price point. Also, negotiate discounts for early payments or bulk purchases from your vendors. Look for other sources that are more cost effective.
One company examined their purchases and found that managers frequently placed last minute orders without paying attention to price, costing the company money. Once they consistently centralized the purchasing function and required purchase orders for payments (particularly with primary vendors), it problem of extra costs associated with rush orders was eliminated.
6. Introduce Counter-Cyclical Products
If you have a slow season, think about introducing counter-cyclical products or services to your core business to generate incremental profits and cash flow. One company that sells floor based heating systems (with a traditional slow summer sales season), introduced a de-icing product that could be sold and installed during the summer. They added $80,000 to their bottom line in the first year of the new product
7. Take Action
A very wise person said that hope is not a strategy. Take action when needed. Don’t let problems linger. If you made a buying mistake, don’t hold on to the product. Take the hit and get it out the door so you can generate cash to buy or produce products that will sell.
8. Look Around You
Find out what the leaders in your industry are doing. As long as they are not direct competitors, most are willing to share ideas. Join a peer group that shares numbers, not just war stories. I know many businesses that are alive and flourishing even in today’s challenging times because of ideas and insights they gained from such groups.
9. Think Outside the Box
Look outside your industry for ideas. We can all learn lessons from how other industries and business models are maneuvering through these times. The New York Times has an excellent online series called “How I Saved My Company” that features videos of business owners sharing how they got their companies through the recession.
10. Nothing Ventured, Nothing Gained.
Ships are safest in harbors, but that’s not where they belong. Are you spending too much time idling in your safe harbor? Sometimes you have to make strategic decisions that are outside the prevailing wisdom. While many are cutting back on advertising and marketing, now might be the right time to increase your visibility. Invest in sales training. Look at picking up some of the substantial talent and experience that’s currently on the market.
Bottom line to increase your bottom line? Act with the conviction that there are profit opportunities out there. Don’t abandon your exit plans just yet. Think of this period as an opportunity for more time to build company value, develop a thought-out transition plan and mentor your successor(s).
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Send an email to ChangeAbility@redpointcoaching.com. We welcome your feedback!
ChangeAbility is a publication of Redpoint Succession and Leadership Coaching, which is run by Lauren Owen, MBA and Urs Koenig PhD, MBA.
Copyright Redpoint Succession and Leadership Coaching, 2010. All rights reserved
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