Super Blog: The True Cost of Doing Bad Business

The True Cost of Doing Bad Business.


I have spent some time showing you some of the perils that the business world faces knowingly, or as I advocate, mostly in a state of abject negligence.

Today is a different day.

Today I am going to give you a blog that will identify 3 of the many areas of loss and cost that stem directly from doing Bad Business. Whether from negligent mismanagement or direct intent to make money from less than respect-worthy methods, the costs of Bad Business can be calculated, and have an impact on everyone – taxpayers, employees and consumers alike.

Already as I write this blog, I know that this issue alone merits its’ own treatise, one that I will pursue in the moderately near future. Already I can hear the thousands of managers’ screams as they realize that I do indeed call their decision-making into question. And already I can hear a percentage of those screams die on the lips of those same managers as they also realize why their decisions were wrong, and what can be done to fix them today, and going forward.


Prior to the election in November, 2008, several key business leaders were interviewed on TV and the general consensus was that a percentage, to the minds of the interviewees, substantially less than 9% of managers were competent at their jobs.

That statistic made some headlines and was duly forgotten in the following weeks’ news.

Here’s what it told me: somebody HIRED 91% of their managers as bad managers and has yet to fix that problem. Actually, the vast majority of companies hired 91% of their managers poorly and that majority of business leaders have never addressed their hiring problem.

Why would most companies be satisfied having sub-par management? Sub-par *anything*???

The answer is that they believe that the cost of doing *better* is too high and that consumers will not tolerate the price increase.

How often have we heard that line? The line that “margins are low, so we can’t afford to bump the price up in order to cover massive cost increases for new projects” is always used when it is convenient for someone’s purpose to not have to do something, but it never seems to come out the next week when the same executive announces their forward thinking project that might just get the company to the forefront of ideas that they happen to like.

In reality, the line has nothing to do with the facts in hand. Bad business decisions cost companies far more than all the deliberate damage inflicted on them by competition and criminals combined. Fixing the bad business decisions actually saves you money – it doesn’t cost more. It is faulty logic to argue against fixing bad business decisions because it *costs too much* to do it right.

And because you’re fixing a bad decision in no way necessitates any relationship to pricing. If the cost of fixing a bad decision is $1,000,000 but the savings from doing it right will be $6,500,000, where is the price increase needed? It is inherently flawed logic, and a fallacious argument.

Don’t listen to the line any more. Listen to facts and you make up your mind as to what the right steps are to get your company back on the pathway to success.

So here are just a handful of examples of situations you have probably heard of where bad business takes place. See what the true costs are, and see if your company suffers from any of these bad business decisions:

1) Employee Turnover/Talent Management.

There is an old adage in recruiting circles and HR departments that goes something like this – There are no bad jobs, only bad bosses. The number one reason people choose to look for other work is because they work for a boss that they do not get along with or do not respect. If you see an employee turnover every once in a while, that would not be a problem – sure there are bound to be some personalities and work habits that just don’t mesh. But when you see high employee turnover rates like 30%, 40%, 50%, 80%, you know that there is a real problem with the manager(s) in question and with the company as a whole.
But how does that cost a company money? Isn’t it keeping the cost of employee salaries low? Doesn’t that keep a minimized employee benefit payment, a more flexible workforce, and sometimes generate government retraining subsidies as cost off-sets? Isn’t a high turn-over rate sometimes a good thing?

Yes, it does all of those things, but it comes with a monstrously high price tag hidden in the weeds. And no, high-employee turnover rates are not good things. Here’s why:

Recruitment costs. Let’s say that you have a fairly low employee turnover rate, all new employees are successful hires, and all of them are quick learners, getting to full productivity in a little over 4 months. Let’s also say that you have a turnover of about 30 employees per year, with an average salary of only $20,000 per employee.

It usually takes a good month of training for employees to get up to speed, and that training involves their supervisor’s time, trainers’ time, administrations’ time, and so on. A variety of national estimates have indicated that the average cost to recruit an employee from opening the position to making the hire costs on average between $2,400 and $7,000 per employee, so we’ll take that on as well.

If you screen 100 candidates to fill each position, and it takes on average 6 weeks for the position to get filled then the cost of the presumably bad employees that were let go, combined with the learning curve costs of the new employees, recruiting costs, candidate interview and screening costs, and everything else rolled in, it’s costing you more than $1,000,000 each year to maintain that, according to Gevity, a company in the recruiting costs management field. And that’s estimating under optimal circumstances.

Gevity then goes on to estimate that if you improve your employee retention rate by just 40% then you can save between $400,000 and $665,000 per year, based on that limited example above.

Now let’s take a more representative sample of the worst case offenders. These are companies that each year turn over 500-1000 employees a year or more. The costs multiply very rapidly, and using the same principle the average costs to the offending company climb to a massive amount. In this example, Gevity’s calculator estimates that improving their employee retention by 40% could save that offending company more than $325 million dollars a year.

If the government retraining subsidies don’t at least pay you that much money, and you don’t save enough money to make up the difference, then you’ve made a pretty bad business decision.

If you would like to see how your company’s employee turnover rate is affecting your business, drop on by their website calculator at http://www.gevity.com/tools/recruiting_cost_calculator.html


Not to mention that you’re burning your bridges with your local community. You can’t measure the impact of negativity created by that volume of negative experiences as former employees are unleashed on your local marketplace. The challenges in recruiting new talent or top level talent only multiply when you’ve created a bad reputation as an employer. The old adage of ‘watch your step on the way up the ladder – you never know when one day the person you stepped on may become your boss’ applies surprisingly often.

These ex-employees may use your product or service – they may in fact be your customers as well as your former employees. Would you react happily to the company that just terminated you? Probably not. Nor would your family. Nor your friends. Word of mouth advertising works both for and against you, so as an additional incalculable cost of bad management on an HR side, you also have a cost in terms of sales and marketing that has just become tougher because of the initial bad HR strategy.

The next related cost-point comes when we start to talk about networks. There are some advantages to having experienced, career-loyal employees in your company. One of them is the size of the network they develop within your company, your client base, and your suppliers. They know how to find solutions when other, newer faces can only throw up their hands in defeat. They know how your company works when it’s at its best, and how it collapses when it fails. They know what needs reinforcing, and what can be exploited for more success. If you keep flipping employees, you don’t have those networks at your disposal. Because that corporate memory just walked out your door on the last firing spree or because of their own dissatisfaction with the workplace environment.


2) Innovation.

I cannot count the number of companies I have worked for, done business with, or encountered who have done ‘the corporate line’ of putting up motivational posters to encourage employees to submit ‘great ideas’ to save or make the company more money. Each year, almost as a token measure, the company takes one or more of these ideas and implements them, makes or saves a few extra bucks and declares this their spirit and corporate culture of innovation. In reality it is a spirit of condescension almost like none other. Here’s why:

The company has no more value for the employee than the 15 minutes of fame that it took to select an idea in the first place. Sure, there may be a token bonus, but in reality the modern corporation doesn’t truly reward innovation. The number of promotions or long term contracts signed as a reward or incentive that I have heard of could be counted on the opposable thumbs of one elephant.

It doesn’t happen, even if it means the company is now able to make millions in additional revenue. To put it in context – if one of your sales people increased their sales volumes by $1,000,000 a year or more, they’d be getting one heck of a commission cheque and a pretty sizeable bonus.

If one of your employees comes up with a $1,000,000 idea and you’re giving them a $100 bonus, you’re not rewarding innovation, you’re encouraging people to take their ideas outside the company where it’ll do them more good.

Innovation is more than just good ideas…it’s the building of an ongoing iterative process. The evolution of a corporate memory is what helps the evolution of small ideas to grow into game-changing ideas. It’s also what keeps you from paying for the cost of bad ideas tried over and over again.

So how does this apply? Here’s one solid example out of literally hundreds I can offer you that far too many companies are ignoring to their own cost:

In House Software Development.

So many major corporations and smaller firms contract others to supply the tailored software they depend on for their mission-critical operations these days. For years now I have been able to call company after company and, while on hold, discover that their applications were unavailable and they were waiting for some other company to fix them. Downtime, non-productive, profitless,wasted time.

Or that their latest, brand new software actually didn’t do what they needed – they couldn’t fix errors on an account, didn’t have the functionality to do obvious job-related tasks, did not have a tool to get information that they had access to previously under their older, manual system, and so on. You know exactly the kinds of problems I’m referring to if you’ve ever had a question about a bill, needed to make a payment to a supplier, tried to find out if a Christmas gift was available at your local store, or wanted to get some obvious help about assembling or using or troubleshooting a product you’d just purchased.

This answer never seems to make sense, which ironically does make sense because the software they are using to do their jobs was built for something else and only highly tweaked for their use. And when it breaks, they have to go back to the original company to get it fixed at usually higher than desired rates.

The original design team has usually moved on to other projects by this point and is no longer available to build a tailored solution so new faces and players come to the table to reinvent the solution (wheel) at the last minute. The cost usually is prohibitive so updates and upgrades are delayed until they absolutely must be incurred. Once those updates, upgrades, and the ever infamous ‘patches’ are installed, there is inevitably a period of costly disaster while the bugs are worked out. And when it’s all done, it still falls far short of what is truly needed to do the work at hand. The company just couldn’t afford all the bells and whistles.

The productivity losses are astronomical, overtime always soars, and customer dissatisfaction…don’t get me started.

And yet…. No one company I have ever spoken to about this has ever realistically considered that the millions that they pay to outsourced coders and software architects could instead be paid to IN-HOUSE staff instead.

*WARNING! WARNING! WARNING! Radical Thought Ahead!*

Have you ever costed out what it would take to build your key applications in-house instead of contracting it out? You wouldn’t have to pay consultancy rates, for starters, or pay for someone else’s development costs and overhead – these would all be costs you would control.

You wouldn’t have a budgetary constraint based on another firm’s timelines and productivity cycles, either.

Oh, but what would you do with all those staffers once the project was finished? You would have to let them go, right? And what about our overhead and development costs? Won’t those be much higher?

WRONG.

That’s where every single bad management decision on the subject starts. The truth is that the same staff would be needed to start right away designing the next iteration of the software, or a new application to innovate a new solution, or design your new online purchasing security features, your new building access controls, your new viral marketing campaign, your new HR database, your new management application tools, your new office automation software, your new organizational management products, or any of hundreds of other projects. You’re not building a team to build a singular product – they’re building an infrastructure for you going forward with an array of corollary products you will benefit from for years and years to come.

Think about it. How many different computer software applications are you forever negotiating new contracts with day, after day, after day?

Sure, they’re on a variety of subjects, platforms, etc. but aren’t your project managers for these projects and in-house interfacing employees often the same people?

When you’re facing needs from a variety of different departments simultaneously, it’s easy to say that your answers always have to lie outside your company, but if you incrementally build an in-house development department you can cut the extra costs and increase your resulting productivity and satisfaction with the tools you end up with and build your capacity to plan, design, and implement software and technology development as you go. You can even design the CBT (Computer Based Training) modules in-house with the people who built the real thing and know best what it is designed to do and what it cannot do.

What you end up with is a unique advantage that your suppliers can’t offer – you own all the rights to your technology projects, and you can resell them to others if you feel like it. Either way, you don’t have to pay anyone else any licensing fees of any kind. You have no availability issues in terms of mission-critical timelines, as you already have the staff on hand, so your downtime, lost sales and overtime costs are much more controllable.

And if ever there comes a day when you feel that you will not need to develop new technologies for your own purposes, you now have a widely experienced and potent team that can design software solutions for others as an additional revenue stream for your company, while simultaneously subsidizing the costs of your development teams for any future in-house requirements you may have. This one idea alone can actually end up not just saving you millions, but making you millions.

In many ways it’s like renting or paying a mortgage. Hiring consultants is ‘renting.’ Developing in-house would be ‘having a mortgage.’ When you’re done with the rental, all you have are expenses. When you’re done with the mortgage you have assets you can sell, and your on-going costs drop dramatically.

As with a mortgage, this only works as a long-term plan – it can’t suddenly crop up overnight and solve your financial woes, but down the road it pays off over and over again.

3) The Company War Chest.


Every famous personal finance advisor is spreading the word about how much money it takes to keep you afloat during the current financial hard times, and their advice ranges from suggesting you have 8 months of income set aside as liquid assets to 2 years, depending on how long they feel it will take to out last the market and regain your earning level in the event of an involuntary loss of employment.

They also suggest you keep your credit purchases to a relative minimum, and keep them paid off and current, while negotiating any liabilities into long term loans at historically low interest rates.

They suggest you purchase long term value capital assets like a home that will provide value for a long time and will also force savings and investment in tangible hard real-property.

In other words, save your money, spend within your means, set aside for big purchases, save for rainy days and emergencies.

And corporate entities should not be following this same mantra…….why?

If companies used the same basis that people should for building a safety-valve war chest, then 10% of their annual revenues would be set aside as an investment, and after 6 or 7 years (with compound interest/investment income) they would have an account that had a whole year’s worth of revenues as investments producing additional income as a *just-in-case* fund.

They would never again have a financial crisis they couldn’t reposition through. They would never again have to rely on a government bailout.
They would never again have to rely on the exorbitant cost of revolving credit for their routine operations and purchases.
They would never again be vulnerable to catastrophic organizational failure.
They would never have to worry about chasing down investors to fund ventures – they could make that decision for themselves based on having the war chest on hand to do the job.
And their financially weaker competitors would be far less likely to want to engage in anti-competitive behaviours knowing that them can out last them and survive anything they can throw at them.

Also…by that point, if the company decided that their primary market had run its course or become too competitive to be profitable, they could liquidate all of their assets and still be profitable doing nothing more than managing their investments. The worst case scenario is the company is in a position to always be profitable from that day forward.

And corporate leaders don’t like this level of security and profitability because …. they prefer reporting periodic losses and lower than necessary profits? They prefer having to beg banks and investors to buy their big capital investments for them and get charged more for the privilege instead of being able to pay for them in cash? They prefer being at catastrophic risk of failure when the supply of credit dries up and interest rates skyrocket like they did in the late 70’s?

Really. Hmmm.

It’s not like the money isn’t being used to generate profit – that’s its’ primary purpose in a savings plan.

I’m still waiting for an honest answer as to why this would be a bad idea.

The reason everyone gives is that they don’t have the money to go around to be able to save 10% of revenues, especially when profits are less in than 10% margins.

So….the difference between that answer for companies, and the same answer from people is….precisely….what?

If it is not acceptable for a person to not get on top of their financial security planning, then why is it any more acceptable for a company who has employees and suppliers dependent on their financial stability and liquidity to shirk their fiduciary duties?

Good financial management is one of the cornerstones of running a successful business. Savings needs to be factored in to cost structures for companies just as much as it does for people. This just isn’t something that’s negotiable. How much to save, when to save, how to save…all are negotiable and discussable. Not saving at all isn’t.

For long term success we invest in retirement savings so that when we get to a point where our earnings from active employment tail off we don’t lose one thin dime from the quality of life we aim to live. Companies need the same kind of foresight, because as sure as the sun will come up tomorrow, there will always be ups and downs in the business world, and no company should be left holding an empty bag in front of the nation begging for alms as a result of challenges they could have foreseen and protected against.

People, companies, and governments have a lot to learn, remember, and respect about the value of having a full treasury when you happen to need it.

Bad Business decisions make companies pay for the same mistakes over and over again, and usually are the first things defended as budgetary line items. Bad managers will often find hundreds of excuses to defend bad decisions, even to the point of making them sound perfectly logical by using theoretically opposite options; e.g. “Either we hire those consultants at that rate or it’ll cost us so much more to do it in-house.” Where superior managers thrive is in their ability to see past those tricks and teach their employees to think about those decisions in ways that actually make sense; e.g. “If we build an in-house department for that we can not only have them here for this project, but we’ll also have them available to work on these 6 other things we’ve wanted to do but never had the budget for before. Amortized over seven projects it’ll save us millions over hiring it done by outsiders.”

See beyond today and the decisions that take the responsibility off your shoulders the fastest, and start seeing the decisions you will genuinely be proud of and heralded for 10, 20, 30, 50 years from now. Start the Smart Business Revolution at your office and earn your company the strength it needs to not only be the best at what it does, but to be the best for a long, long, long time to come.

If you only take information in condensed volumes like soup, try these snippets on for size:

Hire people who are better than you at their jobs, not people you can replace in a pinch.

If you have a disposable workforce, you have a disposable company.

The wheel’s already been invented. Is that good enough for you, or is that just the starting point for your innovation going forward?

Stop paying for the same mistakes over and over again. Fix the bad decisions and move forward.

Are you allergic to new ways to make money? If not, consider how each decision you make is a potential opportunity to make more money today, tomorrow, and down the road.

Invest in making your company good for more than just today. Invest in being the best for years to come.

Save, for crying out loud, save!

And if you only follow one recommendation from this issue, please let it be this one: if you don’t have the money to do something right, where are you going to get the money to do it over? And over? And over?

Promise me you’ll think about these every time you see someone exercising their right to make Bad Business decisions, and feel free to send me some examples, even examples of your own. We’ve all made them. The only question is have we learned from them?