Unintended Consequences

A few weeks ago I was chatting with a business owner about the salary and bonus structure at his company. Like many companies, this owner paid out bonuses at the end of each year. I asked him if he’d considered paying them out twice a year or during the summer months.

The owner said the end-of-year bonus schedule began as a necessity but had become more of a tradition. Wondering out loud, I told him that I assumed he chose the end-of-year because it encourages employees to stay put through year’s end.


And with that, we both came to the same conclusion: Should the bonus schedule reward employees who grind it out through the end of the year, take the bonus and then run? It was an unintended consequence of the schedule he hadn’t considered.

This experience reminded me of another business decision that had unintended consequences.

I worked for a company years ago which allowed employees to spend an average of $75 a day on food. This was not a per diem. If we spent $50 on food, that’s all we could expense. But as long as we kept the average at $75 or less we could eat cheap for a couple of days and then go out for a nice dinner the night before we flew home. This allowed for a level of meal flexibility especially when we stayed in expensive cities with great restaurants like New York or Chicago.

But management didn’t like approving these expensive meals even when we spent far less on some days. So they decided to cap meal reimbursement at $75 a day. No more averaging out to $75. Like before, we could only expense what we spent each day.

Can you predict what happened next?

After the policy change, employees who had casually tracked their meal expenses now went to great lengths to ensure they spent their full $75/day. The new policy made us feel the company no longer trusted us, and many decided to stick it to the man.

During this time, I approved expense reports for about 40 technicians who supported conferences around the world. They often lived out of suitcases, worked long hours and appreciated a nice meal at the completion of an event after living on room service for days.  A few techs complained about the policy, but there was nothing I could do about it.

A few weeks later, expense reports began to trickle in. I was interested to see if the policy would change behavior. Over the first month, the average meal cost per day increased from about $49 a day to nearly $65 or a 30% increase. Subsequent months saw the average inch closer to $68 a day.

I laughed at one expense report that came across my desk. One technician had managed to spend exactly $75 on the day he flew out of Seattle and the day he returned. A closer inspection of his expense report showed that he had purchased $75 (about 5 pounds) worth of cinnamon bears at the airport on his day of departure and another $75 worth the day he returned.

The policy stated that any food was expensable so he was within the rules. I approved his expense report and asked him to bring me a few cinnamon bears.

I can’t imagine this is what management had in mind when they changed the meal policy.

Expense reports with creative meal planning became the norm rather than the exception in years past. I signed expense reports that included pounds of Gobstoppers, Swedish Fish and Whoppers. I also signed reports with $50 worth of food from McDonalds and Taco Bell.

But the only time I recall getting a call from corporate was when one technician tried to expense a couple of bags of Starbucks coffee beans. I considered it food, but someone higher up did not agree.


Homemade Bread

If you drive down Canyon View Drive in Santa Clara UT on a Saturday afternoon you might find Nathan and Logan selling bread on the corner across from the elementary school.

I’ve purchased a few loaves of bread since moving to Santa Clara last year, but today I decided to stop and chat with the bakers for a few minutes before purchasing three loaves of delicious wheat bread. Here’s what I learned:

1. Nathan and Logan are in the 8th grade. They are best friends.

2. They make the bread themselves each Saturday morning.

3. They always make 32 loaves and sell them for $5 each.

4. Wheat is the most popular seller. But they also make white and cinnamon swirl on occasion.

5. The money they earn goes into a savings account for college.

6. They start selling around 10 am and stay on the corner until all 32 loaves are sold.

7. Why did they choose this location? “Because there are two stop signs. When people stop they see our sign.”

These budding entrepreneurs have given a lot of thought to their weekend business. I told them that one Saturday I drove by their table and had planned to purchase bread on my way home. But they were gone when I returned. “We usually sell out of bread by 2pm, sometimes sooner”, said Daniel.

I bid them farewell and told them both how much I enjoyed their bread and admired their business sense. When I pulled away, I saw two customers walking to their table and another car had pulled over. Today’s bread won’t last much longer.

Competing on Price

Competing primarily on price isn’t a very fun way to run a business.

Unless you’re Walmart. But even then you don’t want to supply pickles to the behemoth.

Just over a year ago I worked for a company that competed solely on price. New employees were hired and given a few dollars above minimum wage. Each year benefits were reduced and more restrictions were placed on promotions. We may not be the best at what we did, but no way would anyone undercut our price!

It was a vicious cycle. A race to the bottom.

The work was technical in nature and not always easy to explain to those who were most in need of our services. Imagine going into a Best Buy and searching for a printer. The number of models and features are overwhelming to many buyers. In that state of confusion, many will select the “safe” option which tends to be the least expensive. I’ll bet the thinking goes something like “If I make a mistake, at least it won’t be an expensive one.”

We were the Walmart of our industry: big and cheap. Our prices were so low that we often had to explain how we stayed in business charging below-market rates. A number of customers assumed our low rates reflected subpar technical skills and took their business elsewhere.

Seth Godin refers to this as the tyranny of low price.

It’s been just the opposite at my current employer, Puget Systems.

Instead of competing on price we compete on quality and service. Our goal, starting from the owner on down, is to build the best quality PC we can. Sometimes that means intentionally choosing not to compete at every price point. Take the sub $750 desktop and laptop, products heavily advertised by Dell and HP, for example. We don’t offer a model in the price range, not because we can’t but because doing so would lead to a number of compromises in quality we aren’t willing to make.

What I’ve learned is that companies that compete solely on price seldom give their customers reason to look at anything but the bottom line. Companies such as Walmart, Amazon and even Costco can offer a low price and still survive but only if they grow so large that the massive quantities sold to make up for the low margins.

What separates your product or service from the competition besides price?

Short Cut Selling

When it comes to sales, I have very little experience.  Let me rephrase that: I have none. My career has been spent in either marketing or management roles.

But for the past couple of months I’ve found myself in a sales role at Puget Systems. We are a small company that builds high-end computers. A decked out system can often cost as much as a car, so it’s far from an impulse purchase. My job is to find out what the customer needs and see if we can build a system that meets those needs. Most people I can help. Some I can’t, and in those instances, I will direct them to a company that can.

After a back-and-forth discussion on Twitter with John Obeto I’m beginning to doubt that what I do has anything to do with sales, at least in the manner in which he describes.

The discussion started when I questioned Microsoft’s recent move to pay retail sales staff to recommend Windows Phones. Subsequent news reports have used words such as incentivize, subsidize, or commission in place of pay, but let’s call it what it is.

If you walk into an AT&T, Verizon, Sprint or T-Mobile store looking for a new phone, would you want to know if the sales person is being paid a kickback for each Windows Phone he or she sales? I believe such kickbacks erode trust in not only the sales person but the brand. Microsoft is reportedly putting up a $200 million bounty to encourage sales of their oft admired but slow selling smartphones. Nokia will also get in the action, tossing at least another $100 million into the pot.

I speak to people each day who are trying to make sense of the PC industry. Many are downright frustrated with the focus on technical specs, hype and buzzwords that do nothing but confuse the average PC buyer. When they ask for assistance, they are putting their trust in me to cut through the crap and help them make an informed decision. It would be foolish of me to take that trust for granted.

But what if Nvidia decided to “incentivize” me to recommend their video cards to every gamer who walked through our doors? If I were working with you to select a new gaming PC is that something you’d like to know beforehand?

Luckily, I don’t have to decide between taking a bribe and doing what’s best for our customers. Not once have I been told to sell a certain brand or model, or convince customers to upgrade to more expensive components they don’t need. John calls such incentives “customary practice” in electronics retail, but that’s not encouraging given my experience at Best Buy. I wonder if Circuit City and Ultimate Electronics also followed that customary practice?

Gartner just released their latest report on PC shipments which were down nearly 6% in the 4Q of 2011. Yet we are experiencing record growth, and I attribute much of that to how we treat our customers. That trust leads to personal recommendations and return customers.

Yes, I earn a wage, but it’s not tied to selling a specific model or brand and I can’t imagine a scenario where anyone in sales would be allowed to take a kickback from a supplier. My job is to take care of the customer the best way I can. I’m given an incredible amount of leeway to interpret what the means. Most of my day is spent educating customers. If I’m lucky, I will have gained their trust and put them in a better position to make an informed decision.

But I work my butt off to earn that trust, and the thought of trading that trust for a few bucks is mind boggling. That John refers to us “salesdrones” tells me all I need to know as I strive to change that perception.

Doing Business In Person

With all the reports of Black Friday and Cyber Monday settings online sales records it’s easy to forgot what it’s like to do business in person.

Last week I had the chance to assist someone in selecting a new computer. She already had a good idea of what she wanted. I made a couple of suggestions that saved her a few bucks. Working for a company that’s entirely customer focused is something I haven’t done for a while.

We finished benchmarking and testing her system on Friday. I called to let her know it was ready for pickup. That evening, just before I went home for the weekend, I walked her through the basics of her new system.

That was the best part because I could see she was excited about what she’d purchased and could appreciate the workmanship that had gone into assembly of her system. That’s not something I’ve experienced when I purchased Kim’s computer from Dell because her case was never meant to be removed by someone who isn’t an electrical engineer.

I told her thank you and shook her hand before saying goodbye.

That evening I returned home to finish up my Christmas shopping at Amazon. But it wasn’t the same nor should I expect it to be.

Is meeting with customers only something the owner or senior management does at your company?

Face to face communication with customers can be time consuming and costly. There are many reasons why it won’t work for many businesses.

But when it does, it’s worth the effort. 

Embracing Constraints

When my business partner and I began Ox Consulting, we made a list of services we could potentially offer our customers. I was surprised at how many type of projects we could bid on. When starting out, it’s natural to cast your net far and wide. The market appears large and the more diverse projects we could take on, the more money we’d earn.

But this is not the correct approach. At least it wasn’t for us.

When it came time to list our services on our website, we decided to scale back our offerings and revisit our list. After a number of conversations, we crossed off every service except three. Those remaining had three things in common:

1. We loved to do them

2. We knew we could do our best work on them

3. We could complete them quickly

As a start-up, it initially seemed counter-intuitive to limit the number of service we offered. But we both felt strongly that this was the best approach. No need to bite off more than we could chew. Plus, we could always expand our services, but we knew scaling back and leaving money on the table would be difficult. So why not start by only accepting those projects we really enjoyed doing? Isn’t this at least one of the reasons we decided to branch off on our own? Of course it was.

So what what began sounding counter-intuitive become anything but.

Instead of taking on on projects outside of our self-imposed constraints, we focused on what we did well which, in turn, improved those skills even more so. It also makes saying, “No thank you” that much easier.

A week doesn’t go by where I field a call from someone asking us to bid on a large project that doesn’t fit any of the three characteristics I listed.  If we didn’t have these constraints in place, we’d eventually accept a project that’s outside of our skillset, would take six months to complete, and wouldn’t be worth the larger check.

The customer also wins, because I’m able to refer them to someone who is a much better fit than Ox is. I haven’t had a single person unhappy with me when I tell them their project sounds interesting, but falls outside the size or type of project we do best. What I’ve found is that I earn their trust by sending them to someone who is a better fit. And if they have a project that does fit Ox, they usually return knowing that we’ll knock it out of the park for them.

It has taken a few years working together to determine our sweet spot in terms of type and size of projects. But we both agreed on those topics before we began working together, and I’m convinced it’s saved us from accepting at least three poison projects. That may not sound like much, but even a single project that drags on for months can extinguish every ounce of excitement and momentum small businesses thrive on.

Do you impose constraints on the service and products you offer? Or do you feel that limits your ability to respond to market conditions and ever changing customer needs?