VenturePORT Series - Staffing and Management
Many organizations fail to realize people play a critical role in organizational success. Great partners and employees do not come easily, and they don't stay easily. The people who can really make a difference for your organization generally have choices, if not at the stage of their lives when they meet you, then later. Good businesses always need good people, so the competition often is fierce for reliable people with skills and a consistently positive, can-do attitude.
Depending on the nature of your business concept, people will be one of your greatest assets and greatest challenges. Almost all of the successful entrepreneurs we talked to say finding and hiring people to share their vision and support their work is one of the most difficult parts of running a business. No matter what you do, you will probably need people to create your product or service, deliver it, install it, maintain it, or administer your office or accounting. Those who find a business requiring relatively few people have an easier job as opposed those whose business demands a large labor force. Business ideas requiring several people often need more cash to get started and maintain than those that don't. It will require someone to focus on the challenging job of recruiting and retaining employees.
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The Connection Between Success and People
Many organizations overlook the importance of people, viewing them as a commodity they can recruit and lay off at will. Many corporations think little of restructurings or other organizational changes that eliminate employees and reduce morale. In fact, poor management of employees at larger firms provides opportunities for entrepreneurs, who often leave big companies to develop a business related to what their former employer does. They can raid their former employer for employees and customers. It's much harder to do this when the company you want to compete with has mostly loyal, happy employees. Why would they leave the safety of a good company for a risky start-up?
Companies overlook people because, traditionally, it was difficult for big organizations to measure the impact of loyalty or turnover. In fact, many companies expect a large part of their workforce to leave year after year, often because the jobs have little growth opportunity and qualified people will move on. Many people flip burgers at one time or another. But, most don't do it forever. In fact, many companies want people to leave, because if year after year they have to give raises to someone flipping burgers, after 20 years that person is earning a lot of money.
Today, more and more evidence and research indicates people represent a key competitive edge in many industries. Organizations with engaged employees who have an understanding of organizational goals and who are focused on delivering customer satisfaction actually outperform organizations that don't. A not-for-profit research organization known as the Forum for People Performance Management and Measurement, affiliated with the department of Integrated Marketing Communications at Northwestern University, has conducted its own research and amassed a considerable database of other research finding a direct link between employee engagement and customer satisfaction — and between customer satisfaction and profitability.
You might think this connection only occurs with customer-facing employees whose cheerfulness or grumpiness has a lot to do with how customers feel. In fact, the research indicates all employees count. Why not? If the delivery guy is late, the customer is unhappy. If the shipping department team puts the wrong products in the shipping container, the customer is unhappy. When assembly-line workers lose focus, they make mistakes, and defective products are the result.
Unless you invent the miraculous idea needing no people, your ability to compete may depend on your ability to recruit and engage employees who truly care about making the customer happy.
Many successful entrepreneurs rapidly carve a niche because of their ability to hire and engage employees eager to please the customer and beat the competition. So many big companies have either failed to discover this competitive advantage or are unable to fire up the troops to consistently delight customers. You will have a powerful competitive edge if you get the connection between financial results, satisfied customers, and engaged people. By people, we mean, not only your employees, but any companies that might re-sell your product or service — not to mention the vendors who supply what you need to make your customers happy.
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Employees and Independent Contractors
In the Legal section, you read about the regulatory distinction between employees and independent contractors. Make absolutely certain you follow the rules to avoid unnecessary complexities later on. The temptation to use independent contractors, as opposed to employees, arises not just from a desire to reduce costs related to taxes and state-mandated benefits, but a desire to reduce fixed expenses as well. In fact, the primary reason to use independent contractors isn't to bypass state and federal taxes, which amount to little more than ten percent of your wages (compared to up to 60 percent in some countries), but to reduce fixed expenses. One key to getting to break-even as fast as possible is keeping your fixed costs down. Independent contractors work when you, and their other clients, have jobs to give them. You don't pay them a salary, you pay a fee for services based on mutually agreed upon payment terms often allowing you to collect the money from your clients just about the time you have to pay your independent contractors.
Employees are people who work for your company either full-time or part-time as their primary form of employment. They use your equipment, training, processes, or materials. You pay them according to a payroll schedule you set up, usually twice a month, but it can also be weekly, every two weeks, or monthly. You can pay employees on an hourly or salaried basis. Either way, you will have to set up a payroll of some kind that withholds necessary taxes and makes the necessary payments to the state and federal governments on a timely basis. Fortunately, technology has made payroll management low-cost and easy. Doing payroll on your own is time-consuming, because you have to make specific deposits each month to the government for their taxes, Social Security, Medicare, disability, and unemployment insurance.
Those who can legally launch their businesses using independent contractors have an advantage, because they don't have to worry about meeting a big payroll every two weeks — meaning an obligation to pay people no matter how much money came in during that period. Many entrepreneurs hold their own paychecks for a week or so after their employees cash theirs to ease the cash flow burden. The smaller your payroll in those early days, the happier you will be.
Independent contractors work for almost any type of company that provides services on demand, such as software development, computer repair, software design, maintenance and upkeep, publishing, and much more. Unless you have tons of money and investors who want you to spend it based on potential fast growth, you should do everything legally possible to minimize full-time employees at the outset.
Those who cannot find people who pass the independent contractor smell test should consider finding part-time employees willing to work more or less on demand until there's a clear idea of your level of your volume of business.
As your company grows, and you have established a predictable level of demand, you can usually benefit by taking on full-time employees for more and more tasks. With independent contractors, you will generally pay the same percentage of your overall sales in labor costs, no matter how much your sales grow. With full-time, salaried employees, you can often scale your business more profitably, meaning you won't have to pay as much for the extra hours people put in on a project as you would with an independent contractor. This means your labor costs relative to revenue start going down as you take on more business, improving your profit margins as you grow. That's a basic definition of "scale."
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Organizing Your Company
You might think it a simple matter to determine what type of employees you need to do what. In fact, it requires a little thought to determine the best way to get started. Of course, the final answer to these questions depends upon the nature of your business, and your ability to hire people. To help get organized, you can divide your staff needs into two basic categories: product/service delivery and administration.
Product/service delivery people. This category of your organization's people focuses on creating, installing, and providing the service or product you sell. If you're lucky, you can increase or decrease the hours of these people at any given time, based on how much work you have, using independent contractors or part-time employees. These people might be managed by a full-time project manager, the person who makes sure the work gets done to specification, on time, and on budget (so you make money), and include people who do the specified work for the product or service, deliver it, install it, maintain it, and provide customer service. From a cost accounting standpoint, you apply the costs of these people against the revenue you bring in, so they are in a sense a cost of goods sold. After paying all of the expenses for providing your product or service, you need to have enough additional revenue to pay for your salary and other management, administrative, and office expenses, while leaving money for a profit.
Administrative people. This part of your team provides the basic services required by your company. This includes accounting, office management, human resources (handling benefits and payroll), purchasing, and general management. This team should be valued because they make sure the company is operating according to plan and customers are satisfied with deliverables while a proper profit margin is being met for the company. Since administration represents a fixed cost with no revenue to cover it, you want to keep these expenses as low as possible at the outset. You can almost certainly get away with a part-time office manager and part-time accountant, who between them can provide almost everything but the general management for which you will be responsible.
Organization chart. The business plan you would create for potential investors should have an organizational chart showing how you will organize the company. Those of you who sell yourself into business should still think carefully about how you organize your company. The potential consequences of not developing an organized plan include hiring people you realize later you didn't need or who don't have the right qualifications to handle the work you really need done. It won't take you long to realize that the quality of the people you hire, either as employees or independent contractors, will make all the difference between having a fun, exhilarating experience and waking up night after night sweating bullets, wondering if your customers will get what you promised them on time and on budget.
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Types of Employee Personalities
People come in all sizes and shapes, but when it comes to employees, what counts most is very simple: Do they care or don't they? Can they do the job or can't they?
Do they care or don't they? The more your employees care about your customers, their jobs, and mutual success, the higher quality work you'll receive with more reliability and greater customer satisfaction. An old rule of thumb divides the general population in the following way: 20 percent are born motivated and will work hard unless management stifles their enthusiasm; 20 percent are difficult to motivate and it usually doesn't work out; 60 percent can go either way. We'll talk below about how to identify, engage, and retain that 80 percent of people who are capable of being engaged and motivated.
Can they or can't they? Motivation and engagement will create energetic and cheerful employees, but it doesn't mean employees have the capability to do what's asked. One startup we knew had an eager office manager willing to take on accounting in the early phases. When the company finally grew enough to hire a part-time accountant, it turned out this energetic and well-meaning office manager had made quite a mess of things.
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Recruiting
For many young entrepreneurs, the immediate temptation is to hire friends or family. The idea of having a company built on friendship and family seems exciting. The trouble is, human nature doesn't always cooperate. Old friends and family often have emotional baggage that can be difficult to carry when the going gets tough or difficult decisions have to be made.
This advice might seem counterintuitive, but we urge you to not hire friends or family unless it's absolutely necessary, or unless the friendships are based on successful past work or school experiences in which you have already demonstrated your ability to work together. An entire practice of consultants and lawyers specializes in family business law because many of the emotional issues lead to business and legal problems. That said, some of the greatest entrepreneurial teams started as friends. In many cases, those friends found each other working at a past company or for some school-related or other cause, and enjoyed working together so much it made sense to start a business. This is probably the most ideal type of person with whom to start a business, because you have experience working together and have already established trust in a business setting.
Traditional companies often overlook valuable sources of employees ideal for start-ups — work-at-home moms, and other people who need flex-time schedules, such as aspiring writers, actors, musicians, and artists. These people often have good educations and diverse skill sets ideal for a start-up business. Work-at-home moms can make particularly good employees, because they often have the maturity that comes with parenthood, understand the importance of diligence, and have often had full-time work experience before they had children.
In terms of how to find employees, this is where friends and family can help without the same emotional baggage. If it's not appropriate to have friends and family work directly for you, perhaps they know people who could. Friends of family and friends often make better hires, because someone you know is acquainted with them, and because these potential hires may feel a greater sense of obligation, knowing they are working for you because of a recommendation from one of their friends or family members.
Don't fool yourself: you might be the boss with the checkbook, but the employer-employee relationship is a two-way street. You've got to want the employee, and the employee has to want you. Smart, hard-working employees can usually find jobs and keep them. They usually have their own criteria for selecting a job, in terms of the organization, the pay, the benefits, the schedule and the boss's personality. Twenty or thirty years ago, start-ups had a harder time finding good employees because most people understandably sought the security of a major corporation. Today, big business has made it much easier for startups, because they have laid off so many people over the past three decades. Relatively few people feel secure at any job any more. Furthermore, many people seek more flexible work hours and greater freedoms many big companies can't provide. For today's younger workers, as you probably know, lifestyle issues sometimes rate higher than pay as a primary reason for selecting one job over another.
Whatever your personal or political views about immigration, it pays to make sure all of your employees have a legal status. Chances are you will put every available penny and resource on the line for your business. You don't want it brought down because of hefty fines for violating immigration laws. That means making sure your employees have the right to work in the U.S., either as a citizen, legal resident, or green card holder.
Identifying the right employees
To understand people, watch what they do. Actions speak louder than words because they reflect our true natures, rather than how we view ourselves. This means giving people the chance to demonstrate what type of employee they will be, rather than simply telling you what you want to hear.
As noted above, generally, you will want to find diligent people capable of doing the work. So, you should look for diligence in the way they go about trying to get the job, and for their ability by using some kind of test if necessary. Identify the key characteristics you will need for the job, and try everything you can to simulate those circumstances in the interview process. Depending on the job, this could mean a multi-interview process to give people a chance to reveal more about themselves. We know start-ups sometimes feel desperate for people and will hire anyone who will take the job, but try to resist that temptation. An extra few weeks spent trying to find the right people usually won't hurt.
To detect the "job personality" of a prospective employee, track how they treat you. Do they prepare for phone or face-to-face meetings? Have they taken the time to understand a little about your company? Do they follow up after you have met to thank you? Do they seem eager to get the job? Are they appropriately dressed for the type of business or the situation? Do they ask questions? Do they lean forward or otherwise engage in the interview? Look for actions and behaviors that demonstrate an eagerness to understand, which would be indicative of someone who wants the job. When applicants act as if they don't want a job, they probably don't.
Motivation and engagement alone do not suffice. People have to have the ability to do a job. You have every right to attempt to ascertain the ability of someone to do a job, unless the person has demonstrated skills or the job truly can be done by anyone. Whenever feasible, it makes good sense to create a basic test related to the job, or some kind of trial period if possible, to determine if your candidate can do the job. You don't want to go overboard and construct a college entrance exam, but a basic skills test related to the job can help reduce the risk of hiring someone less qualified than you thought.
Presumably, you will want the people you hire to remain on the job for a while. Every time you replace someone, you have to recruit and retrain, which takes up valuable time and money in a small business. So, you will want to make sure you assess the person's level of motivation for taking the job and how long he or she could potentially remain committed. This especially applies to hiring part-time employees, such as work-at-home moms or aspiring artists, who might have other priorities that can put you low on the priority list at a moment's notice.
One of the best ways to learn more about potential candidates is to resist the temptation to focus on selling the applicant on you, instead of focusing more on letting them talk about themselves. In fact, many experienced recruiters use the 80/20 rule — listen 80 percent of the time and talk 20 percent of the time. Sure, you have to sell them, but do your best to make time for them to talk. Ask a lot of open-ended questions. Leave a gap or two in the conversation. Avoid cutting people off in your excitement. Listen for clues and watch for body language. Hiring the right people takes focus and warrants the time. If you don't have time for it, find someone on your new team who does.
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Engagement and Retention
Big organizations can afford turnover, because the CEO rarely has to directly cope with the impact. For startups, churning employees can become a terrible burden on your time and sanity. If you want to be a master of the universe, the best way is to engage and mobilize a team to help you get there. In many ways, your employees are as important as your customers, because without employees you'll have to do all of the work yourself. Pay people enough, and perhaps you can disregard the advice below on how to engage and nurture them. Most startups don't have the luxury of offering big paychecks and can benefit by addressing what research identifies to be the key motivators of people.
One of the pleasures of starting a business for many entrepreneurs is to create great jobs for great people, and to have an organization that runs even if the owner is on vacation. The key to this is not only to recruit people in the 80 percent or so of the population capable of being engaged under the right circumstances, but to foster a climate that motivates good people not only to perform but to stay.
"Incentives, Rewards, and Workforce Motivation," an excellent compendium of research on motivation conducted by the International Society of Performance Improvement for the Incentive Research Foundation, identifies a number of key factors that go into engagement, retention, and performance. Not all things motivate or engage employees the same way — some people like public recognition, others don't. But research has identified some fundamental principals. They include:
Communication: It's important for employees to understand precisely what you want them to do and how what they do affects your customers, either directly or indirectly. This comes by way of top leadership (you) conveying this to your managers as you grow, so all employees get the message, even if you can't personally deliver it. In a small organization, communication might mean meetings and supportive information, such as posters or e-mails. In large companies, an entire focus is required on internal marketing — not unlike the effort given to external marketing. Don't underestimate the challenge of communication in any company — even the small ones. People are overwhelmed with information in their own lives. Don't assume they have total mental time for your needs, as well.
Buy-in: A belief in the mission of the organization, in its value to customers, and an understanding how they individually contribute gets most people more engaged. For many people, this means having some say over how their jobs get done. After someone has worked at a job for a while, speak to them to find out how it's going. Ask for suggestions, and implement them if they are feasible and make sense.
Support: The feeling that their organization cares goes a long way for most employees. People so often feel like a number in a big company. You can get a competitive hiring edge by showing individual attention to each employee. It doesn't take much. The management guru Tom Peters has called it "management by walking around." Just pop in on someone and chat. Ask how the job is going. Ask employees what feedback, if any, they get from customers or whomever they work with. This does not mean you have to be or should be a friend to every employee. But executives who fundamentally care about people should make sure they show it.
Support can also be expressed by recognizing people for a job well done, by giving them extra time off or perhaps a special non-monetary awards — maybe branded merchandise, a travel getaway, or some other tangible expression of appreciation that doesn't get tangled up in compensation issues.
Capability: Can people do the job you need of them? Some might not have the capability no matter what you do. Others need training. One of the challenges in a small business is training, because entrepreneurs find it difficult to find the time to methodically and systematically train employees. You've got to try. There's a lot to be said for on-the-job training, and learning by mistakes. But too many mistakes too early can undermine your credibility with customers.
One way to provide training time-efficiently is to review work in a face-to-face meeting with the person or other people involved, rather than critiquing via e-mail. People learn through hearing and seeing — some people more through hearing, others more through seeing. Since you probably don't have the time or expertise to evaluate each person's learning styles, try to combine both.
Try to make learning fun, whenever possible, with psychic or tangible rewards for people who get it. Consider making those who complete the training and understand it mentors for others around them. This is a way to help people feel valued even if you can't give them a promotion.
Task Value. Most companies fail to address a key factor in motivation and engagement — how someone feels about the work they do. When people feel their job has value, pride often helps keep them focused on doing a better job. The key to improving task value is to help employees understand how even the most apparently menial task can have great importance. The janitor in a warehouse is critical to making sure dollies and assembly systems work properly so deliveries can get made on time. The person who answers the phone or who puts together the presentation binders helps establish the "brand" of the organization by the way they handle the call or assemble the proposal elements.
Again, impromptu thanks when employees get their jobs right, or even a special gift to reward and recognize them, can make all the difference in how they view their jobs, no matter how basic or boring to some.
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Firing People
Sometimes it doesn't work out. The sooner you realize it, the better off you are. When you hire someone away from another job, you have an obligation to give them every opportunity to succeed. You should never hire anyone who has another job unless you feel confident in your ability to keep them employed. Under any circumstances, under-performing employees should get a warning letting them know specifically the areas for improvement. If you see little change, despite your efforts, you should act fast. The longer you hold on to someone, the more difficult it becomes.
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Vendors
Even companies that pay close attention to employee relationships often overlook the importance of vendors. For a start-up, your vendors can be critical. The quality of the product or service they provide makes your company's product or service better, providing they've got favorable payment terms. Avoid the temptation to take out your frustrations on vendors thinking the shoe is on the other foot. Your vendors can make or break you. Treat them with the same respect you do any valued colleague. Demand the best. Find another solution if they can't deliver.
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