Running at Optimum

I often hear consultants and VCs toss out the latest fashionable term, “best practices” and I cringe every time I hear it. It’s another frequently used and often shallow buzz phrase that usually can’t be quantified but it sure sounds good. Google defines the term as, “…commercial or professional procedures that are accepted or prescribed as being correct or most effective.” First, who decides what’s, “correct”? Or for that matter, “best”? Wikipedia defines it this way: “A best practice is a method or technique that has been generally accepted as superior to any alternatives because it produces results that are superior to those achieved by other means or because it has become a standard way of doing things, e.g., a standard way of complying with legal or ethical requirements.” Again, who decides what’s “superior to any alternative” and why is the standard way of doing things regarded as best? This may seem like the parsing of words however the point is the term depends on your point of view.

What a VC, PE, or private shareholder thinks is “best” may be viewed from another perspective as shortsighted and eventually tank a company by running it far too lean. This is certainly not a best practice from another point of view. They just want to make the numbers look good for a sale to someone else and let the results of their actions be the buyer’s problem. I made this mistake in my 20s when I made a small investment along with other college friends in a company whose equipment was in bad shape. The seller drove up EBITDA by neglecting to properly maintain the factory machines. Lesson learned. I’m sure they thought they too were following best practices, and it could be that they never thought of properly maintaining the equipment in the first place.

From the point of view of the PE firm, they are following their “best practices” when they run a company to be what I would consider at the expense of longevity. I’ve seen other VCs, and private investors, while possibly well-meaning, overload a company with process through measuring every little thing of zero consequence, to the point of gross inefficiency. The CEO spends weeks gathering data to present to the Board when that time could best be spent building the business. To these VCs and investors who make these demands, this is also their idea of “best practices.”

I heard one “consultant” claim that a company needed more agendas. I think he meant objectives but kept saying, "agendas" over and over without any sense of accountability or in my opinion, actual results. Sometimes these investors are understandably looking for ways to report up to their partners and capital source without at all thinking about the burden they place on the company to gather up and maintain the otherwise nearly meaningless data. The company then spends too much time building reports without enough attention paid to what matters. This is not to suggest I don’t believe in dashboards and measuring progress. I do. I simply loathe burdensome demands for information that does not produce tangible results, all in the name of “best practices.”

We’ve also met that owner/CEO who frivolously spends company money to support an extravagant lifestyle while draining the company of the very capital reserves necessary to support the company in rough times. This individual’s point of view is that, “best practices” means the support of their personal lifestyle at the risk of all the hard-working employees who helped build the company in the first place. They go so far as to scream at their employees to produce more while they do absolutely nothing, unless it’s forced on them to curb their lifestyle.

Balancing Four Key Interests

In all my years managing companies, and evaluating countless failures, I gave it a lot of thought. After taking a retrospective look at my work as trustee, it came down to balancing just four interests. This is what I consider to be optimum, this balance of these four simple points; the customers, shareholders, employees, and suppliers. I list them in order of priority, but with just a slight difference in weight between each other. Keeping these four things in balance can keep you out of a lot of trouble if you give each quadrant careful consideration.

Someone wiser than me pointed out that you can’t grant someone a right to anything without taking a right away from someone else. I puzzled over that for a long time, but fairness or not there is some truth. It got me thinking about the different interests in a company which led to this conclusion about the four points.

As I write this, I can imagine the eye rolls from some VCs and PE firm partners who never founded or ran anything in their lives who think it’s only the shareholder who should be considered. My experience has shaped my thinking over the years. Still, after many years and pondering this very idea, and thinking about the core elements that led to our successful results in the past, measuring and balancing these four points was how we got to run at optimum, regardless of challenges. Still, the balance of these four points can be difficult.

It’s easy to find those who believe the shareholder is the sole priority but that defies common sense and never gets your company properly balanced for maximum efficiency. You can make the circular argument that thinking about the shareholder first balances the other three points, yet in practice, it’s often not the case. Yes, providing solid returns to investors is of vital importance, especially when raising money, however you must attract top talent, which quickly becomes a priority and an expense. You must think of the interests of the talent, which isn’t always money. Some shareholders disagree, they think talent is less important and don’t want to pay the expense and their companies flounder rather badly. Departments such as customer service are expensive and easy to cut just to look more profitable at the expense of the customer. Even something as simple as employee satisfaction is often sacrificed in the name of “shareholder value.” Glassdoor is full of such companies.

These same shareholders often find themselves in serious trouble when things go badly and the employees would rather see the company go under than support what they consider to be a greedy shareholder. Meanwhile, I know of multiple CEOs who got the employees to make huge sacrifices because they proved that they were standing shoulder-to-shoulder with everyone. Imagine the company that’s in trouble and an owner/shareholder who complains because they must sell one of their Ferraris. The employees in a financial crisis who are asked to make sacrifices are far more likely to tell them to pound sand.

The Customer

The customer is the very reason you’re in business! Without someone to buy your product and service, everything else is pointless! While this seems to obvious, I’m surprised it’s ignored as often as it is. The customer is the priority. It doesn’t matter if you’re in a startup developing the next great operating system or widget, unless you’re building for that customer you’re not going to get anywhere. You can’t have the mindset that shareholders come first or you never get to a great product. There are enough books and articles that drive this point, and I don’t need to spend a lot of time on it here.

I once asked a very successful restaurateur how he built his empire. He said simply, “I give my customers a lot of high quality food for their money. I serve it hot and on time.” To him it was that simple.

While this seems obvious, there are countless entrepreneurs who invent a solution then look for a problem that needs their solution, even when it’s not important to the customer. For any inventor, it’s critical that you think about your customer experience first. Build your idea from the perspective of solving a real problem. Build your organization around your customers.

Last year I looked at an invention that while interesting, was so complicated to use that it lost all practicality. It was a great idea but the inventor wasn’t thinking about the customer experience and it resulted in a useless product. It was a series of complicated solutions to little problems that made the original invention completely impractical. The inventor started with a great idea but completely lost track of the customer perspective. It’s like that kitchen device that takes more time to set up and clean than is practical and therefore is only used once.

The importance of the customer as the focal point couldn’t be on better display than by walking through Bellevue Square, here in Bellevue, Washington, one of the most successful malls in the US. If your store is not generating enough revenue your lease is not likely to be renewed because it’s a direct reflection on the customer experience. Kemper Freeman, the CEO of Kemper Development Company (KDC), the company that owns Bellevue Square, personally walks through each store and pays very close attention to how they are performing from a customer’s point of view. This mall is so successful that they will have a new tenant ready to jump into an available space the second someone fails with the promise to do better. Their traffic is purely customer-driven and that drive comes from giving customers what they want again and again. Nothing else matters if you don’t have customers.

When a rowdy mismanaged bar that was not in business all that long led to a tragic incident, Kemper bounced them out of their lease within days and was very public about it for good reason. The entire Eastside applauded his swift action. Again, his focus was entirely on his customer.

Bellevue Square set the world record for the most revenue generated per store, per square foot, of any store anywhere in the world! KDC is thinking about everything from making sure their parking remains free, despite very high costs per parking stall, to the overall mix of stores that make up their properties that complement each other. Everything they do is with the focus on creating the best possible shopping experience for the customer, including their constant refreshing of the look and feel of the mall.

The Shareholder

I don’t have to write much about the importance of the shareholder as it’s mostly a given. Without keeping them happy, it’s hard to raise money and grow a company. If you’re in a private company looking for investors, it’s critical that you all agree on what you consider to be optimum so you keep your shareholders happy. Their idea of “best practices” may mean running the company into the ground by starving off all other interests and you should know that ahead of time. I know of one company first hand that’s fighting that very dispute today.

There is a well-known RV builder in the Midwest that has a CEO and parent PE firm that has driven the company into the ground by cutting corners to show a stronger bottom line to investors, only to lose customers and brand value at an astonishing rate. This is something that doesn’t show up in the financials until years later. Because of their reputation for very poor quality, resale value of the products they build have since plummeted. Those buyers won’t ever come back. The shortsighted CFO who drove the company from the financial perspective, simply to show great profits did just that, temporarily. Yet, the seemingly obtuse CEO and PE firm will never put two-and-two together to make the connection and understand why they have so few repeat customers who can’t afford to return or are now unwilling to remain in the brand.

This is a case where bottom line numbers were at the expense of balancing the other three points, and the business now faces some serious challenges in the coming years. I’m speculating they will collapse without a change in leadership at the PE level. It’s hard to fathom a firm so badly run and I’m guessing there is a lot of politics. I can’t begin to understand the thinking in the first place.

The interests of the shareholder cannot be ignored, and many CEOs who are venture funded without giving it much thought, drag their feet to profitability thinking they will simply raise more money as needed. They seem to have all the time in the world and typically have a board who won’t ask the hard questions about their progress because of board dynamics. It is the duty of all CEOs, even if they are the majority shareholder, to perform in the interests of everyone, big and small. This also means running the company with some sense of urgency to remain ahead of competitors.

On the other hand, as I wrote earlier, some owner/CEOs place their interests at the front of the company and bleed the company of cash to support their opulent lifestyle, a lifestyle the company can’t sustain, preventing it from pivoting at a critical industry moment. Somehow buying that next big house seems to take precedence over the company’s future. This is also where boards often fail to say anything to those majority shareholders for the sake of the overall health of the company, the employees, and the minority shareholders, including those holding stock options that they hope to have value someday. They would rather ignore the problems than address them directly and forcefully.

The Employees

When we won Seattle Business Magazine’s Best Place to Work in the Midsize category in 2015, at Summit, we were competing against companies that provided everything from prepared meals for employees, day care, unlimited PTO, climbing walls, all with the real intent of attracting and retaining top talent. Some of which seemed excessive, yet, none of these perks are relevant if you’re not serving your customers first. Unless you have a great product, you won’t have viable, sustainable customers who come back again and again. You have no company to build if you don’t have the customers to leverage into a larger business. Therefore, you can’t put the employees at the front of the line at the expense of the customer.

Think of the unions that forced companies to accept deals at the expense of everyone else. Detroit and the entire Midwest is filled with failed companies that were squeezed by unions and sometimes management to the point of extinction. Employees must participate in the balance of the other points or there is no company. In the reverse, companies must treat their employees well or you end up with a union that sandbags the company’s ability to remain efficient.

Some of the companies competing for awards are doing it at the expense of the other three key interests. Some companies use investors funds without any true sense of accountability for the work they produce, throwing extravagant parties or abusing the company plane for personal use without thinking of who they harm.

While finding and attracting great people is critical to building an outstanding organization, it has to be matched with the productivity to justify that top talent. When I think about extravagances, I’d rather see the money go into helping our employees sharpen their skills. This isn’t to say the company-paid retreat is a bad thing at all. I’m in favor of it if the company can swing it, assuming the other key interests are considered.

Simply hiring top talent isn’t enough unless they are well led to do great things. It also does little good to have top talent if the CEO is marginal and all too often not someone who represents the best interests of anyone. I’ve covered the topic of narcissistic CEOs in other writings.

The Suppliers

I list suppliers in the four balancing points because they are often overlooked and they too have many of the same demands and considerations as the customer. Companies that routinely treat their suppliers badly out of sport do not get optimum treatment by those suppliers regardless of what they may tell you. It’s basic human nature. Suppliers focus on their best customers too, so the best way to have a great relationship with a supplier is to be a great customer right back, and treat your suppliers like they matter. I know of suppliers that limit services to their slow paying customers whose habit is out of practice rather than necessity simply because they can’t afford to carry the paper that long. They would much rather build a relationship and support a company that pays on time.

In the embedded systems software business, we saw numerous suppliers favor one consumer electronics company over another simply because of how they were treated. Relationships matter a lot in that industry and beating up a supplier can send them off to make other better customers a higher priority. At Open Interface North America, we encountered some companies with onerous NDAs. We denied them access to all our newest inventions because there were easier and more efficient customers to work with, customers who were less likely to look for ways to violate the very spirit of an NDA. While this difficult customer may have given mad props to their legal department and thought they won the NDA battle, they spooked us and other companies enough to stay away. It wasn’t worth the risk. Besides, it was far more fun to pursue customers who were outstanding development partners who treated us fairly. They have since failed in that product category.

Apple learned this lesson the hard way and the topic is covered in the book “iCon, Steve Jobs” by Jeffery S. Young and William L. Simon. Apple was known at the time for raiding talent from suppliers and were accused of stealing IP along the way. I have first-hand knowledge of those who were very guarded when doing business with Apple and warned us long before we got involved with Apple. It kept us on our toes.

McDonald’s has understood the importance of supplier relationships for years and procure in such large volumes that without good working relationships, they would be in serious trouble. This isn’t to say they don’t drive hard deals, they do, however sustaining a great relationship with suppliers will pay off in the long run. This is not to say companies shouldn’t demand a lot from suppliers. They should. It’s just that they should build and sustain a very strong working relationship to run at optimum. Run that relationship like it’s a solid partnership.

CEO Dashboard

It’s not always easy to know how best to balance these four points and this is the art of the role as CEO. I couldn’t get a group of CEOs in a room and get them to agree on how to balance these points and some strongly believe it’s not necessary at all. I then look at their track record and see a lot of investor’s money gone down the flusher.

There are times when it’s hard to decide what’s in the best interest of a healthy company, however using these balancing points as a fundamental guiding principal has kept me out of a lot of day-to-day grief. As the company CEO, I try and balance these four points very carefully when monitoring overall company performance to try and find optimum. The role of CEO always has numerous small details to consider, however I try and break everything I do into these primary quadrants to make sure there is a healthy organization going forward. My personal “best practices” if I must use the term, is asking myself that simple question: How am I doing with customers, shareholders, employees and suppliers? How can I build better relationships with each?