Lessons for Success

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It Takes Finesse to Fire a Family Member

Mitchell Kaneff, the CEO of Arkay Packaging, told the story of firing his father in the article “Why I Fired My Father From the Family Business.” Although his father had made him president, his dad remained as CEO and still made a lot of the decisions.

Their completely different styles of management came to a head one day with the COO claiming he was resigning as he found it impossible to work with two men with such different styles.

So Mitchell called his dad and gave him a choice — he could either buy Mitchell out or Mitchell would fire him. Expecting his father to be angry and hurt, he was stunned when his father instead replied, “I am so proud of you. You’re right. It’s time for me to leave.”

Any kind of situation that involves letting someone go rarely goes that smoothly. Unfortunately, as the turnaround authority, I’ve been in the situation many times of having to fire people. It’s never more difficult than when it’s a family member.

Once you have terminated a regular employee, your ties are severed and both the company and the employee can move on. Not so with a family member, where heated emotions and resentments over the termination can affect the family dynamic for years.

That’s why it’s so critical to handle firing a family member in the correct way, as an article in this week’s Wall Street Journal pointed out, “You’re Fired … But I hope to see you at the next family reunion.”

Because ties with this person are not severed and you will continue to see each other, it takes a lot of planning and delicacy to terminate a family member the right way.

The article quotes Raymond Lucas, senior vice president of financial planning and training for Integrated Financial Partners, who said, “Remember: When all is said and done, you need to be able to sit at the Thanksgiving table together.”

The first step is to work with the family member to see if the situation can improve. Perhaps he or she could be moved to a different position or get more training to be more effective in the job. But when it reaches a point that it’s apparent it is not going to work out, there are a few things to do before meeting with the employee.

First, document the reasons you are taking this step. Then try to get agreement on the termination from other family members working in the business so you have a united front.

When it’s time to terminate the employee, meet with him privately. A crucial step is to let him know that you value his happiness and you realize he is not happy with the current situation. Make it clear you will support his efforts to find another more suitable position. Another important step is to listen to his side and make him feel heard about his situation.

It’s never an easy situation to handle, but doing it the right way can make a huge difference in your family. For more tips on handling this delicate process, please read my column “How to Fire Grandma and Still Get Invited to Sunday Dinner.”

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Take Time to Develop Your Own Leadership Skills

When you’re running a company there are plenty of things to focus on. Sales of your products, marketing strategies, long-term goals just to name a few. You may spend a lot of time and money on training your sales staff. But do you ever take time out to consider your own development?

Some CEOs or business owners get around to themselves last when it comes to improving skills, either due to lack of time or considering it a low priority. But what could be more important? If you’re the head of the show, shouldn’t you keep your own skills sharp?

I recently read an article in INC, “7 Reasons You Can’t Learn Leadership on Your Own,” and two of the reasons in particular struck me.

The first is that observing leadership is not the same as developing leadership. I have found that to be true. There seems to be a prevailing belief that people will just “grow into” being leaders.

The article also pointed out that many board members and investors are not good leaders, although they think they may be.

They also operate with an agenda, which may not include developing your skills as a leader. That would not necessarily work to their benefit as it may interfere with them pushing through those agendas. So you can’t expect your board or your investors to encourage you to develop leadership skills. You’re on your own there.

So how do you do it?

There are courses you can take and plenty of articles available on the Internet. There is no shortage of books on the topic. Here is a list from Forbes.com of leadership books it recommended from 2013. In addition to some new titles, it includes some classics like “The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change,” by Stephen R. Covey and even an 80-year-old classic from Dale Carnegie, “How to Win Friends and Influence People.”

One of the most effective ways I’ve found to improve my business skills is by sharing ideas, problems and concerns with other CEOs and business leaders. If you can find such a group of leaders, you can learn a lot from each other as a lot of the issues you deal with are similar.

For example, the Vistage Chief Executive Program brings in 16 peers from noncompetitive businesses that serve each other in an advisory capacity. They have monthly problem-solving meetings and personal coaching sessions. They can also attend up to eight workshops a year led by a Vistage expert speaker.

If you don’t want to attend a formal group, form your own informal one from your acquaintances, again in noncompetitive businesses. Arrange to meet weekly for coffee and discuss your leadership challenges.

Just like you don’t neglect developing your muscles at the gym for your health, continue to develop your leadership skills as well by whatever method works for you.

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Give Your First impression A Fair Shake

Thomas Jefferson is said to have popularized the handshake in Western culture as a more democratic form of greeting. I, and my back, appreciate that we no longer bow when greeting associates. Sounds like an awful lot of work to me.

Now, extending your right hand for a handshake is an important part of our culture and significant in the first impression you make when meeting someone. I’ve written before about the importance of first impressions. In my column, “The First 15 Seconds,” I listed three things I could tell about a person I am interviewing in just one quarter of a minute.

A demonstration of the Lobster Claw, one of the top 10 bad business handshakes as demonstrated in a video of the same name

A demonstration of the Lobster Claw, one of the top 10 bad business handshakes as demonstrated in a video of the same name

Another crucial aspect of making a good first impression is that handshake. I got a big laugh out of this video I came across, done by an Australian company called “The Top 10 Bad Business Handshakes.” Maybe it’s even funnier because of the droll Australian accent but it does illustrate several handshakes that will definitely not make a good first impression. These include the Lobster Claw, the Fist Bump, the Wrestler and the Phantom.

Watch the video and see if you fall into any of those 10 categories of bad handshakers. If you have the slightest bit of concern that you may, here are a few tips from David Gregory at NBC on the “Today” show.

• Have a firm grip

• Make eye contact

• Shake once of twice from the elbow

• Should last about three seconds.

Those three seconds of contact can really pay off. An interesting study done by the Income Center for Trade Shows found that people are twice as likely to remember you if you shake hands with them. They will also be more open and friendly with you. People whose handshakes are evaluated as good are seen as extroverted and emotionally expressive, according to an article in Forbes.com on “Why Women in Business Should Shake Hands.”

Here are a few of the tips the writer Carol Kinsey Goman shared in the article, which apply for both men and women.

• Be the first to extend your hand.

• Stand when being introduced and extending your hand.

• Say something like “It’s great to meet you,” before you let go.

• When you let go, do not look down. That is a sign of submission.

In another study, researchers Frank Bernieri and Kristen Petty screened 300 students, selecting five men and five women with contrasting personality profiles. Their job was to introduce themselves to people of the same sex, who were playing the role of the interviewers.

The interviewers met with five “candidates” who introduced themselves briefly. Half of the time the greeting involved a handshake. The interviewers then rated the candidates on extroversion, neuroticism, openness, agreeableness and conscientiousness.

The one area where the handshake seemed to really make a difference was in conscientiousness, particularly when men judge other men. The researchers concluded that engaging in a handshake could help you predict whether that person would show up for their next appointment with you.

Hard to believe, isn’t it? How much you can tell about a person in an act that takes three seconds. Make those three seconds count in your favor.

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5 Business Resolutions for 2014

I sometimes jokingly refer to myself as a janitor. In my work as the Turnaround Authority, I go into businesses and clean up their messes. And I have seen some doozies in my career, many of which were caused by poor management or a business owner just not paying attention to what’s happening in his company.

This post is for business owners or CEOs that may be looking for a few ways to improve their business in 2014. Here are my top five resolutions for you to help avoid the troubles I’ve seen and the messes I’ve worked to clean up to get the company on the path to success and profitability again.

1. Leverage the talents of others

Don’t aim to be the smartest guy in the room. Hire people smarter than you, who have skills and experience that you don’t have. Take an honest inventory of your own strengths and weaknesses. We all have areas we aren’t as strong in. Successful business owners and CEOs recognize this fact and hire to compensate for their weak areas. Hire those people to help build a strong team.

2. Know where you are financially and always check on your books

As more layers of management are added to a business, the further away an owner may get from the details of the business’s finances. If you are making payroll and paying your bills, you may have turned your attention to other areas of growing the business. Always know where your business is financially. Have someone double-check your payroll. Poke around your books and ask questions on anything you don’t understand.

3. Be aware of conditions that affect your business

An effective CEO keeps up to date on what is going on in the world or the economy that could affect his business. For example, if you own a distribution company you need to know if shipping costs are expected to rise or if oil prices are going up.

Or is society changing so that the market for your product may be shrinking? In 1990 there was a Blockbuster on every corner and many people made it a weekly ritual to go peruse movies. Then Netflix, streaming video and options to watch movies on the Internet came along. All the Blockbuster stores closed late last year.

4. Ask for help before it’s too late

When you are confronting an issue that is beyond the expertise of you or your staff, don’t hesitate to call a consultant or turnaround manager. One with integrity will tell you if you don’t need them. In an initial meeting, it may become evident that you can handle the problems on your own. But if you do need help, it’s better to call earlier rather than later.

Some of my sadder cases have been where I was called in to help a company that could have been saved if only they had called earlier. Sometimes it was just too late to avoid bankruptcy. With others we were able to save them but they were significantly downsized or had suffered large financial losses.

5. Pick a plan and stick to it

As a leader it’s your job to establish a clear direction and to march that way. I’ve seen so many problems arise when CEOs make a plan and garner resources to accomplish that goal, then change their minds later and start over in a different direction.

This often happens with CEOs who are facing a crisis and are unsure of what to do next. They end up following the advice of the last person they spoke to — immediately acting on everything they hear. Gather the best information you can from all relevant parties and make your best decision on which direction to go in. Then stick to it.

However, you do have to continually monitor the numbers, and if they continue to trend downward, react quickly.

Add your own personal resolutions to this list to help ensure your success in 2014. And as a final resolution, resolve to stick to your resolutions!

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CEOS Behaving Badly

Just like my many stories of fraud, there will never be any shortage of stories about CEOs behaving badly. I’ve witnessed several notable incidents myself during my career as the Turnaround Authority and include many of the more salacious ones in my book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes” in the section called The CEO Can’t Keep It Zipped. You can figure out what those stories are about.

It’s not just philandering that gets CEOs in trouble. The latest tale comes from the CEO of T-Mobile, whose mamma apparently neglected to inform him that you don’t go to parties to which you have not been invited. Claiming he was a fan of the band Macklemore, John Legere crashed a private concert party in Las Vegas hosted by competitor AT&T with whom he’s been engaged in a public battle after AT&T offered T-Mobile customers $200 in credit to switch. He was barely there for 20 minutes, long enough to have his photo posted on Twitter, before he was escorted out of the party.

Of course, the flashy CEO attempted to turn the event to his advantage, and milked his expulsion for everything he could on social media, making himself the talk of the International Consumer Electronics Show.

Jason Goldberg founded Fab.com, an online shopping site. He took to Facebook to express his dissatisfaction with a fellow passenger on a flight from Stockholm to Newark who had the audacity to turn down his offer of $100 to switch seats with him. The other passenger’s lame excuse? He wanted to sit close to his family. “Who does that? … Grrr.” Goldberg posted, exposing both his arrogance and disdain for people who seem to care about their family members.

Tumblr founder David Karp managed to alienate his entire workforce when he attended the Cannes Lion International Festival in June. He went there to talk with advertisers, but apparently became impressed with the crowd he was addressing. “You guys are more talented than anyone in the Tumblr office or in Palo Alto or Sunnyvale. We’re constantly in awe. Constantly in service.” I doubt he got much of a welcome back party on his return.

The CEO of Barilla Pasta Company found himself in very hot water. (Sorry, couldn’t resist that one.) For some reason, Guido Barilla felt it was important to let the world know that he would never have gay people in his ads. “We won’t include gays in our ads, because we like the traditional family. If gays don’t like it, they can always eat another brand of pasta.” He later claimed he “simply wanted to highlight the central role of women in the family.”

I didn’t read much response from women, many of whom may not feel that their central role is to boil noodles, but one gay person politely responded. Aurelio Mancuso, president of Equality Italia, said, “We accept his invitation to not eat his pasta.”

Meanwhile Barilla US fought the huge PR crisis he dumped on that division by apologizing profusely on Twitter and Facebook.

CEOs who behave badly may enjoy the resulting publicity or just may not have anticipated how widely news of their antics would be spread. Whatever the reason, it’s a dangerous game. They risk alienating their customers, who may also invite themselves not to use their products or services.

It’s a good reminder that when you are a CEO or business owner and are interviewed or go on social media, you are always representing the company, not just yourself.

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Discovering Fraud By Walking Around

Have a fraud story to share? Send me yours for a chance to win a copy of my book! See details below.

I’ve had a front row view of more instances of fraud than I could have imagined when I first began my career. In my work as the Turnaround Authority™, I’ve seen hundreds of millions of dollars stolen from the companies I’ve worked with. Almost half of my clients have encountered some type of fraudulent situation.

You may think that I uncover fraud by going over the books and discovering something wasn’t quite right. And in many cases that is what has happened. I have plenty of those stories, of accounting personnel setting up dummy companies and payroll accounts, and embezzling hundreds of thousands of dollars.

My favorite story of uncovering fraud this way was when I sat myself down at the CFO’s computer, one I suspected of stealing. He was so organized that he had created a folder on his desktop with an entire spreadsheet detailing all the money he had stolen from the company. It’s so handy when thieves do a lot of my work for me.

But I’ve also found out about many cases of fraud from other employees in a company by employing a form of MBWA, management by walking around. Popular in the 1980s, MWBA really just means walking around and talking to people, face to face, and getting a sense of what is really going on in the office. (For more on MWBA, read my previous column about it, “Get Out of the Corner Office and Hit the Front Line.”)

In one instance of a twist on MBWA, I hosted a midnight barbecue for people working the nightshift. You could call it MBGH, management by grilling hamburgers. As I was grilling and we were all standing around chatting, the employees opened up to me and we began swapping stories. And boy, did I hear a doozy. One of the guys mentioned that he had a concern about excess inventory purchasing. Of course I made a mental note of that. Turned out to be a case of multi-million dollar fraud, which I uncovered because the employee felt comfortable chatting with me in the informal atmosphere.

I uncovered another case of fraud when I learned that a payroll clerk had returned to work the day after an appendectomy. That raised a red flag for me, as it seemed to be an extreme example of devotion to a job. After casually chatting with some other employees about her dedication, I learned they were in awe of sweet “Aunt Tess” because she had not missed a single payroll day in 25 years. Isn’t that something? Why yes it is, and that something is criminal. Aunt Tess was there every payroll day so she could handle the paychecks for the fake employees she had created, allowing her to steal up to $100,000 a year.

One of the best ways to uncover fraud in your company is to create an open door policy, a feeling of camaraderie where communication is encouraged. Generally, if fraud is occurring, someone in the company knows about it or is suspicious that something not quite right is going on. You want to encourage them to share their concerns with you so you can follow up.

I have plenty more stories about fraud and ways to prevent it in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.” One of the most rewarding parts of writing this book has been hearing from readers who share their stories of fraudulent activity with me.

Do you have a story of fraud? Please share it with me at lnkatz@aol.com. I’ll print the stories here, and the best story will win a copy of my book.

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Creative Ways CEOs Communicate

One of my favorite features in my hometown paper, The Atlanta Journal-Constitution, is the “5 Questions for the Boss: Lessons Learned by Georgia’s Top Executives” that runs in the Sunday paper.

As readers of this blog know, I’m all about lessons learned. In fact, my book is called “How Now to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.”

A few weeks ago the reporter, Henry Unger, interviewed Phil Horlock, the CEO of the Blue Bus school bus company. Based in Fort Valley, GA, the company has 1,500 employees with sales reaching nearly $800 million this year.

Previously an employee at Ford, Phil was asked what he learned from Ford chief Alan Mulally, who is credited for that company’s remarkable turnaround. Phil’s response? “He taught me and others that you can’t manage a secret.” Phil said he learned that a company needs an open environment where people feel they can communicate what the issues are.

Every Thursday morning from 8 a.m. to noon all the leaders at Ford from all over the world would gather in a room or join by video conference and take turns discussing all the issues they were facing.

Phil says he brought that strategy to Blue Bird, cancelling a lot of the other separate meetings to hold one meeting on Thursdays. He noticed that productivity started to improve and he felt confident he knew what issues they were facing each week.

George Alvorson, chairman and CEO of Kaiser Permanente, has been sending companywide emails to close to 200,000 employees for six years. He termed them “Celebrations” and intended to continue the Friday afternoon practice for just a year. But as an article in the Chicago Tribune reports, he got a strong response to the emails and felt that writing them made him a better manager.

The emails contain data and information about what they are doing well in an effort to make the employees feel good about the company, but are based on absolute honesty, Halvorson said.  (If you’re interested you can read several of them in the book “KP Inside: 101 Letters to the People of Kaiser Permanente.”)

There are 6,500 employees of Epic Systems Corp., a privately held medical records company in Verona, Wisconsin with $1.5 billion in revenue in 2012. Most days, many of the employees are traveling around the world for installation or training on its software system. But once a month, every employee is on the 800-acre campus for the monthly meeting run by Founder and CEO Judy Faulkner. They enjoy free soft drinks and popcorn as they meet in the huge auditorium to be updated on company news.

Good communication is not just about making employees feel good about the company and about themselves, although those are worthy goals. Good communication also equals higher productivity.

According to an article written in 2011 by David Grossman, “The Cost of Poor Communications,” the total estimated annual cost of employee misunderstanding in the U.S. and the U.K in companies with more than 100,000 employees is $37 billion. On the flip side, companies with leaders that are effective communicators had 47% higher total returns to shareholders over the last five years compared with firms that have leaders who do not communicate as effectively.

I see ineffective communication all the time in my position as the Turnaround Authority. In fact it’s one of the common denominators of the companies that I work with. In addition to experiencing financial difficulties, just about every company I am brought in to turn around also suffers from poor communication among its management and employees.

One of the first things I do when I take over as CEO is to gather all the employees together and tell them exactly what is going on. I hold my own town hall meeting to quickly squash the negative effects of the rumor mill.

Is your company suffering from ineffective communication? I suggest you work on improving it. Or, well, you may just have to hire a guy like me.

 

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Giving Thanks for Giving Companies

As the newspapers grow heavy with inserts and our inboxes fill up with email ads for shopping on Black Friday, it can seem that our country suffers from a massive case of rampant materialism. As I read recently, “Black Friday: Only in America, people trample others for sales exactly one day after being thankful for what they already have.”

We are a consumer society. No doubt about it. But we are also the most generous people in the world. In 2012, Americans gave $316.23 billion to charity, according to Charity Navigator, an increase of 3.5% over 2011.

Last Thanksgiving I wrote the column “Feeling Thankful for CEOs, Companies That Get it Right.” Following what I am now declaring a Thanksgiving tradition for my blog, I would like to give kudos to many of those generous businesses that spend millions to make their communities, and the world, a better place.

Every year the Chronicle of Philanthropy newspaper asks 300 of the top revenue-producing companies in the world about their charitable giving. For 2012, more than 100 companies responded.

One trend noted in corporate donations was the increase in product donation over cash, according to an article in Forbes.com, which reported that when cash and product donations are counted, the total from 2011 rose by 20.2% to $18.6 billion.

Here are a few of the more interesting initiatives and donations from corporations last year.

In an interesting twist to responding to the disaster in the Philippines caused by Typhoon Haiyan, Coca-Cola Philippines and its bottling partner, Coca-Cola FEMSA Philippines announced that they would suspend advertising there. That money budgeted for advertising the brand would instead be used to support relief efforts. Coca-Cola is donating more than $2.5 million in cash and in-kind contributions. My hometown soda company is generous, with donations through its Foundation and company of more than $690 million between 2002 and 2010.

Wells Fargo took the top position as the most charitable company in 2012 according the list in the Chronicle of Philanthropy, with cash donations of more than $315 million. The company leapt to the top with a $77 million donation to partner with NeighborWorks America to launch the NeighborhoodLIFT initiative to help educate and assist homebuyers in particularly hard-hit areas.

Target, which is number 9 on the list of top ten most charitable companies with donations of more than $223 million in cash and products, recently formed a partnership with Feeding America, the nation’s larges domestic hunger-relief charity. The company launched a collection of limited-time only FEED USA + Target products with 10% of sales from June through mid-October being donated to Feeding America. The goal is to provide more than 10 million meals to children and families.

Number five on the list, with more than $215 million in cash and product donations, is Exxon Mobil. One of the company’s initiatives is to fight malaria. Since 2000, the company has donated more than $110 million towards that effort. In 2012 alone, Exxon donated $12.4 million to 20 organizations for 24 different projects. Those projects benefitted 16.7 million people in 10 countries.

So while we may be a consumer society, I give thanks that we are also a generous one. And while I’m in the giving thanks mode, I will also give thanks that come Black Friday I’ll be far, far away from the nearest mall.

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Sales Were Up, Profits Were Down: What Happened?

In my last blog, “Big Sales Don’t Mean Big Profits,” I told the story of two companies I worked with that had increasing sales but declining profits. They both had problems with their product mix.

It was too late for one company — the owners didn’t want to make the investment needed to keep it running after we identified the problem so they closed it down after 30 years.

We were able to save the other company, although it shrunk from a $600 million company to a $350 million company.

What could both of these companies have done differently? What could have kept them out of this situation, which caused one of them to go out of business completely and the other to shrink to almost half its size?

Although the circumstances related to the issues with their product mixes were very different, the root cause of the problem in both cases was the same: a lack of communication.

Company A, which was a $2 million company that manufactured and distributed products, ran into trouble when their lower-profit sales to big box stores increased, pushing their margins down until they were no longer profitable. The operations and sales manager knew that the percentage of the lower profit sales to the big box companies was increasing — it went from 20% to 80% — yet no one discussed it.

The chief financial officer must have recognized the situation because the profitability of the company was severely impacted, but also didn’t raise the issue. Because no one talked about it, no one attempted to fix it. As Peter Drucker said, “The most important thing in communication is hearing what isn’t said.” You can’t fix what you don’t acknowledge. So the situation just got worse.

With Company B, whose management assured me they did not have a problem with their product mix, we found that even though the company had spent millions on computer systems to make sure they knew exactly what their costs were, there was still a breakdown in the system.

We found that there had been a lot of turnover in one of the key positions responsible for the accuracy of the data going into the computer systems. The new people taking over were not being properly trained. So the company had been selling products based on inaccurate cost structures. Again, there was a failure in communication.

In this case, I was reminded of a quote by George Bernard Shaw, “The single biggest problem in communication is the illusion that it has taken place.”

Communication is one of the keys to the success of any business. In my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes” I discuss the value of honest and open communication. In the case of Company A, the management of the company should have noticed the drastic change that was taking place in their product mix and discussed the situation. Together they could have determined what the effect on the business would be and taken steps to deal with the inevitable decline in profits.

As for Company B, it had a breakdown in the quality of training new staff. The duties of people in a key position were not being adequately communicated so the job was not being performed as it should have been.

Good communication at all levels of an organization can alert you to ways to improve your company while also providing early warning signs if things are starting to go wrong. Open communication will not only help steer your company through hard times, it can prevent them from occurring in the first place.

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Big Sales Don’t Mean Big Profits

I want to share a story about two companies that I worked with, one with $2 million dollar of revenue and the other with $600 million per year. Although they were vastly different in size, they both shared the same problem. I was able to help save one, although it shrunk to almost half its size. The other one liquidated after being in business for 30 years.

Both companies had increasing sales volume over the years. So what happened? It’s all about the product mix.

Company A, the smaller one, manufactured and distributed products, selling those products at a 50% gross margin for many years. Then they began selling to big box companies, which negotiated to a 20% gross margin. But with 80% of their business still at the 50% gross margin, the company was still profitable. Life was good for many years for the owners.

The big box customers then drove the margin down further, from 20% to 12%. Again, because of the increased volume, it remained profitable because 80% of their sales were at the higher margin.

Sales are up - great! But profits are down. What happened?

Sales are up – great! But profits are down. What happened? Here is the story of two companies that experienced that situation.

However, gradually over a three-year period, their product mix changed to 80% at the lower gross margin for the big boxes, which left just 20% at the 50% margin. Management didn’t notice the affect that this change in the product mix was having, as management tended to focus on increasing sales and became dependent on increasing bank financing. Large sales volumes frequently cover up a deeper problem.

In year three, the company had a healthy loss, ie red ink, and the banks didn’t want to lend money to this entity. I was called in and identified the mix problem. We came up with a 2-3 year turnaround plan that was reviewed with the ownership. The owners decided not to invest the money it would take to turn around the company and decided to shut the doors.

When I went to Company B, it had been borrowing more and more money from the bank, because the bankers liked the company and considered it prestigious. The bankers should have asked questions sooner but in any event, I was called in when they realized the company was in trouble.

The management first denied they had any issues with the pricing of their bill of materials, the BOM, or their product mix. They had spent millions on computer systems and software to track it and felt confident that they knew their costs. Because the company was in a low margin industry, they had realized that keeping track of the BOM was critical to making a profit and had made the investment to do so.

What I was able to determine, however, is that there had been a lot of turnover in a key position when it came to ensuring that the numbers management were receiving were accurate. The new people coming in had not been property trained, and had not been giving those fancy computers the right information for the correct cost structure. As a result, the company had been selling based on the wrong cost structure for years.

After identifying the problem, we were able to get an accurate view of the cost structure and change the product mix. Because of the severe losses it had suffered, the company shrunk from a $600 million in annual revenue to a $350 million; the owners came up with millions in new equity and the company survived.

Both companies suffered from a failure to recognize what was happening with their product mix. While management saw increasing sales, what they didn’t deal with was that profitability was going down.

Next column: What could they have done differently?