One of the core philosophies I champion as a leader is this: You can’t judge what you don’t measure. How do you hold an employee accountable in their job performance if you are basing your evaluation on subjective or vague criteria? The answer is that you can’t—at least not effectively or fairly.
What if we flipped this upside down and used the same standard to hold ourselves, the leaders in our company, accountable for what we defined to our people as success? Let me explain. At one point in my career, my company acquired an independent lumber dealer. My task was to help the owner, who had been very involved with the business, set out a retirement transition plan for a year after the sale. This business was a top performer, but two operational areas stuck out as having room for significant improvement: sales backorders and accounts receivable collections.
When I asked the sales team about the number of backorders, I was told that the purchasing department just didn’t have enough inventory in stock to fulfill all of their orders. When I talked to purchasing, I was told that the owner did not let them have enough inventory. I asked what their inventory budget was, and they replied that they did not have one. They told me they could tell that they had too much inventory when the owner started asking how much they had in inventory or when he sighed after they told him about a particular buy. So, their goal was to never have the owner ask about inventory levels or sigh when they bought something. When I asked the owner why he didn’t have inventory levels budgeted, he told me that periodically he would look out the window at all the inventory they had and if it seemed too much, he had a way of letting his purchasing team know that they needed to “up their game” and get the inventory down.
I had the same conversation with accounts receivable. There were no established guidelines for when an account should be put on hold or even written off. It depended how the owner personally felt about the customer and how much volume the customer did with them. The net result was that some of their biggest customers were their slowest payers, and the credit team felt powerless to implement guidelines or improvement strategies because they really didn’t know how the owner defined success in credit, leaving the credit team to do “the best they could” to collect money from their customers.
When I sat down with the owner, I complimented him on how well he managed his sales team and the results they were achieving. He talked about his strict pricing and pricing deviation guidelines for his Outside Sales Reps (OSRs). Thus, his OSRs found ways to sell other than by price, and his above average gross margins reflected that. When ask why he did not have guidelines for his purchasing and credit teams, he explained that he liked to have flexibility when dealing with those two areas.
I pointed out that any of his OSRs could make a case that their personal need to close a sale or what customer they were dealing with could influence their thinking on pricing. But the pricing discipline the owner had implemented took away the emotional aspect of pricing, and his results were significantly better. By not implementing guidelines with purchasing or credit, he was making many of the decisions in those departments susceptible to emotional influences and preventing the people on those teams from achieving the kind of results he was getting with his pricing. Or in other words, his lack of holding himself accountable as a leader was negatively impacting the performance of the people he was leading.
Fortunately, the owner did decide to set budgets, guidelines and expectations for both departments. The result? Backorders all but disappeared and their accounts receivable percent current skyrocketed.
So, ask yourself, are there any areas in your business where you have avoided setting guidelines or expectations because you didn’t want to be hamstrung by your own rules? Don’t be afraid to implement guidelines that work for 95% of the circumstances. You can always make exceptions if a situation warrants it. That’s what good leaders do. They lay out a framework and then manage by exception to achieve excellence.
Russ Kathrein is with the LBM Division of Do it Best Corp. based in Fort Wayne, Indiana.