Текст книги "The org board. How to develop a company structure"

Simple calculations showed that the company would not be able to make a substantial profit by selling these spare parts. However, the head of the company explored the consequences of not having such a warehouse. He would have to handle customer dissatisfaction caused by equipment downtime. It would also leave the client open to the competition if they had the part that we did not. Competitors would offer the initial parts, and then the all of the equipment. Then he calculated the magnitude of consequences in monetary terms and immediately decided to establish a unit for selling spare parts for the equipment. By doing so, he basically raised the value of the company's product and restored the exchange.

Another way a company falls into the trap of giving partial exchange is that the customers’ concept of fair and equal are constantly changing. In some business fields, this happens slowly, in others, lightning fast, but this change occurs everywhere. In the restaurant business it happens slowly, while in high-tech quite quickly. Why didn’t videophones take over for regular phones, but rather they got replaced by Skype and Google Talk? Because telephone companies around the world missed the moment when the consumers’ idea of what was a fair exchange for phone and video calls has changed. Telephone companies could not or did not want to create products that provided fair exchange, so today we pay for internet services much more than we pay for a landline telephone connection. By the way, mobile service providers are next in line. If they don’t become flexible in changing their products with regards to data transmission, so that the consumer does not have to think twice on whether to use a cell phone or call via Skype or Google Talk, they will also gradually become internet providers instead of communication providers. Regardless of the size of a business, be it a nationwide company or a budding entrepreneur, it is necessary to regularly conduct surveys on the value of the product they deliver. Otherwise, what initially was a fair exchange will inevitably drop to partial.

Criminal exchange is actually the absence of exchange. This form of exchange is used by criminals when they receive something, but provide nothing in return. This form of exchange is punishable by law and has nothing to do with business.

The most appealing form of exchange, which is preferable to use in business, is exchange in abundance. In this case, the client receives more than he expected. Many companies are trying to provide their customers with this type of exchange. However, it is important to understand that this exchange is only possible if the client already received a fair exchange. If a restaurant customer did not get his food or service at a desired quality, then even a complement from the chef will not make him any happier. If a construction company did not complete the job on time, than even additional service will not create exchange in abundance. If a customer comes into the store during a sale expecting to get a considerable discount, then half-off on the merchandise will not be perceived as exchange in abundance.

For example, many trendy clothing stores have huge Christmas sales, but while the sale is going on they remove their most popular items from the shelves. If the buyer notices that, he will not feel that he is getting exchange in abundance. If before the sale, the buyer laid eyes on the perfect coat, then went to the store during the sale and the coat was gone, he definitely would not feel that he was given something valuable in the form of a discount. Rather, he would be upset and have a feeling of partial exchange. Exchange in abundance is something that exceeds the client’s normal expectations.

Discounts and sales are actually a dangerous thing. If a customer bought a product or service at a regular price, but after a while he finds out that the same item can be purchased much cheaper, he can get the feeling he received a partial exchange, even though at the time of the purchase he was completely satisfied. At the time of the purchase, he received fair exchange, but then a significant price reduction some time later gives him the idea that he had actually overpaid. Apple is a good example of a smart pricing policy – they reduce their product prices only after they release a new and more attractive model. They do not give discounts and they don’t hold sales. In general, to correctly lower prices, it has to be somehow justified. Otherwise, it will disappoint the most important customers, those who have already paid us money.

If we are able to provide the basic expectations and then provide an additional perk, this increases the client’s desire to deal with the company. Does this make sense? An unexpected additional service or a gift does not just make a person happy, but also gives them a reason to express their gratitude by recommending the company to their friends, writing a good review on social media, or simply coming back. A glass of champagne upon checking-in at a hotel, a holiday gift for the client’s child, a bonus for the next order, a cup of coffee, a small birthday gift, etc. reinforce a positive attitude towards the company. One can easily calculate the benefit of these small acts in terms of money: how much money do you save if your next sale to this customer requires half the advertising expenses, time, and salesman efforts? And this is the way exchange in abundance works. This form of exchange has also a flip side – it gradually increases the customers' expectations. What at first was exchange in abundance, over time starts to be perceived as fair exchange. If your hotel always welcomes guests with a glass of champagne, then after some time, for your regular customers this will become just a regular fair exchange. You must be ready for that. Therefore, you should never stop working on improving and updating your VFP.

Chapter 5
Organization

An organization is a certain set of specialized functions performed by individual employees or entire divisions in coordination with each other. By function we mean the certain activity or responsibility of an employee or division. For example, greeting clients as they enter the office and promptly directing them to the appropriate specialist, is a receptionist's function. While a salesperson’s function is closing deals and getting payments. Each function has its own VFP. For a receptionist it is, “visitors, telephone calls and messages promptly directed to appropriate specialists”. The VFP of a salesman is a «closed deal» or a «received payment».

An organization begins with the employee who has well-defined and clear functions, and who also knows the functions and products of other employees and divisions. In the chapter on the stages of development of a company, I mentioned the tiny Di Fara Pizza. Their pizza has garnered awards for its quality and has became known all over the world (Google this name if you are curious). However, it has not expanded since 1964. This restaurant never became a full-fledged organization because its founder – a talented Italian chef – performs all the basic business functions himself. There is practically no separation of functions. The founder of the company tries to his hands on everything. As a result, he gets carried away with personally preparing the dishes and doesn’t pay attention to the restaurant’s maintenance and the functions associated with business development. Due to some basic business negligence, Di Fara’s has been closed a number of times due to unsanitary conditions[11]11
  Walker, Dalton (June 7, 2007). «A Beloved Brooklyn Pizzeria Is Closed, Again, by the Health Dept». The New York Times.


[Закрыть], and the restaurant’s appearance doesn’t meet modern expectations.

Imagine that open an auto service center. You have several skilled friends, and they’re each skilled at auto repairs. Until you divide the functions of running an auto shop in a way that one of them is responsible for working with clients, the other repairs powertrains, the third fixes electrical equipment, and the fourth is doing body work, there is no organization. If the functions are not distributed, it is impossible to organize the motion of the different particles: clients, jobs, repairs, car parts, money, etc.

Any organization is a flow of particles, which go from one function to another. As a result, this allows you to create the VFP of the whole company and, of course, accomplish a successful exchange with customers. When these functions are precisely defined, an executive can view the entire production of the VFP as a sequence of steps. For example, in any company there is a person responsible for advertising and attracting customers – they can be part time, full time, or independent contractors. There is someone who takes calls and greets clients. There is someone who performs initial inspections. A person who is in charge of supplies, orders the necessary parts, and ensures their delivery. A mechanic performs the repairs and delivers completed jobs to the client. If all these actions are performed, this produces the company’s VFP and then its exchanged with the client. With functions distributed relation to the VFP, it becomes possible to observe the motion of particles in the production flow, regardless of how small the organization is.

This simple chart points out something interesting in the management process. Any function in this organization, when not done, can completely stop the entire flow of production. A receptionist who greets visitors could just leave the front desk and not take any phone calls. In this case, all the efforts of promotions will be in vain and the production flow will be stopped. The person who makes the initial auto inspection could botch it completely and everybody will be out of a job. Moreover, the overall performance of an organization will not depend on the most productive employee but, unfortunately, on the most unproductive. This seems very unfair, but it confirms that an organization can only achieve success when all functions work well. A highly skilled professional may wind up without results or work if someone in the flow of product production doesn’t their job. Here’s the second observation: if the executive doesn’t catch the bottleneck in the flow of production, he will likely make mistakes that will reduce the company’s profits. If the bottleneck, for instance, is the person in charge of ordering spare parts, then the personnel in sales and promotion will have their tasks hindered, and company expenses will only increase.

One of the most common reasons for the lack of expansion is when the executive incorrectly determines the function that needs to expand, and then he spends time and money on it. While efforts end up increasing, profits decline. The executive, demoralized, might give up on expansion, and comes up with a strange excuses, "For our industry, it’s sufficient to have only X number of people in our company. "There’s actually nothing wrong with him, except that: he does not see his company as a sequence of functions and does not understand where the weakness lie.

The earlier example of the sequence of functions in an auto shop is simplified as it does not reflect: accounting, legal, etc. The executive is responsible for the entire VFP of the company; therefore, any function that is not assigned to an employee will be turned over to the executive. Here is what L. Ron Hubbard wrote in his article[12]12
  L. Ron Hubbard’s article «Org Board Cutatives», written on September 26, 1970.


[Закрыть] on this topic:

“Any major function, action or post left off an org board will wrap itself around the in-charge like a hidden menace.”

This is the primary cause of executive overload. It explains why managing a small company with few employees is far more complicated than managing a larger company. In a small company, the executive has to take on dozens of various functions, which creates an overload. I was only able to feel like a real executive when there were over 100 people working in my company. When various functions are performed by separate individuals, it becomes possible to plan, monitor, and identify bottlenecks in the production of the company’s VFP. It is very difficult to manage people who combine many functions, hire, train, and evaluate their work. Additionally, the performance of a person carrying out a multitude of functions is lower than that of a specialist. This answers the question of why small companies actually produce much less profit per employee and are incomparably harder to manage. A small business requires the mastery of management tools in order to overcome these basic barriers and grow into a big company. From time to time, I hear from entrepreneurs that a small business has the advantage of flexibility. However, that flexibility is not worth the how much effort is required to manage a small company effectively.

All activities in an organization can be divided into "technical" or "administrative". Technical functions are those associated directly with producing the VFP that is exchanged with our clients. In trade, this is: working with suppliers, purchasing, logistics, order fulfillment, and delivery to customers. In manufacturing, it is the planning and assurance that all materials necessary for production are present, and the actual production. In a law firm, this translates to: advising clients, drafting documents, and representing clients' interests in court and negotiations.

To understand which functions in your company are technical, you need to designate those that directly relate to the production of your company’s VFP. In the following chapters, it will be discussed in detail.

Administrative functions are those that provide the technical functions with good management, legal protection, personnel, finances, promotion and many other things. You could say that these are the functions that don’t produce the main product, but are needed for the functions that do. During the initial stages of business growth and development, executives mainly focus on technical functions. As the company grows, they discover that it is the administrative functions that become the bottleneck.

Interestingly, the technical functions are easier to organize and manage as they create the least amount of problems for the executive. In a restaurant, the chef won’t stomp up to the manager to request that he finishes cooking instead of him, and a waiter won’t demand that the manager the explain menu items to a customer. In a trading company, the warehouse manager will not bring an incomplete order to the executive and request that he finishes the job. However, administrative functions can be passed around quite easily, and passing the workload on to the executive is rather common. HR will demand that the executive makes all final hiring decisions; accounting asks for the executive to prioritize which bills to pay first. Generally, specialists for technical functions understand their VFP better with a greater mastery of the technology required to achieve it. Experience has illustrated that administrative functions create the worst bottlenecks in small businesses, and hinder the company’s development. Therefore, the better part of this book focuses on correctly managing administrative functions.

In any growing company, that is still relatively small and can’t afford to have a worker for each important function, employees will have to perform multiple functions. To prevent a problem from having employees carry out multiple functions, the executive must ensure precise understanding of each function assigned. As company expansion continues, the executive will surely need to re-distribute these functions. This brings up another another issue with smaller companies: administrative duties performed by employees change with the company’s expansion. Evolution of the company necessitates having an accurate idea of all the vital functions from the outset. The list will ensure that tasks are re-assigned intelligently and in a timely manner. To get an idea of what a functions list could look like, at the end of this book there are several examples of organizing boards for small companies. They may seem a bit bulky or redundant for a small business. However, these boards don’t have a single extraneous function. Each one of them is important to the company’s success.

When an executive or an employee of a small company sees such a chart for the first time, this question tends to come up, "Where can we even find that many people? And how are we going to pay them?” Remember that an organizing board is simply a compiled and organized list of functions. The functions get distributed among the existing employees. Conscious distribution of responsibilities allows the executive to see where it is necessary to expand the company. However, it’s not an instant process, it is always a sequence of steps. You cannot simply draw up an organizing board for a new business and immediately fill it with people. Different functions will have a different workload, depending on the type of business and its stage of development. Naturally, the ratio between the number of technical and administrative employees will vary significantly in different types of businesses.

For example, in a construction company you can have 300 technical employees working directly on a site while it’s sufficient to only have 30 administrative employees. But for a store that sells car parts, there could be just two people dealing with the technical functions, which would be working with suppliers and the delivery of merchandise. For the administrative functions, such as working with customers, there could be ten employees. Only through the process of business expansion is it possible to gain an understanding of the optimum distribution of functions among employees.

Let's take a look at a chart for a company that produces various types booklets and magazines. Notice the distribution of functions in the process of getting orders.

For an average-sized printing company to hit a maximum quota, it has to generate about a hundred orders per week. This means that on a weekly basis, their Sales Department (about 5 people) needs to make an adequate number of sales and send them over for production. On average, a corporate customer will place about a dozen orders per year. If it takes a salesperson about a week of work to close an order, then each of them should actively be working with about a hundred customers. For a well-organized Sales Department, this is quite possible. However, not all existing customers will place new orders: some will switch to competitors while others have finished all their printing needs. If regular customers lost a year makes up 50 % of the customer base, it needs to be compensated for by the influx of new customers. This means that each salesperson needs to obtain at least 50 new customers per year to become the new regulars. And for the entire Sales Department that means 250 new customers, which is at least five per week.

Have you ever tried managing the Sales Department where each salesperson, while maintaining relationships with hundreds of regular clients, also had to generate new clients on a weekly basis? I’ve organized sales in the past, and I’ve noticed that without having a manager constantly monitoring the area, a salesperson will generally work on closing existing clients, rather than spending time on those who will not necessarily place an order. In the early stages, it is necessary to do several sale presentations, meet with the client, and place several phone calls before closing the first order. But if this function is not monitored, the sales numbers will resemble a roller coaster. A salesperson, having exhausted his reserves of existing customers, falls into a sales-less rut, and frantically starts looking for new customers. Sometime later, he reaches a sales peak, only to fall back into the rut.

To bring in five new customers (who will become your new regulars) on a weekly basis, you’ll need at least twenty prospects in your pipeline, and you will have to work on them for some time before they turn to loyal customers. Marketing will have to provide the appropriate number of new responses to meet these demands. If this printing company promotes by mailing brochures, letters, and flyers, then in order to obtain the target number of responses, one should send out at least 20X that number of promotional material. In this example, it is 400 letters every week. This is its own function and it takes time to do it, as one needs to continually expand the prospect database. What happens if one neglects this function? The Sales Department’s job will become extremely difficult. The salespeople will have to manually find new clients through their connections and cold calling, while still servicing existing customers. If you ever tried cold calling to find new clients, you know it’s a thankless job. Thus, leaving a vacancy for the direct marketing[13]13
  Direct marketing: a type of marketing communication based on direct personal communication with a customer and aimed at building relationships and making sales. Direct marketing is based on treating the client as an individual, involves feedback and does not use information intermediaries for communications, such as mass media.


[Закрыть] function will result in sales becoming extremely difficult. Sales will require personnel with great patience and nerves of steel as efficiency will be too low. Additionally, if work becomes too difficult, you will have to pay dearly for it, plus it’s not easy to find people to do it.

Now, to get back to the subject of direct marketing. To fulfill a high volume of outgoing mailings, someone has to constantly expand the prospect database. To be able to send out that many messages, you need a database with more than 5,000 names. But even this database gradually loses its effectiveness, approximately 30 % per year – address changes, changes in customer needs, and avoiding over-saturating the same list with the advertisements. To maintain the database in working condition, at least 30 names need to be added to it weekly. This is another function which you need to monitor all the time. Otherwise the effectiveness of mailings will be constantly going down while the cost of promotion continues to rise. There are numerous methods to expand such a database, such as from manually collecting the addresses from directories or online clients registering through a landing page.

Having an accurate concept of the necessary functions and their corresponding time requirements, the executive sees the whole process and anticipates the consequences if one of those functions stops producing its expected VFP. If the executive and the staff do not see the organization as a whole process, mistakes are inevitable and instead of managing the company, you’ll be putting out fires. When sales start going down, the executive will find out that the reason is ineffective promotion that did not provide a sufficient influx of new customers. But this will happen too late, and, by the time it’s discovered, too much time and money will have been wasted. After the executive handles promotion, it will take some time for the sales to go back up.

By the way, if we were to look at the weekly sales graph of many companies, they would resemble a saw blade. The sharp ups and downs generally indicate a lack of control over the functions which are towards the beginning of the product’s production flow.

Having a chart that shows the distribution of functions allows you to define the VFP for each one. Taking the example of prospect database expansion, it is clear that its VFP is, “working addresses for potential new customers entered into the mailing database". As for the direct marketing function, it is, "responses from new potential customers as a result of promotional actions”. For those in charge of sales presentations, it is "a new potential customer who is interested in doing business with the company”. As for the salesmen, VFP is "orders received and sent over to production”. Once the products are defined, they can be measured quantitatively. Reasonable production quotas for each function can be set and monitored. Management becomes simple and easy to understand. Employee results are a breeze to evaluate. Adopting this approach to management, you will be surprised to find out that some very diligent employees turn out to be completely unproductive. Conversely, those who don’t seem like monsters of production are going to be most valuable in the company. This will allow you to intelligently reward results, not just effort and loyalty.

A company can double its revenue every year by increasing the average production of each function by less than 2 % per week. Not that many companies are able to maintain a growth rate of 100 % per year. Even very successful companies have much lower expansion rates. For example, if McDonald's had expanded by at least 25 % every year, today they would have more than a 100 thousand restaurants. The reason why companies can’t maintain high growth rates lies in the "saw blade" phenomenon mentioned above. It occurs due to a lack of control over the important functions, resulting in management having to put out fires. This is when the executive corrects a function only when it has an obvious and devastating impact on the entire company. As in the example with the printing company, if the prospect database is not updated weekly, it gradually loses its effectiveness. But, usually, executives begin to notice the issue when it’s already too late – after the effectiveness of promotion has significantly decreased. This is where executives begin putting out fires – updating the database by any means, but unfortunately, it’s impossible to compensate for all the lost sales.

Why didn’t the executives and employees notice the impending danger? Because they didn’t have a complete chart of functions or defined VFPs. There was no one monitoring their production. As a result, they’ll remain satisfied with a company growth rate of 20 % for the year, which is often considered a rather good. For a large company, this might be quite an acceptable achievement, but does this growth rate align with your personal goals? What kind of company do you want to create and how long do you want it to take? Calculate the growth rate your company needs to meet, so you can truly feel that you’re a successful leader.

In these examples and simple charts, you can see just a few of the functions within an organization. Now, you should have questions about the roles and the VFPs of human resources, a Finance Director, a lawyer, a warehouse manager, etc. Before we start looking at the seven functions of an organization, it was important to sort out the definition of an organization and how it benefits the daily activities of an executive and employees.