Deep Dive — It’s Time to Think About People, Part 1

 

Oct 31, 2017

By Frank Hurtte

We will be posting a lot about people over the next few weeks. Why? Without people distributors basically become an empty warehouse, a collection of well-used computers, and an assortment of worn out office furniture. Speaking with an assortment of folks from inside and outside the industry looking to purchase distribution businesses, the conversation typically revolves around three major points: profitability, solid customer relationships, and stability of people. Take away the latter two and the distributor is valued somewhere near zero. Further, it might be argued, without the people there are no solid customer relationships. So talking about people is doubly important.

Our brand of wholesale distribution is one of the most people-intensive business models in existence. Sure, we have warehouses, inventory, customer credit, computers and company fleets of cars, trucks and lord knows what else, but people are the driving force of our model. For every dollar of gross margin generated, about 58 cents goes toward paying our people. To put it into perspective, this is four-and-one-half times our occupancy expenses and three times our other operating costs. It’s a growing concern.

News pundits point to lower unemployment numbers, nearing those of pre-recession days. These numbers don’t tell the full story. I believe the pool of high quality talent required to impact our business has been fully absorbed. It’s the law of supply and demand. Since midway through the year, salary demands by new recruits have been on the rise. This is especially true for high skill and technically qualified folks. For example, the starting wage for new engineers straight out of college (University of Iowa) has reached US$60,000.

The business model doesn’t allow a lot of leeway for raising the cost of employees. We can’t afford to raise our percentage spent on people above the 60% point and remain in business. There is little we can do about the escalation of salaries, benefits or health insurance. Productivity gains are no longer just nice to have, they are a necessity to survival.

Let’s explore some of the best practices used by others to build productivity within your organization.

Experienced people tend to be more productive

Research into hundreds of distributor organizations points to evidence that experienced people are more productive. They know the systems, short cuts and processes required to adequately carry out their jobs. In addition, experienced folks often have a deep industry background including customer contacts and those behind the scenes whom you can call upon in a pinch to resolve issues.

Retaining experienced hands is critical to productivity with the following caveat: they must possess the right work ethic and professional skills and be in the right position. Hiring errors left to simmer within the organization don’t improve productivity. For the sake of discussion, we’ll assume the last big recession gave you the opportunity to purge them from your organization. Hopefully, other poorly performing employees are on solid improvement plans or on their way out the door.

Whether they mention it or not, assume your team is under scrutiny from headhunters. Other companies, armed with a handful of dollars, are probing your defences. Fortunately, money isn’t the massive driver many of us believe it to be. Assuming your pay scales are reasonably sound and have kept up with the industry norms, the real drivers fall into issues of job satisfaction, proper tools for the job, room for growth, and a feeling of being appreciated.

Reviews are more important than you think

After conducting exit interviews with more than 100 employees, I am shocked to find the majority indicate they have not had an adequate review of their performance for years. Their managers point to ongoing informal conversations with the employee, but those leaving don’t see it that way. What’s missing? A plan for the employee to grow within the company. A formal recognition of success with customers. A show of appreciation for years of service. Their managers use the excuse that putting together a proper review is time consuming and difficult, yet they overlook the issues of finding and training a new replacement.

A few old-school distributor owners have even commented that reviews just open the door to higher employee salaries because after a good review employees expect a raise. In today’s environment, I suspect a new hire with similar skills might demand greater compensation than the existing employee, not to mention associated costs of lost productivity.

Hiring errors are expensive

The only thing worse than losing a solidly qualified employee is hiring the wrong person. While most agree with the statement, the hiring process at many distributors is still abysmal. Let me give you some examples:

• informal interviewing techniques used without a plan. Exactly what are you looking for in the interview? Distributors walk into the conference room with no plan and no idea of what they want to explore with the candidate. Aside from a verbal walkthrough of resume details, a good interview looks for signs of work habits, communication style and willingness to be part of a team.

• personality profiling is not performed. Personality profiles are not perfect, but they do alert the interview team to potential areas to explore. In reviewing hundreds of these profiles we have discovered a number of red flags which, once explored, saved our clients from disastrous new hires.

• reference checks are done in a haphazard manner. Some see this as tedious work. When potential employees come from large companies, you get the standard “they worked here from 2011 to 2015 and that’s all I can tell you” answer. Taking time to find mutual friends and/or customer contacts takes a little effort, so the process often goes by the wayside.

• background checks are often amateurish. I know of a distributor who hired a truck driver with two prior DWI convictions. How did this happen? Further, one company asked me to assist them in their background check. Their search came up with a clean record, while my paid search revealed two felony thefts in another part of the country. Strangely, the potential employee forgot to mention he lived in North Carolina for two years.

Extending this hiring error discussion, best practices indicate new hires be reviewed at the 30, 60, 90 and 180-day mark. An employee showing the wrong signs in these early days needs to be corrected. If no improvement is shown, he or she should be terminated before becoming a detriment to your organization.

Onboarding process

Getting a new employee off on the right foot can speed the time from profit drag to profit generation. An onboarding process is critical during this “need for speed.”

That’s not all

There are a number of other “people points” we need to discuss. In an upcoming issue, we will post Part 2, where we discuss applying management and coaching points to the process.

Frank Hurtte is the Founding Partner of River Heights Consulting. The Distributor Channel is a service of River Heights Consulting. Find out more: www.RiverHeightsConsulting.com.