After buying a factory that was profitable on paper, a business school grad must summon the will to replace problem employees before he loses his investment
Editor's note: This is the seventh in a series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.
Problem: The Tail Is Wagging the Dog
Larry is a business school graduate from the Northeast who decided to live his dream of becoming the owner of a manufacturing business. He scoured the country looking for a prospect and two years ago found "Clear View Manufacturing," a $50 million glass-window and sliding-door factory near Tuscaloosa, Ala. This business had operations ready to go, an established reputation, and what appeared to be a solid client base. There were already over two dozen experienced employees on hand and the numbers showed a respectable profit margin. All Larry had to do was walk in and start making things happen. But what seemed like a slam dunk turned out to be a lesson in dwindling income—due to sheer incompetence.
Larry was dependent on the existing employees for everything from the mechanics of the factory floor to marketing tactics and customer data. He also relied on the old timers to help him acclimate to the Southern style of negotiating business. Larry sensed something wrong from the beginning. The staff's general outlook was too lax for his no-nonsense, Yankee style of doing business. Still, he felt like the outsider who needed to give everyone a chance.
That was Larry's first mistake. During his first month as the new owner, more than half of his staff abandoned ship. One by one, employees came into the office and told him they were owed vacation time and wanted to take it all at once. Figuring the business wasn't going to last, they wanted their paid time off while they could still get it. No one was on hand to answer his questions. Every time the phone rang, it was a mess, one after another.
Larry held the company together until the vacations were maxed out. He took advantage of the empty office to poke through desk drawers and files to figure out who did what—and who on staff was actually necessary. He discovered that most employees were spending work hours on personal business. The third-generation family business had previously been run by two brothers and a sister who'd inherited it. Not caring how it was run, they had allowed the employees to take over the operation. The workers in turn let business take care of itself until profits started faltering. Conditions reached the point where they couldn't be bothered to pick up the phone, let alone go out on sales calls.
As employees returned from vacation, Larry delayed taking action, fearful that he wouldn't be able to fill key positions and convinced he needed these employees to help him make the transition as the new owner. Then disaster struck when a sales manager getting paid six figures allowed a major contract to fall through, jeopardizing the entire year's profits. That's when we got the call.
Solution: Fire Faster
Turnover is a good thing. I don't care if your employees have been with you for 20 years. If you want your business to grow, you need to inject a little new blood that's hungry for sales and eager to advance in the organization. If you really want to make a profit, there's no such thing as tenure.
It's essential for business owners to recognize what is wrong and act quickly. In Larry's case, the free pass stretched several months too long, but he was smart enough and lucky enough to catch it in time to salvage the business. He's still squeamish about firing people and laying down the law, but that's where we come in. It's our favorite part of the job.
We're starting with his accounts receivables workers, who have been more interested in where the morning coffee and rolls are coming from than in collecting on outstanding invoices. We've set a clear target for them and we're breathing down their necks while they make the calls and collect the cash. If they fail to follow up, we've made it clear that they may end up looking for work at the local donut shop.
Meanwhile, we've advised Larry to install a computer system that obviates the need for half the staff, easily eliminating expensive dead weight. Clear View currently has an outmoded design program that's stored on a computer so old it should be in the Smithsonian. A surly employee on the factory floor is closely guarding the secret of how to use this antique. As far as we're concerned, he's outta there.
Recently we drilled down and discovered that a glass supplier was sending bribes to Clear View's head of purchasing in the form of flat-screen TVs and season football tickets. This drove the cost of essential materials for the business up 40%. On Larry's behalf, we immediately fired both the employee and the vendor.
It won't be hard for Larry to find some capable new employees to replace these "entitled," corrupt individuals. We've already found some highly qualified candidates who will be told the rules up front and paid on their performance.
In the three months since Larry started cleaning house, Clear View has seen a 30% jump in profits. I predict that by the end of this year, Larry will have a whole new team in place. The business will finally feel like his, and not some out-of-control shambles he inherited from the previous owners. The key is to take charge and let the business fall or flourish on your terms. Let the axe fall where it should. Let everyone know they are expendable.
Allowing your employees to run your company is like letting the inmates run the asylum—and that's just plain crazy.