How We Will Operate | B. Charles Ames Series

How We Will Operate

This is the fourth in a series of posts that will describe what the CEO Reliance Electric thought about basic commitments, how the organization was going to operate and ground rules for managers. Once again, all the content of this article is based on the work of B. Charles Ames as outlined in his management manifesto titled Basic Management Concepts dated January 14, 1974.

Reliance Electric was a $1 billion conglomerate at the time our company was acquired.  They had been on a run of successful acquisitions for several years.  They owned about a hundred companies producing electric motors, power transmission equipment, retail food packaging and weighing equipment, telecommunications equipment, and more.

How do you run a conglomerate with a wide range of diverse businesses . . . effectively?  Ames wrote the following.

  • In light of Reliance Electric’s girth, the Divisions of the company needed to work together to take advantage of lessor endowed competitors.
  • The company centralized “certain functions” when it was economically advantageous.  The interests of the corporation trumped those of any individual Division.
  • Reliance followed a uniform set of administrative policies throughout all operations.  Human Resources, for example, would be managed consistently throughout the organization.

So far, so good.  Here is where it gets interesting. Ames was clear here:

  • The company would not force integration where it didn’t make sense or seek consistency among the Divisions without regard to individual differences of the Divisions.
  • The company would not impose corporate policies on decisions without seeking into from the Divisions.

What Ames wanted us to do was gain a competitive advantage from our size and diversity, without messing around with the basic integrity of the divisional profit center concept.  An interesting balancing act, to be sure.  And, the basic business strategy of the company.  Because Ames wrote it down and distributed it all of us, we knew what was expected.

B. Chuck Ames and his wife Jay currently manage the Ames Family Foundation.  They divide their time between a home in Vero Beach, Florida and a second home in a suburb of Cleveland.  

 

Our Growth Strategies

Our Growth Strategies

This is the third in a series of posts that will describe what the CEO Reliance Electric thought about basic commitments, how the organization was going to operate and ground rules for managers. Once again, all the content of this article is based on the work of B. Charles Ames as outlined in his management manifesto titled Basic Management Concepts dated January 14, 1974.

In a multi-business company like Reliance Electric, a one size fits all, master strategy defined by corporate was destined to fail, according to Ames. He did not see a single thrust in the business or an “either or” proposition. He saw a “combination of thrusts” that would create the best opportunity for obtaining the company’s growth and profit objectives.

With this multi-business, multi-thrust concept in mind, Ames suggested a three phased growth strategy that would 1) increase earnings at a rate that was attractive to investors and 2) improve the quality and stability of company’s earnings. To accomplish this he suggested the following:

  • Continued emphasis on our strengths to increase profits from our core businesses.
  • Increased emphasis on products and markets less vulnerable to the ups and downs of of the economy. Service businesses, maintenance, repair businesses, for example, fit here as did all of the telecommunications businesses.
  • Increased emphasis on acquisitions that added to our strengths, particularly in businesses less vulnerable to business cycles.

Ames left the rest up to the individual operating company to decide. He wanted dynamic product and market strategies that were tailored to the individual opportunities of each business. He suggested that each business strive for a momentum in order to “make things happen” rather than wait and react to the competition. He felt we could not win by being defensive. His advice was to be aware of the competition but take the initiative and let them react to us.

Interesting advice, on the competition, regardless of the business or industry.  Just as interesting was the reality that everyone in the organization knew exactly what was expected in terms of job performance. Ames wrote it all down for all of us. And that may be the most significant basic management concept of all.

B. Chuck Ames and his wife Jay currently manage the Ames Family Foundation.  They divide their time between a home in Vero Beach, Florida and a second home in a suburb of Cleveland.  

 

Hey, Guys. Meet RONA.

When Reliance Electric acquired our nice, privately held, mid-sized business they paid a significant premium.  They were a strategic buyer.  They wanted an introduction to some of the horizontal markets where we strong.  Congratulations.  The seller got a bigger multiple of earnings.  We got RONA.

RONA is short for Return on Net Assets.  Based on Generally Accepted Accounting Principles the total purchase price of an acquisition of this nature is allocated to assets of the business based on the individual fair market value of the assets acquired. Overnight, depreciated assets suddenly became valuable once again as the premium in purchase price was spread over these assets in what amounted to a “write up.”  This might be considered normal accounting mumbo jumbo except that one of B. Chuck Ames metrics required to fulfill the Basic Commitments outlined in the first part of this series.  RONA.

Ames expected at least 18% return on net assets employed.  The write up in assets moved the bar for our performance hurdle to a new, some would say, unfair level.  What was fair about the metric was it allowed Reliance to earn back the premium it paid for the companies it acquired.  And, it was also a very clear performance expectation for the managers of the company.  We all knew exactly what was expected.

The metrics Ames incorporated to insure the ability to fulfill Our Basic Commitments to our shareholders and our employees included:

  • Sustained rate of growth in earnings per share 4 to 5 points above the going rate of  interest.
  • Improved quality or stability of earnings so that in periods on economic decline earnings would not fall below the level of any prior period.
  • 7% Return on Sales after tax.
  • Increase earnings contribution by 15% per year.
  • And, of course, 18% RONA.

Ames was very specific about operating units that did not achieve these profit goals.  The unit was regarded as a “drain on, rather than a contributor” to the corporation.   He made it clear to everyone that this drain could not be tolerated.  There was no commitment to a plant, product or market that did not at least offer the prospect of hitting the performance targets.  Further, it was the manager’s responsibility to make realistic assessments of a business unit and decide to get out of it if it wasn’t going to make its “fair contribution.”

Interestingly, Ames was quick to debunk “the allure of volume” argument.  He wrote that return on capital and absolute earnings can be improved by walking away from marginal business, even if it meant shrinking the overall size of the business.  His metrics were about making money.

Selected metrics, of course, will vary by company.   They need to be relevant to the goals of the organization.  The suggestion would be to pick three or four that apply to the individual situation and use them as guideposts for judging performance.  The focus these metrics according to Ames would be on earnings.

The next installment of Basic Management Concepts will describe the Growth Strategy Ames devised for Reliance Electric.  Once again, all the content of this article is based on the work of B. Charles Ames as outlined in his management manifesto titled Basic Management Concepts dated January 14, 1974.

B. Chuck Ames and his wife Jay currently manage the Ames Family Foundation.  They divide their time between a home in Vero Beach, Florida and a second home in a suburb of Cleveland.

Odds ’n Ends from Phil Hauck | Retirement Age, National Debt, TEC Meetings, and More!

On Retirement Age

This notion of having a Retirement Age, when the government begins making substantial payments to citizens, isn’t new.  It began in 1889 in  Germany.  The average life expectancy was 40, and the Retirement Age was set at 70, later reduced to 65.  For us, it began during the Depression, when average life expectancy was 61; it was set at 65; half the people were dead before these Old Age payments set in.  Today, our average life expectancy is about 79, yet the Retirement Age is still 65.

Corollary:  The federal budget-killer of just about every Scandinavian and European country is the government making payments to its people at around 60-65 years of age, even though life expectancy is much greater.  Like what we’ve now arrived at, they can no longer afford a defense budget because federal spending is taken over by Retirement Age and health care spending.

Also of interest, in most of Europe, the Fertility Rate is currently at about 1.3-1.5 children per woman, well below the 2.1 replacement level (that the U.S. is at thanks to the influx of Hispanics).  This means that they very quickly will have fewer and fewer working age adults to pay for those retirees.  Indeed, these levels foretell a shrinking of the population, and therefore their economies.  Their outlook as viable nations is very poor.  (These poor stats also apply to Russia and Japan.)  For more information, click here.

National Debt and Its Implications

How come we still aren’t hearing a lot about this approaching crisis … and its implications?Just sayin’!

Told at a Recent TEC Meeting, about a Koch Brother

The Koch brothers receive lots of abuse for their contributions to conservative causes.  What isn’t heard, though, is their astuteness as business leaders.  Recently, a senior executive of a TEC company who has worked at companies owned by the Koch brothers, such as the local Georgia-Pacific plant, but others as well, told this story:  When Charles Koch walked through one of his company’s plants, he would ask an operator, “Who owns this equipment?”  The response often, “You do, sir.”  The correct response:  “I do, sir.”

He required techniques that created team-based approaches that “focused relentlessly on Reliability.”  He contended that “Reliability focused organizations outperform Production-/Productivity-focused ones, and there is research that supports that.  Interesting.

The approach was to create Reliability teams, a replacement for Maintenance.  Maintenance experts were “downloaded” for their expertise, which was provided to production crews for them to use on an ongoing basis.  The crews had to plan schedules several weeks in advance, and then document any variation, called an “unplanned event.”  The objective, obviously, to reduce the number of unplanned events, resulting in increased up-time, productivity, efficiency and ultimately profitability.  “People found this approach much more engaging.”

Another metric:  Number of improvement ideas.  The metrics that the Koch brothers cared about were the Leading Indicators and Forecasts.

Quotes from Recent TEC Meetings

  • “Make sure every employee loves his/her job.  People who are successful are doing what they love to do.  It’s the only path to being the best in the world.”
  • An expert on Emotional Intelligence at one meeting cited this quote from EI founder Dan Goleman:  “Out of control emotions (bullying, anger, nmicro-managing, etc.) make smart people stupid.”  She also said that micro-managing is often a reaction to the leader’s inability to control his/her anxiety, and to impose behaviors on others to compensate.
  • “I built a large garage.  We call it the ‘Garage-Mahal’.”

How Effective is Your Sales Compensation Plan?

We are often asked to review sales compensation plans.  An effective sales compensation plan is a delicate mix of incentive, motivation and fairness.  A plan with a poor design can not only hurt morale, but also inhibit successful hiring.  Here are some critical factors in designing (or re-designing) your sales compensation plan.

Apply the K.I.S.S. principle (Keep It Simple Stupid).  We see way too many plans that most of the salespeople don’t understand.  Therefore, the plan becomes ineffective.

Design the plan to meet your company objectives.  If you are looking for more new business, then reward that activity with a higher commission.  If you want to grow one segment of your business over another, then reward that activity.

Pay for sales related activities.  Salespeople sell, engineers engineer and accountants collect money.  Don’t have your salespeople performing non sales related activities and then complain that sales goals are not met.

Pay promptly.  Tie reward to performance with minimum delay.  It’s okay to pay commissions after receipt of payment from your customer.  But, pay it within 30 days and not 3 months.

Implement some level of base salary.  If you hire a new salesperson as an employee make some portion of the compensation a base salary.  A base salary gives license to provide direction.  If you want to pay commission only, then retain an independent manufacturer’s representative.

Do not let a “draw against commission” run a muck.  If you have some salespeople “in the hole” more than 6 or 9 months of draw; you have a management problem not a compensation problem.  If salespeople are not performing, replace.  No compensation plan will make a poor salesperson better.

Check around your industry and your marketplace.  Maintain a competitive compensation plan to retain and find good salespeople.  If you pay less than a competitive wage, you can expect less than spectacular results.

Review your compensation plans annually and adjust as needed.  There is no intrinsic benefit to a plan that originated in 1948.

Not everyone is equal.  Salespeople differ in experience, motivation and talent.  There is no reason to pay every salesperson the same.  Just make sure the plans are fair.

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Keep these tips in mind when it comes time to review your sales compensation plan. Every business is a little different and has unique goals and circumstances.  A fair, competitive and simple comp plan, however, is the common element to drive sales.