Sunday, February 14, 2016

The Consultants - Telling People the Obvious

Consultants sound like real geniuses, but really most of their advice is common sense.  Since you pay a lot of money for advice from consultants, you may be more inclined to follow it.

A recent article in Forbes Magazine profiled two business consultants who specialized in helping out small businesses.   The biggest problem they faced, they said, was getting people to accept their advice and take action to rescue failing businesses - often family businesses that are seeing smaller and smaller margins over time.

They had an interesting business model themselves, using telemarketers to solicit business using cold-calling.  About one out of a thousand calls results in a lead, and maybe less than half of those as customers.   Talk about long odds!

But what struck me as interesting was that the advice these consultants gave was pretty much basic common sense:  Tighten up your bottom line and prosper.

And yet, customers of theirs were reluctant to do this.   Why?

Well, the two pieces of advice are often hard to swallow: Fire employees and fire clients. In any business, over time, you accumulate more and more employees, often at higher and higher wages (and costs) with lower and lower productivity.  Suddenly "nothing seems to get done around here" and you hire yet more people to get things done - and the circle continues.

(We saw this in the large manufacturing plants in the 1970s - particularly auto plants. Old-timers felt they were now in "the country club" and didn't have to work as hard.  The newbies were supposed to do all the real work.  So management kept hiring more and more people to get work done, with predictable results - quality suffered and labor costs increased.  Oddly enough, law firms and I am told accounting firms work the same way - with "senior associates" leaving work at 3PM and forcing the junior associates to work until 9.   Maybe a shakeup is due in that industry as well).

And sometimes, the least productive employee is Old Sam or Old Edna, who has been with you since the beginning, has some of the highest wages in the place, and the highest costs in terms of health care, retirement, and vacation pay.  And since you like Old Sam or Old Edna and have become friends with them, you are loath to fire them or even have a strong talk about their half-hour cigarette breaks.

And outsider can see this, as the owner of a small business, you can't.  It is like the cardboard box in the hallway that you set down temporarily - five months ago.  They start hoarding employees - unproductive ones at that.

The second piece of advice also seems counter-intuitive.  Clients are something to be cherished, not fired, right?  Wrong.   In most businesses, including mine, there is a small group of regular clients who pay good prices and demand little of your time.   There is also a small minority of clients who constantly demand discounts and argue and bicker over every little thing - taking up the majority of your time.

As a result, you spend 95% of your time servicing 5% of your client base - the least profitable part.   Fire that client, and you can also afford to fire Old Sam and Old Edna, whose primary job was probably hand-holding that client on the phone all day long anyway.

Consultants are in a way like Motivational Speakers - when your company starts hiring these, it is a tacit admission that management no longer has a clue as to what is going on.   And they are not cheap.   The company profiled in the article specializes in helping small Mom and Pop businesses, and they charge $250,000 for this service.

The people who follow their advice often thrive and thus believe the fee is "worth it" in terms of increased profits.   And if you can't see the obvious, well then, it is worthwhile.

My own experience with consultants illustrates how they work.   I was working at a large manufacturing company that had huge overhead costs in terms of labor, plant, and taxes.   We were in a high-tax State full of socialists who thought that "taxing big business" was a way to make everyone rich.   The unions thought that regular strikes were a way of teaching management a lesson.   Our plant infrastructure dated from World War II and was costly to maintain.  And since we spent so much on taxes and labor, there was no money left for improvements or repairs.

As a result, our costs were high, profits were thin, or non-existent, and quality suffered.   Our other competitors - in the US and abroad - had lower labor and plant costs as well as lower taxes.  They were able to plow money into R&D and make better products with higher quality, undercutting our prices across the board.

The consultants came in and made the obvious suggestion:  Shut the place down.   It was hemorrhaging cash and would eventually go bankrupt unless someone changed course.   Borrow money, build a new plant down South, hire non-union labor, and design new, cost-effective higher-quality products.  Management resisted this message, of course.   If your career is based on running this rust-belt factory, closing it down is admitting defeat.   And you may be secure and comfortable in your life - where you live, your job, the people you work with, and so forth.

Eventually, corporate management stepped in and closed down the place before it went bankrupt.  Today, the products are made in Southern, non-union plants, or in Mexico or other overseas locations where labor is cheaper.  The folks in the pro-union high-tax State all argue that this is grossly unfair and of course not their fault.  But when you "milk" a business for all its worth, whose fault is it when it fails?  Everyone's.

My next run-in with consultants was at a law firm.  Again, the managers had lost their way and were unable to see their way to the future.   What started out as a small firm with a few attorneys who based the partnership on their personal friendship.   However, over time, one or two of the partners ended up bringing in all the work, while others had a respectable practice of their own.   One or two barely billed enough each year to cover their own salaries, sometimes less.

As you might expect, the partner bringing in millions in billables wasn't happy that his "friend" was getting paid nearly as much as he was, even though he billed less than his salary.  It was a situation ready to explode.

The consultants came in and stated the obvious.   Get rid of the dead-weight partners.   Fire the marginal clients who paid little and demanded a lot.   Cut associate's salaries and get rid of those who were dead weight.

And this advice did not go over well with anyone.   But it was the correct advice, of course.   The end result, however, was that the firm broke up.   Associates left (some good, some bad) and the partners with clients of their own found work at other, larger firms.  Others scrambled to make ends meet.  A couple took early retirement.

It would have blown up eventually, due to the inequalities in the billing and compensation.   The consultants just jump-started the process.   Sadly, if some of the partners had heeded the advice of the consultants, maybe the place wouldn't have come apart.   But no one likes to hear advice like, "You need to take a cut in salary" and if you have an equal vote in the partnership, you'll vote "NO" to such a proposal, and wonder - like those factory workers - what the hell happened when you come to work one day and the place is padlocked and closed. 

How do companies end up this way?   It is the same thing that happens to all of us, even as individuals.   We focus too much on "getting through the day" or the quarter or the year, and don't focus on long-term goals or see long-term trends.   We made a profit this year, so everything is good, right?   But long-term, our product line or service will diminish, and how long can that go on before we close our doors?

This is how companies like Sears or Blockbuster or Radio Shack or JC Penny stay alive for so long.   There is enough momentum to carry them on for years.   But no one wants to talk about the long-term trends (and annual losses) that are dragging the company down.   An outsider can see that the inevitable will eventually occur - stores will close, the company will downsize, and eventually go bankrupt, if nothing changes.

And often, people at companies like this just "hope" that things will change.  "Maybe people will suddenly decide to like buying Sears products again!" they say, as if the Internet could be wiped away by wishing it so.  Meanwhile, obvious things like taking the great Sears Catalog and putting it on the Internet were shouted down.   Today, it is too little, too late for them to go online, and half-assed ideas like "Internet to store" simply don't work.

Worse yet are pie-in-the-sky ideas that are touted to "jump start" the competition and revitalize the organization.   The aluminum block engine in the Vega and the state-of-the-art assembly line in Lordstown Ohio would make production so cheap, GM could beat the Japanese at their own game!  But the untested technology backfired and made matters worse for GM, not better.

When GM started closing plants in Flint, Michigan, local politicians decided to make Flint a "tourist attraction" even though there was nothing there of interest to see.  They spent millions on this folly - and that was decades ago.   Not much has improved since.  Today, the place is bankrupt and making headlines for all the wrong reasons.

On a personal level, the same thing can happen to us.   We spend money and borrow more.   A credit card crises is "solved" by a home-equity loan (helpfully offered by our local bank).   We congratulate ourselves on our financial acumen and go out and buy more stuff, reasoning that the increased "equity" in our homes means we are getting wealthier.   The increased debt-load is, of course, ignored.

People then flock to financial gurus, who tell them the obvious, in a book for $19.95.    You have to pay back those debts, eventually.   Borrowing more and more money is not a good idea.    If your net worth is going down over time, you are not getting richer, just accumulating more junk.

But with the Gurus, it is the same as with the Consultants.   Advice is easy to give, hard to take.   Just as we don't want to fire our clients or "Old Edna" we don't want to cut back on our spending or think hard about where our financial future is going.  We made it through another year, and that is enough for now.   We just "hope" that things will get better over time or that "our ship will come in" someday.

The good news is, of course, that the advice that consultants give is basically stuff you can figure out yourself for free, if you are willing to listen to your own gut instincts.   This is, of course, the hardest thing to do.   It is easier to pay for a seminar or a book and then take someone else's advice as since you paid for it, it must be good, right?

And as in a business, with a family, you may find members "vetoing" common sense advice in favor of their own personal fiefdoms.   Dad wants to keep his Harley and the hobby car in the garage, of course.  After all, it's "paid for" and "isn't costing anything" and is "an investment" - right?   Similarly, Mom isn't going to give up her shopping sprees and her honking new leased luxury SUV.   And junior tells you that you are rotten parents for not giving him the latest cell phone and video game console.   All the other kids have them, right?  He won't be popular in school with last year's iPhone, and that would just be the end of his life right there, because as we all know, being popular in High School is the most important thing in life.

And sadly, that is probably why so many people divorce today - which doesn't solve these economic problems, but amplifies them.   So many relationships are little more than a race to the bottom, with each family member seeing what they can get out of the deal - using spending as a retaliatory weapon.

And maybe, that's where people need consultants.   Because they won't listen to each other but will respect an outside authority.