Oh Dear! Are You a Micromanager?

If you own and manage a one person business, you are, de facto, a micromanager. You have no choice; you make every decision and you manage every process. If, on the other hand, you are CEO of a FTSE100 Company, you can’t be a micromanager because you can’t possibly make every decision and can only manage a very small number of processes, albeit they are likely to be major ones.

In the case of the one person business, if you don’t micromanage, your business won’t function; so it won’t survive. In the case of the CEO of the FTSE100 Company, any attempt to micromanage will cause chaos and undermine your corporate structure. So in one set of circumstances, micromanagement is very positive and very necessary, whilst in the other it is very negative and seriously damaging.

So, at what point does the positive turn negative?

Before answering that question let’s just look at what we mean by micromanagement. You can no doubt find many different definitions but essentially it means: –

• Allocating tasks, monitoring them in minute detail, intervening with the processes and making all the associated decisions. As opposed to
• Delegating responsibilities, within defined parameters, to subordinates, who make their own decisions and are accountable for the outcomes.

As soon as a business involves more than one person, tasks start to be shared. If the people involved are of equal status – directors, partners etc. – agreement is reached about the sharing of both tasks and responsibilities. However, if staff are employed, they tend to be engaged to undertake tasks under close supervision. They are probably given very little responsibility and are unlikely to make many decisions without reference to the boss.

Initially this may work ok. However, as the business grows and the number of employees increases, the boss inevitably spends more and more time making decisions for his/her employees and monitoring their activities. That means spending less and less time driving the business forward. As a consequence, the momentum of the business starts to slow down and the boss becomes increasingly stressed, as he/she becomes the main constraint on progress.

To address this problem, most businesses start to develop some form of organisation structure, with departmental demarcations and key staff taking supervisory/managerial roles. To start with, this invariably relieves the pressure. However, the extent to which this continues to happen depends on whether the boss is still just delegating tasks or whether he/she starts to delegate real responsibilities in a meaningful way. When the boss is able to delegate responsibilities enabling him/her to focus on the more important aspects of the business, the business itself has a much better chance of developing, growing and building its net worth. But where the boss still wants to micromanage, the business is much more likely to struggle and stagnate.

There can’t be a precise answer to my earlier question of, “At what point does the positive become negative?” because no two businesses are exactly the same. However, most people’s ability to micromanage everything that goes on, within a business, and still perform their own essential duties is quite limited; and once the business employs more than a handful of people, micromanagement invariably becomes negative.

Despite this, many owners and directors of SMEs don’t delegate responsibilities effectively and become increasingly frustrated with the lack of progress that their businesses make, often blaming everyone except themselves for that lack of progress. So why can’t they delegate and why do they continue to be micromanagers?

The four favourite answers seem to be: –

• I can’t get the calibre of staff I need
• My staff can’t do things the way I do them
• My staff can’t do things as well as I do them
• I can’t trust my staff

So let me deal with each of these objections in turn.

I can’t get the calibre of staff I need. If that’s true, then it’s likely that you’re not paying enough to attract the right quality staff. But in my experience, that’s not usually the problem. More often than not, the key people, within the business, are more than capable of taking on much more responsibility and are eager to do so. With very few exceptions, where I’ve been able to persuade the boss to stand back and empower his key people, the positive effect on the business has been substantial. However, when key members of staff are not empowered there is a tendency for them to become demotivated and cynical; and once this happens you really do have a problem.

My staff can’t do things the way I do them. Frankly that tends to be good not bad. A business needs a diversity of ideas. If the key staff are all clones of the boss, the business will go nowhere. The boss may be the key driver but he/she doesn’t have a monopoly on ideas, doesn’t know all the answers, doesn’t always have the best approach to problem solving and is often wrong. If key employees are empowered, bosses are much better able to develop their own strengths, whilst ensuring that their weaknesses are offset by the skills and experience of their key people. Running a successful business is about teamwork; it’s not a solo act.

My staff can’t do things as well as I do. In some cases this may be right. The boss will have skills that his/her key staff don’t have. But there will be areas where key members of staff have more skill and experience or perhaps greater aptitude or perseverance than the boss. It’s important to recognise this and exploit it. Again, it’s back to the principle of diversity of skills and ideas being the basis of a successful team. Where there are shortcomings in skill sets, you need to develop them through structured training programmes.

I can’t trust my staff. In many respects this is the real objection. The other three are often excuses for what is, in reality, lack of trust. And to be fair, all too frequently I hear stories of small businesses that have been ripped off by a rogue employee or damaged in some other way, by an incompetent one. But this opens up the much bigger question of how you actually manage and control your business.

The trust issue may be about not trusting people to complete tasks properly or take decisions appropriately; equally, it may be about the honesty and integrity of employees. In practice, most people are reasonably honest; but, unfortunately, a small minority is not. However, regardless of honesty and integrity, it’s important that no one, within the team, behaves as a lone wolf, acts outside their jurisdiction, covers up mistakes, works within a self-constructed silo or behaves dishonestly in any way. So how do you reconcile all of this with delegating responsibilities and losing detailed control of what your staff do and how they spend their time?

The answer is that you manage your business in a completely different way. And to do this, you need good management information that tells you, on a regular basis, how each significant element of your business is performing. In conjunction with that, you need to set targets, so you can see how each part of the business is performing against expectations. The type and level of information will differ depending on the type of business, its size and complexity and the markets served; but it’s likely to include data about sales, production and/or service output, productivity, costs, inventories, cash and all other key activities within the business. Some of this data will come through the production of monthly management accounts, some will require your IT systems to be set up to produce it. Some information will be most useful on a monthly basis, some weekly and some daily. When you have this data, you can identify areas of over and under performance, trends in both the right and wrong directions and aberrations that don’t, on the face of it, make sense. Whenever you identify anything that appears to be going in the wrong direction or otherwise out of the ordinary, you dig deeper until you have answers. If necessary you then take remedial action; but its remedial action based on facts not on gut feel or guesswork. You’ll soon find that you’re learning far more about what’s going on in your business than you ever did before.

This management information shouldn’t be treated as just yours and available to no one else. Headline data needs to be available to all your key players and each key player should have more detailed information about their own individual areas of responsibility. You can then meet regularly with your key players, both on a one to one and as a group, to set new objectives, report back on current issues, agree solutions to problems and establish strategies to exploit opportunities. This ensures that everyone is clear about strategies and objectives in general; and clear about their individual responsibilities and how these interface with the responsibilities of their colleagues.

As a result of this, you’ll start to build a real team that co-ordinates effectively, buys in to the core values and direction of the business and works with much greater enthusiasm and commitment. Under performance and lack of integrity then become a much smaller issues; but also much easier to identify because they’re much more difficult to hide.

Small businesses that make this leap are much more likely to grow and prosper than those that don’t. Sadly, many small businesses fail to reach their potential for no other reason than the boss remains a frustrated and stressed micro-manager. Some owners of small businesses do find it incredibly difficult to let go. If you’re one of these and you want to try and change, don’t try and do it on your own. In most industries, there are specialist business consultants, business coaches and mentors that understand this problem only too well and will be able to take you through a difficult learning curve far more quickly and effectively than you would otherwise achieve.

If you’d like to discuss any of the issues raised in this article, in more detail, please feel free to contact me.

Are your overheads too low?

If your business is losing money or making only small profits, the chances are, you’ll be under pressure to cut your overheads. Sometimes this pressure is self-generated and sometimes it’s applied by banks, accountants, financial advisors and financiers. But is it really the right thing to do?

In some cases, it most definitely is. If your overheads are disproportionately high relative to the throughput of your business, then you need to cut them. This is true whether you’ve let them grow too fast or whether sales have declined and you haven’t yet downsized.

But in many other cases, cutting overheads to address bottom line under performance is entirely the wrong thing to do; and I’ll explain why.

When comparing overheads with direct costs, overheads are usually much easier to control. You just say “No”. A manager wants an additional person in his/her department: you say “No”. An employee wants a pay rise: you say “No”. There may be a need for repairs or renewals: you delay them. There may be a requirement for investment in plant or equipment: you make do with what you’ve got. Your IT system may be past its sell-by date: you ignore it. So by just doing nothing you’re controlling many of your overheads.

In most businesses, there are some overhead costs that should be reviewed regularly, with a view to making savings; utility bills, outsourced services etc. This is simply good practice and should apply irrespective of bottom line performance. There are also some overheads that are difficult to influence in the short or medium term; rent and business rates being the obvious examples. So in practice, you’re stuck with them, irrespective of your bottom line performance.

When it comes to cutting overheads, there can be some difficult emotional, personal and personnel issues to address because it usually entails making people redundant. But predicting the costs that will be taken out through downsizing and achieving those predictions are relatively straightforward processes.

Now think about direct costs. In many businesses, the two major direct costs are raw materials and direct labour. So how do you control them?

Material costs don’t just depend on the price you pay for them. They depend on: –

• Efficient stock control, keeping losses and damage to a minimum
• Efficient utilisation that minimises wastage
• Getting orders right first time to minimise errors
• Quality output to minimise replacements.

Direct labour costs don’t just depend on the numbers of operatives or the rates they are paid. They depend on productivity and the level of output that is achieved. Furthermore, achieving the right balance between the number of operatives, their individual wage costs and their combined output isn’t just a question of how well they are managed day to day, although that is extremely important. It depends on the operational efficiency of order processing, planning, procurement and stock control. Well maintained modern machinery and appropriate levels of automation, as well as effective batching and efficient materials handling systems, are also essential in manufacturing businesses.

Effective control of direct costs is, therefore, much more complex and much less predictable than the effective control of overheads.

Now consider the relationship between direct costs and overheads.

In some businesses, such as professional services, overheads are likely to account for a much larger proportion of total costs than are accounted for by direct costs. So, in businesses of this type, where bottom line under performance is an issue, reducing overheads may be the only option.

However, think about a light manufacturing business or a home improvement service provider – windows, conservatories, kitchens, bathrooms etc. A typical profit and loss statement will show direct costs accounting for somewhere between 60% and 70% of total sales, whereas overheads may account for only 20% or 30%. In these situations, direct costs are much greater than overheads; and this is actually typical of lots of small and medium sized businesses in many different sectors. It’s also where the wrong approach to addressing bottom line under performance often occurs.

If the majority of your costs are direct and your business is under performing, reducing those direct costs, as a proportion of sales, is likely to provide far greater returns than cutting your fixed costs. But to many small and medium sized businesses, this is often perceived as a much bigger challenge.

In reality, most under performing businesses, in this category, are under performing because of operational inefficiencies. As a consequence, their direct costs are too high and that is why their bottom lines are under pressure. But few of them fully appreciate the extent of their inefficiencies; even fewer realise how much it’s costing them; and fewer still make any serious attempt to quantify that cost. So they focus on their comfort zone, namely overheads.

If you then look at why these businesses are operating inefficiently, it’s usually because they are under resourced. Their processes, controls and management information systems are often inadequate. Their administration often depends on too few managers and employees; and they put too little emphasis on the training and skills development of the people they employ.

Where businesses of this type are under performing, the right solution is, very often, to increase overheads to provide a more effective level of resource that can support greater operational efficiency. This will, in turn, reduce direct costs. So there may be a trade-off; for example, increase fixed costs by three percentage points (of sales) in order to achieve a ten percentage point reduction in direct costs, giving a net bottom line improvement of seven percentage points.

The problem with this approach, as perceived by many small and medium sized businesses, is that they need to commit to the increase in overheads with no guarantee that the direct cost reductions will be achieved. However, in reality, the risk associated with addressing the problem might be more immediate but the risk of not addressing the problem is usually much greater. Although, this can sometimes be difficult to reconcile, particularly when cash flow is under pressure.

There are several lessons to learn from this.

The first is not to get into this position in the first place. Always recycle a reasonable level of profits back into the business to invest in appropriate plant & machinery, automation, IT, systems & process, staffing and training. By so doing, you will have the best chance of maintaining effective control over your direct costs.

The second is that, if your fixed costs are starting to drift, either because they are going up or because those of your key competitors are falling, act sooner rather than later. The short term risk of an increase in overheads is much lower when you have a strong balance sheet and the ability to fund the additional costs reasonably easily.

The third is to recognise that if you have lost control of your direct costs, there will be an additional cost to regain that control. It’s unavoidable and the longer you leave it, the higher the costs will be and the less cash you will have available to fund them. It’s a vicious circle leading to a downward spiral; and the sooner you act the more chance you have of recovering the position.

The fourth is to understand the level of risk, to which your business is exposed. The earlier you recognise and address the problem, the lower the level of risk. If you don’t address the problem, the level of risk will increase, the number of available solutions will decrease and the risk of those solutions not working, when you do eventually try to implement them, will also increase.

Finally, if you’ve recognised that you have a problem but you’re not sure what to do or whatever you are doing isn’t working, bring in professional help. Yes there’s a cost; but it’s likely to be a much smaller cost than losing your business.

Anthony Pratt
AP Management Consultants
May 2013