Risk Takers of the Highest Order. Back when I was in an undergraduate finance class, Dr. Wade, Professor of Finance at the University of West Florida, used this phrase to describe people who choose to take on the challenge of building businesses and following their passions instead of taking the more traditional career path of getting an education, trying to land a good job and working their way up. I think of this phrase often when I work with my clients and colleagues to build and expand their businesses, and as I watch them deal with the incredible range of emotions as well as the highs and lows that come with the dynamics of leading a second stage company. There are very few safety nets for second stage business leaders, yet most of these mavericks wouldn’t have it any other way. Interestingly, these leaders are usually not well known and most do not seek a lot of attention. They wake up early and work late every day simply because they see building their business as the best way to support their families and make a difference in the world. Despite the financial commitment and the time away from family and outside interests (especially in the first few years), their vision and commitment to build something new and different is compelling and ultimately, incredibly fulfilling. Unfortunately, the pressure of living this way can be overwhelming, especially when things go wrong and there are few people who actually understand how daunting the journey can be. Your spouse and friends may be sympathetic because they care about you, and they may offer support and advice, but they rarely understand what you are experiencing. Many people believe that start-ups have the highest failure rates, but second stage business actually have the highest risk of failure. Trying to juggle all of the competing demands of a growing business – especially common challenges such as cash flow pressures, trying to increase revenues and manage a growing number of people all at once – can overtax the most committed leader. Fortunately, once a business gets through these initial second stage growing pains, the rate of failure falls dramatically, and these businesses become easier to run and manage with a much clearer path to success. The trick is to recognize the growing pains early and take the right path to get to the other side as efficiently as possible. So I want to thank all you "risk takers of the highest order" for having the courage and perseverance to dream and build a better way every day. An Interesting Fact about Second Stage Companies
While these businesses account for less than 12% of all businesses, they generate more than 34% of all jobs in the United States (source; Edward Lowe Foundation, 2014).
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Congratulations on the new hire. This is the important one—the one you announce in the local business journal and feature on the company Facebook page. Now what happens? It’s tempting to think your new key hire will take a load off your shoulders and improve your business overnight. That almost never happens. Just because he shows up with great functional skills and abilities doesn’t mean he can hit the ground running. At first, the new hire may even add to your problems. Consider: your new hire is in unfamiliar territory, surrounded by strangers, unaware of the company’s unspoken norms and idiosyncrasies. There will inevitably be rough spots as your new employee adjusts to your business and culture. He may make mistakes that cost you money or customers. He may step on toes or miss a deadline. He may do all of these. More than once. So what does that mean? Do you put him on notice? Cut your losses and start over? Or wait it out? If you followed an evidence-based hiring practice to make the hire, now is when you can “trust the process.” After all, you did your homework to recruit and select the best possible candidate. If you didn’t use an evidence-based hiring approach, it may be a little harder for you to keep the faith. You may start to doubt your judgment. In either case, you’ll be able to give your new employee the best shot at success if you understand the dynamics at work. Make Sure Your New Hire Knows How You Keep Score It’s critically important to be very clear and specific about your expectations for the new hire: How will you measure progress? How will you judge his ultimate success? How long does he have to get it done? You may think he should know all this, but he’s not a mind reader. Make sure you work with him to set out expectations in writing, with specific deliverables, accountabilities, time frames and performance metrics, and keep them updated. In short, make sure your new key employee always knows what you consider a win. Make Allowances For Culture Shock If your new hire has spent much of his career in a large organization, the lack of formal authority and a clear chain of command at a second stage company can create confusion and friction. This is a chronic problem at second stage companies. The new hire may believe that his title alone should win the staff’s respect for his words, ideas and authority. He may also think everyone should be impressed with the size of his previous employer. Meanwhile, his staff members who have been with the company for longer than the new hire may not be overly cooperative with the new boss, or may not even see themselves as his subordinates. This Is A Test Don’t be surprised if a crisis develops that tests your new hire’s competency and leadership. For example, if he’s previously from a large organization, that test may take the form of a “breakdown” requiring your new man to roll up his sleeves and jump in at the operations level to help get the work done. If your new hire is learning-agile and adaptable (traits that would be rated and valued in an evidence-based evaluation), he’ll pass the test and firm up his authority. If instead he spends too much time managing formally from the office, he may never get the buy-in to succeed. Three Or Four Months Is Usually Too Soon To Know. Don’t expect to get a clear go/no-go signal on a new hire’s suitability in the first three or four months of employment. He’s probably still in the “honeymoon” phase. Peers may treat them differentially and tone down the pushback, so the new hire may look particularly competent. On the other hand, your new hire probably hasn’t earned much trust or credibility yet, either, which can slow his progress. So when to start worrying if you don’t see progress? Usually somewhere in months six through nine. That’s when you can legitimately ask, Is he contributing to success? Is he building functional capacity? Is he integrating and innovating? By this time, it’s happening, or probably never will. Six to nine months is a long time to wait—all the more reason for a rigorous hiring process. Before You Fire Him, Re-Hire Him. So it’s been six months, and your new hire is presenting the latest polished version of the great ideas that helped him get hired in the first place. You wonder: is it all empty talk, or a reminder that he’s already set the wheels in motion for good things to happen? If your hiring process didn’t include assessment tests to evaluate work styles, leadership style, strengths, weaknesses, and personality traits, use them now. They’ll help you identify your employee’s strengths and weakness, and areas where he would benefit from leadership coaching and skills building. If you did use those tools in hiring, go back to them and identify what’s going on—and arrange for your new hire to get the coaching he needs. Also re-examine the scope and responsibilities of the position—are they realistic? Achievable? If your new hire is truly a good fit for the position, he’ll likely respond quickly and positively to guidance and skills building. If he’s not, it’s better to know sooner rather than later. Next: "Risk Takers of the Highest Order" An evidence-based hiring process can look like a lot of work until you realize that every step in the process is there to preempt future problems, avoid future pain, reduce future costs and maximize your new hire's effectiveness. In the last post, we stressed the importance of applying the same kind of rigorous, objective, systematic evaluation to hiring key employees as you would to source a new raw material or vital product part. The visual below diagrams the process that we undertake when engaged by a second stage CEO to fill a key position in the company. Some of the most important work is done before we ever start recruitment--systematically defining the need, requirements and compensation for the position. Once you give us the green light to begin recruitment, we continue a step-by-step process of finding, selecting, and interviewing candidates. Depending on the type of position to be filled, we almost always give each final candidate a battery of assessment tests that provide objective measures for work styles, leadership style, strengths, weaknesses, and personality traits. When that's done, we're able to help you compare your candidates on a level playing field. As you review scores and evaluations, re-read interview notes, weigh relative experiences and expertise, you’ll have substantive hard evidence to help you answer important questions--
By following this process, you may very well have more than one excellent candidate to choose from. This is where you might "take a gut check." By this point your intuition will be well-informed and is much more likely to give you a trustworthy answer without running the risk that you'll make a bad hire or pass up a superb candidates because of personal biases and snap judgments. Not only will an evidence-based hiring system help you hire an outstanding employee, it also helps ensure you do so in a fair, legal and objective way. The next time you need to fill a key role, you'll have a ready-to-use, standardized and efficient hiring path and assessment tools. Finally, you'll be able to improve your hiring system over time, since each new hire allows you to evaluate the selection process itself by comparing the new hire’s predicted performance to actual results. Next: Congrats On The New Hire. Now Trust The Process. (Assuming You Had One)
Many CEOs and owners of second stage businesses routinely use their intuition to make important decisions. In fact, research has proven that our intuition—our “gut” reactions—are an integral part of our decision-making process, linking our physiological states to the executive centers of our brain. If you're hiring for a key position, you may tend to put even more importance on being a "good judge of character"--how you feel about the candidate when he or she looks you in the eye, shakes your hand, and answers a direct question. But research has also proven some things about intuition that relate directly to hiring:
Given all that, there are clearly some decisions where even the best intuition needs to take a back seat to systematic evidence-gathering, testing and analysis. The recruitment and selection process to fill key positions in your company is one of these. You're Already Doing This Elsewhere You probably already use this kind of systematic approach to make other important decisions. If you need to choose among several raw materials for a new process or product, do you select the one with the best advertising? Not likely. You'd probably conduct a rigorous evaluation. You'd probably start by ranking the importance of the functional properties the material needs to have, and working out a scoring system for cost, availability, quality, ease of use, shelf life, etc. Then you’d gather sufficient samples of the materials, subject the materials to consistent testing and analysis, capture the same metrics for each and create scorecards. Finally, you might seek outside confirmation of your results by asking others about their experience. In the end you’d be confident that you’d picked the best material, and you’d know what to expect from using it. Evidence-based hiring applies the same sort of process to filling key positions. You start with relevant, unbiased standards and requirements for the job. You decide on the nature and number of interviews, the kinds of assessments or tests to use, the means of checking references, background, etc. You develop a scoring and ranking system for candidate's strengths and weaknesses. Most significantly, you interact with and evaluate all the candidates in a consistent way. Next: A Closer Look At Evidence-Based Hiring
We hear this quite often. And we understand the frustration. You finally step up to the plate and spend the money to make that key hire, the one you've been putting off. Maybe it's the phenom sales manager known for leading teams to triple-digit gains. The production leader who trained at P&G. The logistics guru you lured away from Amazon. Whatever the particular role, this was the big one: the functional area specialist who can solve the problem holding you back from true greatness. The one who can make things happen. Except they aren't working out. And things aren't happening. So now you’ve got a new problem: do you keep them or let them go? And if you let them go, how do you avoid making the same kind of mistake next time? Prevention Beats Intervention Let's answer the last question first. Make a commitment that from now on you'll use a systematic, evidence-based hiring process to find, evaluate, and select the right candidates for your key positions. No matter how urgent the need. No matter what a great first impression someone makes. Anything less is too risky. A systematic hiring process will add some time and cost up front. The added time and cost required to ensure you make a good hire is pocket change compared to the costs of hiring an unsuitable person. In fact, without a validated evidence-based approach to hiring, you may have difficulty even figuring out if you made a good hiring decision. Your new hire may be an expert at his job, but the job doesn't exist in isolation, and a second stage company is a unique environment. It's small, fast-moving, and let's face it, quirky. A lot of the processes are home-grown, a lot of the expertise has yet to move from brains to systems, and a lot of the dynamics are more "family tradition" than functional practices. There's a learning curve with all that. So if your new hire hasn't hit their stride after three or fourth months, is that just part of the learning process or do you need to look for a new replacement? By doing your homework before making the hire, you'll be a lot more confident in "trusting the process" as your new hire gets oriented and comes up to full speed. Next: The Evidence For An Evidence-Based Approach To Hiring
But only a small number of those business owners have the data and the tools to drill down even one level into their finances to get a clear picture of business performance by segment--say, the three to five key categories comprising the core of their sales. Even such fundamentals as gross revenue and expenses by segment are out of reach. That's a real loss, because you need this level of data to compare revenues and gross profits by category. For example, if you are a manufacturer and you sell several product lines, chances are that you have one or two product lines that are your ‘bread and butter’ and account for significant revenue and profit and a few product lines that may actually lose money. Sometimes, this situation can make sense if the poor performing product lines lead to more business in the highly profitable product lines but often times business owners don’t really know how much each product line contributes to revenue and profits
After all, your business has limited resources. If you over-service an unprofitable customer, or over-invest in a marginal product, it’s inevitably at the expense of your best customers and your biggest moneymakers. But if you only have anecdotes and educated guesses to guide you, you run a real risk of creating a costly mismatch. Detailed, accurate, near-realtime data, you can dial in your investments of time and resources with confidence that you're steering the company toward greater success.
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