The Employment Conundrum

A jack of all trades is a master of none, but oftentimes better than a master of one.

Guess what? Employment and economic growth are no longer related, but don’t expect the media or any politician to tell you that.

I am sometimes accused of being anti-HR. In my regular career, however, I never had a HR director suggest ways to increase profit or improve efficiency with less people. All I heard was hire, hire, hire and then build systems to keep the hires content.

I worked with some exceptionally talented HR professionals, but they all came to the companies with a mentality of recruitment. Every time an issue came up the immediate response was to hire someone to handle it. That is how the old industrial model worked.

The average ratio is said to be one HR professional for every 100 employees, but that includes companies of all sizes. In the smaller companies the ratio is naturally much higher and Bloomberg reported in 2017 that ratios were up 40% in the previous 10 years. My challenge even with that quite modest ratio is that I have worked for companies with as few as 60 employees that had a HR department of six professionals. Although they did a great job of recruitment, they also strangled management with endless systems for performance and appraisal assessment. Then we lost countless hours discussing benefits, vacation allowance, promotion issues etc. I called it the internal whirlpool as it sucked all the company’s energy down into internal issues when we should have been focused externally on customers. When I occasionally visit other companies today Is ee much the same thing happening. I know managers who spend the whole of November and December doing nothing other than performance and appraisal work. It is all a bit mad and quite out of hand.

This traditional approach of running companies often accompanies the new entrepreneur into his or her startup. Some can’t resist hiring immediately and then they can’t resist having a meeting with the person hired.

A friend of mine who once read Three Simple Steps as well as an early draft of Secrets to a Successful Startup, and then had several coffee meetings with me, started a company. Despite my advice, he immediately hired executives for sales, product development, and finance. Then he hired a team of full-time software engineers to make a prototype product. He was quickly overwhelmed with personnel issues. The finance guy spent most of his day searching online for other jobs, which upset the other employees who could all see it. The software engineers became two cliques that did not see eye to eye in project meetings. The sales leader took orders from every customer he could talk to even though the engineers didn’t know how to build what the customer had ordered.

My friend brought in an HR management consultant who kept all the staff in a meeting room for two days while they did his ten-step empowerment program. Then he decided to hire a full-time HR expert to keep them all playing happily in the sandbox (his phrase). When I asked my friend how he spent his workday, he sighed and admitted it was all meetings… update meetings, HR issue meetings, staff coming into his office complaining about other staff, some staff asking for pay rises, others threatening to leave.

His first experience as an entrepreneur was not what he hoped for. He was stressed, working long hours and his family were not happy about it. He was worried that his wife would leave him as he had been so obsessed with the company and forgotten anniversaries and dinner dates, kid school runs etc. He asked me how I had coped with the stress in my two companies. I answered:

‘What stress? I deliberately set about not hiring people to avoid exactly the experience you are having. I told you to hire contractors. I was able to focus on growing my businesses, taking time out to have new ideas and solutions. I knew if I hired even one person, I’d spend all my time sorting out personnel issues which is how my regular career was.’

‘But,’ he said, ‘It’s good to hire people, good for the economy, and the community.’

‘So, let Amazon hire them. Bezos did not start out by hiring people. He started out selling books from his garage. When you start out you have to focus on survival first. Hiring people is the surest way to lose the plot of growth. If you bought a house you wouldn’t start by hiring a full-time handy-person to live in the garage just in case something needs fixing. You’d probably try to fix things yourself first and then only call in a handy-person if and when it is needed and for a fixed price. Why start a business differently?’

Whether he listened or not I can’t say, but a year later he had burned through $5 million in investor funds and his hair had turned grey, but then again so has mine. For every new sdtartup an established one fails and 82% of them fail because of cash flow management issues. One of the biggest drains on cash reserves in the formative years is the hiring of employees and the associated employee support mechanisms required by law and culture. When you consider the structure of your company it is imperative to find less expensive and less time-consuming strategies than simply hiring people.

Culture of Hiring

Starting a Successful Startup requires a completely different mentality because if you are like most people you have been indoctrinated to think hire, hire, hire and that doing so is not just a good thing for the economy but a noble thing for society. It is neither.

I don’t want to criticize any particular author, but an article was written by a management consultant and macro-economist for a leading entrepreneurship magazine in 2018:

The stability of the economy rests on the ability to maintain a low unemployment rate and provide a safe, secure workplace… *******, author of “*******,” explains that the employment rate and economic growth are linked. This is because employment contributes to economic growth: Workers produce valuable goods and services, and in turn receive a wage which they can spend on buying the goods produced. High employment means a greater number of goods can be produced as well.

This is the common belief throughout western culture, a belief constantly reinforced by media and politicians. It is, however, factually untrue. Hiring people does not automatically lead to growth.

The idea that employment and economic growth are linked is based on a long-held law called Okun’s law from the early 1960s. In its most basic form, Okun’s law investigates the statistical relationship between a country’s employment rate and the growth rate of its economy. The economics research arm of the Federal Reserve Bank of St. Louis explains that Okun’s law “is intended to tell us how much of a country’s GDP may be lost when the unemployment rate is above its natural rate.” It goes on to explain that “the logic behind Okun’s law is simple. Output depends on the amount of labor used in the production process, so there is a positive relationship between output and employment. Total employment equals the labor force minus the unemployed, so there is a negative relationship between output and unemployment (conditional on the labor force).”

Yale professor and economist, Arthur Okun, was born in November 1928 and died in March 1980 at the age of 51. He first published his findings on this subject in the early 1960s, when robotics, artificial intelligence and big data were not even imagined. It was a time when automation seemed a long way off.

It is 2019 when I am writing this course update. Our business environment is far different to the one that existed in the early 1960s. I was born then and it was into a world of coal mines, labor-intensive farming and production lines. Mass production was in its infancy. Theoretically, today we could all be unemployed, an army of robots could drastically increase production and the economy would grow exponentially and we would all live rich lives if the profits were shared (big ‘if’ that one, of course).

Okun’s law did not hold up during the financial crisis of 2008. Bernanke speculated that “the apparent failure of Okun’s law could reflect, in part, statistical noise.” Those in power want you to believe that hiring people equates to growth and progress even when the law doesn’t hold and indeed the evidence suggests the opposite is true. People don’t want to be unemployed so they vote out politicians when the ratio of unemployment rises. That is why you’ll not hear the media tell the truth.

Janet Yellen, however, Chair of the Federal Reserve 2014-2018 finally revealed she is on the path to realizing the it is none other than the Fed’s own actions that have broken the economic “virtuous cycle”, and that Okun’s Law – the bedrock behind the Fed’s flawed philosophy of assuming more debt equates to more GDP, which equates to more jobs, is no longer relevant in the broken “New Normal.”

I was shocked at the old view written and published in the original article and its grossly misleading assumptions, but more shocked that a magazine supposedly in existence to help entrepreneurs succeed would print it. It made me mad, and it is one of the reasons I decided to write this course update.

Implications for a Successful Startup

You are no longer compelled to hire. It relieves you of guilt if you build a multi-million-dollar company but never hire anyone. You can ignore the media and politician hype. Imagine a future when no one is hired, Artificial intelligence does all the menial work, but everyone becomes a creative Successful Startup. What amazing inventions and growth we could see.

To say not to hire anyone is, of course, a little naïve. There are certain ventures that still need full-time employees from the start, but even then knowing that alternatives are possible should reduce the urge to hire too many too soon. Other businesses might start out frugally but then hire when cash flow permits. The main point though is to cause you to pause and consider alternatives. If you can postpone hiring and manage by yourself for a period, it has a dramatically positive impact on your cash flow. Just as importantly, it frees you up to focus on your business rather than on having to spend all your time focusing on keeping your employees content, and that results in less work hours needed.

Jack of all trades

If you accept that it makes financial sense to avoid hiring employees straight away, how do you become the Jack of all Trades, Master of None? Today, that phrase is used as a criticism meaning a person of superficial skills. The complete saying, however, was originally “A jack of all trades is a master of none, but oftentimes better than a master of one.” Formerly intended as a compliment, the phrase means that a person is a generalist rather than a specialist, versatile and adept at many things. That is exactly what I suggest you become because it aids adaptability. Let others use it sarcastically. You know the true meaning. The owner of a Successful Startup is versatile and adept in all the business functions and better than someone who is master of just one function.

Imagine you just entered your home office. Right then you are CEO ready to direct your day. If your first task is to find a company to make your product then you are now vice president of manufacturing and quality assurance. Later in the day if you need to talk to a vendor about product branding then in that task you are vice president of marketing.

In 2010, I decided to sell my first company. Our financial numbers were very attractive to five suitors. Each prospective purchaser assigned a due diligence team to make sure the numbers were sound and the business on a solid foundation. Together that meant 70 full-time employees performed due diligence at the same time on a startup. It was like a TV comedy.

The teams were all made up of mid-level managers. Their main concern was not whether my company was a good investment, but how they could best impress their bosses. With that attitude they arrived online and on the phone with a negative attitude of constantly looking for faults or reasons to not do the deal.

Because I was the jack of all trades, the initial impression they got was of a one man show and I could tell it unnerved them. They could not understand the business model as their mentalities only accepted a traditional structure as a possibility. That was a hierarchy with executives, vice-presidents, and directors. They could not conceive of one person doing everything and achieving a NET profit of 75% on annual sales of over $15 million.

Fortunately, I am good at impressions and doing accents. When they called asking to speak to my head of sales or director of manufacturing, I pretended to be a receptionist with a deep south accent. I asked the caller to hold while I put him or her through to the appropriate department. Then I paused, tapped my desk as if pressing a triage phone connection, and a few seconds later spoke again but in a Bostonian accent and tone. ‘Hello, this is Bob McGraw VP of manufacturing, how can I help you?’

Because I only work a 5-hour workday the callers would more often go through to voicemail. Inadvertently, this made me appear very busy, but it also gave me the time to recall which accent I had used with which caller before replying to the message.

As part of the final acquisition contract I was required to make myself available for a six-month transition period. My unique hub model means the company pretty much runs itself. I never received a single phone call during that period. All the vendors around the Hub model had to do was change the name and address on the invoices. They barely noticed the change.

Two years after the sale, I met the company’s new CEO at a trade show. He boasted that they now had 28 full-time employees. Sales were up 20%. NET profits were 35%. When we discussed the difference in the business model and results his response was ‘You just got lucky. It should never have worked. You got away with it.’

I am currently building my fourth lucky company.

There are many things you can do to arm yourself with sufficient knowledge to run a business without feeling the need to hire a team of functional leaders. We live in a marvelous age in which technology, transport, and communication systems mean you don’t have to work your way through every department to get knowledge, although if you are young and don’t plan to start a company for a few years, you might like to consider it. In Secrets to a Successful Start-up I discuss in detail how to gain cross-functional experience and then how to select and manage outsourcing partners. We’ll do so in the course in more detail later.

The more cross-function education you can get, the greater will be your entrepreneurial self-confidence, and the less you will feel the urge to hire someone too soon. The cash benefit is obvious, but you will also be able to make quicker, more intuitive decisions than can be made when hierarchies and groups are in place. That is critical in the early and bumpy phase of the start-up roller-coaster ride. The knowledge also helps in your choice and hiring of vendors and contractors.

Some start-ups, like medical services, may require the immediate hiring of full-time employees, but even then, there are alternatives. Rarely, however, do I encounter entrepreneurs who stop to consider any alternative. In my own doctor’s office, which is a fairly new company, there are often three receptionists working behind the desk. I watch them while awaiting my appointment, and I always conclude that two of them are an unnecessary expense if the third would just use better technology. As pleasant as they are to talk to, I can actually make my own appointments online, get electronic reminders and check myself in if they would just adopt the technology.

Regardless of industry or size, I can walk into any company and immediately see ways to cut costs and improve efficiencies if the management (itself usually heavily overstaffed) adopted more virtual staffing in certain functions. Of course, this makes me an unpopular visitor.

The old industrial model of organization is one of large groups of people doing specialized tasks with centralized coordination. However, the fixed costs of office or retail space, inventory, and employees make this model less obviously sensible today when fashions and markets change so quickly.

Large, previously inflexible companies such as IBM, Hewlett Packard, AT&T, and even GM have recently realized the need to become more agile to compete with their rivals by introducing more quasi-virtual structure. It is important that all organizations recognize the fact that there are rapid shifts in the economy, in demand, and in customers’ and employees’ habits, and ensure that they are agile enough to adapt.

For a Successful Startup, every function of a company can be provided by specialist vendors under contract on an as-needed basis at a fraction of the cost and risk it would take to build the same capabilities from scratch. Hiring a manufacturer, distributor, and accounting firm is relatively easy because so many companies compete to provide those functions for you. They usually work on a fixed monthly fee which is a fraction of what it would cost to hire a functional leader. We’ll get into outsourcing in detail later.

That makes vendor selection critical, because you want people and companies that get on with the job with the minimum of direction from you, so that you can get on with the task of being a successful entrepreneur. If you were a micro-manager type before, or had trouble empowering employees, you may struggle for a while with a virtual business model. The model requires that you allow others to perform their role somewhat freely and out of your sight. Later in this book we will delve deeply into the issue of trust around the hiring and managing of virtual functions, vendors, and staff.

Most businesses have similar departments organized by function. Accounting & finance, Administration, legal, information technology, manufacturing & distribution, purchasing & inventory warehousing, sales and marketing, and human resources are common to most traditional firms. In my businesses, I have also had research & development, regulatory and quality assurance functions to consider. The virtual business model requires that you as CEO behave like the conductor of an orchestra, selecting the best players and directing them in harmony.

Adopting a Hub model offers many advantages to a Successful Startup:

Customers have a right to expect the same quality of service from every function of your business as they do from an established multinational firm. They are under no obligation to show empathy simply because you are a start-up, and no business can excuse poor levels of service just because they are new or small. Outsourcing functions to expert-providers means the customer immediately experiences the same high level of service with your fledgling company as they do with a large, established one. Satisfied customers always return and refer others. Dissatisfied customers rarely return and they turn off lots of others. As CEO, you are looking for an established vendor with a positive track record, and you must check references… and then use your intuition.

Outsource providers adopt your company name when they interact with customers so you will always give the impression to customers and clients of being a bigger company. I have used one outsource vendor that services over a hundred and fifty businesses ranging in size from a sole proprietor to a multi-national. My company was a modest revenue generator for them. Regardless, when any customer called the dedicated toll-free phone number provided by the vendor, they would hear the correct company name and be treated to the same quality as the multi-national.

Outsource contracts allow you the flexibility to add on or cut back services and volume according to demand, which helps cash-flow management. When cash-flow is turbulent, being able to pull in the reins of certain functions or put projects on hold is tremendously helpful to managing the money. As CEO you are looking for a vendor that understands the turbulence of a start-up company and that offers flexibility in terms and fees matched to volume.

Outsourced providers are experts in performing their functions, which means you need to spend less time keeping up with industry standards. In a regular career, most people have to attend training and updates to keep their functional knowledge up to speed. Virtual staff can do all that for you.

In your previous job you might have spent considerable time managing and coaching less experienced staff. With outsourcing to experienced staff, you can focus more on business growth. It is, however, important that you assess the knowledge level of the people who will represent your company. Also important is to investigate the rate of staff turnover at the vendor as well as the level of satisfaction among the vendor’s employees. During the selection process, I always take a guided tour of the vendor facility. There are plenty of opportunities to get one-on-one with the employees and ascertain what they think of the company and people. Staff turnover can be one of the biggest issues with this model, so look out for that.

You don’t have to create operating procedures from scratch, but simply edit the existing vendor templates.

Vendors have all the systems and infrastructure to manage staff like human resources, so you don’t have to spend your own cash, energy, or time on them.

Vendors typically offer a menu of services so you can cherry pick what you want when you need it. You can start with the basics, and you can add and upgrade as you grow. There is always the temptation to take on more than you need, but at the outset much is determined by budget anyway.

In the first three activities we have discussed how the new industrial revolution offers you the opportunity to return to a hamlet lifestyle by working from home again in a pseudo village-centric model that was the way of life before the machine disrupted everything. By also changing your mindset from a traditional business structure to a fully outsourced structure, it means you can work from just about anywhere with a business that runs, well, like a well-oiled machine. Now you are master instead of slave.

There is no longer a need to rent and staff an office space. Technology aligned to the outsource model frees you from the workspace. Now instead of commuting to work and suffering an endless round of meetings in a depressing room for 8 or 9 hours a day, you can be 100% productive from a home office. That means you need to work less and that advantage allows you to balance your life.

Hopefully, these three activities have given you pause to think and change your mentality from the traditional startup structure to the successful modern startup. For many of you, however, you are still thinking about starting a company. Next we will discuss the importance of a winning idea and how to get one.

I have 20 years experience running 100% virtual companies, and I am here to help. If this seems a revolutionary idea, it is. I have come across very few other companies run that way, but there is a strong trend toward it now. Feel free to fire questions here

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