My earlier post talked about how seasonality impacts your business.

Dedicated Hiring allows you to change your cost structure depending on the business realities. One important feature of this service is that it allows you to change the cost structure based on sales volume and at a notice of less than 30 days.

In order to understand it benefits, see the graph below:

In the above graph the shaded area represents that profits that your business can made even in the case of slow business seasons. Since you have the ability to switch costs “On” or “Off”, it ensures that you can cut down the costs to match the current revenue levels.

Illustrated Example
Total Cost of operating your business consists of two things:

Employee Cost + Operational Expenses

Employee Cost = Recruitment Expenses + Salaries, Wages and Bonus + 401(k) + Insurance + Employee Welfare Expenses + Vacation Costs

Operation Expenses = Software Expenses + Communication + Travel + Rent + Legal + Office facility maintenance + Computer equipment maintenance + Electricity + Recruitment and Training + Office supplies

Here is an easier method to calculate the cost of running the operations. Take the employee’s base salary and multiplies it by 1.25 to cover employment taxes and benefits.  Then multiply that number by 1.75 to cover rent, equipment etc. 

Some management personnel are needed and some of the employee time is spent in non-billable technology development, multiply that number by 1.25.  Thus a full functional managed employee costs about 2.7 times the base salary!

Here is how you can benefit from Dedicated Hiring:

1. You need to pay only a fixed fees per month for actual work that is done - there is no other operational expense.  

2. The employee cost is lower and can be managed based on business volume. Thus, this is a triple benefit i.e. lower costs, scalable manpower and no operational expenditure.

3. You don’t need to hire in-house resources for the non-core area. Dedicated Hiring allows you to manage these jobs in a more flexible way. For instance, if you specialize in Enterprise Applications and you have a infrequent request for a web design, you can get it done through Dedicated hiring program.

4. Ad-hoc maintenance requests on projects can be easily managed through this program as well. Your prompt attentions to these post-delivery requests are important to ensure repeat business and it can especially difficult if the resources have been re-deployed to other projects. In such scenarios, Dedicated Hiring can be of great help.

5. Overflow jobs can be easily be outsourced by this way and it can be directly be managed by you. This is probably the most hassle free of dealing with outsourcing projects that require variety of skills and it saves time as you do not have to go through complex and time consuming selection process.

The profitability of your business is a function of two things, namely, Revenue and Cost. Revenue is the revenue is the amount of money that your company actually receives from its sales of product and/or services. Cost is money that you have to pay for production of the products and services.

Your revenue is directly affected by the seasonality of your business i.e. in peak period your revenue is high whereas in low period when the volumes are low, the revenues will fall. The Graph below shows the effect of seasonality on your business:

Assuming that you business that a fixed cost of operations (i.e. fixed number of staff members with other fixed expenses like infrastructure etc.), The area of Triangle “A” represents the profits that your business makes as it gains steady volume while being able to keep the cost low. Area of Triangle “B” represents the losses that your business may have to incur while keeping the costs same but as revenue falls.

Now there are several variations here:

Area of Triangle “B” is less than Area of Triangle “A”
Here your company faces fewer losses than the profits that it has made in the previous cycle. Your profitability is determined by Total Profits – Total losses which effectively means that the downward cycle negatively affects your business but you are still profitable.

This is case with managed companies or the companies that sell highly profitable products.

Area of Triangle “B” is equal to the Area of Triangle “A”
Here your company faces same amount of losses as the profits it has made in the previous cycle. Here your Total profits = Total losses. Thus, although your business is not loss making but your operations are risky and growth prospects are minimal. 

This is the scenario at Small companies which get infrequent flow of projects and assignments and lack the management expertise to plan ahead. In downtime they consume whatever profit was generated in a high period.

Area of Triangle “B” is more than Area of Triangle “A”
Here your company is loss making at the end even though you have generated positive sales. Here your Total Profits is less than Your Total Losses.

This is the scenario at start-ups and individual freelancers which do not have any reserve and they end of being unprofitable and have to close down their operations. 

Next: How companies can manage this sesonality with outsoucing?

I know its not the end of financial year as we still have one more quarter to go. It’s however very important to draw of all significant plans within the last quarter and then start making adjustment early on so that you can take on the first three quarters of the next financial year without “loosing” more time in planning.

Planning for the HR is very important function in order to ensure that you have production capacity to undertake any expansion plans or support other organizational objectives. You need to sit down and answer the following questions:

1. What are new positions within the organizations that will be filled?
2. How many people will be required in what positions?
3. How will the current man-power evolve? (Think promotion and attrition!)
4. What are the new competencies that will be required?
5. What jobs would you like to remain in-house and what would you like to outsource?

Once the future labor requirement and the current availability has been clearly established, the gap is action oriented target that can be handed over to the HRD (if you have one!) or in some cases you may need to draw a more detailed plan to fill those gaps. As soon as you begin to think of HR requirements, it is important to separate the qualitative issues from the quantitative issues. Let’s talk about them in more details:

Quantitative Issues

The quantitative issues are easiest to spot. A simple way to do this is simply calculating the ratio between number of people in the company and the current revenue and then calculating the number of people required to achieve the targeted revenue. Ofcourse, this assumes that efficiency with the organization does not change and this short process usually does the job pretty well.

So, if you have 2 employees who are maintaining 40 client installations and generating $20000 every month, you simply calculate that by doing 60 client installations, you will generate revenue of $30000 and you will need one more employee. This “1″ employee then needs to be hired and trained before he is actually needed for production.

Qualitative Issues

In a layman term these are the sort of issues that you can’t put number against and usually means that the current man-power or a part of it does not have the skills and knowledge future job requirements or in some cases you may see that the person is overqualified for the particular job. These are the sort of issues that can only be handled by Training and Restructuring. As as business owner you must realize that right people with right skills and doing the right jobs are the precondition to success.

Is Outsourcing a Qualitative or Quantitative decision?

Outsourcing is a quantitative decision only when same economies of scale can be achieved with an outside vendor or when it’s a strict question of changing capacity within an existing relationship. Getting this plan ready with you will allow you to look for possible outsourcing opportunities early and notify your vendor in advance about your ramp-up or ramp-down plans. However, if you ask yourself - “Can this job be done better by a specialized vendor because I want to focus on core areas?” - it becomes a qualitative decision.

The core is that you must plan ahead of time about what you are going to outsource and in what volume.

Even though distance, communication barriers, lack of local knowledge and geopolitical factors create significant risks, the economies of Offshore outsourcing are numerous and significant. However, to make these economies work for you, you should keep in mind the following few very important points:

Project Scope – Clarity and Understandability

Project Scope is the most important part of the project. The success or otherwise of your project largely depends on how clearly the developer has stepped into your shoes and understood the project scope, the purpose of his actions and the consequences thereof.

It is advisable that your initial efforts should mostly go in making sure that your words are being understood clearly and correctly. If you find any deflection, you should right away contact either the Project Manager or the Account Manager and get a meeting scheduled with the developer, where the relevant issues are discussed in an open and constructive manner. The importance of clear communication should never be discounted at this stage and everything should be put in black and white as far as possible.

Manage The Project

Developers are mainly concerned with developing and not with project management. Someone needs to manage the project and that’s your job in a dedicated hiring project. You should not treat the project as the Developer’s responsibility alone, but should also understand yours as well, which includes the following:

• Make sure the Developer’s interpreted your description the way you intended.
• Make sure the Developer delivers what you asked for.
• You need to set expectations and inspect the Developer’s work to make sure it meets your needs and quality standards.
• If something turns out to be much harder than expected, or does not work out exactly as planned, you might need to decide which of several paths the project should take, after consulting the developer with regards to their feasibility.

Again, Developers do not know the intimate details of your business, your users, etc. An old expression says you only have the right to expect what you inspect. You have to be involved in the project to make sure it delivers what you need.

Finally, it is your project! You have the final say about what the project is.

Share Your Vision With The Developer

After hiring a developer, most people answer the developer’s questions about the project and assume that if he doesn’t ask a question about a particular part of the project, everything must be OK.

What they did miss are all the assumptions:

1. Assumptions made when writing the project description
2. Assumptions the developer made when he read the description

One problem is that we tend to write from our own perspective, not even realizing the assumptions we make. But the fact remains that you know your business inside and out, but your content developer probably won’t know anything about it.

So to avoid this issue, one should take the following precautions:

• Be very clear and concise in your project description. Keep it brief and focused. Adding more words often just adds chances for different interpretations.
• Ask the developer some probing questions about the most important parts of the project. You will very likely discover some assumptions that you or the developer are making.

Get some interesting or useful work output from the developer as early as possible.

Use Instant Messaging for Communicating at the initial stages

Instant Messaging makes remote workers feel as if they’re in the office. It’s faster and more intimate than email and allows you to track and transcribe exchanges. It’s also best for immediate feedback, quick question-and-answer exchanges and other important discussions.

Again, only important matters be discussed over the messenger during the project period or before the beginning an important phase of the project. Have regular goal-oriented communication sessions scheduled with the developer and the project manager. However, it is always recommended that you send your suggestions, ideas and views through email, as you can be express yourself in a much better and free way and discuss the same over IMs.

On a personal level, you must try and gain certain information about the Developers. For example, send across an e-card to wish him on his birthday or on his marriage anniversary. It is similar to treating him like an employee in your own office. This will motivate him and make him feel like a part of your family, after all, he is working for you as your employee!

Proper Expectation Setting

This is the most common mistake people new to software projects make. Unreasonable expectations lead to despair and failure. Most of us just give away a few general ideas about what we want, then sit back and wait for the finished product. Result: unsatisfactory projects.

You need to put time and effort into managing the project to get exactly what you want. Hiring a developer is not “fire and forget” methodology. To succeed, you need to be involved in the process.

You must be prepared, determined, and flexible. You should first ask the developer to work on at least one small project you want to be done. This allows you to learn the ropes on a project you fully understand. It also frees your time for other more important or more profitable tasks!

Understanding The Cultural & Language Differences

Most of us believe that there’s no need to be concerned with culture or language differences that exists during outsourcing. But we must understand that cultural differences can appear in any function. Acceptable user interfaces may have a different look and feel from one society to another. Colors and sentence structure may differ just enough to draw the user’s attention.

When business processes are outsourced, cultural differences are even more pronounced. For example, the way the developers answer your queries, how they interpret the complaints of irate customers, and how they try to add humor to the conversation may all be driven or affected by local culture. For example, a message that is written by a well-intentioned customer to his client in India was like this: “Do this process this way, I bet you’ll get better results.” The developer replied “Sorry, but I don’t gamble!”

Timely Audit & Review Strategy

In order to ensure that the project is completed on time and you get the maximum and timely benefit out of it, you should prepare, beforehand, a periodical audit or appraisal strategy and look for the areas which demand more attention, in terms of timely completion of the project, without facing any cost overruns. Again, this review also helps you to evaluate the performance of the developer and reach various important decisions, like when to deliver the software to your client and report to him with regards to the project performance.

It also helps to ensure that the objectives of the project are properly met. It should ideally be held once every fortnight or every month, depending upon the duration of the project.

Issue Escalation

In case you are facing regular trivial problems with the developer, it is never advisable to simply ignore them. You should report the same to your Project Coordinator in your weekly project feed back. This helps the management to understand the reasons of such problems and would allow them to work on the developers short comings, thus, making it a very important part of effective communication. This in turn will help to prevent any future disasters!

Organizations need to continuously improve themselves, not for capturing more market share but for maintaining the current share that it holds. However, most of the improvement efforts tend to focus on levels that are not directly contributing to creation and delivery of products and services. I don’t blame people for this, but if you are trying to improve too much without actually impacting the way the work is getting done then you will achieve too little.

If you don’t see the link, then try to think your organizations performance as a summation of performance of all individuals within it. This chart will probably help you think:

∑ Individual’s performance = Performance of the Team

∑ Team’s performance = Performance of Department

∑ Department’s performance = Performance of Organization

Now given the above relationship, look at what you need to do to improve the organization:

To Improve the Organization => Improve Departments

To Improve the Departments => Improve Teams

To Improve the Teams => Improve Individuals

Thus, before wasting a single dollar on any silver bullet solution, the most important questions to ask is - “Will it improve the way the individuals works?”. If you can’t say yes, then it ain’t worth doing it and on the other hand the smallest change that can improve the way an individual works, is worth doing right away.

A quick tip for budding entrepreneurs:

If your business starts at the right time, you can extract maximum growth by getting ready when the industry segment gets the peak demand. I strongly suggest that a new business should be started during the “low-tide”, i.e. when markets are not doing well and industry sentiments are not positive. It helps in many ways:

1. You can get the best talent available in the industry due to lay off by major players.

2. You will not have major competition and you can prepare your competitive edge ”in hiding” to give surprise to your competitors.

3. Tough times results in innovation. It is highly probable that your company will have the “innovation” advantage as you try to come up the adversities of a low-lying market. This innovation can become a catalyst when the markets are strong and can become the deciding factor.

4. You can concentrate in building the right processes, measurements, quality control systems and genetic-composition of your company which will result in its rapid growth when the right time comes.

5. Your expenses will be lower in building the fundamental framework for the company.

It is well known that markets have both the ups and downs. I feel “downs” should be well utilized to prepare the company for taking maximum advantage of the “ups”. It makes much more business sense and also keep your spirits up!

Note: It is important to be patient. It is very important to know that you are preparing for the “good days” and, it is most important to know that you should not blow up all your money, since capital is another thing that you need to scale up your company fast when the right time comes.

Programmers are intelligent, problem solvers. If you can’t believe this then please move on, this is not a post for you. If you are managing a group of programmers then here are the things that you should concentrate on: 

Remove Obstacles
By obstacles, I mean real ones. Things like Hardware, A.C not working, improper lighting, noise, printer out of paper, furniture, wending machine, pending feedbacks occupies very expensive portion of a programmer’s brain. You need to free this up so that they con concentrate on job. If you land up in a job which involves managing a group of programmers then the first thing you should do is make sure that the environment is appropriate for working and all barriers to productivity has been taken care of or at the very least, the programmer don’t have to bother about them. 

Maintain flow of work
A large part of your effort should be spent on maintaining the flow of work for the programmer. By this I don’t mean signing more contracts! You need to make sure that when the programmer comes in to office every morning they know what needs to be accomplished today. The programmer needs to know the work queue that has been lined up so he can go full throttle and get things done. 

Get them the information they need
It’s not that programmers don’t have business acumen, it’s just that they are closed to any problems that cannot be solved by writing codes. If that doesn’t makes sense to you, then think about why certain things don’t appeal to you. Thus, save them from this anguish and get them the information they need to know about the application. Don’t send a business case and expect them to deliver a working product.  They are more interested in knowing what the application needs to do.  

Don’t talk technical
This is only for the non-techies who need to manage programmers. Talking to them about technical aspects is the surest way to loose your respect. In case you can’t resist then try being suggestive rather than authoritative. I don’t think that managers respect better managers with the same intensity as a programmer respects a better programmer. Thus if your suggestions are shallow then you will loose respect forever and moreover, if they have to implement your solution then they will end up hating you. Stay away from this and rather focus your energy on getting the first three points. 

Feel free to add to the list - the world really needs one!

I was recently going through a very interesting White Paper about Organizational Structure written by Richard Kibble & Neal H. Kissel of Marakon Associates, which presents a very different notion about the parameters based on which a business should form its Organizational Structure.

As per Kibble and Kissel, an enterprises’ structure defines its strategy rather than the other way round. Flexible organizational structures leads to flexible strategies and better Global/Local Structures Produce Better Global/Local Strategies. Thus, better organizational structures lead to better strategies being formed and implemented successfully. This is because organizational structures greatly affects a manager’s management style.

Structure critically affects managers’ decisions and, in turn, influences their emergent strategies. Managers with unique talents emerge when the organizational structure allows them to refine and perfect their craft.

Better structures provide the an ideal platform for grooming young talent; allowing them to interact with various organizational demands and scenarios, in turn, creating better managers.

If you want to develop more managers who can manage for value, create a lot of opportunities for them to manage for value. Managers with unique talents for discovering and developing new customer groups - or creating and executing new strategies - don’t emerge by chance. They emerge because there’s an organizational structure in place that allows them - and challenges them - to refine and perfect their craft.

In short, organizational structure greatly influences the way managers function and make decisions. Hence it should be always be designed to exploit the uniqueness of the business with regards to its markets, products and more importantly, its people.

To sum it all, if you want to have a distinctive strategy to outperform the competition, you need have a distinctive structure!

Every executive and his dog have thought about incentive schemes that will give the company a performance boost. Incentives schemes are bribes that is given to people for doing things they were already supposed to do. The problem with incentives is that it works only too well. Here is what you need to think about: 

Is the incentive system simple enough?
Complicated incentive systems look fishy. If you want people to trust the system then you have to make it simple enough so that everyone can understand it. If the people won’t understand what they need to do, it won’t get done anyways. I once interviewed someone for the post of business development manager and her incentive scheme was nothing less than an MLM program. 

How much is it going to cost to have an incentive program?
Incentive program requires collection and analysis of data which requires resources like people and time. The more complicated the program is, the more difficult and resource consuming the job becomes. We once implemented a program called “the point system” in which every employee earned 1 point for every $25 worth of production. 

Every employee had a target set of points that they were supposed to accumulate in a given month. This target was set based on the average costs of his business unit. The idea was simple, we wanted to focus on revenue per person (PPR) and it seemed logical to provide incentives to person whose PPR is higher than the target. The most important point was that it gave us quantitative data for performance analysis. 

This program seemed brilliant at the moment, but later the cost of administering the program was so high and it was so counter-productive that we closed it within 4 months of its implementation. It produced 20 pages for each team every month and some 300 sheets in total that had to be verified, analyzed and tracked. 

Is the goal achievable?
It makes sense to set the goal slightly higher than the normal but, setting it too high is an obvious way to kill all motivation. If I know that the defect-rate is 10%, then it makes sense to provide incentive for reducing it to 5%-7% but giving an incentive for 0% defect-rate will only have your employees laughing at your back! 

Will increased effort lead to increased performance?
Wait for moment to let that question sink in first. 

If your employees are ineffective because of your company’s systems and processes then no amount of incentives is going to make them more effective. 

Incentives, especially in the form of financial reward can be a great motivator and it can get people working really very hard. However, people still got on work with the processes and structures within the organization and if that’s not efficient then raw hard work will not lead to superior performance. 

People will slog endlessly, only to find at the end that the target has not been achieved. Thus, they will be de-motivated because they have done all they can to achieve a reasonable goal but still the money has eluded them. Running on ice will slow down the best sprinters! 

What behavior am I encouraging?
Behavior is a result of consequences. There six elements of project i.e. Scope, Cost, Quality, Risk, Time and Customer Satisfaction. This forms a perfect hexagon in which every element has impact on all others. Pull one and other 5 gets drawn too. The problem is that incentives focuses the attention of employees like a laser beam, all periphery vision is lost. Thus, giving incentive for “on-time” delivery will mean that people will forget about other five things because to them, it means that ”on-time” delivery must be most important to management.  People are smart and they will soon figure out a way to meet the objectives may be at the cost of quality or customer satisfaction. 

Incentives is not just about throwing in money to get things done, for all you know it may be changing the way your organizations expectations, thought process and behavior forever. Employees will begin to judge the importance of the job by checking whether it has an incentive scheme tied to it or not.  Things that don’t have incentives will not be considered important.

IMHO paying decent salaries, treating people well and maintaining the right culture is far more important and useful then crazy incentive schemes. 

The Rule: You will always feel you are underpaid.

Want to know why? Read on.

The following gets answered or at least thought about when the management wants to decide about salary appraisals:

1. Change in costs and revenue over the next year. For the uninitiated, the difference between two is called “Profit”. No company can survive without it.

2. Mitigating the change in the cost by choosing from multiple alternatives i.e. change in pricing or cost averaging.  Price sensitivity of its customers is an important factor here because the way Deccan Airlines (or Southwest Airlines) will conduct appraisals will be different from Kingfisher airlines (or United Air).

3. Compensation data with respect to the local geography amongst companies of same size. For us it means considering the disparity among salary structure for similar skills and experience across multiple locations.

4. Consideration for budgets for different departments. The appraisal budget will be different for different departments.

5. Performance Rating patterns emerged in bell curve (for your division, your unit and then deciding where you fall)

6. General outlook of the company towards future

It’s a tall order. While the management is figuring this out, here is a question for an average Joe whose salary is due to be appraised.

Choose an alternative from below:

1. Making a salary of 40000, when I say that others are making 30000
2. Making a salary of 50000, when I say that others are making 60000

Having a hard time answer? Do you see the point?

While the management has a ton of factor to consider, our average Joe is just bothered about how much his cousin Nick or friend Peter or colleague Tom is making.

Our average Joe will never be happy with his salary review because:

1. His expectation has got nothing to do with his own situation
2. Even if he gets what he wants, companies cannot control how the salary of others around him will change.

As for the management, this is a thankless job that someone got to do!