The biggest risk to your business

John attends his first Board meeting and realises this organisation has a long way to go before it delivers on the promises it has been making to its shareholders and employees. Product development is being hampered by the lack of delivery of back office and logistics. This organisation has some problems. They could be fixed, but it was going to take time.

John began raising issues and making suggestions at Board meetings but none of the management team seemed to take accountability for anything. There was a lot of finger pointing and not a lot of action. By the end of John’s first year on the Board, very little has changed from the market’s perspective.

Here’s what happens to the ENP® wall:

The trust has not completely broken, but it’s not looking good. In this case, something needs to change or the wall will break down and the trust in John, the Board and in Company X will fall and break.

Trust and its fragility is something that impacts us all every day. Whether you are a Director, shareholder, employee, customer, parent, partner, son, daughter, or sibling – in every relationship and interaction we need to trust. Where there is no trust there is no relationship and when trust breaks down it hurts. It costs businesses greatly, it costs relationships, and the cost to society is mounting.

The good news is, when you do focus your attention first and foremost on building trust, the outcome is a significant improvement in your Results, Retention and Relationships – what I call the 3 Rs of Trust in Business.

One of the best examples I’ve come across is the complete turnaround of Fantastic Furniture in Australia, a story told tome by Peter Draper. In my interview with him he shared a number of thoughts. An excerpt follows, with the complete interview included in my book.

1.      Tell me what the state of Fantastic furniture was when you bought it in terms of:

·         Results (sales, profitability)

·         Retention (staff and customers, if known)

·         Relationships (with suppliers, partners such as banks)

Fantastic Furniture was started by two ex outdoor furniture salesmen in 1999 with only $8,000 of equity. During the next 6 years they grew the business to a turnover of $36M ploughing back everything they earned into the business. However during 1995 and early 1996 Fantastic Furniture had sustained substantial losses due to theft, lack of tight financial controls, poor staff morale and poor management procedures.

In March 1996 the directors had no alternative but to appoint an Administrator to the company.

I gathered together a Chartered Accountant and ex banker friend of mine Peter Brennan and one of the founding directors of Freedom Furniture, Julian Tertini and we bought the business in May 1996.

Peter Brennan looked after the company’s finances, Julian Tertini took charge of the retail and I took responsibility for the manufacturing. (I had no experience in manufacturing at all, having a real estate/financial services background.)

Shortly after I took responsibility for the factory I found that there was considerable theft taking place and so undertook a detailed investigation to find the source and those responsible were immediately removed from the company. This included some senior staff, so I found myself having to step in and run the factory on a daily basis. The factory had approximately 115 staff and staff turnover of around 60%.

2.      What were the expectations and needs of the people in Fantastic Furniture when you arrived on the scene?

As the Administrator had laid off many staff, they were naturally fearful of losing their jobs. They had already been informed that the company had not been paying their superannuation contributions which amounted to $440,000 and they had pretty much accepted this loss. They were angry and upset. They felt betrayed by the previous management and owners, and rightly so.

The toilets were absolutely horrifying with filth and graffiti. The lunch room was dirty and had bird dung on chairs and cockroaches running around the floor. There was sawdust and dirt lying on top of anything that had not been moved in the last month. The manufacturing and assembly areas where cloth was handled was almost what you could call clean – it had to be, they were handling fabric covered sofas.

If you were going to the toilet, you had to see the storeman to collect your sheets of toilet paper! The problem was, he was not always in the store, so if you were in a hurry, you had to go and look for him! He actually metered it out according to how many sheets you thought you might need. The story was that this had to be done to stop staff from clogging up the toilets with toilet paper and to stop them from stealing it. Unbelievable.

We had a lot of work to do to change their expectations and meet their needs!

3.      How did you manage and meet those?

There was obviously a total loss of trust by staff. There was little or no trust held by suppliers who were living now in hope that Peter, Julian and I could make a go of getting the business up and running again, so they wanted cash up front which put high cash flow demands on us.

But the very first thing we did was to pay all outstanding staff superannuation contributions and to provide proof to staff that this had happened.

I met with remaining management, section supervisors and leading hands and we identified some things we could do together to make immediate changes to improve working conditions. These included:

·         Cleaning and repainting the toilets and re installing toilet rolls

·         Cleaning and repainting the staff lunch room

·         Cleaning the whole factory from one end to the other

·         Disposing of any redundant machinery, fabrics and other stock

·         Servicing all remaining machinery

·         Replacing any damaged or broken machinery

·         Cleaning up the outside grounds

·         Looking at waste and seeking ways to reduce it

·         Investigating our manufacturing procedures to get rid of inefficiencies

We also agreed that we would review productivity, some of the working environment issues, the basis of pay and working hours. In the sofa section of the factory they could and were manufacturing approx 42 sofas per team per day. They needed to make 48 per day with the same number of team members, just to break even.

We decided we would operate as a separate profit centre and that we would need to make a profit on every item of furniture we made, albeit that we only had one customer – the Retail division of the company.

The team came to understand that the Retail Division was not going to be forced to buy from the factory, but Retail would only buy from them if they were the best supplier – that is, best quality, best service, best delivery and most importantly  - best price.

Now they had a challenge.

Within one week, all of the points above were completed including painting. We let the staff chose colours and styles. We did what we could to include them in this new direction the business was taking.

I made one of my duties a visit to the toilets several times a day. Within 24 hours of the clean up and repainting, the men’s toilets were completed flooded due to toilet rolls being jammed down the toilet bowls, graffiti depicting previous management being hung, drawn and quartered appeared everywhere and faeces was smudged over walls. The female toilets were not quite as bad but still very bad.

I immediately had all the toilets cleaned, called the painters back and had it all repainted and informed the staff that this was totally unacceptable behaviour and that they were really only spoiling the facilities.

I told all the staff, in a factory meeting, that whoever was doing this needed to know that they would not beat me on this issue as all the rest of the staff had a right to clean facilities and I would not let a few people spoil the needs of the rest.

All the staff eventually came to appreciate that management cared about them.

4.      You tell a great story about listening to the staff on the shop floor – tell me what happened there? Why do you think it made a difference?

My management team decided that we would have meetings with staff in each section of the factory and that we would discuss productivity, pay and hours.

So the process started. One of the first groups I met with was the staff in the fabric handling, cutting and sewing area. We all sat on the floor in a circle and started to discuss issues. However, I found myself doing the talking and that many staff had their arms crossed and were obviously not going to be part of the discussion.

I pushed staff to tell me what was wrong and finally I was told that ‘This meeting is a bloody waste of time’. Another staff said that if I wanted to downgrade their pay and increase their working hours then I should just get on and do it and let them get back to work.

When I informed them that what I wanted to do was to see how we could afford to pay them more and reduce working hours at the same time. They all laughed and said things like ‘Yeah, sure you do.’

Then one woman burst out and yelled at me ‘They never listened. I have been asking for wider sticky tape for 2 bloody years so then I can layer more fabric, cut more layers and increase productivity, but they have never given it to me and I am sick and bloody tired of all of you! You are full of bullshit and I’ve had enough of all this crap!’.

I looked straight at the supervisor and told him to immediately go to the hardware store and buy the sticky tape that the woman wanted. He said ‘Ok, I will do it later’. I said ‘You will do it NOW’. He made excuses like he didn’t have his car at work so he couldn’t go now. So I threw him the keys to my car, and told him to go now and buy the sticky tape. I remained calm but firm and we had a bit of a stare down at each other. There was silence as everyone was wondering what was going to happen next. He finally got up, walked out of the factory, and came back with wider sticky tape and thrust it at the woman.

That afternoon everything changed. We had an amazingly productive meeting with all sorts of great suggestions and ideas. The next week sofa production went from 42 per team per day to 52 per day per team. We were now above break even.

5.      By the time you did what you set out to do, what had happened in terms of:

·         Results

·         Retention

·         Relationships

My partners and I had originally set ourselves a target that there would be a major event at the 3 year mark. That would be a float, or purchase of another associated business or sale of the business.

We floated the company on the Australian stock exchange in 1999 just 3 years and 4 months after we took it over. We had retail stores in NSW, ACT and Victoria and the factory was by then very profitable. We were able to produce sofas cheaper than retail could either buy locally or that they could import from China - the cheapest 2 seater sofa at that time retailed for $249 and we made money in the factory, plus our normal margin in the retail division.

The sofa production had at that point reached around 70 sofas per team per day with the same number of team members as when we started out. In fact one of the teams had managed to produce 97 sofas in one day!

From a results perspective, in the factory we had reached a net operating profit margin of 6% before tax, which for this type of manufacturing is very healthy.

From a retention perspective, in the factory we had moved from a staff turnover of nearly 60% in 1995 to less than 1% in 1999. We ended up with a waiting list - we had staff wanting their brothers and sisters, aunts, uncles and cousins to get a job in Fantastic’s manufacturing arm!

The Fantastic Lounge Factory is now the largest manufacturer of sofas in the southern hemisphere.

From a relationship perspective, the internal relationships between the teams had improved significantly, and between staff and management there had developed a deeper respect that clearly was non-existent before.

Trusting relationships with your staff is an absolute essential to any businesses success. In my opinion, if you ignore it, you will fail.

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If you are not having critical conversations about trust in your boardroom, I’d suggest you get started. You could be sitting on a major risk – the risk of a breakdown of trust and the pain that follows, or the risk of missing out on the greatest opportunity.

Take Care

Vanessa

Vanessa Hall is Australia’s leading expert on trust. Her business, Entente Pty Limited (www.entente.com.au) teaches and supports organisations and individuals to build trust in businesses, homes and communities around the world.