Actually changing policies and procedures and navigating the BIG CHANGE is like your first trip through a haunted house attraction: the first few scares make you want to quit but after that you settle in for the ride.
In part 1 of our three-part series, we explored the profit margin issue my 25-employee company was experiencing as we entered 2014 and the three major metrics analyzed in search of a solution: payroll % to sales, bill rate, and efficiency.
In part 2, we’ll look at the structural, process and company culture changes implemented to move these numbers in the right direction. To re-cap, our goals were to:
- Increase average billable rate by raising prices 5%
- Decrease total payroll cost by 2.5% as a percentage to sales
- Increase overall efficiency 7.5% by switching to individuals and two-person teams
Ultimately, we were looking for a 10% increase in our gross margin. Our goal was to achieve this while keeping intact our client base, staff and commitment to being a responsible employer. Let’s get started!
Proper Previous Planning…
First, because each of the above items is related to the other, it became apparent that they would all have to be done simultaneously. This was a tremendous amount of work; there was no way I could do it on my own.
I had a team of coaches (and supportive fellow students) through the Cleaning Business Builders Foundations course. I had two consultants locally that I turned to at various points, and a great bookkeeper and accountant. Having an Office Manager with a command of our schedule and administrative processes was essential, as was a specialist who focused just on data entry, necessary software system updates and building lots of spreadsheets.
Our rough plan of action, which took about three months to fully develop and implement, looked something like this:
- Hire a recruiter
- Make all of the potentially painful structural changes all at once (compensation, incentives, team structure), with a set deadline for implementation of April 28th.
- Raise client rates
Hiring a Recruiter
We had to plan for potential additional employee attrition as a result of our changes. So, while carrying out analysis and running scenarios on our structural changes, I went out to search for a part-time person tasked only with recruiting, screening and hiring new staff members. After a few false starts, our search met with success, and within weeks we had a talented new recruiter filling our candidate pipeline.
Making the Structural Changes
This would be by far the biggest and most complex series of steps in the process. I will endeavor to briefly touch upon each major area and metric and briefly describe its role in our process.
Competitive Wage Analysis
The US Bureau of Labor Statistics breaks down wage information by state and occupation right on its website. So I did a survey of what types of jobs our employees came from (and could easily go back to) to get an idea of what other occupations to benchmark us against. A clear list was formed and included job categories like personal care aides, food servers, childcare workers, cashiers and counter help. I averaged them all and compared them with the Housekeeping wages category:
This data told us we had to be paying $8.25 to start, and top out somewhere between $13.00-$13.50 to be paying market wages.
Switching to Commission Pay
In August 2013, we had devised a system to pay our staff, but it was not going well. Our payroll as % to sales increased and everyone had essentially gotten a raise, yet morale was at an all-time low. The system was overly complex and included a quality “bonus” that staff could lose if they generated quality complaints. The complexity of the pay method and the uncertainty of the bonus structure were the main sources of the discontent for the staff. For me, the complexity meant lots of wasted administrative time.
Rather than just modify the existing structure to cut costs, now was the time to change the way we pay entirely. After exploring alternatives, including switching back to straight hourly pay, we decided on a commission pay structure. I liked this idea for two reasons:
- It makes controlling payroll % to sales easier as you are building a guaranteed cap on wage costs into your compensation method.
- The opportunity to shift our company culture to better reflect my values of entrepreneurship and personal responsibility. I suspected this would have the long-term benefit of attracting the type of driven employees that would like to work in a more entrepreneurial environment.
We then ran scenarios that compared effective hourly wages under both systems, as we needed an “hourly” number to benchmark against our Bureau of Labor Statistics Data. We also needed a measure that was common to both pay systems.
Keep in mind that these are averages. When we looked at individual examples we found that our most efficient techs and team leads could end up getting a raise, while less efficient staff might see a pay cut. These numbers met our social responsibility goals to have entry-level staff making at least $10/hr, with at least a $2/hr differential for entry-level supervisors (Team Leaders). These wages also made us competitive in the employer marketplace.
Changing the Incentive Structure
In 2013, we had spent around $21,000 on our incentive bonus system, which alone represented 2.74% of our gross sales. These incentives were immensely popular with the staff but were unsustainable at these levels.
Under the new incentive system, we reward only for activities that directly generate revenue (like a client referral) or offset a potential expense (like earning an online review from a client, which is like free advertising). While we were at it, we changed the points values to make them more straightforward from an administrative perspective, added new prizes in response to previous input from staff, and developed a new spreadsheet that made tracking and paying out points easier than ever.
Team Structure: And Then There Were Two
Critical to our ability to achieve necessary profit levels without too drastic a cut in pay or increase in prices was an increase in efficiency (total billable hours ÷ employee hours worked) from our current 73% to our target 80%. As described in part 1 of this series, we had determined that switching to two-person teams gave us our best shot at achieving these numbers.
In order to switch to two-person teams, we had to undertake several simultaneous projects, including:
- Re-configure the entire schedule of 230 clients around 8 teams of 2 instead of 5 teams of 3 or 4, matching clients’ preferences, geography and staff availability. My Office Manager and I sketched out a rough plan, and then she set to work on the full overhaul.
- Purchase three additional vehicles (we use company cars) and get them lettered.
- Purchase and configure three new tablets for our new teams. We use a cloud-based scheduling software and our teams use tablet computers to get their work orders.
- Re-configure the physical layout of the team stations. Key boxes and numbers, cubbies, supply storage and control (each team has its own supply cabinet), and more.
- Find and train three new team leaders. All at once! Luckily, we had created a new position called Assistant Team Leader in the months leading up to this change. The original intent was to create a leadership pipeline in our organization and, well, it worked! We had two of our three almost ready to go, right out of the gate.
Increasing Billable Rate
Finally, the rate increase. This was actually the easiest part of our change. We’d raised rates each year since our third year in business, and already had a letter template and analysis spreadsheet in place. Although it had only been 10 months since our previous increase, we reasoned that most clients would not notice the slightly earlier timeframe as it was an annual occurrence anyway. The letters were prepared to go out one week after the new structure took effect.
Presenting the Changes to Staff
At two weeks before the implementation date, I called a special staff meeting. We prepared the staff by letting them know we were making some big changes and would be telling them all about it the day after tomorrow. I had also made some key staff members aware of the gist of what was happening, so it wasn’t a total surprise for everyone. Most staff knew something big was coming but not exactly what it was all about.
The approach I took to the presentation would be critical. I’d learned the hard way that any group conversation about payment method must be handled carefully. The last time we had changed the payment method, less than 9 months prior, the presentation was met with much consternation even though everyone was getting a raise. Since I knew this meant a potential pay cut, the pressure was on to get it right.
This time, I rehearsed the presentation ahead of time and chose my words carefully. Not because I felt I needed to walk on eggshells, but because as owners it’s easy for us to forget what it feels like to be in the audience listening to someone tell you how things are about to change for you in a big way, especially when it affects your wallet.
The presentation opened with a frank conversation about our unpopular pay method. Why was it unpopular? A lively discussion ensued. The staff had lots to say about why it wasn’t working. What they didn’t know about was our efficiency number – how that had decreased since the new pay method had gone into effect the previous August. I continued to ask questions: “Who can tell me what efficiency is?” and the staff arrived pretty much at the formula for efficiency (hours billed/hours worked) all by themselves. Then they came up with a list of things that affect efficiency. Amazingly, two items on the list were things I hadn’t even thought of, and they are now part of how we define efficiency!
Once we’d defined efficiency, I made the connection between efficiency and profits, and made the connection between profits and the future of our company. No profits meant no resources to hire more staff, to get them the training or equipment they needed or to advertise and grow the company. I can remember the big red marker I took to the presentation board: No Profits = No More Green Clean Maine.
At this point, I took the reins. I’d never seen my staff so enthralled in a presentation before. Their looks were eager and curious. I presented the solution in four parts, putting the potentially unpopular ones in the middle of the list, to emphasize positive benefits. I listed:
- Raise Prices (during this item I reminded them that they provide a premium service and the work they do is worth a premium price),
- Pay by percentage (focused on its simplicity and fairness, the two major objections staff had to current methods),
- Change to bonus structure (explained that it would have to reflect revenue-generating activities), and
- We would switch to 2-person teams. When I unveiled this item, the room erupted in applause! I had a hunch this would be popular, but hadn’t anticipated that kind of reaction.
The rest of the presentation was spent delving into the details of each item, and answering the myriad questions that came up. When it came to presenting the bonus structure, I asked the staff to tell me why each item was a bonus item. It was incredible how well they understood the revenue-generating or expense-saving potential of each item.
In closing, I let the staff know that this might mean a sacrifice for some, that some people might see a reduction in their paychecks. Stick with it, however, and it will pay off for everyone. The message was about opportunity, and the response was much better than I could have anticipated.
Next in our series, we’ll look at the results of all this change. We’ll delve into the numbers and get an idea of what’s worked and what hasn’t.
Joe Walsh started Green Clean Maine in 2007 to bring a truly sustainable and non-toxic cleaning service to Southern Maine.