Businesses constantly struggle with capacity issues. Manufacturers seek access to the ideal manufacturing capacity, and service providers look to employ the optimum number of employees.  Both understand their labor spend is a key component of a company’s profit formula. So how is the entrepreneur to scale in an uncertain economy?

Those who had not experienced rapid market erosion previous to the liquidity crisis learned an important lesson; high fixed costs can be truly catastrophic when demand contracts quickly. Employers must marry labor costs with demand. There are several steps one can take to mitigate labor capacity risk:

Optimize Labor Efficiently- Most entrepreneurs intuitively understand that they should push low value activities down through (or out) of the organization.  Senior managers should aim for “zero administration”, where virtually all of their time is spent improving service or profitability, and not loading paper in the copier.  A good administrative assistant is worth their weight in gold. Similar thinking should apply to all; all work should be allocated to the appropriate staff based on their skill level, experience and cost.

Outsource Low Value Activities Based on Demand- The zeal for outsourcing is far from over. Organizations are not only seeking lower costs, they are looking to move resources outside their organization so that they can scale  their bandwidth quickly. Look for outsourcing partners who have infrastructure that can move, (in real time) with your business. Such organizations typically have an existing core competency in the services provided, including technology and human capital geared towards executing such work.

Increase Weighting of Incentives to Total Cash Compensation-Those who only provide subjective bonuses are actually doing themselves a disservice. Practically the entire Fortune 500 have moved to some type of performance based pay. Part of the rationale is to only pay out incentives when an organization reaches certain performance thresholds.  Failure to have a significant portion of cash compensation in incentives (20% or more) creates fixed costs and puts stress on a business and on employees. Fluctuations in demand require drastic action such as lay offs or furloughs.

Measure Labor Meticulously- Labor KPI’s are amongst the easiest predictive indicators to measure, and directly affect the bottom line. Examples include overtime, labor dollars per unit, direct labor, indirect labor and labor as a percentage of revenue.

Beware of External Demand Indicators- Within virtually every business segment there are external measures that provide context on future demand.  Add external indicators to your scorecard/dashboarding system so that you can stay in tune to the market place. Government websites, trade associations, and private research organizations offer a litany of statistics.  Plot such data  against company revenue to find which numbers correlate with business growth.

As a result of the liquidity crisis and the giant sucking sound that followed, business-to-business customer relations have taken a dramatic turn.  Salespeople, beaten down by heightened customer demands and rampant discounting have become far more tactical.  As customers have attempted to flatten the playing field through RFQ’s and reverse auctions, vendors have been conditioned to comply with a new set of norms. How tedious and unfortunate.

The art of dissecting customer needs has deeply eroded. These new realities put the seller at a tremendous disadvantage, and often impacts margins and profitability. Selling organizations are better off identifying the minority of customers who are still willing to have strategic conversations.  Below are 4 types of questions you should be prepared to ask in a strategic meeting.

Perhaps the most critical element of consultative selling is getting to a decision maker. Procurement departments are typically focused on one variable; price. One way to orchestrate a senior level meeting is to ask for a strategy session or peer review. This can be positioned simply as…”the senior management of my company is planning a trip to…and they wanted to know if we can have a strategic conversation about the future and how we can; take cost out of the system, improve customer experience, reduce cycle time, etc…” In some cases, you may need to be prepared to suggest that you are considering investments that will decrease the total cost of doing business for the customer (that does not mean a price concession).

Salespeople should prepare rigorously for the meeting, digging up every possible piece of information on the company, their customers, their competitors, your competitors and about the people you are meeting with. Linked In, Facebook and other internet sites offer all type of information about clients-everything from the alma mater, to hobbies and interests.

Always allow the client to be seated first, but if possible, position so that your organizations are not seated on opposing sides of a table. Begin the meeting with opening questions and quickly transition to strategic questions. You want to first set a tone that you are there to probe and listen:

Stage 1: Opening Questions

• How many years have you been in the industry, or how many years have you been here?
• What did you do before?

Stage 2: Strategic Questions

• What is your vision for growing the business?
• What are your strategic objectives?
• What separates you from you competition?
• How will your company need to change to maintain its advantage?

Explain to your salespeople that if they interrupt the customer, or speak while you are asking questions, you will fire them on the spot (and mean it).  Many will have an overwhelming desire to present (and not to listen). Here is the golden rule: if you are speaking for more than 20% of any meeting, you are losing!

While asking strategic questions, you are observing the customer’s tone, pace and body language. If they are tactical thinkers, or simply don’t want to have a strategic conversation with you, you will observe their discomfort and move on to lower level discussions (which you should be fully prepared for).

After you have established the fundamental business problems, create a transition where the customer views you as the solution (without you even suggesting it).

Stage 3: Anchor Questions

• What are the long term ramifications of …?
• What would be the affect on revenue/profit/cycle time/customer experience, if …were to continue?

Stage 4: Closing Questions

• Do you have any initiatives to outsource … to suppliers?
• What if we were to…?

Here is the hammer. Companies (and especially purchasing departments) have seen dramatic contraction of headcount. If there is a way for your organization to accept the burden of certain  activities on behalf of the customer, you have reduced their total cost of ownership.

This approach will not work with all of the customers all of the time, but it will promote dialog the most profitable customers and those are the ones who are worthy of our time and investment.

Adapted from A Seat at the Table by Marc Miller

This week, I want to expound on a series of unrelated events shaping our world:

Last year, a deluge of rain in Australia and Canada, and drought in Argentina and Russia sparked a worldwide rise in food prices.  On Dec. 17^th, after months of poor supply, Tunisian produce vendor Mohammed Bouazizi was mugged by police and then set himself on fire in protest.  Reaction to his plight set off a revolt in the Middle East. Beyond the radar to us overly indulgent Americans is that the world is on the verge of a global food shortage.

Ironically, the U.S. growers have reaped the rewards of higher prices for U.S crops and futures contracts. Wheat prices were up as much as 74%, (corn 87%[i]) and net farm income is up 20% this year. Demand is rising for dairy, meat and poultry to support a burgeoning global middle class.[ii] Spring planting of key crops will dictate food prices later in 2011 but farmers may be hesitant to plant in a period of high fuel and fertilizer costs.

While unrest continues throughout the Middle East, social states who provide strong entitlements such as UAB, Kuwait and Oman will likely not be threatened. Similar protests in oil rich Iran or Iraq would be more unsettling to world markets.

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As Motorola revealed its Xoom tablet this week, the Microsoft vs. Apple war took on a new dimension. The real war may be tablet vs. PC as a new generation of devices operating on Honeycomb-Android (Google) and other operating systems hit the market[iii].  Electronics makers are currently developing over 100 designs of new models, many of which sport more business friendly applications.

The second generation of iPads has been somewhat under wraps but is expected to be lighter, faster and include a camera and video conferencing capabilities. Apple’s advantage is its burgeoning iTunes and App Exchange platform.  Apple only spends about 7% of revenue on R&D, about half of what Google and Microsoft[iv] spend, providing a significant competitive advantage. I was in a meeting last week with 7 other people; everyone had a tablet.

Meanwhile, Microsoft (Office 365) and others are developing new Small Business Enterprise applications to better leverage the combination of mobile devices and low cost cloud computing options. The paradigm shift to storing all documents on the internet is emerging as a revolution coined as “cloud productivity.”

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Cisco’s new “telepresense” conferencing systems are all the rage, providing a far more realistic teleconference then the 1^st generation systems. With concerns over fuel costs and the environment, more companies may be moving towards adopting such technologies.

If you want to see an amazing video on future technologies, see “A Day Made of Glass…Made Possible by Corning” on YouTube.

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It is expected that the U.S. post office will eliminate Saturday delivery by the end of 2012.

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It is “hurry up and wait” for small businesses looking to minimize their insurance costs.  The health care bill requires that each state set up “health care exchanges” by 2014[v]. Most states are dragging their feet, and waiting to see what legal challenges emerge.  California has already pushed through legislation but other states are dragging behind.

It is expected that “exchanges” once enacted may actually bring about market conditions that will lower costs for small groups (in the neighborhood of 50 lives)  who will be better able to leverage buying power and have more predictable premiums. Let us pray.

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[i] Hungry for a Solution  Bloomberg Business Week 2/11/11

[ii] The Kiplinger Letter Vol 88 No.

[iii] Motorola’s Xoom Starts Tablet Wars by Walter Mossberg WSJ 2/24/11

[iv] Mobile Wars Bloomberg Business Week 2/21/11

[v] The Kiplinger Letter Vol. 88, No. 7