How should we figure a performance penalty?

January 2008

"We're being asked by our maintenance customers to sign 'service level agreements' that guarantee we'll fix a software problem within a certain amount of time or pay a penalty. We're okay with the general idea of a guarantee, but what's a fair way to calculate a penalty for missing the deadline?"

Mike: Fairness isn't the issue here, because your customers don't ever want to collect this payment--they want you to fix the software promptly and keep them in business. They'll ask for some kind of penalty to make sure you share their sense of urgency when the system goes down, but keep the calculation as simple as possible.

As long as you're negotiating penalties, however, this might be the time to put a cap on any damages in case your software is responsible for a major business disruption. As a general rule, your guarantees should never promise to refund more than the amount of the customer's direct payment for software and services. Walk away from any customer who demands an open-ended penalty greater than this amount

Do we have to pay a long-delayed invoice?

January 2008

"Is there a statute of limitations on invoices? We just got a 'supplementary' bill for hotel space for a user group conference we ran six months ago. We thought we'd paid for everything and closed the books, so this new charge will really mess up our budget for next year."

Mike: First, talk to your meeting planner about the charges. Presumably, your contract with the hotel spelled out estimated costs for major items like rooms and meals, and included some language about who could sign off on any extras. If the hotel let unauthorized people run side events or rent meeting rooms that weren't in the contract, you may have grounds to contest the charges.

But it's more likely that your meeting planner didn't bother to keep track of extra charges and change orders, leaving the bookkeeping up to the hotel. Even if you didn't know about every penny of extra costs, your meeting planner--or someone in charge of the project--should have been tracking changes and updating the total budget. That way, you could have accrued a reserve on your books at year-end and prevented this fiasco.

Why aren't we as efficient as an outsourcer?

July 2007

"We're getting a lot of pitches lately from outsourcers who want to handle our tech support, our IT department, sales, on and on (yes, finance, too). Even if they're exaggerating the savings we'll see, I can't help wondering how these outfits can be so much more efficient than we are--and it's not just overseas salaries, either. Any insights?"

Mike: One reason outsourcers are efficient is that they can achieve economies of scale by spreading fixed costs--equipment, space, management staff--across multiple clients. That's particularly important for jobs like manufacturing, where an outsourcer can easily shift employees and workspace from one client's job to another, based on fluctuations in demand. Running at close to full capacity is always more efficient than shutting down occasionally because there are no orders this month.

Outsourcers are also more efficient because they try to be efficient. The best outsourcers are always looking for ways to cut costs and fine-tune their work processes (because otherwise they don't win bids). You should take a close look at how an outsourcer would do some of the people-intensive jobs in your own company. It can be an eye-opener.

Is there a way to get everyone to share tight times?

February 2007

"We badly need to ask our employees to pay a larger share of health insurance costs, but our sales reps (and their manager) insist that their contracts guarantee 100% medical coverage. Financially, I could afford to make an exception. But the symbolism is terrible. Any ideas?"

Mike: I agree that exempting the sales team will be bad for morale. But if their contracts call for full payment of health insurance, that's a perk you're locked into providing. You might offer to renegotiate these contracts--for instance, ask if they'll accept another benefit in exchange for a giveback on health insurance. And you should warn everyone that any new or renewed contracts will reflect the company's reduced contribution for medical coverage.

Remember also that you don't need to be absolutely consistent about compensation policies. You already give the sales organization things that other people don't get, like commissions, non-recoverable draws, trips to vacation spots if they bust quota, and frequent flyer miles. Other employees probably get generous amounts of overtime. And people with seniority may get extra vacation time. As long as your staff feels the rules are reasonably fair, they'll cut you some slack for occasional special situations.

How do we price stock we trade for services?

September 2006

"A well-respected law firm has offered to handle our legal business in
return for stock, which seems like a good deal. But they want the stock
valued at the price our three founders paid, not the price that new
investors are paying. Your advice?"

Mike: Frankly, this is a terrible idea. The price your investors are
currently paying represents the stock's fair market value (or it should),
and cutting the price implies that your stock has already been devalued. Is
that the message you want to send?

Presumably, the law firm believes in your future, so you shouldn't need to
sweeten the deal at all. If they don't believe in you enough to pay full
price for the stock, offer cash instead--and ask *them* for a discount on
their hourly rates.

(Incidentally, issuing stock at below its fair market value will trigger an
expense on your income statement. That's another reason this offer is a bad
idea.)

How do we ramp up our staffing in a hurry?

September 2006

"We have a very careful hiring process--multiple interviews, background
checks, orientation, the works--that's been appropriate for the one or two
new people we hire every month. Now we have to staff up a brand-new
operations group with 20 employees by the end of next month. Your advice?"

Mike: I see this problem a lot in high-growth companies--the founders get
bogged down in building a staff and don't have time to do the jobs they're
really good at (programming, sales, client service). The obvious solution
is to bring in professionals, either a full-time in-house HR person or an
outside recruiter. It's okay to keep your hands on small tasks like hiring
one or two people a month, but you'll destroy the business if you can't
delegate the big jobs.

And speaking of time, you need to be more realistic about your hiring
schedule. Most people you hire will want to give at least two weeks notice
before they come to work for you, so in effect you only have two weeks to
recruit your new staff--not a month. You should take a hard look at what's
driving this nutty schedule and see if you can get some breathing time.
Otherwise your new operations group will be a mess from the moment you open
the doors.

Can we make exceptions to the employee handbook?

July 2006

"We finally got big enough to have a formal employee handbook that covers vacations, holidays, and benefits. However, our office manager--our very first employee--says that our new rules shouldn't apply retroactively to her. Your opinion?"

Mike: For all kinds of reasons, you can't make exceptions or allow personal interpretations of basic company policies. The rules have to apply to everyone--including the founders, by the way. But you probably invited this kind of pushback by imposing a new set of policies on your employees without any discussion. It may not be too late to late to salvage the situation: Hold a company-wide meeting to discuss the HR handbook and ask your staff which policies seem to be a problem. Be prepared to explain the new rules--or to consider adopting better solutions. If your employees have a stake in creating your HR policies, chances are they'll feel these policies are reasonable.