Instead of just being a way to save costs, freelancers are discovering that they bring original ideas and solutions to their clients. But does it work? Can freelancers help avoid failure and stimulate innovation?

To find out, we are conducting a survey with an analysis of the results and some thoughts on how businesses, agencies and departments might go about resolving those challenges and find new ways to innovate and grow. Please complete our survey and in return we will email you the full results once analysed.

An early innovation that got replaced?

Stock investors have rediscovered Warren Buffett’s investment principle of ‘never lose money’ and entrepreneurs are now focused on how to avoid small business failure, rather than searching for growth at all costs.

So have we all become neg-heads? Not at all, instead there is a new realism to what it means to grow a successful business and that it all begins with understanding business failure and how to avoid it so that your business has time and space to innovate.

Okay, so what are the 5 ways to avoid small business failure?

1. Take no debt 

Debt ties you down and stops you being flexible. However, in my experience, the worst problem is that it encourages entrepreneurs to hold onto a business idea that isn’t going to work and it stops them looking developing that idea into something that can make money.

For most entrepreneurs, debt involves putting up prized assets, such as a home. This then involves your partner or family (most probably) in the outcome of your business and they too become emotionally attached to your business idea not failing.

Strangely enough, taking debt removes your freedom to fail and the learn from that business failure – because something as important as your home is on the line. Don’t do it – give yourself time to fail and learn from business failure – this is the only way to create a truely unique product, service or business.

2. Make your costs as flexible as your contracts

Next up – costs! These are a big issue in the early days because whilst customers and clients may buy from you once, there is no guarantee that they will buy again.

Equally, in a tough economic climate, most businesses will not provide a contract but want to buy your services on a drip feed or bit by bit basis. In this case, if you lose a contract – or it simply isn’t renewed – then you need to be able to adjust your costs just as quickly. This means – no fixed costs!

Examples of fixed costs include permanent staff (but not freelancers, and you can now advertise freelance jobs free), office space, cars and phone contracts. None of this necessary. So why do so many entrepreneurs make this mistake? Well, somehow having an office to go to, or a car to ride in gives a new entrepreneur (or ex-student / ex-employee) a feeling of comfort. So fight the feeling! 

I can tell you it is far more comfortable to know you can pay your bills than have a soft expensive chair to sit on.

3. Take no partners nor shareholders

Partners and shareholders require rules – lots of them.

The rules need to cover how the business is governed and run, how the money gets spent, who gets the profit and salaries and what happens when it goes wrong. Sound simple? It isn’t. 

Imagine setting up a government – democratic-ish – where some people have more votes than others – on a small island and then you’ll have some idea of the complexity. Imagine that as the island becomes successful it grows, more land, more people (some with votes, many without), a few ambitious barons and yes, you have idea of the increase in complexity that follows initial success.

Now, many small businesses take on partners to dish out shares because at the outset when they are worthless. Well here is the bad news, as soon as the business is worth something, then you’ll need all the rules and constitution of a small island.

Yes, after an intial success, your business will almost certainly fail if, for instance, you have some partners or shareholders on a free ride whilst other are working their socks off.

Of course, if you are raising 10m GBP or US Dollars, then you’ll need partners, shareholders and a constitution – but at least you can now afford the lawyers to set it up and run it correctly. Anything else is a massive distraction to be avoided like the plague.

4. Reward people for great work with more work (not profit share, stock options)

Okay, mistake number four; you’ve got your partners and handed them large chunks of shares, now you’ll be thinking about giving more shares to your employees. C’mon, this does not make sense.

You reward great work by paying on time and a renewed contract. Simple. Why pay a second time in the form of share options?

Share options distract your team from growing the underlying value of the business and encourage them to see a quick sale on a hyped up valuation. The result? The business will take on massive risk in order to grow as fast as it can whilst also massively increasing the risk of out right business failure.

Of course, the option holders don’t lose out if the business fails, they just move onto the next opportunity. It is the original shareholder(s) who lose out. Therefore, the incentives of a shareholder / founder and an employee on a stock option deal are in conflict and yes, poor decisions/ risk management is what you’ll end up with. This is a recipe for failure not for success.

5. Don’t forget – it is all about product, price and perception – nothing else matters

Hopefully, you’ll now be ready to buy into the idea that debt, fixed and inflexible costs, shareholder partners and stock option incentives are a route to business failure. The essential problem with all of these is, that whilst they can all be resolved by patient management, they are a huge distraction from what really matters – product, price, perception and the sales that come from that.

Now, partners, shareholders, fixed costs and share options all have their place in large or very large ventures – or those that are funded by Venture Capital. They just don’t have a place in small, innovative start ups.

So, the biggest cause of small business failure is the inability to focus on what your business does.

So, focus on price – that means, deliver the best price whilst producing a profit and constantly drive your costs per product down so that you remain competitive and can grow. Equally, a program of constantly enhancing and improving your product is critical too.

Customers will stay with you if they see the product they buy gets better – whilst the price remains static / low or even better, falls. Lastly, this will allow you to concentrate on the perception your customers have of your business and your products and services. Now, you may think this is about marketing, and it is, but not big advertising and promotional marketing. Instead, it is all about how your customers – current, previous and future – think about your business, products/service and customer service.

Another way to think about this is to simply call it innovation. You need to innovate, constantly and re-invent your business, products and services. Look, great pop stars such as David Bowie, Madonna etc have done it all their career. You need to do the same.

Conclusion?

So, the cause of small business failure is largely down to an inability to focus on what matters – product, price and perception – which is often caused by a mix of debt, rigid costs, partner/ shareholder complexity, share options.

This ability to innovate around your business or technology or what ever you do is the key and is the result of being able to avoid the key reasons for small business failure.

So, let’s learn from these mistakes. Innovate and avoid these things and focus relentlessly on what matters.

Does it's singular purpose make it successful?

Why do you have a website?

Is it because everyone else has one, so you thought you ought to have one too?

Anecdotal research tells us that 80% of websites don’t have a clearly defined purpose. So, if you’ve made the classic mistake of building a website and are now wondering what to do with it, or even, whether it works, then read on…

What is the purpose of your website?

In our last article, we talked about the cost of a visitor to your website, and how this can vary from a couple of pence or cents to anything up to 10 GBP or over 15 US Dollars (such as the UK Government’s www.UKTradeInvest.gov.uk website).

Whilst this information on costs shows a massive variation, could it be that the 10 GBP per visitor cost to the UKTradeInvest website is money well spent? Well, perhaps it is, but firstly, this will depend on what the website is for, or put it another way, what the website is attempting to achieve.

In a similar way, if you were asked ‘what is the purpose of your website’ would you be able to give a clear and confident answer?

To help solve this problem, we’ve taken a look at the web and can come up with this list of reasons or purposes for any website. Which of these purposes fit your website(s)?

• Digital business card (make the phone ring – could be a one page site with you phone number on it)
• Digital brochure(static content and generate enquries – might be anything from a 6 or 8 page site )
• e-commerce (to sell products online – which will a database driven website)
• Magazine (to promote corporate messages, update on relevant news, demonstrate brand values, generate brand loyalty or to sell advertising and membership services – such as this one or www.EnterpriseFreelanceFair.co.uk - and requires a CMS or Content Management System)
• Community(to allow community to connect to each other – independent of the media and either promote your corporate messages or sell advertising such as LinkedIn or Facebook etc… but could also include smaller communities – such as teachers)
• Deliver internal or service data (so a corporate intranet, an added value customer service site – such as DHL giving real time tracking of a parcel or a Government website – with the purpose of improving your product/ service)
• A redirect site (if you buy a .com and a .co.uk domain, you’ll want to redirect one to the other, or you may set up a corporate home and redirect traffic to your sub-domains, a bit like www.MediaModo.co.uk)

Okay, let’s take some examples. www.DHL.com – this site combines a number of the above purposes - so it is a corporate brochure, an e-commerce site and also it delivers data about the movements of your parcel or shipping.

Equally, our favourite high cost site www.uktradeinvest.gov.uk (which costs 10 GBP or 15 US Dollars to run) is very complex and appears to attempting to deliver the purposes listed above – it is a brochure for the UK, it is attempting deliver information both in magazine format as well as a data driven service. It also appears to have a community aspect to it too with login and restricted parts of the website.

Now, we don’t know the cost metrics of the DHL website, but given the size of its business and customer base, the costs are probably a lot lower per visitor than the UKTradeInvest website.

Other sites, such as www.number10.gov.uk (which only costs 2p or 3c per visitor to run) have a very simple purpose and that is a Magazine to promote corporate or Government messages.

So what can we entrepreneurs learn from this?

Again, we don’t have access to the ROI (Return on Investment) measures for the different websites, but it is absolutely clear that the web lives up to its promise of being cheap and simple if – and only if – you build websites with a single purpose – such as the www.number10.gov.uk website.

Once you go beyond the singular purpose,  and if your website begins to manage multiple roles and has a number of different purposes it will become very complex (and anything complex has a higher risk of failure) and much more expensive per visitor.

If you are a large company with a large number of customers, then the complexity may pay for itself on a cost per visitor basis. But if you are not a DHL, but just an inward investment agency or national based business, then the costs will be too high in most cases.

The advice then, if you want to build economically viable websites with multiple purposes and don’t want to pay 10 GBP per visitor, is to create separate website for each purpose and then a single / central brand brochure website which directs traffic to the correct website.

There is still some work to be done on multiple domains and subdomains – but this will cost far less than then integrating complex ‘heavy lifting’ computer systems into a single domain / home page.

The alternative, again, if you don’t like this complexity (and its associated cost) is to make a radical decision and choose just one purpose – then build a website that meets that purpose.

That - single purpose websites - after many years of getting it wrong and thinking the web is a complex place, is what successful entrepreneurs are now doing. So, do you now have a clear purpose in mind for your website?

How much does this visitor cost?

Do you know how much your digital visitors cost?

Well, if you are working for the UK Government, you will now know how much a single visitor to your website costs – and it can vary by a factor of 48,900%.

Yes, that’s right, the cost of visiting www.number10.gov.uk cost just 2p per visitor – compared to the cost of visiting www.UKTradeInvest.gov.uk which cost £9.78 per visitor.

You can read more about the analysis provided by the Guardian’s data blog.

How can you use this data?

Well, the first question to ask is whether the £9.78 spent on a  visitor to the UK Trade Invest site was good value or not, compared to a visitor to the Number10 website – costing 2p.

We could at this point fall into a lengthy discussion about time spent on the website and therefore, the quality of the visit – but I think that we should approach this a different way.

Firstly, a Number10 is essentially a PR/ News selling site. That is, its function is to push a set of news stories in a way that is beneficial to the UK Government. If it can successfully influence the media agenda, then it is doing a good job.

Equally, the purpose of UKTradeInvest is to bring investment to the UK or support exports. A single investment could be multi-million pound – and therefore, the site is selling a key product – trade to or from the UK - to potentially very high end users.

Okay, let’s look at the costs. Number 10 spent 400,000 GBP on its website last year – that’s around 30,000 GBP per month – or the costs of a medium sized magazine.

On the other hand, UKTradeInvest spent 5,000,000 GBP on its website last year. Now that would pay for the print, distribution, editorial and production of 25 copies of the London Evening Standard. On Editorial costs alone, it would probably get you a 64 page daily newspaper for most of the year.

So, let’s get back to the value argument – take a look at www.­uktradeinvest.­gov.­uk - which will immediately redirect you to a different domain name. The site’s home page – looks cluttered and static. Clearly there are logins and databases behind it – but it looks really hard to use.

It is quite possible that UKTradeInvest has spent a lot of money developing tools – but the figures suggest that no-one is either finding or using those tools. Perhaps because no one really want them?

Take a look now at http://www.number10.gov.uk - and you can really clearly see what this website is about – and why you might want to browse or come back.

The point then is this – very high visitor costs are probably a sign that readers/ browsers simply aren’t engaged with your website. Perhaps this is because it is dull and static (like the UK Trade Invest) or more probably, people/ visitors don’t really know what to do when they get there.

And this brings it all back to the strength of the brand!

To make your digital business work – or any business which relies on digital communication – you need to clearly define and understand the message you want to communicate – then deliver that message and as a result build a strong brand presence.

If you fail, you’ll end up with exceptionally expensive websites that aren’t being used.

So, let’s go back to our brands – and let’s review what we are trying to do – and let’s see if we can achieve a cost of 2p per visitor?

By the way, average time on the site – per visitor – for Number10 is over 5 minutes. UK Trade Invest achieves 6 minutes. Both of which are high scores, but I’d rather be paying 2p per visitor – wouldn’t you?

So what do we do?

Let’s use this information then to set some goals. Websites that cost 2p per visitor and where the visitor stays longer than 5 minutes are a success and will be a clear sign that your have a strong and clear brand and are delivering your website to a high quality relative to the cost.

New start-up digital businesses are going to take some time (or get very lucky, quickly) to reach these kind of figures – but this does set a goal for what we should be aiming at.

Now, would we be willing to share data about the cost per visitor to our websites? Hmm… there’s a tricky question. Answers below please…

In some ways this is good – as it is a fast growing sector with very high levels of innovation (and failure rates). On the other hand, it means that we see the same errors of strategic business thinking repeated again and again.

So, to help out, I’ve laid out the three key mistakes that I’ve seen after 11 years working in digital innovation.

You may have some of your own – so please feel free to contribute.

1.) 1 in 100 Chinese customers

Many business plans start with this fallacy. They begin with the population of the world, or a country or a business sector and then say – ‘if we could only get 1% of that market’ then we’d have a business worth £x million.

Of course, this is designed to make ‘1% of that market’ sound tiny. But this is because you are working top down.

Take China for instance. The population is 1.3bn people. Okay, so 1% is 13 million. Is that a lot? Well, it is greater than the population of London. It is around half the UK’s working population. 13 million is also around about the peak level of TV viewing in the UK of the England vs Slovenia world cup football game.

So, when a start-up business begins with a huge numbers and asks if you could take just a tiny part of it – 1% say – they are making the mistake of working from the top down.

Instead, it is better to ask, what does it cost to gain a single customer? From which you can then ask what it would cost to reach 13 million viewers – well advertise around a major England football match – but to win 13million customers is going to require constant marketing and conversions of leads from your advertising. To give you an idea, a single 30 second TV slot reaching 13 million world cup fans would cost £300,000.

The error then, is to work from the top down. Begin, always, with what does it cost to acquire 1 customer? And then argue whey you customer acquisition costs will reduce as you gain size and momentum.

2.) If I build it – they will come

This is the Google error. Okay, okay, Google had one massive success – the search engine – and ever since, every product has failed to deliver or failed to dominate its market in the way that you’d expect the Internet giant to do, given their brand reputation and quality of engineering.

Take a look at this great article about why Google projects fail – and you’ll find that it is because Google does not do marketing. Amazing really, as their income is entirely dependent on classified advertising that they themselves don’t do marketing.

Apart from one success, Google has delivered many greatly engineered products – but doesn’t lead the market in any of them.

That is because Google still believes that if they build it – the customers will come. Well, that simply isn’t true for anything but the most ground breaking of products (such as search). All the other products are great - and could be excellent if they included marketing.

So, why don’t business start-up entrepreneurs include the marketing? Well, simple – because the costs are huge! And, if fully costed, probably make the idea untenable.

Therefore, the successful entrepreneur has two options – reject the business idea – or do it anyway, but use stealth marketing. That is use the new (and therefore) cheaper channels – such as PR or social media or digital marketing – using freelance contracts. But you do need to be very good at this.

Either way, for consumer products, marketing will be 50 to 60% of your costs (okay, this may include commissions to 3 parties) and for industrial products, this might drop to 15 or 20%.

Nevertheless, fail to include enough marketing spend, and unless you have an utterly amazing product, you’ll end a failure.

3.) I haven’t built anything, haven’t done anything but if you give me lots of money, this will all change.

You may laugh, but this is the most common mistake.

Often it comes from someone who is thinking in a corporate way – ie. build the plan and then persuade – rather than an entrepreneurial way – ie. let’s have a go and see what happens / we learn (but without spending too much money or time.

The difference is massive.

One the one hand, you have a highly practical ‘go out and make it happen’ approach – which whilst it will be messy, will actually deliver some results. And those results – either good or bad – can be used to devise the next step in the business strategy.

On the other hand, you have a planner who shows no sign of being able to implement something on a tight budget.

Now, no matter how much cash you raise – your budget will always be tight in an entrepreneurial start-up business. In fact, if you can’t run a tight business, you shouldn’t set yourself up as an entrepreneur.

So, the reason that so many business plans don’t get cash – is because they don’t get started. Investors and business angels want to speak to your customers to see if you are any good. If you don’t have customers – there is no one to speak too – and the risk level on your business idea goes through the roof and the investment cash stays in the pocket.

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What do you believe are the biggest start-up mistakes? Let us know by adding your comments below….

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Doherty’s approach was simple; when asked about his target audience, he explained that he used social media to encourage loyal customers to assist him in building his connections with major retailers.

Mr Doherty’s company now supplies all major supermarkets with his jam, and he credits his social media marketing approach for his success. So don’t underestimate the power of the digital world.

Can you do this?

Okay, we know the answer lies with outsourcing – but how much can you outsource and how do you do it safely?

Here are our 7 key tips for successful entrepreneurs… 

1. IT support should be outside of your company in most cases. If you are concerned about access to IT support staff, hire a local company. If a problem occurs, you can always take your machine over to their office or meet them for a coffee.

 

2. 80% of your total marketing staff costs should be outside of your business. If your internal marketing team are ‘doing’ marketing rather than ‘co-ordinating’ then you probably have an opportunity to increase productivity

 

3. Human Resources and training are probably outside your company already, if not, then this is an obvious next step. HR is a highly sensitive area and the laws keep changing. So, you need a specialist who spends 5 days a week on this topic and can also turn up in your office at short notice (staff problems are always at short notice), hence, resource this skill locally.

 

4. Finance – you are more likely to in-source finance help – that is, ask a bookkeeper to come and help you prepare your monthly accounts in your office. You can arrange this yourself, or you may prefer a freelance Finance Director to do this for you. In some cases, the Finance Director will actually do the books for you – this makes sense if you have very few items or are setting up your accounts

 

5. If you are contracting with senior freelancers, don’t forget that many will also carry out more junior activities (such as a Finance Director will do bookkeeping) at a lower rate – so you don’t have to pay their full rate for everything.

 

6. Write your stop doing list. This is the list of things that you are no longer going to do because they no longer work, but you’ve kept on doing them hoping they might start working again. Some things just stop working – so accept it, stop trying it, and move on.

 

7. Find a way to meet more local freelance talent faster. Find a local event – such as http://www.enterprisefreelancefair.co.uk where you can meet 40 or so freelancers in a couple of hours. Event such as these will massively increase your flexibility and are a great way to find new, more productive, ways to innovate and grow your business.

 

Feel free to add your own tips below….

Sticky going...

What shall we call this period – between the first recession and whatever is to come in the form of substantial public sector cuts and reductions in government spending?Shall we call them the treacle years? The years of trudging along with heavy boots - just about keeping the forward momentum of your business but demanding constant and focused effort?

Sometimes it seems that way.

Okay, so how do we first survive and thrive in the treacle years?

Here are my 5 key tips – feel free to add yours at the end…

Firstly, it is important to recognise that the stodginess of business isn’t your fault. That’s good, so we can stop beating ourselves up about it.

Secondly, having accepted that there is a limit to what we can do, we can start to focus on our spending or cash burn. If you have enough cash for another 12 months – find a way to make it last 24 months. If you have cash for 2 years – see how you can make it stretch to 4 years.

Thirdly, recognise that you need to find new markets - those markets that have some growth in them. We live in austerity times, so austerity products at austerity prices work. Equally, some luxury sectors are growing fast too – because whilst customers cut back on everything else, they still want some treats.

So, your task is to find the growth sectors and move into those sectors.

Fourthly, innovate. Innovation isn’t expensive – if it is, then something is going wrong. Instead, innovation is about a mindset – about a desire to improve things – and use the fact that you have little or no money to find really creative ways to innovate.

Fifthly, put back your retirement date by five years. By giving yourself another five years you’ll create a little thinking space which will help the creativity and also you’ll ensure that you are planning for a marathon and not a sprint.

Lastly, learn to love the taste of treacle. That means, become really really good at what you do – so that you can charge a premium for it – or your products – and make a profit and grow market share.

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Got any tips for surving the treacle years? Feel free to add them below
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In this first video of the 7 point plan, Lewis deals with three key points

1. We are now learning to live with tough credit terms (as per pre-dot.com boom)
Lewis talks about the forecasts that net lending will remain negative until 2011 and that the new credit terms are here to stay.

2. Our markets appear slow but actually, most markets are shrinking fast, with a few growing quickly too
Lewis discusses how mature markets are getting squeezed either by lower prices which maintain demand, or higher prices coupled with much lower demand – both of which means shrinkage of market for most businesses.

Equally, there are a few key sectors which are growing rapidly, digital media, freelancing, green technologies etc… and that successful business needs to be connecting with if it is going to achieve growth.

3. And the Good News - slow or no competition (no one has any money, which makes it easier to start new ventures….)
Lewis agrues that the old notion of “early mover advantage” is gone. In this business climate it is more important to take your time and get your proposition right.

…click here to watch all the videos from the 7 Point Plan – How to Grow Your Business in 2010..

Ernst & Young's says Get Agile

I recently got sent a link to the report that Ernst & Young launched at Davos earlier this year and it has some important lessons and advice for successful entrepreneurs – you’ve got to become agile.

Davos, you may already know, is the economic summit attended by global CEOs and world economists to discuss the current major business and economic trends and therefore the issues facing their global businesses.

So, essentially, this is top quality stuff – but the question remains – what value or use is this for small and medium sized businesses (SMEs)?

The answer is that what affects our big brothers will impact on us, the successful entrepreneurs, too – only, traditionally, SMEs get to find out about it later. Often, a lot later….

So, interpreting the Ernst & Young report – what can we decipher? Quite simply – if you want to grow your successful business then you need to build agility into its DNA.

Steve Howe, Managing Partner, Americas — Ernst & Young said “leading organizations need to look at talent and the value of different perspectives in a new way to drive innovation, mitigate risk and support new ways to achieve success.”

Mr Howe is encouraging established western businesses to find new ways to drive innovation and mitigate risk. And, in his view, this requires a new way of looking at talent – or perhaps our staff and teams.

Okay, so, we are right back to the issue about people – it is what makes or breaks a successful business. And what the EY team are really saying is that we have to find new ways to engage that talent to bring new perspectives on our businesses and find ways to innovate with lower risk.

How do you do that then?

The most effective way to acheive this flexibility is to create and use flexible pools of local freelance talent.

Also in the report, Donald Sull, Professor of Management Practice at London Business School, expressess the idea that establshed/ western business have high absorbtion rates – that is they are able to weather shocks with a protected core market, diversified cash flow, a strong brand or long-term customer contracts.

However, the risk is that new companies growing up in the large emerging markets (India, China, Brazil for example) have a a much great agility which is what allows them to spot and exploit new opportunities.

He says “companies from developed countries, by and large, have the advantages of absorption — size, established brands, technology, diversification and so on,” however. “lacking these advantages, emerging-market firms typically rely on agility. To me the striking thing is how fast agility can trump absorption.”

So, what Professor Sull is saying is that the emerging market business will thrash the established market businesses – unless those businesses can become agile!

Let’s put it another way – your business will go bust if it doesn’t become agile.

Okay, so getting back to agility – how do you do it? Well, as we said in the beginning, draw in a different perspectives and innovate with lower risk. How do you to this? The only way to acheive this must be to open your business up to more people with a wider range of experiences, whilst reducing the risk.

The only way I can see to do this is to engage with an expanded pool of freelance or outsourced talent – who can get to know more about your business and who are given more opportunity to innovate for you.

I put this to Richard Burton, Brand Strategy and Development, Ernst & Young Global Marketing and he told me

“Finding a way to embrace and leverage flexible freelance talent seems like a very smart thing to do”

So, there you have it.

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Looking for more tips on how successful entrepreneurs can grow their business? Check out our 7 Point Plan to Growing Your Business in 2010…

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In addition to the known cuts, the events in Greece and Europe have put further pressure on Governments (especially Spain and Portugal and hence, implicitly UK) such that cuts will come faster and sooner then previously expected. Successful entrepreneurs are already preparing for an increase in business failures and a loss of national business.

Where Might Your Business Goal Take You?

Guys – it is time to ditch the old ‘build a business and sell it for zillions’ goal!

Just as easy credit has passed into history so too have the dreams of becoming instant dot.com millionaires as a result of a few lucky breaks and some unknown buyer waving cheque books.

As most successful entrepreneurs know, it doesn’t really happen like that – unless you are incredibly lucky.

But, it is a common battle cry from entrepreneurs that they want to sell their business for £5m in 3 years time – or some similar sort of goal.

This type of goal seems to be partly a response to the need to ask for funding – which inevitably invites the question ‘why would I fund your company’ to which the prepared reply can be ‘because I’ll make you rich and here is how…’

So, now that the old credit flows have dried up and we are living a more chastened business life, what kind of business goals should a successful entrepreneur set him or herself?

This is a tough question.

Okay, it has taken me about 1 year to come up with an answer – and here it is

£1.5m / 10 / 3

Okay – it looks simple, it seems simple, but what on earth does it mean?

Well, it is a ratio.

It is a ratio that ensures that the business is strong, sustainable and adaptable – it has the flexibility to adapt to abrupt economic impacts or changes in customer behaviour.

To explain – the first number – £1.5m – in this case, is the annual revenue or turnover.

The last number – 3 – is the number of employed staff. Now, I include myself in this – and you should include yourself too. So, that leaves two more staff – one of whom will be your right hand man/ woman and probably a very able PA/ Marketer/ Credit Controller / Fixer – who can help hold everything together.

So, what is the middle number – 10? Well, that is the number of equivalent staff (including the 3 actual full-time employees). That is, the number of freelance or contractor staff based in your office or at home that regularly provide you with 5 full days work per week. Now, probably you’ll have 15 to 20 part-time or periodically hired contractors – but these are equivalent to 7 full-time posts – which make 10 in total.

Right – enough of the explanations. Why?

Simple, the goal is to build sustainable businesses with strong market positions, great products and a really efficient and effective way of delivering them.

If you have revenue of £1.5m and an equivalent full-time staff of 10 – then you have £150k per revenue per employee. So, unless you are paying exceptionally high wages – on average – then you have a strongly profitable company.

You also have the flexibility to grow the company to £3 or £4m – or if you lose a contract to temporarily reduce to 8 or 5 full-time equivalents.

With a broad and experienced freelance workforce, your business can respond to changes in the market place with minimum difficulty and equally, be ready to exploit any opportunity that presents itself.

You now have a fantastically strong company. And, one that will be very easy to sell – because you have minimum employment issues and it is highly portable – so the new owner can pick it up and merge it into an existing office.

Your business sale costs will be low – because the legal due diligence will be simple – and most importantly, your business sale has a much higher chance of going through.

Best of all, because you have a highly flexible business, it is unlikely that you’ll be the exhausted / flaked-out entrepreneur desperate to sell – so you can sit tight, happily, and choose your moment to sell.

The point is that no matter how your business grows or shrinks (as it will) your job remains the same – to keep the same ratio. So…

£4m / 20 / 6 is good too, as is
£1m / 6 / 2
£0.5m / 3 / 1
etc…

So, the new goal of successful entrepreneurs is no longer to sell for £zillions, but to build sustainable and strong businesses – and then let the dividends roll in while you wait for a preferred buyer. And so long as you keep focusing on this ratio – you’ll be fine.

The great thing about this ratio is that it tells us one other thing too – that is, you are on your own until you get to £500k turnover – and only then do you think about a second full-time employed member of staff.

In the meantime, get building your local freelance talent pool. Your are going to need them.

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You can learn how to grow your business in the 2010 post credit
crunch environment whilst building your local freelance talent resource
at the Enterprise & Freelance Fair. Event are taking place in Chester,
Warrington & North West, and West Midlands.
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ps. If you subscribe to the slightly tougher view that entrepreneurs should never employ anyone, then just put your ‘full time’ staff on long term freelance contracts. The effect is the same – continuity – need for a small office space – etc…. but the flexibility remains.

Seven Point Plan

The credit crunch is hardly over, but at least we can now focus on how to grow our way out of the problems we are in – rather than worrying if everything was going to collapse.

So, in this new credit chastened environment, how do you, the successful entrepreneur, grow your business in 2010?

To help, here at Rags to Wreckages, we’ve put together a 7 point plan on how successful entrepreneurs are moving ahead and starting to grow their businesses again this year.

Each point of the plan will be an individual video clip and we’ll make that available to newsletter subscribers early next week.

So, if you want to get access to these videos on what you need to change, what you don’t need to do and what successful entrepreneurs are focusing on, click here.

Three special questions every successful entrepreneur asks

Successful entrepreneurs are constantly asking three key questions –

1. ‘what isn’t working’
2. ‘why isn’t it working’ and
3. ‘can I do anything about it’?

These three questions are the most important questions in the entrepreneurs vocabluary and a lifetime can be spent on developing the skills and abilities to answer those as successfully as possible.

So, what might these questions mean in practice? Let’s have a look…

Well, you might say that the European labour market isn’t working. That is, unemployment levels are much higher than in Asian countries or the US and the long term unemployment rates are far higher too. Why isn’t employment working? Well, mainly due to taxes, costs and the bureacratic burden of employees.

But is there anything you can do about this? Well, taxes are political – so let’s not go there – but knowing how the structure of the labour market works means that companies would be attracted to simple and cost efficient ways to hire staff. So, the freelance and contractor sectors of employment are the growth areas. And, therefore, can you build a business to meet this increasing demand?

Another typical complaint – house prices – might lead to a different answer. That is, house prices in the UK are very high – relative to earnings - and therefore it is hard to sell your property and move to another. This has all sorts of macro-economic disadvantages, but leaving those aside, it has lead many entrepreneurs to believe that the solution lies in either a direct sale approach to house sales (ie. cut out the agent) or a digital online database (property portals).

Now, let’s ask why houses don’t sell easily in the UK? Well, high price is one reason, but is it the agent? Evidence todate of 10 years of would be websites dedicated to cutting out the no-win/ no-fee agent – and replacing with a fixed adverting charge have failed to make any inroads into the market.

In fact, as it becomes harder to sell property, so it seems that the commission motivated agent in the middle is critical to ensuring that the two parties agree and close the deal.

Equally, the rapid proliferation of property portals suggests that property sales are going online? But no… instead, property adverts are going online – but the quality of those adverts is poorer now than before. Why?

Well, the agents treat the property portals as an advertising cost and therefore, don’t want to display all their stock at once – only those properties most likely to generate sales leads.

Hence, the all comprehensive promise of property portals is falling apart and anyone wanting to buy a house now has to look at multiple websites to see what they might buy.

It seems that property and property sales are – once again – returning to the existing structure of buyers, sellers and media used to generate leads.

Hence, it seems that business plans dedicated to changing the way that we buy and sell our houses have failed.

Now, the quickest way to make houses easy to buy and sell would be to cut their price in half – and that could be achieved by a massive increase in the availability of cheap land. Ah, back to politics then.

So, as we all agree, there is something deeply inefficient about how property is transacted. But there isn’t an obvious way to change it – other than by radical politically lead reform. Which isn’t easy either. It is a bit like capitalism – it is the least worst system.

The risk is that many young entrepreneurs may spend too much time (and money) attempting to make perfect an imperfect system.  Sometimes we just have to accept that there is ‘nothing much we can do to help’. If so, then find out fast and move on.

You see, often the successful entrepreneur is portrayed as someone who never gives up – where as, in fact, he (or she) may simply be willing to give up faster – and therefore find something that works quicker.

If you perfect the use of our three special questions then you’ll get there faster, waste less money and time and achieve a greater result.

The survey also claims that 85% of UK companies are either average or poor at managing change. Is that why we need fear to drive us to do something about it?

This explains why the current owners will also meet £9m worth of liabilities as part of the sale.

However, the key is that it shows how long term liabilities can sink a business. How on earth did the independent get it self into this state? Probably by negotiating cheap print deals in return for long term commitments? And, of course, staff redundancy costs and office leases…. Time for a new way of doing business – contractors and freelancers and short term contracts, anyone?

Firing the old guard?

Luke Johnson, a successful entrepreneur, wrote in the FT last week that it is important to fire your existing management team if you want your business to discover reinvention. He says that gradual revolution is not enough and that when systems are broken small steps won’t work.

Whole swathes of businesses no longer work the way they used to. Book publishing and local newspapers are at the top of the list, but other business such as estate agencies, state education, financial services are all looking for new ways to do things.

We are not looking at a gradual revolution here - we are looking at business models that no longer work.

What does the successful entrepreneur do?

So, in these situations, how does the successful entrepreneur respond? Fire your management team, says Johnson.

In effect, the proposal is that you should remove your entire management team that was linked with the old business model. Why?

Firstly, turn around situation are short on time and demand decisive action. This is hard for anyone to implement, but particularly hard for a management team that have been working hard to save the existing model – or adapt it gradually to the new circumstances.

Therefore, existing management is weakest at performing major surgery.

I saw this happen in my previous business, where it was extremely difficult to get the existing teams to accept that things had changed radically and a more direct approach – removal of all management – might have brought about change faster.

Secondly, management is probably your most expensive single cost in a business. Yes, I know we all say that staff are your biggest cost, but actually, it is probably the management that is the largest part of that cost.

Thirdly, removing management shouldn’t affect day to day operations – at least not in a situation where the business volumes have shrunk.

Therefore, your front line customer facing and sales staff remain.

Lastly, your management team is paid to develop the business. In situations where radical action is required, the existing management are actually poorly positioned to do this because of the legacy and deep relationships they have built up with co-workers.

Contrary to popular thinking…

Contrary to popular thinking then, your management do not become more valuable as time goes on – but become more and more wedded to doing things the old way – or a gradualist process of change. Therefore, a management team with years of experience is not such a great asset after all and may become a liability when markets change quickly.

Indeed, if you yourself the entrepreneur are ALSO part of the management team, then you also need to fire yourself!

So, how do you fire yourself and the management team and expect the business to survive?

Okay, this simply isn’t going to happen - because you have set the business up wrongly.

Hand over – Mr(s) Successful Entrepreneur…

Therefore, instead of the entrepreneur growing with his or her business, he should aim to hand it on to managers very early on whilst still on an early upward growth path.

This allows two things

1. you, the entrepreneur can start new businesses and bring that experience via a board role in the business back to the existing enterprise

2. you, the entrepreneur are still available should a clean sweep of management be required

Now, if we set out to run and grow our businesses in this way, then we have the capacity to implement a clean sweep of management. Then the entrepreneur take control for a short but intensive time whilst searching for the new revenue model, whilst also developing the next generation of management for the new model.

Of course, the entrepreneur then has to leave the nest and go and do something else.

Therefore, entrepreneurs must leave their businesses - either by selling them, or by handing them onto a management team. This action early on in the growth cycle is likely to give the business the greatest chance of surviving the next business downturn.

The only question we are left with is this – when is the optimal time for the entrepreneur to exit the business?

Let’s hope they are hiring these guys on a freelance or agency basis…

Google beats Yahoo? How?

Which is the better business Google or Yahoo?

Well, you probably are going to choose Google – and you’d be right.

But do you know why they are a better business? Again, you might say better products etc… and again, I’m sure you’d be right.

But how would you measure the difference?

Profit? No, because profit is an outcome of a successful well run business - it is not an indication of the quality of the business by itself. Equally, some businesses are cyclical – that means profits go up and down with the economic cycle – but there can be better or worse cyclical businesses.

So, a comparative measure against a peer? Yes, that is a good idea, but not one using profit.

Okay, let’s go back to our piece on how successful entrepeneurs can build a smart business. The essence of a successful business is an increase (over time) of revenue per employee. This measure shows that the business is getting smarter, whilst also getting bigger.

And, when you look at the chart between Google and Yahoo – you can clearly see the really smart business. And yes, it is Google. But…

… it is even more interesting than that…

The really interesting point in this graph is around June 2009 – when Google’s declining revenue per employee switched direction and began an upward path, yet again.

This change co-incided with Google deciding to drop a number of peripheral activities and give greater concentration to search. As Martin Sorrell said in the FT that ”Google is a much more dangerous company than it was 12 months ago,” he said. ”They are much slimmer. They are more focused on search and more focused on mobile search.”

So, it would appear that the improvement in revenue per employee is a clear indication of becoming ‘a much greater competitor’ and of being ‘much more focused’.

So, then, revenue per employee is a single measure that really does tell you how well you are doing. It goes beyond a sense of having better products and allows you to be judged next to your peer group and for you to track your (hopefully) upward path.

So, the holy grail of business is not a fabulous valuation, but an upward trend in revenue per employee. Create that and you truly have a world beating business.

Have we got our head in the sand over employment?

Tom Farmer, the entrepreneur who made his money with Quick Fit, a tyres and exhausts retailer and fitter, says that the bigger you are – the dumber you are.

In Mr Farmer’s view ‘the reason governments are dumb is because they are so big’.

So size is a real problem for both businesses and institutions.

Therefore, Tom Farmer is an advocate of the low employee business, which grows by outsourcing all the other services.

In a similar way, many entrepreneurs see their businesses become more vulnerable once they reach 50 staff than they were at 5. Why?

Simple, with a team of 5, you the entrepreneur, know exactly what is going on. Once your business reaches 50 you don’t know any of the detail and are entirely in the hands of your managers – who you may or may not be able to oversee and manage effectively.

The management issue you face with a team of 50 staff and perhaps 5 key managers is this ‘do I intervene and undermine my manager, or do I step back and let my manager get on with it?’.

It is also quite likely that whilst your managers had the skill to run a team of three or four people, they may no longer have the ability or experience to structure and lead a team of ten.

Tom Farmer says that when Quick Fit grew from 40 to 240 centres they discovered they didn’t have the management skills to run the larger business.

So what is the solution?

Your company both needs to grow by hiring talented managers and yet, at the same time, it doesn’t want to increase its size and become ‘big but dumb’.

So, adding growth by using outsiders, interim managers or freelancers is the solution. When new people come into the business they tend to have a fresh appraoch. Generally, good quality freelancers bring excitement with them for the new project and long term staff get invigorated by new influence.

Don’t forget that freelancers will recently have been working in other similar or comparable businesses or departments and therefore can share some of the good and bad things that they have experienced.

In this way, your business will become more efficient and more cost effective and you can avoid the loss of control by keeping your core team to less than 10 or 20 people – at least until your business has grown substantially.

And the measure is…

So, as with all things in business, we need to decide what we want to measure to ensure that we don’t become Big But Dumb. And the way to do this is to measure

….annual revenue per full time employee.

If, as your business grows, you generate more revenue per employee – then you are becoming smarter!

Whereas, on the other hand, if as you grow your annual revenue per employee declines, then you are becoming Big But Dumb.

The trouble is that when your margins slip in a Big But Dumb business, it is very hard to cut costs without also cutting profit margin and therefore your business quickly falls into trouble.

Whereas, if you build your business with a constantly increasing revenue per employee, then you will be able to react to market changes faster and smarter.

Therefore…

So, the conclusion, if you are still with me, is that you should only increase your full time headcount when your revenue justifies it. If your goal is to achieve £100k of revenue per full time employee, then until you have £100k of revenue you will remain an entirely freelance team. When you get to £1m you will have 10 employees and at this point, you might decide to raise the goal to £150k per employee. So no more hires until you reach £1.65m – the rest coming from expanded use of freelance, contract staff and agencies.

A goal of £150k revenue per employee will ensure your business is smart, fleet footed and able to react to the market and take advantage. And, of course, you will be heavily dependent on your ability to hire and contract with the best freelance talent in the market place.

That’s what Robert Craven says at
http://robert-craven.blogspot.com/2009/06/business-support-bsbis-industry.html

Lisa C Clark, entrepreneur and adviser

Is this the best single business idea that you will ever come across? We reckon it is pretty much up there with the best.

One working prototype and one paying, happy customer ==> testimonial + request for second product from second customer. The two happy customers and testimonials then create a third customer and so forth.

Telling prospective investors you’re in profitable revenue (even at quantity one) and that you have a production plan, know your costs and how to scale, puts you in a completely different light than telling them what you will do or want to do.

by Lisa C. Clark

Okay who is Lisa…

Lisa is a global strategic consumer+tech marketeer, with a balanced creative+analytical brain, entrepreneur/founder/incubator of interior design, speciality retail in gourmet groceries and global home imports, e-commerce Thinker Clothing(tm). Lisa is also a consulting advisor to start-up senior level teams – from tech and medical to a Chinese fashion brand favorite of Warren Buffett. She helps businesses define strategy and pitch for funding.

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Do you have a great single business idea? If so, please post below and we’ll pick out the best and publish it as an article.
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All it takes is a courageous decision

What makes an entrepreneur different from a small business man or woman?

Well, the best definition of what entrepreneurs do is provided by Peter Drucker. He said

Entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship. It is the act that endows resources with a new capacity to create wealth. 

Okay, so what does that mean?

Well, if you are selling your time just as a web designer, then you are not innovating. Yes, you are in business and perhaps you have increased the chance that you might eventually innovate, but in what way are you endowing resources (here the resource is time) with a new capacity to create wealth? Unless you are offering a new service, and then perhaps hiring a team of consultants to carry out that service, then you are not endowing time with a new capacity to generate wealth.

An alternative example might be to compare opening a burger restaurant which usually is closer to creating a job for yourself than it is to being an entrepreneur. This is because providing burgers for cash in a location of establish restuarants is not a new idea – although it might be commercially wise.

Yes, you may be meeting a demand and may even make money, but the point is that the demand existed before you built the restaurant. Your role is to satisfy existing demand.

Whereas, Apple is an entrepreneurial company because their new products create new demand. I am not an Apple customer, I have never bought one of their products for myself (neither iPod nor iPhone) but soon, I will be. Yes, I will buy the iPad and the result of their innovation is that they are creating millions of new customers including me.

Hence, being an entrepreneur is about creating a new service or product that wasn’t previously available, or rather as apple do, taking mixing existing technology with new technology and coming up with a radically different product. Or take the apple iPhone, it wasn’t the first smart phone, but it was the first smart phone to do things in the Apple way – and that stimulated huge demand. It created new customers.

But, don’t stop there, you don’t need to be Apple to innovate.

You could be running a burger restaurant and create new sauces and launch those sauces – that would be innovating. If they work, then why not sell them through the supermarket and create a food brand? Or perhaps you could write and publish a book on how to cook the perfect burger? Or perhaps you start to make turkey burgers or carrot burgers or something new and different that creates a new set of customers.

You might even be selling your time as a consultant and this has the potential to be entrepreneurial if you are offering original services. If you write a book about your method and sell the idea/ concept, then you can start to train other consultants on how to do it your way.

The difference then is both very small but huge at the same time.

Peter Drucker also said

Whenever you see a successful business, someone once made a courageous decision

This is another great saying because the small step across the divide of doing what everyone else does and doing something unique and new and going out on the streets to sell your new idea, yes, that takes courage.

So, have courage, do something new and don’t look back. That is how to get from running a small business to becoming an entrepreneur.

3Bs - Beg, Borrow and Barter

I’ve been asked to advise Liverpool John Moores University entrepreneur students on getting finance for their new businesses.

Controversially, my view on finance for young entrepreneurs would be, don’t.

Here’s what I would recommend:

a) avoid finance if at all possible and always for as long as possible – learn to beg, borrow and barter
b) focus on the ability to implement – not the idea
c) no one will invest in your idea unless you can sell – so what proof do you have of sales skills?

The only exception are silicon valley type VCs which invest heavily in ideas from untested entrepreneurs. If this is the kind of project and experience that you offer, then your best bet would be to catch a plane to San Francisco as this is extreme high risk investing and most investors are not willing to do this.

The essence here is that you have to be offering to create not only new customers (the standard definition of entrepreneurship) but also a new industry. But be careful, this is not as easy as it sounds – and many young entrepreneurs fall for this mistake. (See the business parable of the Rock that Wouldn’t Budge).

New industries don’t come along often, so, a VC is going to expect a high risk (or potentially very high risk) to the enterprise in return for a huge ‘google’ like return.

However, the more normal path to investment is essentially, don’t take investment in stage one, but look at investment in stage two and three – and what investors would look for at these stages.

You can define these stages as

1. Idea – pre-sales
2. Sales – pre-profit
3. Profit – pre-national or global expansion

If you approach investors at stage 1, then you need a track record because the likelihood of the idea failing is very high – and not least because you may or may not know what you are doing!.

The only way to reduce risk – once the idea is proven as new and potentially interesting – is to focus on the management team.

If you are still young and inexperienced and approach investors at stage one, then expect the investors to demand a majority stake for a small cash investment, which is a bad deal for you, and the investors know it.

So, any entrepreneur worth his salt is going to reject such a poor deal and work on the idea until sales are proven and preferably profitable.

At these later stages the young entrepreneur can already show a degree of resourcefulness and ability to implement. Now, you are no longer the greenhorn entrepreneur, but someone with a proven (albeit limited) ability to make stuff happen.

Hence, at stage one, you must begin by Begging, Borrowing from rich uncles and aunts and Bartering.

Learn the rule of the 3Bs – Begging, Borrowing and Bartering – first, and then you will find raising funds infinitely easier – not least, because you won’t need so much money.

Dr James Bellini

“The glue that holds the company together is trust” said Dr James Bellini, a forecaster of employment trends, and therefore not employment.

This statement stands in direct conflict with some of the comments expressed in response to my article ‘Entrepreneurs – never employ anyone’.

The reason that staff traditionally sought employment and employers believed that employment was important to ‘attract the right person’ is because that way of doing things has been deeply embedded in our society and well understood – it used to be the trusted way.

However, this doesn’t mean that a new contract for work can’t be established. The 1m official self-employed or freelance people now recorded by the UK employment Statistics is a clear sign that things are already changing.

The standard employment way of doing things also comes at great cost. Dr Bellini, director of the Talent Foundation,  made an extraordinary claim. He stated that only ‘4% of staff are located where they want to be’. A full 96% of staff would rather work in a different geographical location – perhaps closer to home, perhaps in another town or city.

Perhaps this explains the length of commuter frowns and stress of rush hour traffic? We are always in the wrong place desperately trying to get back to where we want to be.

So much better then to be a freelancer? And here, please note, the benefit is for the freelancer themselves not just the company that is hiring or contracting with them.

In Dr Bellini’s vision of the future ‘the company of the future will have next to no assets – having outsourced the technology and office’ and it will rely in substantial part if not entirely on trusted freelanced or contracted workforce.

The issue that is left now for freelancers – is personal branding. That is, being able to explain to potential companies that might hire the freelancers skills or time what the freelancer can do as well as give them confidence that they can do the job well and deliver on time.

As students of branding know, the essence of a strong brand is trust.

Ah yes, and that was exactly what Dr Bellini said in the first place ‘the glue that holds a company together is trust’.

So, perhaps we can see the future of freelancing as a series of strong trust based personal and agency brands working with other partners in a larger organisation.

The future of freelancing then, is the future of brands – and for a freelancer to build trust in his personal brand he will need to develop and deliver trust. To do this, he will need to deliver his projects on time to budget and keep his client happy.

The freelancer in this world can not walk out on a job. He can not call in sick to take time off and go and watch a football match. He can not drop the project and take another – without seriously impairing his brand and affecting his ability to secure future contracts.

Therefore, the freelancer is motivated to keep the client happy in a way that the employee is not.

No wonder that business strategists forecast that companies and successful entrepreneurs will be able to build better and stronger corporate brands on the back of a strong, experienced and highly trust worthy freelance resource.

What a huge business advantage this will be for the entrepreneur or business manager willing to encourage the freelance model in his or her work force. And, for the freelancers, what a great place to work.

Click here to listen to Dr Bellini’s interview with the PCG.

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This series on the future of freelancing was inspired by the PCG’s National Freelancing Day held on 23rd of November 2009. You can find out more about the PCG here.

If you want to receive updates of future articles in the Freelancing – the Future Looks Like This series - then please join our newsletter and also get the first chapter of Rags to Wreckages free.

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Will Hiring Freelancers Lead to Success or Failure?

…that you have to hire the best. … and hiring the best means you have to offer the full time employment – the best package – a full time employment contract and for CEO’s golden handshakes to welcome them and golden parachutes should they fail, share options if they don’t etc.

And therefore, you might think, if I don’t offer a full employment contract why would they ever leave their current employment to join my organisation?

Let me be blunt about this. This is rubbish. People will join your organisation mainly for the opportunity and excitement you offer – much less for the terms of a contract.

Here are six reasons why freelancers are better than employees;

Firstly, freelancing and contracting is more fun and the freelancer earns more money. The freelancer gains by being treated as an equal – they are in business too – albeit for themselves and the relationship between you and the freelancer is a much more grown up one. No longer do freelancers expect you to provide for them – as a parent might to a child – instead, it is a relationship of equals. This benefits the person hiring the freelancer just as it benefits the freelancer him or herself.

Second, freelancing and contracting allows your team to work on projects in natural bursts. It is more like going to college, you work hard or very hard for 10 or 12 weeks to reach a goal or set objectives in that term or timester. Then you take a break. I haven’t seen any studies, but I believe you could argue that it is more natural for us to work like this than to be expected to work week in and week out. Thinking about this a bit more, our ancestors used to work according to the seasons and this required short bursts of activity – sowing and harvesting being the busiest times.

Thirdly, in the UK and European countries the first 6 months of a new job are pretty tenuous anyway as they just offer 1 weeks notice. When taking on a contractor you can offer 1 month notice for the first 6 months. This is a great deal for the contractor as they actually have far greater certainty (ie a month) than if they have a full time employment contract. The point about the contractual structure is that you don’t offer one month notice for ever and you don’t allow it be silently become two months or three months or six months as they spend more time in your organisation. This will make a considerable difference if some relocation is required.

Fourthly, freelancers who leave your organisation can and do come back – if they enjoyed their work with you – and often come back more motivated and with a fresh set of ideas. This is great for both the freelancer and for your business.

Fifthly, not all brilliant candidates will fit your company culture. Think of football. How many times does a great manager turn down the offer of a great player because the great player wouldn’t fit into the team? It happens all the time. You are looking to fill roles in your company, that doesn’t mean you want the best player, you want the best fit.

Sixthly, men (or women) are as their times are. This is a line from Shakespear when a young soldier complains when he is told to carry out a contract killing. His Sargent replies that he should go and do it for  ’men are as their times are’. Often your ‘good’ people in a high growth company will become your ‘bad’ people in a sudden slow down. This isn’t because they have changed, only your company circumstances have changed and their motivations within the company and those circumstances may have changed out of all recognition.

A freelance or contractual structure allows you to let them go quickly and without fuss. The cleanness of the parting of the waves is actually a lot less controversial than you might think and allows you to rebuild the relationship with them later on, should conditions improve.

At the end of the day, you are looking for the best fit for the role you have now.  If you markets and products change, the role may well change. If you switch from high growth to low growth or a sharp decline, most of your people won’t fit any more no matter how good they were in the first place.

Lastly, if you have decided on an entrepreneurial structure then you need the best fit with that – enterprising people. And I can guarantee you they will not be standard employees looking for the apparent security of a standard employment contact, as that is the last thing either you or they want.

Employ or Hire Freelancers and Contractors?

Okay – here is a radical business strategy for entrepreneurs that some of you won’t like – and that is that you should not employ anyone. Please, if you disagree, please don’t switch off but take a moment to think about the argument… you can always respond below…

Work with people on a freelance and contractual basis – yes, absolutely, you simply must. You can even have an office or a factory if you must, but never sign a standard UK or European employment contract.

(I accept that employment law in the US is a lot simpler and so this does not apply to the same degree, but employment law is bad in the UK and terrible in continental Europe for the entrepreneurial business).

Here’s how to start. Find a Human Resources training company’s website and look at all the training you’ll need to go through to be allowed to hire people. Here are three I selected from the UK

1. Employment law, discrimination, grievance, discipline, dismisal, data protection, maternity, paternity rights
2. Conducting disciplinary investigations, guides to contract law, workplace stress, unions, guides to managing redundancies
3. Employment law insurance – for when you really mess it up…

Now, let’s compare all this to something we all know about – qualifying to drive a car. Well, in comparison if you thought getting a licence to drive a car was tough, this is 10 times harder and takes 10 time longer to master.

Of course hiring people is different from driving – you are allowed to do it before you pass the exam – but you’ll be sued and screwed if you don’t know and follow the letter of the law. So read through the websites above, the message is clear enough. Either you need to perfect employment law – all aspects, you never know when you’ll need it, or you need to find another way.

And, the worst of it is that the more successful you are then the more people you hire, the more work you need to do to comply with legislation. In other words, as you get bigger, so the burden becomes greater and employment law becomes stricter.

Okay, you might say, I’m in the UK and once my business gets to 50 staff, I’ll just hire an HR (Human Resources) person, won’t I?

Sounds good, but has two problems.

But ask yourself, why should you do this? This is an entirely bureaucratic role required simply because you are a growing company. It will attack your profitability weakening your company.

Hiring an HR person will also create an extra layer between you and your revenue producing team and confusion between your managers and the HR person about who is responsible for employee performance. This is truely dangerous.

Recall that in nearly all start-ups and fast growth businesses the employee costs will be the largest component and will probably make up 80% of your costs and be responsible for 100% of your revenue.

If your managers are going to be responsible for the costs of their division, then they must be responsible for the staffing costs – including the time and monetary costs of any disputes. This can not shift to a central HR person, otherwise you’ll find the the HR person is actually running the business, which is your job or your Managing Director’s job.

Okay, I’ll make it simple for you – follow this link to see employment law training and note the headline quote that:

“100,000 employment tribunals in the UK each year, costing British business more than £250 million”

So, not only do traditional businesses using traditional employment need to hire a full time HR employee – who will deliver no benefit, but you also now face the risk of time consuming tribunals that could result in loss of time and more cash.

Of course, an HR person will be brought in to develop your staff, but hey, this happens when you get to 50 staff and have a successful business. How is it we are sold the idea that the HR person now adds value? Instead your aim should be to stop corporate and legalistic rot setting into your business.

So, you have the costs of the HR person. You have the cost of the tribunals or at least defending yourself and you have the distraction from the goals of the business. If you must go down the employment route then I would recommend that you put aside an additional 10% of employee costs to meet this extra drain on your time and money.

However, how much better would it be if your managers had to learn to live with large pools of freelancers and contractors who could walk out at any moment? They’d become great people managers right? And isn’t that what you want?

If you follow this business strategy then throughout your business growth, your managers would have learned to deal with staff being available and staff not being available. Staff who didn’t want to work for them anymore would just walk, and you would immediately know there was a problem with your manager because there would be a staff shortage.

Also, your managers will have to develop large networks of talented and motivated people they could call upon in an emergence. Many of those people will have developed new skills by working elsewhere which they can regularly bring back to your company (and the best part is that you didn’t pay for the training course, nor the days out of the office to take the course, nor the manager to set up and purchase the course!).

In this scenario, where is the problem now? We don’t need an HR person to ‘develop’ our staff – our managers have demonstrated an ability to do this and our ’staff’ are actually freelancers and contractors who have an utterly different approach to work – they need to make each project work in order to get the referral for the next piece of work or contract or project. And, usually, they are improving and upgrading their skills on their own time under their own motivation.

If your managers can not develop and keep your staff, and by that I mean freelance and contracting teams, then they have no place acting or being paid as managers of staff.

If HR managers are so good at developing staff as is often claimed, then they should be hired as managers (on a contract) with a revenue or p&l responsibility and given the task of building and holding together a team whilst delivering good profit to the original shareholders and investors.

If the HR managers can not do this, then they have no place in an entrepreneurial growing business and that means you need to develop a different culture – one based on personal motivation and the freelance and contracting concepts.

You need your business managers to grow up in this freelance and contracting climate so that they can cope when the business grows strongly.

You do not, I promise you, want to trade your role as an entrepreneur to become an HR expert. You are an entrepreneur, nothing will kill your entrepreneurial spirit faster than the dead hand of employment law and the endless tribunals that they entail.

Please, if you are a true entrepreneur and dedicated to a life of discovery and adventure – carried out in the business world – then value your freedom and don’t build a traditional business based on the screwed up incentives of the employment contract. If you can avoid this horror trap, you will go a long way to keep the spirit of enterprise alive in your business and what is more, you’ll encourage like-minded people to work with you who also share that spirit.

Give up on the excitement of the enterprise and you will chase away all your best people and nothing will achieve this faster than traditional employment contracts.

Now why on earth would you want to do that?

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Please note, as an entrepreneur I find that diversity of my teams in terms of age, race, religion, disability, criminal record or sexual orientation, is no hinderance to performance. In fact, often your best people may well be people who have suffered some form of discrimination and those who have life handing to them on a plate are lazier.

And if you focus your business on performance then you will allow people to prove themselves based on what they can deliver and not what they look or sound like or how they move. So my recommendation is in no way to avoid the intention of  employment law, but is has every intention of avoiding the spirit destroying effects of employment law on an entrepreneurial business.

Alan Sugar

Alan Sugar, a UK entrepreneur with more than his fair share of grey hair, stoked controversy by stating that 85% of UK businesses that failed to receive bank finance had nothing to complain about.

Amid the controversy of whether he actually said this or not, we can still ask ourselves whether he has a point.

Essentially, he is saying that the reason that businesses don’t get finance is because they aren’t good enough.

His description is that many entrepreneurs are living in a Disneyworld.

Okay, let’s start with what did he actually say. He said

“The problem is that some younger people who have lived through the last 10 years or so of business and prior to that 10 years they may have just come from education, they lived through that period of the last 10 years where they think the irresponsible manner in which the banks dealt is the norm.

“Let me tell you, you lived in the Disneyworld, you have lived in the unrealistic Disneyworld in the way banks dished out money.”

“The moaners are bust. They are bust and they don’t need the bank – they need an insolvency practitioner.”

Okay, actually, he has a point.

Perhaps it is not so much our education or some people’s youth - but perhaps it is because our businesses became more and more unhinged (or leveraged) and the value they added became less and less clear.

Not so much that we became lazy during this period of excess – I certainly worked harder than ever – but we became relaxed. Relaxed about profits believing that so long as revenue was growing, we could always sell the business. Relaxed about staff performance, knowing that replacing mediocre staff was hard and may not deliver any improvements.

It is certainly true that during this time of excess we’ve seen huge salary and employee wage rises. Which is understandable, because you now need to earn a small fortune to buy a small flat.  Again, perhaps we became to relaxed about profit and too willing to share it with those who didn’t put up the risk in the first place.

We’ve also enjoyed higher taxation during the boom years which has swamped the public sector in money and built weak competitors that are poorly attuned to drought conditions.

Essentially, we have lived, as entrepreneurs, too well for too long and the arguments for the war on talent etc has encouraged us to turn a blind eye to poor or average staff performance and that coupled with the increasingly restrictive employment  legislation and ‘fear of losing good people’ has perhaps been the root cause.

Still, Alan Sugar is right when he says most businesses are not worth investing in. Especially those businesses built in the boom years and used to the easy sales that came with that time.

We now face a period of hard work grinding out results and delivering clear value. And that requires a major shift in the way we run our companies. It has been argued that the success of new start up businesses – or restarting enterprises -  is down to the quality of implementation and not the idea. This is a major shift in thinking.

The good news is that in this environment we can forget about our competitors and their threats to steal our carefully nurtured talent – we can now just get on with paying a fair rate for a great days work and focus entirely on the quality of implementation.

As entrepreneurs we have the opportunity to turn our businesses around or begin again, but this will be achieved mainly by going back to the simple things, making a profit always and being intolerant of mediocre performance from highly paid staff and becoming crystal clear about how we add value to our customers.

New businesses need to be value driven, they need to be grown without debt or with small business angel investments in order to prove the business model. And all business investment needs to be justified in clear revenue terms, questioned on a regular basis and pulled if it fails to achieve its objectives.

Growing a business without debt is hard work, but it is the most certain way to achieve success as it allows you to adapt your business model as you learn about how the market responds to your offering.