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.

He explained that he felt confused that the Tories should wish to diminish entrepreneurial motivation, but acknowledged that there is a problem with ‘individuals who manage private equity funds who somehow magically turn their commissions made by creating gains for their clients from normal income into a capital gain.’

It seems as though that the Coalition are struggling to make distinctions between enterprising individuals and tax-dodging schemers. Hopefully George Osborne’s speech tomorrow afternoon will clarify a few things for Rags to Wreckages readers.

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….

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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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.

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?

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?

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.

Will this dog let go of his bone?

Do successful entrepreneurs never give up?

Is a top entrepreneur like a dog with a bone, and just won’t let go?

True or false?

Well, true but only to a point. A smart entrepreneur will “try, try and try again – and then give up. No point in being a damn fool about it”. (WC Fields).

However, many young entrepreneurs believe they must keep going and avoid failure at all costs. However, sometimes the costs are too high and the fact that some entrepreneurs make it to the other side of the river, doesn’t mean that this is the only course of action.

Sometimes, to continue the analogy, it is better to give up and try to cross the river at another point. Or, if you simply can’t get across, then wait for the water to subside and then try again.

So, strangely, although resilience is rightly regarded as a great trait in an entrepreneur, there are times when too much resilience is bad. Sometimes you find another way or truly you should give up.

Now, let’s be really clear here, if you give up on a business, this is only so that you can take your time, energy and resources and go and focus on another business. Investors do this all the time when they sell shares and buy new ones.

If you were employed and left one job to take another, would that be giving up? No, so then why is leaving a business giving up?

The answer is that entrepreneurs need to know when to persist and have the capacity to persist and persevere. And, they need the capacity to give up, cut losses, learn from mistakes and move on.

The truly great entrepreneurs are those that can do both and know when to use persistence or a willingness to cut losses.

It is the ability to create a synthesis between resilience and a willingness to cut losses that counts – not the possession of a singular quality.

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.

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.

Enterpreneurs are particularly bad at recruiting

Now, that is a strong statement, but it comes from an industry veteran who has years and years of helping businesses recruit the right person for the job, so it is an opinion that carries some weight.

So, why is this so? Is it because an entrepreneur sees opportunity in everything but isn’t aware of the downside? Is it because we believe that anything can be done if you just get on and do it, but non-entrepreneurs just aren’t like that?

Or some other reason?

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.

“Serial entrepreneurship is not a matter of success and failure but rather boredom”

Great quote – but is it true or false?

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.

Arsene Wenger - Arsenal Football Coach

Arsene Wenger, the Arsenal coach and ‘Warren Buffett of football’ was quoted this August as saying:

“The common denominator of successful teams is that the players are intelligent. That does not always mean educated. They can analyse a problem and find a solution.

“The common denominator of a top-level person is that they can objectively assess their performance.

“You speak to a player after the game and ask him to rate his performance and if he analyses well, you know he is the sort who will drive home thinking, “I did this wrong, I did that wrong”. His assessment will be correct and, next time, he will rectify it. That player has a chance.

“The one who has a crap game and says he was fantastic, you worry for him. This is also true in life beyond football.”

What Wenger appears to be saying is that success on the football pitch, or in any practical walk of life, is more about a person’s ability to honestly assess and learn from their experiences.

Of course, there also needs to be some raw talent – but Wenger is explaining why some raw talent disappoints

and some raw talent becomes honed to (almost) perfection.

And, for that to happen, the player – or the entreprenuer, must do three key things.

1. Honestly assess their performance – anyone is believes their business is stronger than it really is, or that they are a better sales manager, technical manager than they really are starts with a huge disadvantage – and that is that they believe they have nothing to learn. Honestly recognising that we all have a lot of learn is the first step – whilst also being to acknowledge that whilst we may be highly skilled and able people.
2. Next, the player, or entrepreneur must turn over the events in his mind – before applying them on the football pitch or board room. The player who asks, how can I do that better, what must I do to improve will have a chance to succeed. So Wenger is talking about a relentless drive to improve what we do and to better ourselves. Entrepreneurs then need a commitment – almost obsession – to doing things better, cheaper or faster – than they’ve ever been done before. A bit like football players.
3. Lastly, in honest reflection, Wenger admits that even this does not guarantee success - but that it is a necessary requirement for success. The football player or entrepreneur may not know this, but that does not mean it isn’t true.

So, honest appraisal of our strengths and weaknesses followed by a relentless desire to improve – is that gives each of us a chance at being a great entrepreneur.

Likewise Wenger insists that great teams are made up of intelligent players – and that does not necessarily mean educated.

No wonder then that the most important part of an entrepreneurial venture or start up is the team. Get that wrong and you’ll be demoted in no time. A bit like football then – which is obsessed with bring in and developing new team members… and a relentless desire to do better in every game.

 But what is most stiking about Wenger’s comments is the fact that he defines attitude – the honest – the desire to improve – as the key attributes that have the potential of making a player great.

And, most helpfuly, he clearly describes what that means. He even implies that with a great attitude any of us will appear to be intelligent!

I am using parables – or stories – to express the ideas about business which will form the basis for this blog and the subsequent book Rags to Wreckages … to Riches.

Lots of people are asking me why, or expressing scepticism that it is worth writing business parables. So let me explain why…

Parables are used to teach and change us. They reach beyond the mere logical or reasoned understanding to touch our hearts and our emotions. Perhaps parables are a little like the picture above, they stir us up and allow each of us to see what we need to see.

Our actions are mainly based in our emotional thoughts and responses are only occasionally driven by logic, although we might like to think otherwise. This does not mean we are unthinking, but that we tend to think with our hearts first and

foremost and usually engage our rational mind later. After the event rational thinking is usually in the form of worry and is often more of a hindrance than a help.

The fact that we think emotionally explains many things including why stock markets are famously driven by the emotions of fear and greed despite the many maths experts attempting to reduce it all to a calm irrefutable logic.

Likewise great entrepreneurs and investors alike learn to develop and act on their instinct and not just logical deduction.

Therefore, for any business book to be successful – and by that I mean it inspires you to make changes in how you run your business or investment life – then it must speak to your heart. It must stir you up so that you emotionally buy into the decisions and actions that you must embrace if you wish to be successful.

In using parables, I don’t claim to be unique or original. In fact the world’s best selling book the bible – uses the parables of Jesus to teach. When asked why Jesus uses parables we are told

Though seeing, they do not see;
Though hearing, they do not hear or understand

and

You may be ever hearing but never understand;
You may be ever seeing but never perceiving.

For when people’s heart’s have become hardened,
They hardly hear with their ears,
And they have closed their eyes
Otherwise they might see with their eyes,
Understand with their hearts

In writing business parables for Rags to Wreckages and speaking to business owners and investors I’ve been told that the advice they contain is ‘common sense but rarely considered because they it is so obvious’

So the challenge for us as entrepreneurs and investors is not that we don’t know what needs to be done, but that it is a supremely harder to do it than to talk about it.

Many times our business lives become too complex with a constant barrage of new opportunities and risks, from social media to finance and leverage, such that we lose sight of simple common sense actions that we need to take or focus on.

The aim of Rags to Wreckages is not to lay out new management theories or grand business ideas. We’ve had enough of those already in the past twenty years. Instead, its aim is to reignite our understanding and perception of ourselves our business and investments more clearly and most importantly to do this with our hearts as well as our minds.

For if we see with our hearts, then we perceive and we can act.

This is why I have write these business and investment stories and experiences in parables and then to explain the meaning and implications those stories.

My desire is simple. That the parables will lodge themselves somewhere in your heart and so give you a framework for dealing with the decisions you need to make now and will need to make in the future.

I hope that you avoid the mistakes that I have made without having to repeat those mistakes yourself. If this book can succeed in that goal, then it would have achieved all that I had hoped for.

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You can download and read the first chapter by subscribing in the right hand bar. I’ll be added more parables and stories as time goes and will send those out to anyone subscribed…   >>>>

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The new way to work, for nearly all white collar work, is freelance.

In recent years, freelancers have established their own trade body – the Professional Contractors Group.

And now they are celebrating National Freelancers Day on 23rd November 2009. This day will bring together freelancers and innovative business leaders to discuss and explain business on a freelance model. The point here is that it works for everyone – the investors, the entrepreneurs and the freelancers.

• Why Many Great Sounding Businesses Ideas Don’t Make Money – and – The Rock that Wouldn’t Budge
• Why Brittle Businesses Break – and – How Glass was Cursed with Brittleness
• Goldilocks and the three Shareholders
• They Know What Needs to Be Done But They Don’t Do it – and – The Bug and the Light
• New Entrepreneurs Don’t Say No – and – How the Rhino got his Thick Hide
• Why Government Schemes are the Death of a Great Business – and – How the King was Fooled by his White Knight
  
• If You Could Hire the Best Person Tomorrow Why Would you Traditionally Employ Anyone Today – and – Why Fear Drives Man More Than Success