Managerial risk in practice

Some two years ago our family company took over a manufacturing company. I intentionally don’t mention the industry or the company’s names since a story like this can happen to anyone.

Right after the acquisition we started taking many remedial steps, first aimed at decreasing various, often unnecessary, costs. It should be noted that the company had a detached branch with 12 employees some 200 km away from the headquarters.

Business is primarily about money and figures. A good manager always focuses on the efficiency of costs.

True, the reason for having this branch so far away was sufficiency of qualified workforce that was 30% cheaper there than around the main manufacturing plant, but no one took into account material and goods transport, repairs of faulty products that first needed to be delivered to the headquarters to be checked and then some of them were taken back to the branch to be repaired. And I don’t need to discuss in great detail how complicated it was to monitor the staff there. No surprise, they did almost what they wanted.

When I gathered all the facts and vetted them, I had to make a managerial decision. First of all, I expanded, in terms of space and technology, the workshop in the main factory which had the same scope of work as the detached branch and it was ready to be filled with new staff at any time when appropriate.

In the second stage, I made the detached branch an independent company and I tried to make its employees behave accordingly, meaning they needed to search for new orders and start earning for their operation costs instead of just waiting idly for receiving money to cover their salaries and utilities.

The problem with a detached branch often lies in insufficient monitoring and effort of its employees.

When I saw that achieving this aim would require rather substantial personnel changes I started looking, through the sales department, for competitors who would give the newly established company suborders. After a while I entered into an agreement with two companies who operated on the same market, but their final products were complementary.

The whole time being I had to subsidize the company that we can call Detached Branch Ltd. The agreements gave me a glimmer of hope that it would finally come to an end. Well, to cut a long story short, the agreements with competitors didn’t lead to any good and I had to make a decision that I should have made long before as it would have saved me a lot of money that would come handy elsewhere.

The right managerial decision is often unpopular, so it requires even more skills to make it.

I dismissed all the employees from Detached Branch and employed some new people at the headquarters. When I counted it all up, I realized that this managerial hesitation of mine cost me CZK 1.5 million, but it would save me 350 thousand a month in the future so I don’t need to be angry at myself.

This is what I call a healthy business risk: you do your best but things don’t go your way anyway without you making a radical managerial mistake. The lesson learnt is: you need to have sufficient funds otherwise such a healthy risk turns immediately into a gamble. In other words, unless you have enough cash, you have to take remedial action, one after another. And sometimes there’s no other way and you’re better off pruning your company even when you have enough reserves.

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