The value of stability

A businessman we respect owns a restaurant franchise. Even before we knew him, we loved his food and had worked our way through several “loyalty cards.” We should have guessed was that there was more than good cooking that earned our loyalty. There was good management—and a keen eye on the relationship between good management and profitability.

It turns out he has industry leading retention, of both employees and managers. And industry leading profitability and growth rates.

He would tell you the relationship is not coincidental. Like any business owner, he runs the numbers constantly, comparing the performance of each one of his restaurants. After several years of collecting an exhaustive list of metrics, he realized he could simplify his job; there was one measure that above all others predicted profitability. That metric was the tenure of the management team. Without exception, the restaurants with management teams who have worked together the longest are the most profitable. What he calls his “stability analysis” is the single strongest predictor of profitability in his business.

His conviction about the value of management stability drives his investment decisions. Going into the recession, he had an unusually high ratio of managers to employees. So, as consumers tightened their belts and reduced discretionary spending, it would have been understandable, in terms of “old math,” if he laid off some managers. His competitors did just that. But using his “new math,” he made a tough and bold decision: he decided to maintain his high level of management staffing. The results? In spite of the toughest economic environment in a generation, he has held his levels of profitability and has actually grown his corporate business as his competitors have faltered and retrenched.

We think every business should do this “new math.” In your business, what is the value of tenure? Find out by comparing the performance of like business units where there is a range of performance and analyzing the tenure of your managers and employees. We believe this new math will reveal some insights that will drive your investment decisions.