Have you ever heard of the Hawthorne Effect?

The Hawthorne Effect is a term from psychology that describes the tendency of people to act differently when they know they are being studied.  The concept was named by Henry Landsberger, who was busy in the 1950’s analyzing experiments from the 1920’s at the Hawthorne Works.

The earlier experiments were designed to measure the impact of lighting on worker productivity.  Presumably they expected to find that worker productivity increased with better lighting.  However, this was not what they found.  Instead, the original researchers observed productivity improvement in both control groups, regardless of the lighting.

The researchers were puzzled by the result.  Presumably it was not until Mr. Landsberger reviewed their work was his theory postulated.

The Hawthorne Effect has since been used to describe any short-lived productivity improvement that occurs because individuals are being watched.

So what happens if you apply this concept to MVaaS customers?  If MVaaS is deployed to several “test” sites, and these sites achieve greater performance than the other “non-test” sites in the enterprise, could you dismiss the findings and conclude that this is due to the Hawthorne Effect?

In a recent post, I wrote about the economic impact of hitting and not hitting store level KPIs. It’s imperative that everyone involved in the business process have the same goals in mind - those that govern daily behaviors towards the ultimate reward of profitability. This includes, management, staff and yes, vendors (or as I like to call them, business partners).

Let’s face it, operating a profitable restaurant or retail business is a difficult task. Success lies in the ability to flawlessly execute upon well defined business processes and procedures with little to no variance, every day. The wage level employed in these environments is often ill-equipped to consistently execute due to inexperience or lack of maturity. What one gives up with inconsistency is sales and expense, and that translates directly to decreased profitability.

There are several tactics to ensure the proper beahviors are on display at all times to ensure flawless execution. I personally advocate the following: Training, followed by monitoring, measurement, correction and improvement. This cycle repeats itself indefinately in the spirit of a constantly improving business process.

So how does MVaaS help one achieve KPIs? It’s one of the five steps noted above - monitoring. Leveraging MVaaS in a routine store audit process will ensure that behaviors which compromise the ability to achieve KPIs are eradicated from the business process. I will follow up soon with several specific examples of how this works, the economic impact to the bottom line and ultimately, the Return on Investment.

I recently read a great article in my favorite restaurant industry publication Nation’s Restaurant News. Most of the headlines are laser-focused on the economy and it’s effect on the industry. In fact, of the six leading stories, five of them contained the headline words gloom, glum, laid-off, slump and downturn. On the bright side, the articles focus on solutions to these adjectives, whether it be staffing, menu updates, loyalty programs or technology.

The one that caught my eye analyzes the elimination of many midlevel execs of multiunit enterprises. The remaining staff is then required to double their store coverage, essentially trying to do more with less. While the current economy and job elimination is rarely a pleasant subject, shouldn’t businesses be constantly striving for efficiency and productivity gains, no matter the economic condition?

Let take a hypothetical situation where a single $80K field position is eliminated, thus increasing the coverage of another field position from 5 stores to 10. Further, a technology investment in MVaaS is made to boost the productivity of the remaining field employee. Mathematically, that might look something like this:

10 location MVaaS 4 camera deployment: $42K

Investment Payback: About 6 months

1st Year Profit Increase: $38K

3 Year Profit Increase: $198K

Keep in mind, this is in payroll alone. There are many additional benefits of MVaaS that contribute directly to the improvement of store operations and increased profitability without straining existing staff or IT resources. Something we should be looking at everyday, even during the good times.

Sun Microsystems, Inc. (NASDAQ GS:JAVA) President and CEO Jonathan Schwartz posted to his blog an e-mail that he shared with Sun leaders.  The e-mail was written in response to frequent questions that Mr. Schwartz has received regarding the current banking crisis in the U.S., and how this might impact Sun.

Mr. Schwartz turns the question around.  It is not how the crisis impacts Sun, but rather how it impacts Sun’s customers, both current and prospective.  In this he sees tremendous opportunity.

The statement that was most impactful for me was this:

“You’re not going to hear from any of our customers: ‘Let’s stop buying technology and hire more people to do the work.’  They’re going to default to the opposite - automating work, and finding answers and opportunities with technology, not headcount.”

Will customers be impacted?  Certainly.  This has already started.  But this stressful environment will also create opportunities for companies with technology that adds value for its customers.

In a tough economic environment, Walgreen posted an impressive 12% increase in Q4 profits.  Congratulations Walgreen!

Given the roller-coaster stock market, the cynic in us may attribute this to a surge in the sale of pain relievers and antidepressants.  But while revenues did increase, Walgreen executives attribute a portion of their improved results to cost-cutting. 

We’ve posited on these pages about the strategy of combating the economic slowdown with technology focused on improving operations.  It is unclear if this was part of Walgreen’s cost-cutting activities.  One thing is certain, however.  Success is possible in our current environment.  And investors will flock to companies who deliver outstanding results rather than offer excuses.

I’m a huge fan of the weekly publication Nation’s Restaurant News. This week’s edition had a great article in the Opinion section titled “Stopping employee theft a fast, cheap way to boost profit” by Kevin Lynch.

The article does a wonderful job detailing how a reduction in shrink of just 1% (as a percent of sales) can lead to a 20% increase in profit. This is at the core of the MVaaS payback calculation which is typically around 4 months. As Kevin continues to illustrate, the alternatives to a 20% boost in profit by increased sales would include considerable expense in marketing, build-outs, remodleing, etc…

Nice work Kevin, I’m sure we’ll be speaking soon.

I watched with mild amusement as our CEO’s heart missed a beat.

“How do you measure inventory shrinkage?”  I asked innocently.

After the palpitation subsided, his return comment was “Ah, we would fire them.”

“No, no, not with us.  How do our customers measure their shrink.  When they provide us with a shrink percentage, is there an industry standard for how this is measured?  For example, is it measured as a percentage of cost of goods, revenue, or average inventory value?”

One thing I have learned in my years of work is that there are different ways to calculate just about any performance metric.  Maintaining consistency is a noble goal, but very hard to achieve.  In fact, many companies are unable to pull this off within their own four walls.  How could we expect consistency to improve across an entire industry?

I have now heard the “shrink” percentages of several potential customers.  It struck me that they seemed to be very different, even though the general product mix was comparable.  This is why I started asking my questions this morning. 

Understanding what is important to your customers is paramount.  Understanding what they measure, and precisely how they do it, goes a long way to developing this understanding.

By the way, our CEO is fine.  But you should try this with your boss sometime.  Try this double-shot:  ”So who did I see sleeping in your car this morning?  Are your in-laws in town?”

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I recently had the pleasure of attending the IHOP National Franchise Conference (considering it was in Hawaii, the pleasure was all mine) and sitting in on various sessions celebrating the 50th Anniversary of the brand and addressing concerns of IHOP Franchise owners.  No doubt these concerns are not exclusive to IHOP and are shared across many restaurant brands.  One particular session reminded me of a previous post by Jeff Gannon on portion consistency and trimming food costs.

In this breakout session titled Food for the Future, IHOP’s Jay Miller, Director – Research & Development, spoke to attending franchisees about upcoming changes to the menu, addressing franchisee concerns about food quality, cost, and vendor selection.  He also played a few news clips negatively highlighting IHOP among those restaurants busting belts with high fat and calorie count menu items.  He spoke of the growing interest from government entities in mandatory publishing of Nutritional Values on menus and the implied importance of portion control.  Here not only can portion consistency help manage food costs more precisely as prices continually creep up, but more importantly it can protect the image of the brand and its reputation.  Imagine what’s at risk if portions are exceeded, the media secretly tests that plate and nutritional values don’t match those published by corporate.

Once again MVaaS provides an opportunity to manage not only the hard costs, but also the soft costs associated with a household name being condemned by the media for false representation of nutritional information, or anything else for that matter.

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Maybe it’s my penchant for financial analysis, but I was particularly drawn to Jeff Gannon recent post, Alternatives to Expansion in Today’s Economy.

Jeff lays out two scenarios for a hypothetical enterprise to increase earnings by 22%.

1. Build 11 new stores - Upfront cost $9.4 million - Annualized profit $1.1 million
2. Implement a video solution - Upfront cost $0.3 million - Annualized profit $1.1 million

Does anything jump off of your screen?  How about the astonishing difference in invested capital! 

I’m not an expert in the restaurant operating costs, but maybe a reader could help us pinpoint the typical costs of opening a new store.  Changing these costs assumptions would certainly impact the analysis.  However, I do know that customers our our MVaaS solution at Envysion have reported an increase of 1.5% to 2.0% of revenue to their bottom lines.  This is an increase of profitability of approximately 20% (depending on their pre-video results).

In my opinion this is not an either/or question.  Rather the merits of the video solution should be evaluated separately.  And the merits are very compelling:

• Payback Period ~ 4 months
• IRR ~ 319%
• NPV ~ $2.3 million (at 10% discount rate, 50 store enterprise)
• ROI ~ 323%

Any way you look at it, this is very efficient capital.

The past decade has seen unprecedented growth and investment in the restaurant space. Today, most of the industry is seeing top line revenue flatten while food and labor costs rise, putting a tight squeeze on profitability. As the credit markets continue to tighten, owners must find creative alternatives to increase earnings outside of revenue growth from new store expansion.

We’ll use a 50 location concept as an example with average unit volume of $1,200,000 and 8% earnings. This would put enterprise-wide earnings at $4,800,000. What are the options to increase earnings by 22%?

OPTION 1 - Growth Through Expansion

Target earnings increase: $1,050,000 (22%)

Number of new stores required to achieve: 11 = (Target Earnings)/(AUV*.08)

Cost to build 11 new stores: $9,350,000

Timeframe to deploy: 18 Months

OPTION 2 - Technology Investment to Improve Operations

Target Earnings Increase: $1,050,000 (22%)

175 Basis Point Operational Improvement Realized: $1,050,000 = (50*$1,200,000)*.0175

Cost of Investment: $327,100 (6 Camera System in all 50 locations)

Timeframe to deploy: 45 days

Even with flat revenue, an enterprise is able to demonstrate significant growth to the bottom line with minimal investment in technology when compared to an expansion strategy. The timeframe to deploy is of great significance as a technology deployment today would have positive impact on Q408 with full ROI by early Q109.