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Episode #290
Phil Krichilsky

From Hourly Billing To Lucrative Performance-Based Fees

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Summary

Many businesses do not optimally perform. It can be frustrating, but you don’t need to suffer today. In this episode, Philip (Phil) Krichilsky, the CEO of Innovative Directions, dives into shifting from hourly billing to lucrative performance-based fees. In the consulting business, you are only as good as your billing hours. Phil wants every consultant to challenge that model. There are more insights Phil shares in this episode, so if you want to improve your profitability today, tune in now!

I’m very excited to have Phil Krichilsky. Phil, welcome.

It’s nice to meet you.

I was enjoying our conversation before the show and getting to know where you are in the world, Hong Kong, but also hearing a little bit about your background. I want us to dive a lot deeper into that because you’ve had quite a journey. You’ve been to many places around the world and conducted business in many places but for those that aren’t familiar with you and your work, you are a turnaround specialist. You’re a corporate director. You’re an entrepreneur. You have a real focus on East Asia. You’re the CEO of Innovative Directions where you specialize in materials, apparel, and distribution inside Asia. Is there anything to clarify on that? Was that an okay intro? Did I miss anything that we need to hit on?

It’s a great intro. Here’s my background at the simplest level. I was born in New Jersey in the US. I went into the military as an Army officer. I was an infantry officer. In the military, you’re changing jobs every year and a half. Most of the work I did was taking situations where things weren’t performing optimally and making them perform better or helping them perform better. In those leadership roles in those first 8 or 9 years, I led teams and helped develop them to be the top-performing teams in our units.

After that, I went to General Electric, WR Grace, and a few other multinational companies over the next twenty-plus years. I never changed my job. I always got thrown into difficult situations to fix them. In GE, my first job was at a union distribution center. I had 80 nice people who were so senior in the union. They would bid for these jobs so they could sit on forklifts and find ways not to work. I was hired to help get everybody working again.

The problem we fundamentally had is we produced about $800 million in chemicals. We could not ship on time. We had an on-time fulfillment rate of less than 15%. One of the driving factors was the warehouse decided what they wanted to ship when they wanted to ship it. Customers were getting frustrated. My first role became fixing that. On account of that, GE sent me for Six Sigma training. I became a Black Belt and then ultimately a Master Black Belt. I started running small commercial P&Ls.

Direction applies in business because if you can help people understand where they're going, it's easy to center them and make that purpose palatable within their terms. Click To Tweet

Over the next ten years, GE, like the Army, keeps switching you. I started to do more turnaround and inside consulting work. I did that for almost twenty years, culminating in being a CEO and regional president for different multinational companies. I got onto boards, and even the board roles I took as the younger guy on boards were turnaround-focused. In the third part of my career, I said, “Why wouldn’t I offer this service myself?” That’s what I’ve been doing. I do more interim CEO turnaround work.

Thanks for that. I want to take us back a little bit because you started talking about your time in the Army. That’s something that I wanted to touch on a little bit because we have talked to many people over the years who have been in some Army or military capacity. They come out into the world either corporate or they get involved in consulting.

I’m wondering. From your time inside the military, what do you still feel was most valuable or applicable to you? If you were speaking to somebody else regardless of where they’re from in the world but they have that military experience, what might you suggest that they shine a spotlight on or use from that experience that they might not be using?

I think about that a lot because my son is a lieutenant in the Army. To me, the great thing about the Army is its purpose, direction, and boundaries. If I forget these three, you can remind me. Anytime you’re in a situation leading people, and the difference between the military and the civilian world is as a lieutenant, you’re leading people at 22 years old, there’s a goal, “Attack Hill 543 at 2:00 in the morning, get the operating room working, and do surgery.” Whatever it is, there’s always a mission.

I was a combat officer as an infantry guy. You would be given these operations orders. You would have the five Ws of Who, What, Where, When, and Why. It applies every time you go. That says, “What’s your purpose?” In the military, we had absolute purpose and direction. I learned that early. This applies very much to everything I do as a civilian. I was lucky. I had four platoons. On my second platoon, I never got it right. I put a calendar in front of the door and wrote what I knew we were going to be doing in the next three months.

Direction applies in business because if you’re able to help people understand where they’re going, it’s easy to center them and make that purpose palatable within their terms. What works both in the military and big corporations like when I worked at General Electric is we speak a common language. Especially in the theoretically soft world of consulting, you have to find that common language.

In the military, we were trained in the language. At GE, they did a breathtaking job of teaching us the GE language. What I would say all of us on a show like this have in common is there’s a finance language that we could and should speak that allows us to stay centered. Purpose and direction are the two biggest things I got out of the military. I told you about my third.

You did a great job with those. That provides the context that I’m looking for or a bit more of that background. I wanted to also ask you. You talk about the time at GE and the certifications or going through Black Belt and rising up through Six Sigma. How much of the success that you’ve had would you connect to the actual experience of going through those certifications, Six Sigma, and that kind of training?

In the end, you adjust to what your personality is good at. Most people have far deeper experience than I do. As I said from the beginning, I was an Army officer. My experience was broad. I wasn’t the guy who could sniper at 2 miles out or set up an ambush line in 15 minutes like a sergeant that has been there for 20 years. What Six Sigma did for me was when Jack Welch implemented the program at GE, people didn’t understand it.

CSP Phil Krichilsky | Lucrative Performance-Based Fees

 

I was one of the first or early practitioners of commercial Six Sigma. Six Sigma makes total sense in a factory where you’re trying to get zero mass balance. You buy 500,000 pounds of iron ore and try to make sure you have 500,000 pounds of iron ore content in something when it’s done so you don’t have any loss. You can measure all of that.

You could statistically see if there’s a high variation in the outputs that you want but when you’re dealing with commercial Six Sigma, is a Salesforce effective? We did a project at Home Depot. Are they optimally running one of these operations they have? We did another project at Lowe’s. Are they getting the sell-through they wanted?

The data is there but it’s not necessarily statistically correct nor is it necessarily accurate. I got out of it on a broader scale, to answer your question. What was useful about the training is I applied it to myself and realized most people couldn’t speak the language. Back then, Six Sigma was the DMAIC process to Define, Measure, Analyze, Implement, and Control. What I discovered at GE is it was awesome at Define and Implement. It screwed up fixing it. The guys did it.

The problem is the guy or girl would get promoted. It wasn’t in control. It didn’t stay in control. It wasn’t measured. We didn’t always agree as to what the problem is. Everyone would agree. A lot of times, the client will say they have a problem, and they don’t know what it is. What I got out of the training because it applied to me as a generalist is Measure, Analyze, and Control. That’s why I recommend it. Apply it to yourself and find out how you can use it to make it common sense for others.

In doing some research before we jumped on here, I was looking at your LinkedIn profile. Correct me if this is wrong but it looks like you started your company Innovative Directions after coming out of the military. Is that correct? Did you go right into GE? From what I saw, it looked like you went in and built the business up to over $1 million per year, and then things shifted after. I have a question about that if that’s the case.

That’s good research. That is true. When I was a captain in the Army, the Berlin Wall came down. The Cold War was over. America was in one of these phases where we thought we wouldn’t be involved in any of that. They started to tell us to use our free time and get more family time. My wife was working, so I started doing consulting on the side.

My question for you based on that is this. How did you go about getting clients for that business? Here you are in the military. As somebody in the military, or even if you just left the military, where did those first few clients come from?

I encourage everybody to do it. You have to start telling your friends what you’re working on and have them introduce you to their friends. Ninety percent of it is going to be wasted effort other than a couple of good drinks and a few stories but I started telling people what I was interested in. Three separate things happened at the same time. 1) I met another West Point guy who got out and owned some McDonald’s. He told me about a client that started a business that had a successful idea but was failing. I helped write his business plan, ultimately took it over, rebuilt its turnaround, and made it pretty successful.

2) I had another West Point classmate who was working as a financial advisor. These are great guys to help you out. He had a client who took over his father’s business that was struggling. I wound up putting in an operational structure, implementing a CRM before there was a CRM, and creating scheduling before there was scheduling software. I didn’t even know what I was doing. I was making it up as I went. On account of those, I started to get press written about me. People would call me up, and I probably did another half a dozen projects off that.

You just can't sit still. You have to go knock on doors and talk to people. Click To Tweet

I love what you’re saying. To summarize, you started by leveraging your network, connecting with people, and telling them what you’re up to. That led to introductions, referrals, and conversations. Conversations led to business. Something that you said which is so important for those that are at the earlier stages is that you didn’t have everything figured out. You didn’t have the actual systems in place that you would later develop.

You had probably an idea of what you were doing, hoping that you would be able to create a result. I’m guessing you read a bunch of books. You had some knowledge and experience being in the military but it’s not like you had everything figured out before you launched your business. You launched your business and then figured things out. Is that fair to say?

Even another way of phrasing it is I almost fell into it. One of the ladies’ partners I have always reminds me of, “Activity begets activity,” but another takeaway neither of us said is, “You can’t sit still. You have to knock on doors and talk to people.” When you’re doing higher-paid engagements, and we will talk about my model later, sometimes it takes a few years to win something.

COVID taught us to turn on Netflix and hang out at home. You have to go out, have coffee with people, have drinks, have dinner, talk about what you do, and refine your elevator speech. None of that will get you the work. It will just get you comfortable with your conversation. Watch how people react so that you could start to figure out how to hone what it is that you’re offering.

That’s so important. We talk to clients about this all the time. In the day and age that we’re in, it’s so easy to hide behind your computer and feel like you’re being productive by creating a bunch of stuff and touching the keyboard but if you’re not engaging in conversations, whether that’s on a phone call, a Zoom call, or in person, you’re going to have a hard time getting business. Taking that action is so critical.

Let’s fast forward. You got some clients through your connections. You did great work. That led to press and more business but then about three years in, you decide to close that business and go into the corporate world, working with GE and other organizations. You ended up rising up and becoming a CEO and president of other companies but why do you stop consulting? What was going on in your life and your business that made you decide, “I have this business that is doing over $1 million per year. I’m going to give that up and work for other companies?”

The first thing I say is none of us give anything up. You carry with you for better or for worse your experiences. As I look back, I’ve always been doing turnarounds. I’ve always been leading people. My patience level sometimes isn’t where it used to be, and my energy level isn’t always the same but I carry experiences that I use every step of the way. Theoretically, it was for family reasons. Realistically, that’s not what happened. I wound up doing the same work in GE that I was doing for myself.

Diversifying your experience gives you perspective, and I like that. I met some people like you who have done everything on their own every step of the way. I’m glad to know what it is to be in a corporation. I can relate. I’m glad to know what it is to work as an operating CEO or an operating general manager for private equity because I can relate. I wouldn’t trade it. I would tell you the direction on the path has been the same. The specific trail has always been a little bit different.

Is there anything now looking back with the benefit of hindsight that you would have done differently along that path? I’m painting some broad-brush strokes but from the perspective of how you had this consulting business, you decided to make a change, go into the corporate world, do that for a period, come back, and reignite that consulting business. With hindsight, are there any adjustments or changes you would have made looking back?

CSP Phil Krichilsky | Lucrative Performance-Based Fees

 

I’m going to answer it a little bit broader. With a son that’s in the military, I would tell you from a broad perspective that in anything that I did, I would probably be a little bit more patient and stubborn. I’ll explain both of those. Patience means just because things aren’t exactly going where you want, you don’t have to react. In a system like the corporate system, the last man standing does work. If you’re the only highly experienced person, they do need you. In the military, as the last man standing, you’re the guy with the experience. They do value that. Patience pays off. I wasn’t always patient. I wish sometimes I was.

Stubbornness is a lot of people will convince you to do things that may not be good for you. I’ll start with the military and then apply it to some other things. I got the max test score for foreign languages back in the day because I cheated. I studied this fake language called Esperanto, which was the test. In doing it, they wanted me to become a foreign areas officer. That would not have been the right move for me but people will come to you and say, “This is right for you. Do it. We’re going to move you in that direction.”

You have to decide where it is you want to go and be stubborn about that but be patient and wait it through. Some people are an expert at closing lots of businesses. I’m very stubborn about what I’m willing to work on. I don’t know if that’s good or bad. The model is still very much under development, and I suspect we will talk about it shortly, but I do think patience and stubbornness to stay where you want to go matter. I know the times I didn’t do it, it did not pay off.

It’s so interesting that you mentioned that because one thing that I’ve been hearing about and thinking about as well is this. Let’s say you create a successful business. It’s very natural for people to think, “I have something that’s going well. What else can I do that’s different from what I’m doing?” Honestly, we need that dopamine, that new thrill, or that change. Back to your whole patience thing, often people have a good thing. They don’t necessarily stick with it and let it compound and grow. It’s good but now they want something a little bit different.

That’s something the boring business or what’s working for you if you stick with it, keep finding ways to improve it, make it enjoyable, and structure it in a way that works for you with freedom and flexibility. There’s so much value in that. Often as entrepreneurs, all of us tend to have a bit of that shiny object, looking for what’s next, what’s more exciting, and where there are more opportunities. In many cases, that can mean that we pull our attention away from what’s already working for us. Any thoughts on that?

That’s a good segue into something that I’ve learned. Everyone faces a choice, “Me by myself billing my hours where I’m going to call the supported team, come back to you, and define in more detail, or us building something bigger.” Those are real decisions but they all start with one thing that you touched upon. You have to slow down a little bit and ask yourself, “What are my skills?” Just because you like shiny objects, it doesn’t mean you lack focus. You could like shiny objects. Know that’s who you are.

If I take the shiny object example or a lack of patience sometimes in my case, what I started to learn was if I take an interim CEO role, I’m not coming in alone. I’m going to sign a contract. It’s going to have a clear beginning, an end, a purpose, and an outcome. I’m going to have the right within the amount that I’m charging within my retainer to bring in people to help.

I have a partner on my team who has a lot more people development and leadership development. We help provide what she calls scaffolding. We try to look at people’s strengths and make sure they’re aware of the areas that are perhaps deficient and that they’re built upon. Sometimes I do the shiny object thing. I have a couple of people I work with who are more data-oriented. I know I lack patience. I have some people I work with that can stay in the room after I leave and hear what should have been listened to. It’s perfectly fine to work alone. A lot of you will and do but you should also try to find people who have skills that you don’t and keep them next to you so you can build out on it.

Focus on your strengths. Don’t try and compensate for your weaknesses but recognize them and then adjust as necessary. You go into these roles. Let’s take an example. You’re getting paid $40,000 a month to have this interim CEO role or some executive role. The money doesn’t matter, up or down, but many consultants would struggle or wonder, “How do you structure that?”

Patience means just because things aren't going exactly where you want, you don't have to react. Click To Tweet

From the buyer’s or the client’s perspective, they want you to come in. They want your brain filled. How do you present it in a way that the client or that company is okay with it not being you but you’re saying, “I will come in. I’m going to be part of this. Here’s the outcome we’re going to create but I’m bringing in a team.” Have you found anything that helps you to position that in a light that the company feels very good about and ultimately accepts?

It’s not easy. The biggest challenge in this industry is you’re only as good as your billing hours. I have tried to challenge that model. I have not fully succeeded at it. I will keep challenging it.

When you say challenge, what do you mean? Can you define or explain it a little bit more?

The people are billing $1,000, $2,000, or $3,000 an hour for mediation, arbitration, ESG consulting, and corporate social responsibility building. All of you have incredible skills. You’re 9 miles deep, not even 1 mile deep on how you get those things done but the problem is you could only build for the time that you have if it’s just you, and that holds you back.

This works more in turnaround. The challenge I’m trying to give it is, “Let’s look at your structure and see who’s not performing.” If we move that person out and I take over that role, that’s my retainer. You’re going to hear this pretty regularly, “I’m trying to find a level of fairness.” You’re swapping costs. The problem any of you or us have, whether you come in with friends and attack a project together or your own company and attack a project, is the more people a client sees, the more they think they’re paying even if they’re not paying.

You have to always realize that you’re mostly if not 100% of the discretionary cost. You can’t create the perception of being too expensive for clients that are sensitive to it. In a turnaround, they’re surely sensitive. I try to replace something on the staff that they’re already spending money on, and then we try to calculate and figure out, and remember what I said about Six Sigma’s Measure and Analyze, what it is they want to get done and how we could share in the improvement.

Can you explain a little bit more about that model specifically? It sounds like you’re getting a base, which is your retainer, and that might be the equivalent of some executive senior role inside of the organization but for you to then figure out the next component of your compensation, which comes from an improvement, a cost decrease, a profitability increase, or growth, how do you arrive at that? Do you set with the company, “If you keep doing what you’re doing, here’s the baseline. If we achieve X level of improvement or whatever metric we both agree to, then Y percentage of that is what we will take? “

It’s as simple as that. There’s an adjustment that answers your earlier question. Step one is to come in preferably at a retainer or some fixed cost. There are no surprises. I was on with some accountants talking about surprise billing. I don’t like surprise billing. I don’t do it to clients. The second is to find something that matters to the client that you can drive improvement on and agree on a percentage of payment. You can cap it, bound it, or put time on it but what it does suddenly is it transforms working by the hour. If I could get you $20 million in growth and I get $2 million, it is an I now. We can work on a $2 million project with a $50,000 retainer. That’s a great deal.

Let’s say we’re doing an exit. I say to the client, “We’re going to get you profitable, sell your business, and get 5% to 10% of it. It’s not what a broker does. I’m not selling your business. I’m leading it through the sale.” Let’s say we’re doing 10% on it. Suddenly, I say to the client, “You will pay for lawyers, accountants, and everything else extra on it that you were going to pay for anyway. If you and I can’t agree on it, I have the right to hire my people and pay for them myself.” You have to be careful on how you phrase it but clients generally like that because if they want to control it, they pay for it. If you control it, you pay for it. That’s a fair deal.

CSP Phil Krichilsky | Lucrative Performance-Based Fees

 

Let’s take two scenarios. Is there any average or standard percentage that you look at? If you’re going to improve something, is it 20%? Do you think about the percentages based on what the total is? Is it different if it’s a $10 million improvement you’re looking for compared to a $50 million improvement compared to a $5 million improvement? What do you think about that in terms of arriving at that performance component of compensation?

You bound it with two critical things. It’s risk and timing. If it’s something you could do quickly at a low risk, the price is going to be very different from a high risk that will take forever. I’ll warn you about forever. I took on a project that I hoped would take two years. COVID hit. I was an outside director for these companies for three years, and then I took over. It took three years to execute the project. I didn’t know what it would take but that was super long. I’m still doing wind-down work two years later.

I’ll adjust my billing and talk about that in a second. The percentages will go anywhere from 5% to 20%. Twenty percent is a long range. You have to be careful about things that extend past a certain point. EBITDA has windfalls, for instance, built into it. If you’re looking at profit, you might have gotten lucky. The economy changed. A rule changed, and suddenly you’re super profitable.

Exit tends to be a little nicer. The client gets paid. You get paid at work. You have to find something that is bound by time and is risk-adjusted that all of you feel what the private equity guys when I worked for them called aligned interest. You have to find that measurement that aligns with everybody’s interests. You have to think through it and leave a clause in your contract that you can revisit if necessary. It’s a bit of a high-stakes game because you have to trust each other.

Anytime you’re doing shares with clients all the time when they’re thinking about doing performance types of arrangements or equity arrangements, it’s typically not the thing that you enter into right away unless you already feel a very good relationship, and it’s something that you trust because there are a lot of risks on both sides that are being taken here.

Here’s one question I had for you about this. Let’s say you know it’s going to take two years. They’re paying you the retainer fee, and then there’s the performance component of this. Does that kick in only once you’ve reached that milestone, which takes two years? Do you have any structure in place that allows you to get some of that compensation? Let’s say the goal is to reach $10 million in new profitability, and it’s going to take you two years to do that. One year in, you’re at $5 million now in improved profitability. Is there a structure for you to receive some compensation there? Do you have to wait until you’ve hit $10 million?

That’s a great point. I do issue pro forma earn-out invoices. I do sometimes allow portions of it to be paid out, and I haven’t done that in the past. I don’t like any surprises. There are two things I do for my clients. I don’t like a lot of reviews but I do a quarterly review, almost like a board meeting. They will have a slide that will show how much quote was in the money because I don’t want to date that one. I’ll not only show what was in the money. I’ll show what the add-backs are and the things that they paid for that don’t go against my earn-out.

There shouldn’t be an argument. I’ll issue a pro forma invoice. This is what I do that’s cool and fair. At my busiest, I might be getting paid to be on boards for a client. I might get a retainer. I might be getting special expenses to do other extra work. I might be doing a little bit of hourly work, and I’m still working on an earn-out. There are five invoices going at any time. I’ve had this happen. A client might wind up paying $70,000 to $80,000 a month for all kinds of things but what I do that isn’t in a contract is as things taper down, I start lowering my prices every step of the way.

Why do that? What’s the mindset of doing that for you?

I’m doing wind-down work, for instance. They don’t need to be paying $50,000 a month. I drop it to $20,000. We have shut 3 out of 5 companies. We have sold them. They don’t need to be paying for all those services. I don’t need to have a discussion with them. I say, “FYI, that’s done. I’m going to lower the invoice.”

Find people with skills that you don't have and keep them next to you so you can build on them. Click To Tweet

When you do that, what’s the reaction from the client?

Everybody is different. Some are like, “Finally.” Others are like, “Thank you very much.” At the end of the day, this is an important point. You have to decide what your moral standards are. It doesn’t mean I don’t accidentally do it but my moral standard is, “Am I taking advantage of someone?” That’s mine. It doesn’t mean you have to write that down or anything else but I don’t want to feel like I’m taking advantage.

That’s so critical that you define your values, your morals, and the way that you want to operate. Everybody should be doing that so that they feel good about it. The last thing that any of us want to be having is these thoughts running wild in our minds. They’re hard to put down because you’re doing something inside that you know you shouldn’t be doing. It doesn’t jive with you. When you have a bad client, the best thing that you can do is get rid of them because they’re weighing you down. That energy holds you back from working, finding, or taking action that’s going to allow you to create the true ideal clients.

It’s painful. I’ve been doing more forensic accounting-type work for a client and rebuilding some books. It’s horrendous work. I’m not charging market rate but I’m not going to whine to the client. The client will accept any bill that I give. The client might not even realize that I’m not even billing for it but at the end of the day, you’ve been fair to me, and I have to be fair to you. You’re going to have to find your standard in that one.

I want to ask you this because you’ve been in so many different turnaround situations. You go into organizations and work your magic to find the different levers that you can pull that are going to help to improve whatever metric the organization wants to improve. When you go into an organization, what do you typically look for? There are a lot of variables because it depends on what the organization is, “Are they selling chemicals?” Are there certain things that you feel are across the board, “Here are 2 or 3 things that I always look for?” Can you share what that might look like?

I have a scope and a methodology. My scope is I generally prefer to stay in product-oriented companies. It doesn’t matter if it’s retail, consumer, or industrial. I like that area. That scope one. Scope two is I generally prefer $50 million to $500 million because there’s enough to squeeze. It doesn’t mean I don’t do smaller. Many of you will work by the hour. I personally don’t like working by the hour. I have done it. What I do is make myself feel good. I’ll charge a lower hourly rate and say, “If I take it to where you want it, pay me a 50% bonus on what I build. At least I can feel better about it,” but I’ll try to stay within a size and a product line. I won’t engage in something that I don’t think I can fix.

Those three scopes aside, when I go into my methodology, it’s boring. I argue with people about it all the time. The wonderful lady I work with that does the people development sites says, “You got to look at the people first.” I argue that I don’t. A lot of people I work with say, “You got to work on growth.” I’ll argue that I don’t do that either. I start at a fixed cost. The reason I do it is I want to pay bills. These are underperforming businesses. It doesn’t mean they’re not great businesses, and they don’t have a great history and legacy but somewhere along the line, too much is being spent.

Business owners hate when I do it because I get rid of the office they have in Seoul where I force them to no longer get the limousine picking them up at the airport every time but I attack fixed first. What fixed does is it drives cash when I do it and lets me start to understand people. In driving fixed costs, I have to understand the financial statements. By understanding the financial statements, I prioritize and assign costs to owners. By doing that, I start to see how people work.

Some people are 100% on board and saying, “Thank God.” Some people are running in the opposite direction. Others are telling you why you can’t do it because in this part of the world, sadly, some people do steal, and they’re trying to protect what they’re working on. The fixed cost then allows me to work on the second thing, which is people. You start to understand who’s rolling in the same direction and who rolls in their own direction, and that’s perfectly fine, who wants to roll and doesn’t know how, and who needs to leave and do something else. Two is people.

CSP Phil Krichilsky | Lucrative Performance-Based Fees

 

Step three because I like product companies is looking at productivity. Half of the people reading this are probably 1,000 times better at it than me but if I see people sitting in a factory and I can’t help it, I always see that. If I see full waste bins, my eyes are programmed for this stuff. If I see machines not producing a consistent output, I start working on that variable cost productivity, both in terms of labor and product, and then I work on sourcing in it. Somewhere along the line, I’ll usually look for something in variable cost that isn’t burdensome on the organization because by now, you’ve tired everybody out. You got to give them a couple of quick wins.

Can you give an example of what that might look like?

I was working in a contract manufacturer of clothing. We make down and Gore-Tex jackets. The industry is very green. They want to measure your waste. We’re running at about 1.5% waste. I discovered two problems. Problem number one is they’re only measuring what you put on the cutting templates. They didn’t measure the fact that they bought 1,000 yards of fabric, and 640% was a true waste.

I started measuring it but rather than attack things that were going to upset everybody, I realized we were running our patterns to 5 millimeters from the edge of the fabrics. I ran it to 1 millimeter. That saved $1 million in productivity because we used $1 million less fabric. It didn’t cost anybody anything. They told me why we couldn’t do it. They were nervous but nervous about why we couldn’t do it aside, nobody lost their jobs. Nobody had to work harder. It was a minor change, and a lot of money was saved.

That’s a fantastic example. You’re doing this great work for companies. You’ve shared a bit about the model, how you go about doing things, and the methodology behind it. How are you getting business these days? Is it referrals or the network? Are you involved in any speaking? Walk me through how are you getting business.

It’s something that I need to improve on. The problem with the work that I’ve done, and I said to you earlier, is you could be alone. You could be supported but the problem in the first two business models is you’re not out looking for business all the time. I was the CEO of somebody’s company for almost four years. I couldn’t breathe. I had no time. I was smart enough to hire partners of mine or general managers to help run businesses but I still didn’t have any time. What I’m trying to do now is work more as an executive chairman and put people in running things so I can go out and promote the business. That’s how I’m trying to change my business. I have not cracked the code.

I’m a member of 6 or 7 relatively useful organizations for this. I participate in senior advisory for different companies. I will start to do speaking engagements. I have not. I’m under a lot of pressure to start writing. I will start doing that. I don’t do digital marketing. I will start doing that. I don’t think any of that’s going to get business. What it does is get your name out there. Ultimately, you could do this type of work when you’re doing an engagement that’s $5 million to $10 million for somebody if you’re McKinsey and Alvarez-Marsal but if you’re us, you’re not getting those quickly.

It’s going to happen at 10:00 at night. You’re walking down the street, “It’s good to see you. I need your help.” You don’t know when it’s going to happen. My goal was to get out there. I sit in probably the greatest market in the world of underutilized talent. It’s people in their late 60s and above who are semi-retired with great skills not working and people in their low 30s who are underpaid and doing hard work. I’ve got the talent around me. It’s just getting the word out.

I have some resources I’ll share with you after we’re done that might help with that. I wanted to ask you. As you’ve been building this business, what has been the biggest challenge? What’s one thing that stands out for you? It was tough but you got through it, or maybe you’re still working through it.

It’s not that it’s bad. It’s targeting and quickly closing the people that need our help. Every one of us as we refine our sales pitch loves to tell people, “I’m not a consultant. I’m here to solve your problems.” All of us tell the same story in different words. If you’re lucky, you don’t have to say anything, and they tell you that’s what you do but either way, we’re in the business of “solving problems.” All of us have the same challenges. How do you accelerate that? How do you get people coming to you and saying, “We need your help,” and you say, “Let’s table it because I don’t think I can help. Maybe go talk to Frank. I can help them. Let’s talk about how we do it.” It’s speeding that process up.

The biggest challenge in this industry is you're only as good as your billing hours. Click To Tweet

I work on an uncapped model. It’s different from most people. I try not to charge by the hour. What I want to do is run teams. That’s what I think about every day, “How do I deploy three great teams with wonderful CEOs and general managers with diverse experiences that can take clients’ businesses to a level of profitability or exit that they never imagined?” I’m challenged by that every step of the way.

How about personally? Has there been anything that has been impacted as you’ve been running this business from a personal side of things if there’s anything that you can share that you’ve been working through, or adjustments that you’ve made that have helped you? Maybe changed your schedule or you’ve adjusted how you’ve done things or anything from that side. The reason I’m asking out of context is very often, we talk about business, growth, and all these things but I’m a big believer that the personal side is super important because I know days when I’ve had a little issue.

My wife and I have gotten into a bit of a conversation. I come to the office, and it’s hard for me to focus the way that I would like to because the relationship or something personal is on my mind, or something happens with my kids or so those kinds of things. I find that people don’t talk about that maybe as much as we all could. Is there anything? Maybe there’s nothing but if there is anything that you could share, I would love to hear it.

I have a problem. I play too much. I don’t mean that I run around and play. Years ago, my running buddy when I lived in Shanghai ran a $7 billion company. He’s a Jordanian-American. He says, “Whenever I do something great, I give myself a reward.” I followed this ridiculous philosophy. Please, don’t write it down because it’s idiotic. Anytime I finish something good, I give myself a reward. It might be something silly like a Rolex watch but that’s not where I’ve moved to.

When I turned 50 as a reward for finishing something, I applied to and went and got a master’s degree at Harvard. That was my reward. I’m an extremely experienced rock climber and outdoorsman. I don’t know anything about horses and hunting. I’m not lying. I took a $2-an-hour job and disappeared into the middle of nowhere for three months. This is probably why I would like to figure out how to get more business because I’m gone. I worked as a cowboy.

I love that. What was that like, Phil? Don’t leave us hanging. What was that experience like for three months?

It was brutal when you were in the mid to late 50s, and you were working with 20-year-old kids pulling 20kg loads on top of mules that want to kick and bite you 50 kilometers from the nearest town. It’s brutal work. You’re eighteen-hour days. It’s tough. There’s a business aspect. I watched how they run their business and how they deal with seasonal employment and difficult customers but business aside, to answer your question, you’ve got to reward yourself from time to time and take experiences that broaden what you’re doing. There’s nothing I did as a cowboy that I don’t think I’ll apply now every day.

The humility of realizing that you’re not as strong or experienced as any of these kids is useful in business every day, climbing or going on a climbing trip and going back to school. I can’t even describe in words how great it is to go back to school when you’re in your 50s, work with 30-year-olds, and learn the mentality. It’s spectacular. It applies to business every day.

I realized that I went from an individual to a small team. I want to build a mid-sized team because I want to encourage it. I want one guy to work as a CEO and decide he wants to disappear somewhere. I’ll go take over as an executive chairman for a few months. They will come back, and I’ll switch out with somebody else. I would love to build that model. Reward yourself. Give yourself time. Create experiences that might seem irrelevant that in the end will be relevant.

Reward yourself, give yourself time, and create experiences that might seem irrelevant that will be relevant. Click To Tweet

I love that. That’s the balance of time to recharge and step away from the business of work so you can come back refreshed. I love that new experience. I was not expecting you to say that you went off and became a cowboy. I thought you were going to say that you reward yourself by doing some trek climbing since that’s where you have some experience but regardless, that’s fantastic.

There are a couple of questions before we wrap up. You have so much experience in identifying what dials to turn and what levers to pull to optimize businesses, turn growth around, and so forth. Is there a book that stands out to you as one that you feel a lot of people should read or could benefit from even if they’re not necessarily working with product businesses or in manufacturing but if they have a better understanding of what to look for and how to optimize things, it could potentially benefit them, their business, and their clients.

I can say that 2/3 of the time, I don’t read and then I binge read. That’s one of my rewards too. The 2 or 3 that stick out are from long ago. Good to Great was one of the early management books that helped you think about it. I’ve read 5 or 6 in the same genre but the principles are useful. Although it’s not about turnaround, a random walk down Wall Street lets you look at money in a certain way when you’re working with clients. I always told you I start with fixed costs, which means I start with the financials. A broad look at the financials is useful and a good way to zoom out. I apologize. You will know the name. There’s an old productivity book by an Israeli guy where he talks about Herbie on the production line. I can’t think of the name.

It will come back later.

Some of you will know it.

If anyone remembers who that is, reach out to us. Let us know. Post it wherever you see this show like on YouTube, Spotify, or wherever it is. Leave that comment. Let us know what that book is if it rings for you.

It’s good because it helps you think about queuing and productivity. I work in a region. I started in China. I live in Shanghai, Beijing, and then here. You got to find the regional books that tell the story of where you are. You and I were talking about the Lee Ka-Shing area in Hong Kong. There’s a cool book called Red Roulette that talks about an entrepreneur who helped build the logistics around the airport in Beijing.

I would strongly encourage you as you work in an industry or geography to find good books. If you work for Exxon, for instance, Private Empire is a great touch on it. There are good books relevant to the geography and/or the industry that you’re in. I can’t emphasize it enough. That’s a third of my reading. You’re not going to be an expert. You’re not going to impress anybody but you will get a sense of where they’re coming from.

That’s good advice. I remember when I was living in Japan and running a business over there. I was trying to immerse myself in as many books about Japan, its history, culture, and all the different kinds of things as well as the business and trying to have some of that understanding, not that I would be an expert. I was schooled by many Japanese people in conversations or over meals but at least I had a sense.

I could drop a name or a location here and there. That oftentimes would impress somebody, or it would get them to feel like, “You understand what I’m saying.” They keep going. It makes that conversation for both people a lot more enjoyable. Before we wrap up here, I want to make sure that people can learn more about you and your company and see everything that you have going on. What’s the best place for them to go to or the one website they should check out? How can they learn more about you?

That’s easy enough. It’s InnovativeDirections.com. We have an online form you could reach us at or click and see who you could talk to. We would love to help if you have any friends looking for turnaround work or want advice on it. I don’t view anybody as a competition. We’re all in the same business of helping people. We’re always here if you need us.

That’s wonderful. Phil, thanks so much for coming on.

 

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2 thoughts on “From Hourly Billing To Lucrative Performance-Based Fees with Phil Krichilsky: Podcast #290

  1. Jamie Hendry says:

    The book about Herbie and the production line is The Goal by Eliyahu Goldratt. Super book! Read it at MBA school in 1990.

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