The premise of Food Network’s Restaurant Impossible show is that muscle-bound chef Robert Irvine is given two days and $10,000 to save a restaurant from going out of business. Some of these restaurants are literally days from closing, and many are hundreds of thousands of dollars in debt. These owners are so desperate that they often invite Blaster Irvin to expose their mistakes to a national television audience.
You may wonder how in the world Restaurant Impossible relates to the investment industry. As it turns out, many of the mistakes made by new, even seasoned restaurant owners are the same mistakes that keep investment companies from achieving sustainable success. After all, restaurants are great microcosms for SMBs (small to medium-sized businesses) because they are typically privately owned, operate in a single location, and employ staff and systems to perform day-to-day operations.
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Here are four recurring themes in the show that provide valuable lessons for our industry.
1: Dysfunction starts at the top
Thanks to clever editing and a slick one-hour format, the poor management of most of these restaurants becomes immediately apparent to viewers. There are owners who are only present for an hour or two each day, hoping that the restaurant will run itself. Conversely, there are owners who practically live in their restaurants and are so detached from reality that they no longer realize that bad food/bad service/bad atmosphere is destroying their business.
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A distinct lack of leadership is a common thread. Numerous episodes feature people with no real experience buying a restaurant, and subsequently struggling to define a purpose or vision for the business (other than just surviving).
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The menu often contains dishes that the owner wants or likes, but not what the market demands. The staff is disorganized and fails to perform even the most basic tasks of their job (like cleaning, which sends the already experimental Irvine into histrionics). This is not always because staff are incompetent – it is because they are not given clear instructions about priorities and expectations from owners and management.
The leader of any organization must set the tone for that business. Does management articulate and share a common vision and goal for the business? Do leaders foster a culture of calculated risk-taking and innovation, or cling to what has made them successful in the past? Are employees given clear expectations and held accountable for fulfilling their responsibilities? Is there an emphasis on constant evaluation and improvement?
In a small enterprise, all of this needs to come from one place: the top.
#2: A good cook does not make you a great owner (and vice versa).
We’re forced to play many roles at an SMB, but top-performing restaurateurs understand that just owning a restaurant doesn’t make them great cooks. At the same time, being a fantastic chef does not always make one a savvy entrepreneur.
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Several Restaurant Impossible shows have featured husband/wife teams who mortgaged their homes or used their entire retirement savings to buy a restaurant because one of them “had a dream and was a good cook.” Almost universally, these restaurants start losing money from day one, as they quickly learn, a good cook is not the same as running a business.
Similarly, private companies in our industry often have management structures that are dictated by ownership stakes as opposed to efficiency or capacity. The CEO of a portfolio management firm may be the person who developed the portfolio trading strategy. The sales manager can be an advisor who brings in a large book of business in exchange for equity. But do they have the skills to run a business or manage people? Maybe, maybe not.
When company direction is determined by ownership (as opposed to expertise), business decisions regarding management, marketing, technology, and long-term strategy are not always optimal. The most effective companies (and restaurants) have owners willing and able to self-evaluate and empower others to help build a thriving enterprise. They know that the key to success is doing what you’re good at and surrounding yourself with great people who are good at doing the rest.
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#3: How can you manage it if you don’t measure it? (For example, Analysis 101)
Like Chef Irvin, we’re amazed at the number of failed restaurants on this show who still use paper tickets instead of automated POS (point of sale) software to operate their businesses. These are the same restaurant owners who, in the show’s opening on-camera interview, don’t know their food costs, their labor costs or their profit margins on certain dishes. Prices are set arbitrarily based on competitors or “guts”. Business Intelligence is anecdotal (“Wednesday night is the slowest we think, but I’m not sure”).
At one such restaurant, the owners tell Irvin how grateful they are for their catering business because it’s what “keeps our restaurant afloat.” A cursory examination of their financials reveals that the catering business is actually costing the restaurant thousands of dollars per year because of its mispricing.
At another restaurant, the owners insist that they sell “a lot of beef wellingtons,” but, because they fail to track or understand business analytics, they don’t realize that only long-time customers buy beef wellingtons and there ‘sustain business. Long enough customers to keep. Or worse, the beef wellington costs more than the restaurant charges to make.
How many companies in our industry continue to set fees arbitrarily, based on intuition or competitors’ pricing, without considering how much it costs them to provide the service? For firms that charge fees based on a client’s assets under management, are all clients “created equal?” Are $50 million relationships always more profitable than $10 million relationships? Can you calculate, with reasonable accuracy, the total servicing cost of each of your relationships? (This includes your staff time, fees paid to third party services for reporting and custody, client retention costs, etc.)
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Sometimes, in the restaurant world, a group that has a $500 meal but holds a table for three hours (and consumes the staff’s attention) is less profitable than three $100 customers who quietly come and go at the same time.
The opposite can also happen. We’ve all seen or heard horror stories of relatively small account customers who spend hours of productivity requesting personalized, and sometimes unreasonable, custom reports or frequent face-to-face meetings.
The point is: If you don’t track these costs, you may end up attracting clients who end up costing you money, regardless of how much revenue they bring in to your business. But you’ll never know if your analytics consist of a few different Microsoft Excel spreadsheets, anecdotal observations, or worse, nothing at all.
#4: Clinging to the past (rather than building the future) is not a ‘recipe’ for success
Every failed restaurant owner featured in Restaurant Impossible is either inexperienced or naive. In fact, some of the most formidable owners on the show have years of experience and have successfully owned one or more restaurants in the past.
Their most common line of thinking is: “It worked then, why isn’t it working now?”
One aspect of the show’s $10,000 “makeover” budget is that a professional designer comes in to “freshen up,” or modernize, the interior of each restaurant. Many of these owners struggle with letting go of clutter and dated decor, believing, wrongly, that the design standards of the 1980s will continue to attract younger or more affluent customers.
They stubbornly resist changing menus that haven’t been updated in years to reflect different trends in the food industry or in their own communities. In one episode, the owners refused to consider changes to the menu or decor because both were favored by a handful of longtime customers. The problem is, except for weekly visits from these loyal diners, the restaurant is a ghost town.
We in the investment industry are particularly guilty of this phenomenon. The 1980s and 1990s were a great time to be in this business. With a booming economy and a stock market to match, it was a time of prosperity where elegant and expensive offices were seen as harbingers of success and credibility. Relationships were built with potential clients at golf courses and steak houses. It was almost impossible not to provide clients with healthy performance in their portfolios.
The industry-changing events of 2008 are still being felt today, but many organizations have failed to adapt to a new and more rigorous vision of money management, transparency and wealth. The industry is still behind the technology curve with software operators and so-called “robo-advisors”, while traditional firms (which still make up the majority of the market) have languished.
A huge investment generational gap exists, with most studies overwhelmingly showing that Generation X and Millennials will not use their parents’ advisors (and for the same reasons described above).
Ingredients for Success: A Checklist
Many restaurants that have heeded Chef Robert Irvine’s advice — and, most importantly, continued to advance his best practices — have reported increased sales and profitability after nearly going out of business. Here are some “ingredients” to use for your own future success:
• Define your business goals. Remember, making money is not a goal. It is a result.
• Build business culture around business goals.
• Make sure that every employee in your business – up to and including top leadership – has defined expectations and duties (defined means documented). Share it with everyone in your organization.
• Owners and managers need to be honest with themselves, focus on what they are good at and let others handle the rest.
Management and ownership are two different animals. It takes talented experts regardless of their ownership interests to run a successful organization.
• Make business decisions based on facts, not intuition. Understand how much each client is costing you. Build your pricing models around your costs and the added value you provide. If you build a pricing model around what your competitors are doing, you are a product.
• Look to the future, not the past. Emulate the leaders in your industry. Use the power of technology to increase the reach of your message and reduce costs.
Understand the specific characteristics of the generation that will inherit the wealth of the Baby Boomers. Start now to position yourself as someone who “gets it” to the generation.
• And finally, if Robert Irvine ever visits your office, at least make sure everything is clean!