Linda Watkins, the CEO of Raleigh & Rosse, is faced with two distinct challenges. The first is the ongoing legal challenge relating to the company’s system of recording the hours worked by its employees. The challenges have been ongoing, and some in management have expressed skepticism about the effectiveness of the SPH (sales per hour) system. Additionally, the system has now exposed the company to a lawsuit that could deliver a judgment in excess of $200 million, in addition to generating considerable negative publicity for the company. Furthermore, the company is experiencing a downturn in sales, even while analysts are predicting sales growth for some the company’s competitors.
The sales per hour system is at the root of the company’s legal troubles. This system measures the performance of sales associates on the basis of their sales per hour. The system — and management- encourage employees to not record all of the hours that they work. For the employees, to do so would hurt their SPH score, which is critical to getting the best shifts for generating commission. For the company, it is evident that in many jurisdictions, not paying employees for hours worked in any amount is illegal. The New York State Department of Labor found that the company had violated state law, and doubtless other states would find the same. The company now faced a class action lawsuit from sales associates as the result of the practice.
The SPH system is the brainchild of Brian Rosse, the former CEO and one of the company’s owners. Rosse holds a tremendous amount of power in the company, both formal and informal. When new Human Resources head Bill Schwartz was brought on board, he expressed considerable skepticism about the SPH program in particular, but faces tremendous political obstacles in changing the program. The impact of the program is uncertain. The company has grown in the time that the program has been in place, but doubling the revenues in 12 years from 1995 to 2007 is not exactly stellar growth. There are also other factors that could have contributed to this growth — inflation and overall economic prosperity for much of that period among them. It has not been demonstrated with any certainty that the SPH system has made a positive contribution to the company’s growth. Even if it has, that growth must be weighed against hundreds of millions of dollars in legal judgments that the company now faces.
Issues and Symptoms
NY Dept. Of Labor judgment against the company
R&R is now facing class action lawsuit
Sales associate culture is negative
Press about the sales associate culture is negative
Only a matter of time before customers realize that the company is not putting their best interests first
Sales are declining, despite market gains
Morale is low
New HR boss skeptical about the merits of SPH
All of the problems except sales can be directly tied to the SPH system. The system has created dysfunction, negative publicity and substantial legal risk. It is also possible that the sales declines are related to the negative publicity. First, the clients might not appreciate dealing with a company that is perceived to be negative. Second, the clients may see how R&R operates, and realize that the company is not working in their interests. Sales contests to promote multiple purchases, and high pressure sales staff who not only push products on customers but steal sales from each other are often viewed negatively by consumers. Every client can read the story about SPH are see how some past purchases they were talked into fit into the paradigm. SPH creates this environment so is likely a contributor to the declining sales as well.
The luxury brand industry has globalized. Most luxury brands are either European or American but sales have gone global by this point in time, with Asia being a major growth market. Raleigh & Rosse operates only in the United States, however, placing them at something of a disadvantage relative to larger, vertically-integrated competitors. The customers are the ultra-rich, and the differentiating factor for firms in the industry is customer service. Historically, R&R has competed on the basis of providing exceptional customer service. The recession led to temporary sales slowdowns, but at this point most firms in the industry are expected to see sales rebound.
Luxury goods market is growing
Most consumers are ultra-rich and therefore recession-proof
Sales associates have a negative, sharky, competitive culture
Customers want to feel that they are receiving superior service
Limited application of technology in this firm and business
There is some risk of competition from online vendors, but there is opportunity as well
Slow pace of technological change in the industry
Recession hurt industry sales 2008-09
Most customers are relatively recession-proof
Many firms in the industry are enjoying recovery
High concentration in the industry
Asia is the new source of growth, so a focus for many firms in the industry
There is little government regulation of retailers
The main regulation is with respect to HR
New York State already judged against R&R
Class action lawsuit
Legal risk in other jurisdictions
Raleigh & Rosse is a family-owned luxury goods retailer, selling goods produced by other firms. Competitors are often department stores or branded stores of established luxury goods retailers. R&R operates only in the U.S., in contrast to many competitors. The company has stores across the country. In general, these stores have begun to underperform. In terms of the management structure, Linda Watkins is the CEO. Bill Schwarz is the new HR head, and he is from LVMH, so less entrenched in the R&R culture. Brian Rosse is a former CEO and unofficial spokesperson for the owning family. His ownership position lends him considerable formal authority and influence. SPH is his baby and he believes that it has been critical to the company’s success.
Strong reputation for customer service
National coverage (distribution)
Great lines of goods (breadth)
Established customer base
Low morale among sales associates
Class action lawsuit
Intransigent culture, esp. Brian Rosse
Organizational culture breeds negative attitudes in store
Competitors are looking at Asia, leaving U.S. market unattended
There is room to grow the product range
Some goods can be marketed online
Internal Analysis of systems, structures and problems
The SPH system is a cancer. First, it creates substantial legal risk. The company now faces a $200 million judgment. While the company’s legal counsel wants to claim that it has addressed some of the issues that New York State had, the relevance of this to the class action lawsuit is debatable. The lawsuit is a symptom of a dysfunctional human resources strategy that pits sales associates against each other. This strategy might serve to motivate associates to higher sales levels, but it also creates a toxic atmosphere in the stores. If one considers the Herzberg’s hygiene factors, working conditions, salary and supervision are all hygiene factors. The company is not delivering on these and that creates the sort of discontent that results in class action lawsuits. The lawsuit for wrongful termination was also a symptom of the toxic culture. The media attention is another symptom of this toxicity — if there was no good story there the media would not have jumped on the story
The company needs to find a system that can motivate higher sales but maintain compliance with the laws. The Ownership Culture and SPH are not congruent with many laws governing employment. Moreover, when word reaches the public that the sales associates have been seeking to churn sales from their customers, this is likely to turn off some customers. The new HR boss is from outside the company and he understands that the HR system needs to be replaced, but faces intense political pressure, especially from Brian Rosse. Finding the right reward system that motivates desirable behaviours is important, because the current system does not do that.
There is also a leadership issue at work within Raleigh & Rosse. Linda Watkins is the CEO of the company, but through his ownership Brian Rosse is still running the company. Watkins answers directly to him. This undermines her leadership. Consider that she brought in her own HR guy and he is paralyzed to fix the most broken system within the company. It is clear that Raleigh & Rosse needs to resolve this apparent leadership crisis — either Watkins is in charge or she isn’t. Or more specifically, either Rosse is retired or he isn’t. Either way, the two people running the company are having a hard time providing direction for the future, and a viable option to a broken HR system that will probably be dismantled by law within a year or two anyway.
Furthermore, there is little leadership at the store level. Store managers appear to revel in the atmosphere of conflict in their stores. They have become enculturated to this atmosphere and cannot look at it objectively. Thus, the leadership at the store level orients the associates to treat each other like crap. It is also worth noting that the store managers are also motivating the associates to deliver what is actually lousy customer service, where the interests of the associate are place above the interests of the customer.
Conflict and Resolution
There are multiple unresolved conflicts within the organization. When your sales associates are filing a class action lawsuit against you, that is probably a red flag that you might be doing something wrong. There are obviously no serious conflict resolution mechanisms within the company, so legal action is the only resort for the people who work at Raleigh & Rosse. This inability to deal with conflict in a mature manner is endemic to Raleigh & Rosse. Schwartz is unable to confront Brian Rosse with a plan to get rid of SPH. When associates have problems among themselves, managers simply shrug their shoulders. There is no resolution mechanism in place even for something as simple as enforcing employee honesty. A conflict about employees poaching sales, quite frankly, should be one of the easiest conflicts to resolve because there is clear right and wrong. Yet the managers at the company seem to prefer to have these conflicts and are unwilling to even address the issue.. So the overall trend is that Raleigh & Rosse, from top to bottom, has an unhealthy relationship with conflict. The company is not using conflict effectively and is now suffering from years of negative conflict within the company
Raleigh & Rosse must deal with their weaknesses before the company can concern itself with taking advantage of opportunities in the marketplace. This is because the company’s weaknesses have put it in a vulnerable position. It faces a major lawsuit and is losing customers to the point where it is dramatically underperforming the competition. The company therefore needs to develop strategy that will address those weaknesses.
The first alternative is the “do nothing” option. Under this option, the company would fight the lawsuit and carry on as business usual. This option is favored by Brian Rosse, but ultimately it does not address any problems. Not only is there the possibility of the lawsuit, but if the culture and publicity are hurting sales, this option will result in a continuation of sales declines.
The second alternative is to find a new HR system. This should not be too difficult, because merit and incentive systems are in place all across retail, but in compliance with the law. Store-based incentives would promote better service and render poaching moot. The company could then pay employees for their time without compromising their ability to earn commissions. The company could find other ways to compensate employees for going the extra mile — like the bonuses R&R used to give for churning.
The third alternative is to shift strategy altogether. Faced with a declining business model, the company can move to a salary-based system, get a serious e-commerce site running, and approach its business in an entirely different way. This approach is the riskiest and most comprehensive, but would put Watkins’ stamp on the company, take it into the 21st century, and leave its broken HR system behind.
Recommendation & Implementation
It is recommended that R&R should adopt the second alterative, but investigate the online option as well. R&R is known for its service, but service suffers when associate shark each other and churn clients. Clients know this — they are leaving the company because of it. Furthermore, the legal risk is great — the company needs a new compensation system ASAP. This system should incorporate store-based incentives, and corporate-wide incentives a well. Doing this would allow the associates to not only focus on sales but service as well. The company could be compliant with laws about paying employees for time worked.
In most companies, implementing this strategy would be easy. At R&R, there are significant implementation issues, in particular relating to the corporate culture and the leadership conflict. Thus, implementation will need to result from Watkins asserting her control over the company, marginalizing Rosse, and eliminating his signature program. Direct, personal appeals to Rosse are critical, because he has to willingly step back and support Watkins in the culture change program. If the store managers feel that Rosse will remove Watkins for eliminating SPH, they will maintain the toxic culture and await her dismissal. Watkins needs to be the one to convince Rosse. She can use Schwartz as backup with a comprehensive new HR plan, but as the CEO it is her job to exercise her political skills and move the company away from SPH, settle the suit, and transition back to a customer-focused culture. Part of doing this will require reminding Rosse of two things. The first is that the company is hurting and needs a new direction. The second is that SPH is relatively new and has proven to be incongruent with the ideals that drove the company to its reputation over the course of a century.
There is considerable risk that Rosse does not accept any of this. If he insists on the do nothing option, and other family members cannot be convinced to change, then the company is in a lot of trouble. At such a time, Watkins and Schwartz should leave the company. An intransigent owner is not somebody a good manager should work under. Alternately, Watkins could use the scorched earth option, blowing the legal defense of SPH so badly that the courts have no choice but to order the company to dismantle it. This option is obviously riskier (the judgment would be bigger, for starters), but as a last resort to work around Rosse instead of with him, this poison pill-style option is a potential contingency plan.
McShane, S. & Steen, S. Canadian Organizational Behaviour.
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