That Would Put Me Out of Business
Introduction:
This week, Mel Gravely, Liz Picarazzi, and Jaci Russo talk about how they set prices. Jaci explains why she refuses to respond to requests for proposals. “We have not participated in a single RFP in 15 years,” she says, “and we won’t under my watch.” Mel explains how his construction company manages to get work despite always being among the highest-priced bidders (which is why he never gets government jobs). And Liz tells us what happened when she was forced to raise prices because of the tariffs placed on goods manufactured in China. But first, she tells us what she’s thinking now that there’s a possibility those tariffs could go to 60 percent. Plus: We review how the three owners handle employee reviews.
— Loren Feldman
Guests:
Mel Gravely is CEO of Triversity Construction.
Liz Picarazzi is CEO of Citibin.
Jaci Russo is CEO of BrandRusso.
Producer:
Jess Thoubboron is founder of Blank Word.
Full Episode Transcript:
Loren Feldman:
Welcome, Mel, Liz, and Jaci. It’s great to have you here. Liz, I want to start with you today because the topic of manufacturing in China has been in the news of late. As president, Donald Trump imposed a tariff of as much as 25 percent on trade from China. He’s now saying, if he’s elected in November, he plans to raise that to 60 percent. I’m wondering, what would that mean for you if that actually happened?
Liz Picarazzi:
Well, 60 percent would put me out of business, and I’m hopeful that that doesn’t happen. And frankly, I’m hopeful that Trump isn’t elected. But regardless of who wins the presidency, the threat of China to Taiwan right now seems to be heating up since the election. And even if Biden wins, if there was tension there, he could raise tariffs again. So it’s been a little bit scary. When I woke up on Monday morning, that’s the first thing I focused on.
We already have the wheels in motion to look into what we’re calling a China-plus-one strategy—so, to probably still have China as our main manufacturer, but now we’re looking as well at Vietnam and Mexico. And then in a tertiary way, I should say, we’re looking again at manufacturing in the U.S.
But as I’ve shared here before, I have never been able to affordably manufacture in the U.S., despite trying many times to reshore my work. Most recently, it was in 2021 when I spent two to three months of my time with an RFP, getting bids from various American factories. And on average, the quotes that I was getting were 67 percent more than I’m paying in China. And that’s even inclusive of the tariffs. So for me, it is a really big deal. The geopolitical risk, regardless of who wins the presidency, is something I need to take seriously. And, you know, we’re waking up to it.
Loren Feldman:
You’ve had a great relationship with the supplier you use in China. Tell us a little bit about how that relationship has evolved.
Liz Picarazzi:
Sure. So I moved my manufacturing over there in 2017, after having produced in the U.S. for about three years, in literally five different states. So you can see how diligent I was about trying to keep my manufacturing here. There’s a huge stigma about producing in China, so I’m always very careful about how I talk about it. And I know that you like to ask me about it, so I do sometimes choose my words carefully.
Loren Feldman:
Tell me about the stigma. I know a lot of brands love to promote the fact that they are made in the USA, but are you saying there’s actually a penalty for manufacturing in China?
Liz Picarazzi:
In the minds of Americans?
Loren Feldman:
Yeah.
Liz Picarazzi:
Oh, absolutely. We all know that. There’s an assumption that I’m manufacturing there because of price. And that’s actually one part of it. I’m actually producing there also because of quality, about the level of trust I’ve built over the years, my relationship with my factory, as well as the middle contract manufacturer that I work with. They’re based in Shanghai. That’s actually partially an American company. And so all of the conversations with the factory, the negotiations, the translation, the tariffs, everything that we go with, we’re not doing that in our office in New York. We have kind of our satellite office in Shanghai that’s doing all of this.
Over the years, I’ve probably gone there like five or six times, most recently in December. And I would say the relationship has been good not just because I’m getting kind of the price and the quality that’s better. But for me as an entrepreneur, I like it when people are excited about my ideas and want to move my ideas forward and want to get creative in the weeds, side by side. When I go to China, we sit for hours and hours, right on the factory floor, looking at things that could be improved, testing things out. For me, the quality control, making sure everything is being done right.
But I think there’s an understanding of the Chinese that they’re kind of just drones or robots, maybe not that creative. And I found exactly the opposite. I mean, it’s such a delight for someone to be excited about what I’m doing. You know, I’m an entrepreneur. I have that ego involved. I didn’t find that level of excitement at any of the three factories I produced at in the U.S.
I hate to say it, but there was a bit of a feeling I had of, “Who is this person with her trash bins? What does she know about this?” Or, “There’s no way this is going to go anywhere. We’re not going to be able to give her the price she wants, because she’s never going to sell many of them.” Okay, whether or not that was in their heads, I don’t know. They certainly wouldn’t have said that. But when I went over to China, and there was the sort of, “I want you to want me,” as in the song, we feel good with that.
We were in the New York Post a couple of years ago with some filthy Citibins in Times Square, where we looked really bad. And a couple of the things we needed to reengineer on the bins, we moved that ahead so fast. And we made adjustments to doors and various hardware that we had air-shipped from the factory, that we were able to get into Times Square and installed within three weeks. Unheard of! Unheard of with anything I had done in the U.S.
So for me—okay, and this is a sample of one, me, American company and my factory; I haven’t worked at other factories—I have had a really good situation. And one could say, it is just the factory. It’s not China as a whole. But whether I’m in the U.S. or China or Vietnam or Mexico, there’s a lot of expense involved with changing your supply chain in any way. And so I’m not going to make any jerky, quick decisions. I’m going to be very methodical about it. And I will be very sad if the tariffs go up to a point where I can’t continue to work with this factory that I have built a very good relationship with, both professionally and personally.
Mel Gravely:
Wow.
Loren Feldman:
Liz, we have talked here previously about your attempts to kind of have a plan B. Nothing has panned out the way you hoped it might. At this point, are you thinking something has to pan out here? You have to have a plan B?
Liz Picarazzi:
I have to. Yeah, this is the very first time. If you’d asked me that even two weeks ago, I wouldn’t have said that. But with what’s going on in the Red Sea, with hijacked cargo ships by pirates, and anything with my supply chain being disrupted. We have a large order that’s being manufactured right now, that’s going to be shipped over here in like three to four weeks. And I know that that could affect it. It’s definitely affecting our shipping rates. So there’s volatility.
And with the tariffs—I did look it up in advance of our taping today—when I first started producing over there, my tariff was 3.4 percent. Then when Trump was in office, it went up to 18 percent. Our tariff bills for 2020 were crazy high to the point that we probably were operating at a loss. And then, since 2021, I’ve been at 11 percent. So if it were to go up more than that, that would have a huge impact on the business. So yeah, I do take it very seriously this time. And you know, I have my list of five or six objectives for 2024, and the China-plus-one strategy was number two on the list.
Loren Feldman:
What happened when the tariffs first went up during the Trump administration? How did you react to that?
Liz Picarazzi:
I just paid them and hoped for them to go away.
Loren Feldman:
Did you change your pricing?
Liz Picarazzi:
We did raise our pricing, probably not proportionate to the amount of increase in the tariff. We appealed it. There was an appeal process. And I think most companies, unless you had a lobbyist or a lawyer or something involved, were not going to get an exclusion, and we didn’t either. So that’s what I did back then. And I’m just glad I wasn’t raised to 25 percent, because that could have happened easily. Our classification on our goods was kind of in a gray zone between the 18 percent and the 25 percent tariff, and we were able to get it to 18.
Loren Feldman:
So it sounds easy to say, “Well, we’re going to check out Vietnam and Mexico.” What is that process like?
Liz Picarazzi:
Well, so on the Vietnam front, it’s actually fairly straightforward for us, because the contract manufacturer we use in China set up an operation in Vietnam in 2020, when all of this tariff nonsense started. So they’ve had four years to establish a presence and to have relationships with factories around Vietnam. So, I reached out to them and said—this is something we’ve briefly discussed in the past—“This is something I’m very serious about.”
So from the time of asking for that quote a couple of weeks ago to now, it was seven working days. I got pricing from Vietnam. I know what it is. I know that it is going to be less. I don’t know by how much less, because we still need to kind of figure out the tariffs and so forth. But that is moving along really fast. And we’re actually having a meeting next week with the head of the whole Vietnam division of my contract manufacturer, who’s in New York. So that’s looking very promising. I would not be surprised if I got on a plane in a month or so and went to Ho Chi Minh. I’ve never been to Vietnam before. For me, I love to travel, so there’s a little bit of excitement about this diversification opportunity.
And then on the Mexico side, we’ve never really looked into it that seriously, but I do have a personal assistant who’s incredible with research. And literally, just yesterday, I assigned him to start looking into Mexico. So, looking for metal fabricators that make similar goods, whether or not they’re trash-related. It could be safes, metal cabinets, any sort of goods related to bent metal manufacturing. So, those are the two countries we’re looking at right now.
And stuff like tooling? I haven’t figured that out yet. You know, we’ve spent a lot of money on tooling for all of our products with our factory in China. Does it mean that I need to retool everything in Vietnam? Or does tooling get moved over? Do we have tooling in both places? Those are the sorts of details that we need to work through. But like I said, changing anything in your supply chain involves a lot of thought and time and work. But we need to do the work now. Before, we were kind of delaying it. But I’ve gotta say, after that Trump 60-percent number, it’s been on the top of my mind.
Mel Gravely:
There is so much to unpack in everything you said, Liz. I’ve got like 72 questions. But I’ve been forced into a moratorium, so I’ll just ask one. [Laughter]
Loren Feldman:
Mel, Mel…
Liz Picarazzi:
Oh my God, I’ve never gotten a moratorium. You’re new to the podcast. How do you have one already?
Mel Gravely:
Bad behavior in a previous podcast episode. [Laughter] It’s a long story. So Liz, I’ve got to ask. This feels like it’s got elements of cost. You mentioned cost and quality, but it also feels a little bit like you’ve been disrespected domestically. Like not appreciated, not—I don’t know what other words to use. Does it feel that way? Did I capture some of that accurately?
Liz Picarazzi:
I don’t want to say it’s disrespect, even though it might be. But I would say, not taken seriously. So the example that I often use is, Sara Blakely, the founder of Spanx, who sold her company for $1 billion because she was 100-percent owner, when she first started her company and she was working with a couple of factories in the U.S., they didn’t really respect her. They didn’t really think cutting up pantyhose and making them into shapewear—like, what is this? She created an entirely new category. And I think she still manufactures in the U.S., but I’ve heard her speak many times about being a woman going into manufacturing, into something that admittedly you don’t know a lot about, which means you’re relying on the factory to help you advance your idea.
So for me, as an entrepreneur, I’m always looking for people to advance what I want to do in any area. But in manufacturing, if someone takes me so seriously that they’re going to create prototypes quickly, and they’re going to iterate, and they’re going to work on pricing to make sure that this product will work in the market, that it’s sellable… So, to answer your question, I don’t want to say it’s disrespect. Because the other thing is, I really liked the people I met with at the factories in the U.S. I don’t think that they were necessarily chauvinists. But I think that they hadn’t really encountered someone like me before.
And I found in China, that was never an issue, because I’m an American. Already, they’re not really going to understand me. So it doesn’t really matter if I’m a man or a woman. If they can do what I need, and I pay them for it, it’s transactional, primarily. The other thing I would say, to the credit of American manufacturers, is they’ve probably seen a lot of people like me who work with them for a bit, advance the design, and then outsource it. And so they’re leery of you taking their work and doing it elsewhere. I didn’t do that, because I was still somewhat of an infant. But in 2021, when I attempted to reshore manufacturing, I could tell in their pricing that there was probably built-in—like, “If we do one production with Liz and it doesn’t work out, well, at least we haven’t lost money on it,” right?
So I guess if you boil it down, it takes a factory. They have to take a risk or chance on you, or on me. So, one, I’m a woman who has an undergraduate degree in Russian. Like, what do I know about manufacturing aluminum trash enclosures? So from their perspective, they probably are like, “What is going on here? Who is this person? And why should we put any effort into something that could likely fail?” In addition to which, if they’re already really successful metal fabricators, and they’re doing stuff for the government or for the military or for elevators in Manhattan skyscrapers, they have a consistent flow of really good orders in business that they might think that they can’t get from me.
Mel Gravely:
Yeah, Loren, maybe there’s a whole other podcast episode on this—but there’s a cultural element of how we do business that is more than the numbers. And I think the combination of small and different often come together in ways that don’t serve certain kinds of businesses. And I’m disappointed that Liz hasn’t found a place in the U.S., because I think that we can get very, very close to closing the gap in pricing in the U.S. on most things, many things, in manufacturing—particularly metal, especially if you consider risk. So if risk is at all a factor, I think we can close the gap. What I don’t know that we are positioned to do is to close that gap at the intersection of smaller than huge and different, presenting differently. And I don’t know that our culture here in the U.S. is ready for it. And so, anyway, I’m just intrigued by what you’re experiencing.
Loren Feldman:
I’m no expert on manufacturing, but I have spoken with other startup manufacturers who have described to me a similar struggle to find a manufacturing operation that would take that chance on them. And you know, it’s a business decision for them like any other business. They’re looking at a new product. Probably the majority of new products that they’re asked to manufacture do end up failing, I suspect. So, under the best of circumstances, it’s easy to imagine that there are a lot of factories that would rather just not deal with something new.
Mel Gravely:
Yeah, and it’s understandable, right? They’ve got to have their own business models. And like Liz said, if they’re flush with very large contracts, why should they take a one-off for something that even at its height is not going to be as big as the things they have?
Liz Picarazzi:
Yep. Well, the other thing is China. If you want to manufacture there, a lot of people before I went there were like, “Oh, you’re never going to meet their MOQ,” minimum order quantity. And I’ve actually found that not to be true. The MOQs were higher in the U.S. than they were in China. And again, I’m a sample size of one. I’ve had a seven-year relationship with them. But they really wanted my business. And so, if I were only ordering 40 in the beginning, there was no huge price increase on that. It was like, “Let’s run these 40, see if it works, see what we need to tweak, and then we’ll extend it out further.”
It wasn’t just about the pricing. It was making sure we get the product right before we mass-manufacture it. And I think most Americans think that the only way you would want to go over to China is if you are ready to mass-manufacture it. Whereas I’ve found that China has helped me innovate my product, so that I feel safer with mass manufacturing. And I just love the process of being side-by-side on the factory floor. We have something we’re working on with our doors and our opening mechanisms that we’re still trying to get right. And when I was there in December, we tried, like, 10 different locks and doors.
And I never had that experience in the U.S. It was more like I told them what I needed, and then I would come up and look at a sample, or when it was all done. I wouldn’t be right there and saying, “Can we try this? Can we try this? Can we get a different lock? Can we try the door a different way? Can we redesign the door?” American factories, they don’t really have a lot of patience for that. Unless, I don’t know, you’re Boeing or something where it’s going to be some huge contract. But I really feel that I’ve been able to innovate and advance my product because of the side-by-side nature that is very similar to Agile software development.
Loren Feldman:
Liz, if we could, I’d like to go back to the discussion about pricing a little bit and what you learned from the experience of having to raise your prices when the tariffs came into effect. I guess, first of all, I’m curious what your philosophy of pricing is. When you think about pricing your trash bins, are you focusing more on covering your costs or on what the market will bear?
Liz Picarazzi:
So, I think it’s mostly what the market will bear. Oftentimes, when we’ve increased prices, it will be at a time that many other products are increasing prices. To say we’re raising prices 12 percent, as we did a couple of years ago, because of difficulties in the supply chain and cost of goods coming up, occasionally, we’ll get some pushback, but we’re not a commodity. We’re a pretty specialized product. So if someone is having a trash-and-rat problem, and the only product out there to really deal with it is Citibin, which is true in a lot of cases, they’re not going to be as sensitive to a 12-percent increase. Because they’re going to be able to solve their trash-and-rat problems and have to pay 12 percent more. Otherwise, they’re still going to be dealing with that.
Loren Feldman:
And was that your experience when you raised your prices?
Liz Picarazzi:
Yes. We did not get a huge amount of pushback. We may lose a little bit of business, but oftentimes, people, let’s say they think it’s too high and they shop around. They still come back in most cases, because they have their requirements of what they need, and they’re not going to find it somewhere else.
We’ve got to be careful with it. We definitely wouldn’t want to gouge. We can’t. We wouldn’t, and we can’t. But I think one thing with philosophy on pricing is, I’m probably a little slow to raise prices. And I know if Jay’s listening to this, he’s not going to like it. [Laughter] But every time I see him or talk to him, he wants to talk to me about my pricing, too.
Loren Feldman:
Well, you learned an interesting lesson. And I wonder if it encouraged you to think about how much further you might be able to push?
Liz Picarazzi:
Meaning with my pricing, how much further I could go up?
Loren Feldman:
Yeah, having had the experience of being forced to do it and finding little pushback.
Liz Picarazzi:
Yeah, well, I think that the place where I have a little more flexibility with pricing is if it’s more of a volume order. So with cities, where they make bigger orders now, it’s not going to be as high of an increase as it’s going to be with a residential client for their brownstone. I’ll probably put the increase on them and not really lower it, because it’s low volume. So, that’s one thing that I’ve noticed that we do with the pricing.
Loren Feldman:
Jaci, I’d like to get you involved here. What’s your philosophy of pricing?
Jaci Russo:
You know, Loren, I’m just sitting over here being real quiet, thankful for professional services that don’t require any manufacturing. [Laughter] The ability to have—
Liz Picarazzi:
I’m so jealous.
Jaci Russo:
—complete control of my costs. I just want to be real quiet and have no one pay attention to me in the corner. I empathize, I do. I can’t even imagine having all of those factors outside of my control, being in the middle of a political battle. I will pray for you daily.
We’ve got some clients in the agricultural space, and they’re singing the same song, but their battlefield is immigration. They need workers, and the thought of ending immigration—and when it was shut down in ‘20, it was crippling to their industry. There are farmers who went out of business because they just couldn’t find enough people to work on their farm. There are a lot of times it feels like the people who are making the rules have never actually done the work of the people that the rules will affect.
Mel Gravely:
That’s always true.
Jaci Russo:
And so, I will sit here quietly grateful for my professional services business that I get to be the king of, or queen. I get to decide a lot. I don’t have nearly the same kind of external factors that affect my business, and I am forever grateful for that.
Mel Gravely:
Jaci, you do have a maybe even a bigger challenge in pricing, though, right? I mean, in Liz’s business, there’s a comparison set. There are some costs on the bottom side. She can navigate to find a space she can justify. Professional services is more difficult. True?
Jaci Russo:
It is both more difficult and more opportunity. So, we look at a lot of factors with pricing. And it’s kind of a complicated situation that I think I’ve tried to make easier. Because I’m not financially-minded. That’s not my background. And we joke all the time that there are a lot of answers that QuickBooks could give us that I don’t know how to understand. So I have an Excel spreadsheet for that. I just live by Excel, because that’s clear. And I understand those columns. And that makes sense to me. And I’ve taken classes on how to read my P&L, and it still feels like Greek. So I just go to my Excel spreadsheet, and at least it’s not pen and paper. I feel like I’m at least one step ahead of that.
But so when it comes to pricing, when we started the agency in 2001, there were 84,000 other ad agencies, and I would say 99 percent of them were hourly. The agencies I had worked in both in Los Angeles and in Lafayette were hourly. And so it really was pretty plain and simple. And I didn’t like that model. And I really wanted to evolve this into a project- and retainer-based model. So then it was an even stickier way to go forward.
So I didn’t understand that there was an established concept called value pricing, but I know now that’s what I was doing. And so we, I think, really kind of perfected our value pricing. And over the years, we realized there are a lot of factors that go into it. Part of it is: who’s going to work on it, how long it’s going to take, the volume of the work. But then we get into some of the trickier things around the value to the client. Because I can do the exact same logo project, and to a brand new startup, it has a very different value than to an established Fortune 500 company.
So we modulate based on that list of factors. So that gives me a lot of freedom, but also a lot of really trying to find that sweet spot. And making sure we’re always checking ourselves and doing the best we can to make the decision of our clients not based on price—that we’ve earned our way in and they appreciate that price may be a consideration. But it’s maybe fourth or fifth on the list when they’re deciding.
Loren Feldman:
How much do you think about where you stand next to competitive offers?
Jaci Russo:
We left the RFP rat race about 10 or 15 years ago, and that really freed me up to not worry about what other people were charging. RFPs are designed to put apples next to apples. And it’s a very price-centered approach to choosing an agency. And I think that should be maybe the fifth consideration, because with choosing an agency, you’re dating, and you’re getting engaged, and you’re getting married. And you should not do that just because they’re the cheapest available option on the corner.
So, it’s a lot about trust. It’s a lot about chemistry. It’s a lot about expertise. And we want people who think those are more important than pricing. So then, if there is a slight fluctuation between this price or that price, we’re still going to get the gig. We went from being the least expensive company in the room, and not winning, to now most of the time being the most expensive company in the room and winning. And I like that version better.
Loren Feldman:
Jaci, when you say you left the rat race of RFPs, does that mean that when somebody comes to you with an RFP, you refuse to play along?
Jaci Russo:
I say things like, “Thank you so much for considering us. But at this time”—which is for the past 15 years, and will continue to be for the rest of my life—“we don’t participate in the request-for-proposal process. If you want to meet with us, and have us do a discovery and put together a proposal, we’re happy to do that. But I’m not filling out your RFP. I’m not playing your game. I believe that you already know who you want to hire, and I think you should go hire them. And don’t waste my time so that you have somebody to say no to to justify the decision of who you want to hire.”
I don’t always say that last half, but I think it. And my creative team is happier, I am happier, we are happier. We have not participated in a single RFP in 15 years, and we won’t under my watch.
Loren Feldman:
Why do you assume that somebody who’s doing an RFP process already knows who they want to hire?
Jaci Russo:
Because most of the people who I’ve talked to who have conducted RFP processes say, “We really know we want to hire this agency, but we need to have five to justify the decision.” I’m like, “Okay, good luck.” And sometimes they say, “It’s me. We really want to hire you, but…” I’m like, “We’re not going to be a part of a decision by committee. We’re not going to look as good on paper as we do when we get to actually have conversations and talk. So if we’re just filling out this piece of paper, and we’re going to be judged apples to apples on the paper, what we’re bringing to the table is not going to come through. I’m not doing spec work.”
That makes me sound like I’m very unpleasant, but I’m very pleasant to work with. We’ve been able to sort of narrow down and figure out where we excel. And that’s where we spend our time.
Loren Feldman:
Mel, I’m guessing you do play the RFP game. Am I right?
Mel Gravely:
We do, in a select way. We will RFP if it is a qualifications-driven RFP. So we’re not afraid of the pricing part, but there must be a qualifications part of it. So we don’t hard bid—and hard bid would be basically—we’re a construction company—“Here are the drawings. What’s the price?” That’s a hard bid. We don’t do that at all, zero, none. Because we don’t want to be low. But we’re not afraid of competing, if price is a factor amongst others. So we do qualitative-including RFPs, Loren. I hope I made that clear.
Loren Feldman:
Tell us about your overall philosophy of pricing. Where do you want to be in the market? I mean, it must be enormously complicated in construction, because you have the timeline and supply chains and all kinds of things you have to think about.
Mel Gravely:
Yeah, I think what we want to make sure is we have a combination of factors that make us the best answer for the customers. We really don’t go after customers where we think we’re not going to be the best answer. So for example, if a customer wants a 12-month project done in six months, we’re not going to go after that, because either we’ll have to break ourselves or break our subs to make a 12-month process a six-month process. So, we’ll pass. We’ll tell the customer the truth: “We think six months is too aggressive, to be safe and to have a good product. And so we invite you to make it a 12-month project. Maybe 11 months, we’ll go after.”
So we want to have the parameters around it, also. In our build-up of costs are our subcontractors, their materials, any self-performing work we’re doing, our margin. So we build it up from the bottom. And we want to finish in the top 10 percent of price, because we think in the places we compete, we are either the best or amongst the best. Price, in our opinion, should be an indicator of where you think you are in the market. So we tend to be high. And for those customers who want the total package, they will pick us 67 percent of the time. And for those who don’t, they’ll never pick us. And so we try to make sure we don’t compete for those kinds of customers.
Loren Feldman:
Do you have software that spits out a number for you?
Mel Gravely:
Sure, we do. We do have estimating software that takes square footage and takes drawings and loads in all of our subcontracting costs. And it spits out a number, but that’s usually not the number. That’s a number, and then our folks manage to look at that. They think about what we ought to get as profit, based on size of the project and market conditions and how bad we want it. And they’ll put a little art to the science.
Loren Feldman:
I don’t think it’s a coincidence that none of you are commodities, none of you want to be the cheapest number in the conversation.
Mel Gravely:
But Loren, that’s a good business. There are a lot of folks, particularly in the government-contracting space, who are very good at being the low bidder, and then very good at change-ordering their way to significant profit. You laugh, but if that’s how the customer wants to buy, they’ve set the terms: This is how we want to buy.
They’re also accepting that when we look at drawings, we’re trying to tell the customer, “You’re missing this, you’re missing that.” When the low-bid contractors look at drawings, they’re so happy that the architect left this out or left it gray, because that’s where they’re going to be able to make money in the future. So the customer set that up, that dynamic. And I think there are some people who are really, really good at it, and I envy them for their skill-set in change-ordering their way to significant profitability, probably beyond what we’re seeing.
Loren Feldman:
Well, you probably don’t envy them that much. Or you would follow the same process.
Mel Gravely:
Well, our customer set is different. So we don’t do any government work. And if we did, most of the government agencies in our area must take the low-responsible bid. And so, we’re never low. We’re always responsible. We’re never low. So we don’t get a chance to participate in a lot of government work. But those same contractors that do that well, you go to a private company like a Procter & Gamble or Fifth Third Bank, and you try to change-order your way to profitability, that’ll be your last project.
Liz Picarazzi:
Because you’re not going to get referrals, either.
Mel Gravely:
No.
Liz Picarazzi:
I did a home renovation last year, and I was change-ordered way beyond what I should have been. I do agree that I had left out some items that were overlooked. But because he change-ordered me—he just was crazy about how much he did it—I would not recommend him to anybody. And word of mouth will get around about a business, if they’re change-ordering like that. And that sounds like you’re able to avoid that Mel, because you’re already on the higher end.
Mel Gravely:
Absolutely.
Liz Picarazzi:
And you want customers that understand that, too. It’s not in your interest to have an uneducated customer that doesn’t understand how, if you don’t get it kind of right from the beginning, you’re going to change-order it through. And then the price is going to be double what the first proposal said. And that’s what happened to me. I learned my lesson. Whoa!
Mel Gravely:
Yeah, our customers are very sophisticated around everything in their procurement process, including construction. And so, they often know as much as we do. They know what they’re getting. And here’s what they say to us. If we say, “Well, that was missing on the drawings.” They will say to us, “Well, you knew what we wanted.”
And we should have known what they wanted. They’re right. And so they don’t accept the change. Now, if they change scope and say, “Let’s add a room,” that’s different. But if there’s a toilet there, and they didn’t have a toilet-paper rack—I’m making a very silly example—well, you know a toilet needs a toilet paper rack. So we should have made sure that was in our bid, because who doesn’t want a toilet with a toilet-paper rack next to it?
Loren Feldman:
Mel, were you able to take this approach early in your time with the company? Or is this something that evolved over time as you figured it out?
Mel Gravely:
No, we were blessed enough to start in this position. If you remember, Loren, I bought this company, and it only had one customer, but it was the most sophisticated buyer of construction in the city. It was our Children’s Hospital here in Cincinnati. And so we started at the high end. Our people understood how to work there. And that’s how I learned that business. My background is selling to big, complex customers. We combined those two ideas, and that’s how we grew.
Loren Feldman:
Jaci, in our emails leading up to this recording, you expressed an interest in talking about employee reviews. What kind of guidance are you looking for?
Jaci Russo:
Well, I always want to know: What’s the new thing? What are the best practices? Where are we leaning towards now? And we’ve done it all: We’ve done peer reviews. We’ve just ignored them. We’ve done them once a year. We’ve tied them to raises. We’ve separated them from raises. And I’m always wondering: There’s got to be a better way.
And when I sent the email, it’s because it’s really been on my mind. And we had just scheduled our whole round of them. And maybe because I’ve really been giving it a lot of thought or because this particular team that we’ve assembled—and we’re in about our second or third year of this group really kind of gelling and working together—is the best group we’ve had and the best round of reviews.
Everybody came prepared with feedback. I set some clear expectations. So I’ll take a little bit of credit on that. But I give them the credit of really participating in it, bringing solid self-review and agency review with some great feedback. Michael and I did it together, which we try not to take any meeting together, ever, because running the business together and being married to each other is enough. We don’t also need to be in the room together at all times.
Liz Picarazzi:
I understand that.
Jaci Russo:
Yeah, right. I mean, it’s a whole thing. There’s a whole series that could be just dedicated to working with family/spouses. And I think what we are settling on right now is we’re going to continue to do self/agency reviews, and doing it twice a year—January and July—and separating it from raises.
Even if somebody’s due for a raise, we’re not gonna talk about it in the review. We’re gonna focus on performance and technology and what’s going great, what we could do better. And then, a week or two later, have that, because we just want to not tie those two things together. And I thought, “Well, maybe that’s wrong. Maybe we should tie them together.” So I just was curious about the thoughts from the others.
Loren Feldman:
Is that a new policy for you, Jaci, separating the conversations over—
Jaci Russo:
Having policies is new, Loren. I mean, this whole accidental entrepreneur thing. I mean, we’re just figuring it out every day, day by day.
Loren Feldman:
Liz, what’s been your approach?
Liz Picarazzi:
So I mean, I’m still a small business. So I sometimes compare what I do to how it was in corporate when I worked at American Express. We did two reviews a year and the 360-review process where you give reviews of your colleagues and they of you. Those are helpful in some ways, but they also can cause trouble in other ways. As long as I’ve been a small company, I’m trying to keep it really simple. So we just do reviews once a year. It’s usually no more than like two pages of actual review, which I write. We do handle compensation at the same time to kind of keep it simple.
One thing that I’ve found, part of keeping it simple, is really having a framework of three things: What should you continue doing? Which is the biggest bucket. What should you start doing? Which is usually an opportunity area where you’re behind or weak. And then, what should you stop doing?
And stop doing is usually the more difficult part of the conversation, and I don’t need to have those very often. But that’s kind of to show them when we next time get around to this and we do the review, you need to be moving this stuff that’s in the start-doing into the continue-doing bucket. Sometimes when I see someone who has that same opportunity area, year after year, I’ve had to learn that it’s on me to actually not expect that of them. Like, just talking to them about it once a year is not going to change it.
So, as an example, I had a designer who worked for me a few years ago. He’s a German architect. And he was very instrumental in some of the early designs of Citibin. He wasn’t actually a very out-of-the-box thinker—he was a German architect. He was narrower with what he could do. He was very, very good.
So in one year, kind of spontaneously, right before his review, I was like, “You know what? Maybe if I give him a new title, he’ll be more innovative. And that’ll get him around to where I need him to be.” So I made him the director of innovation, thinking that that conversation and that title in his performance review was going to make him innovative. And it didn’t. And that was my fault. Like, don’t use performance reviews to try to push someone into a role that they’re actually not really meant for. And I’ve done that to several people over the years. But I try not to do that anymore.
And then one other thing I can say that has come up for me a bit in reviews, especially in the last few years, is because the inflation rate has been so volatile, if I do a review at the point when the inflation rate is like 8 percent—as it was in 2022—if I give someone a raise that doesn’t correspond with that, they’re not going to like it. Most people wouldn’t like it. But Loren, I know you sent around an article back in 2022 that said you can’t peg the raise to inflation, because inflation is variable.
And so I’ve had to have a couple of tough conversations where we’re in New York City. The cost of living here is already very high. If I’m not giving them a raise at the rate of inflation, they’re going to feel like they’re losing money. But then when the inflation rate comes down, it normalizes. So that’s the sort of conversation I’ve had to kind of get used to having. You know, I’m informal about it. As we get bigger, I’m probably going to have to hire some HR consultant to help me with my whole review process. But as it is now, it’s been very straightforward.
Loren Feldman:
The criticism that I’ve heard of linking the conversation of the performance review with compensation is that the employees tend to only hear the compensation part of the conversation and everything else gets forgotten. What’s your approach, Mel?
Mel Gravely:
I don’t know the sizes of our various businesses, but about five years ago, I had an opportunity to hire a new VP, an HR leader, and I hired her because I wanted a performance management culture. And to me, the performance conversation is only a part of it. And so we have a pretty—maybe it’s on steroids, to be honest with you, maybe it’s too much—but we have quarterly conversations. Everyone’s direct boss talks to them once a quarter, and it’s that simple conversation Liz outlined.
Loren Feldman:
You have over 100 employees, right?
Mel Gravely:
Yeah, we’ve probably got 110 or so at this point. But it’s the conversation Liz outlined. In general, “How are things going?” But, “What do we want you to continue doing? What do we want you to stop?” So it’s at a pretty high level.
Once a year, there is an actual rating where you go through and you are actually scoring on predetermined items. And they’re all tied to our values and our goals for the year. And then each individual has a set of development items they’ve picked and worked with their managers to develop. And so we’re reviewing that. “Have you gone through the various trainings you said you’d commit to? Have you gotten the exposure you need on your job to take that next step? Have we moved you closer to your career aspirations, whether inside or outside of our organization?”
So there’s a lot of steps to it. We run it on a software platform that everybody hates, but it’s a way to keep it all collected. So Loren, I just believe that one day, we’re going to be a billion-dollar business. And if we don’t build the culture intentionally, it’s gonna get really raggedy one day. And I didn’t know when that day was. So we just decided to invest pretty heavily in this performance-development culture.
Loren Feldman:
Jaci, any questions?
Jaci Russo:
No, those are two amazing perspectives. And I find myself kind of squarely positioned in the middle, not by dollar volume, because I’m definitely not half a billion, but by process.
Loren Feldman:
Mel’s not at a billion today. [Laughter]
Mel Gravely:
I’m not at a billion, either. I want to be clear.
Jaci Russo:
You hear it in his voice. He’s gonna be. But no, I love the feedback, because it really helps me see the things we’re doing right. I particularly like the “keep, start, stop,” because I want to simplify ours. I went overboard, I’ll admit it. It’s eight pages. It’s out of control. So, looking for ways to kind of get down to the root of the matter, that helps a lot.
Mel Gravely:
I’ll just throw one other thing in there, and I don’t know how it applies. We also layer on top of this a succession-planning conversation at various levels, so that we lower the likelihood we’ve just got a huge gap over time. So if we don’t identify young talent who’s going to be our next level of project managers, and they’re going to be our next level of senior managers, then we end up getting a little jammed up on succession. So, that’s layered on top of this as well.
Loren Feldman:
As someone who has spent most of my career as an employee, one thing about employee reviews that always annoyed me was being hit by something unexpected in an annual conversation. I always felt like, “If you had this concern, why did you wait until now? I would have been happy to deal with this when it first came up.” How do you guys think about that issue?
Mel Gravely:
It should never happen.
Jaci Russo:
Correct. One hundred percent. You’ve got to have feedback in the moment. Don’t wait.
Loren Feldman:
Doesn’t the annual review system, though, kind of encourage that?
Mel Gravely:
Well, this is why we like quarterly meetings, because we tell leaders now, “If we get feedback from an employee that they were shocked, I should be able to look back in that software system and see where you’ve told them two or three times that there’s a challenge. And if you haven’t, then shame on you. Now, I gotta evaluate you differently as a leader, because no one should walk in that room and be surprised.” You just don’t treat people that way.
Jaci Russo:
And Loren, I’m not saying it’s you, but I am saying that we met with an employee eight times in a two-month span—a new employee, testing them out. It did not work out, let me assure you. But eight different times, I was personally involved in not formal reviews, but feedback: “Listen, you’re struggling with deadlines. Let’s talk about how we can better help you be successful in that area. Lots of typos. What’s your review process? How do we get that fixed?” A lot of discussion of, “How can we help you? What tools do you need? Let me show you this person’s step-by-step guide. And here’s how this person does their step-by-step. Would either one of these work for you?”
So, on the ninth meeting, in a two-month span—so, it was once a week—I said, “This isn’t working out.” Stunned! She was stunned. She was like, “What? No!” I said, “Oh, yeah. No, it’s really not working out. Here’s the list of all the things that you keep making the same mistake over and over again. Make new ones? Sure. But you can’t keep making the same ones.” This was a Thursday. “Well, if you give me till Monday, I can fix it.” I was like, “In two business days, you can fix the thing you haven’t been able to fix in eight weeks? We’re done.” She was done. So I’m not saying that maybe sometimes the employee doesn’t hear it. But sometimes they get told, and they just don’t retain it.
Loren Feldman:
I feel seen, Jaci. Thanks for calling me out. [Laughter]
Liz Picarazzi:
It’s a two-way street. So, Loren, when you heard something surprising in any past reviews, did you ever think, “Well, maybe if I had talked to them ahead of time or had more regular meetings”—even if you initiate it—“that there wouldn’t be any surprises?” And in my own experiences in corporate, that happened a bit, and sometimes I do have employees who don’t bring things up with me. And then, I’m the one that’s surprised in the review. So having regular communication isn’t just from the employer to the employee. It’s the other way around as well.
Loren Feldman:
I think that’s a fair point. And I honestly think I probably could have done better on that, on occasion.
Jaci Russo:
We’re all gonna end up in timeout with Mel, just for calling him out. [Laughter]
Loren Feldman:
Well, I was gonna say, we’re just about out of time. But Mel, you’ve been very careful and cautious. Do you have any questions that you really want to ask me?
Mel Gravely:
No, sir. No, sir.
Liz Picarazzi:
Wait. Mel, you said you had 74 questions for me. I think I only heard one or two. So we may have to talk offline about it.
Mel Gravely:
I love the idea of manufacturing, and I love the challenge of figuring that out. And I’m not in manufacturing. So listening to you, I think you and Loren ought to have a one-on-one podcast episode. We ought to talk about manufacturing, because I think it’s fascinating. And I think it’s such a big opportunity for our nation to figure it out. My goodness!
And I also hope that Trump is not elected—I’ll go on record to say that—and I hope if he is elected that he doesn’t do what he promised, although he’s pretty good at doing what he said he’s gonna do. There are other reasons I think Trump’s problematic, but I just think, Liz, that your supply chain and its resilience might even become a competitive advantage at one point. That’s how difficult it is out there in the world.
Liz Picarazzi:
Right, absolutely, and for me right now to only have one country, one factory… Even if I had stayed in just China, I should have had two or three different factories. Even though I love the one I’m with, there’s a risk in having all of your eggs in that basket. So it would be a competitive advantage for me if I could choose between three countries to produce in, based on geopolitics, based on costs. I mean, with Mexico, with NAFTA—or whatever they’re calling it now—I wouldn’t have any tariffs, and I wouldn’t have any ocean involved. It would just be probably trucks. So I’ll be very curious. We’ve never gotten pricing from Mexico, but when we do, I’m hoping it’s really low. But who knows?
Loren Feldman:
All right, my thanks to Mel Gravely, Liz Picarazzi, and Jaci Russo—and to our sponsor, the Great Game of Business, which helps businesses use open-book management systems to build healthier companies. You can learn more at greatgame.com. Thanks, everybody.
