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. Key Facts

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

Issues

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

Symptoms

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.

Industry Analysis

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.

STEP Analysis

Social

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

Technological

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

Economic

Recession hurt industry sales 2008-09

Most customers are relatively recession-proof

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.
SWOT Analysis

Strengths

Strong reputation for customer service

National coverage (distribution)

Great lines of goods (breadth)

Established customer base

Weaknesses

Low morale among sales associates

Class action lawsuit

Intransigent culture, esp. Brian Rosse

Organizational culture breeds negative attitudes in store

Opportunities

Economic rebound

Competitors are looking at Asia, leaving U.S. market unattended

There is room to grow the product range

Some goods can be marketed online

Threats

Legal judgments

Competition

Economic slowdowns

Internal dissent

Internal Analysis of systems, structures and problems

Human Resources

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.

Leadership

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…