Situation: The CEO of a family business seeks to create a succession plan. One family member has expressed an interest in taking the reins of the company but has failed to take the initiative to demonstrate that he is prepared to take on this role. Another family member is now demonstrating both interest and initiative. How do you plan for succession?
Advice from the CEOs:
How should this situation be approached?
Do not view this situation competitively, but rather from the standpoint of what is best for the whole family because many family members stand to benefit from the ongoing success of the business.
Whatever decision is made, the successor will need support and assistance understanding both the financial and business sides of the company. This individual must also be aware of conflicts and challenges that face the business.
What else should be done to prepare for succession?
Given that there are two individuals interested in becoming CEO sit down with each individual and negotiate a clear boundary statement on what you, as CEO, can and can’t do, as well as what can and cannot be expected of you, as CEO, as the succession decision is made. This understanding should be documented in writing and signed, signifying understanding by both the CEO and the candidate. Each candidate should have their own signed agreement with the CEO.
In a family business, the CEO, as guarantor of the company, may be faced with a different level of financial risk than other family members. Both candidates for the CEO position must understand that if they accept this position, they also accept this risk.
Situation: A company has multiple locations from which it both sells products and provides services. One location has been in place for several years and produces good revenue but consistently fails to be profitable. The CEO has met with the managers in charge of this location and has set broad objectives to demonstrate a trend toward profitability. However, she is concerned that these objectives won’t be met. How do you manage for profitability?
Advice from the CEOs:
To be effective objectives must be specific, measurable, and timebound. In addition, there must be clear consequences for failing to meet objectives.
If a business is not covering its own costs, there are three alternatives: increase prices, reduce costs, or both.
Calculate the revenue impact of a 1% cross-the-board price increase at the location or across the company. Is this enough to cover the loss? What about a 2% increase? What is required to produce profitability?
Historically, have the location managers been responsible for business results? If not, does it make sense to continue with these managers and to expect different behavior or results?
While the managers may be well-intentioned, do they possess the necessary business skills? Would training or education assist?
Once objectives are set and incentives are changed to make the managers’ pay dependent on profitability, the CEO may be surprised at their ability to comprehend and tackle the situation – with the CEO’s oversight.
How do you change pay and incentives without sending a negative message?
A person who is paid hourly has the incentive to maximize hours worked, not productivity during hours worked. If the manager is shifted to salary at the same level he receives now or lower, with the potential to more than make up the difference through regular incentive bonuses, it becomes easier to direct him to make efficient use of his time.
How do you change the roles and focus of the managers?
The customer development manager is the only one who can impact revenue – by bringing in more business. Bonuses are based on both new business acquired and total revenue received.
The operations manager cannot contribute to revenue within his current responsibilities but can look for places where the cost of operations can be reduced. Bonuses are based on cost savings achieved.
Situation: A growing company needs new space for operations and back office functions. They have grown steadily over the last two decades. Prospects for the future are positive. Options include expansion near their current location or to another, lower cost city. The CEO is also considering whether to sublease space or rent. How do you plan for expansion?
Advice from the CEOs:
Consider whether the company needs to expand in one step or whether it is possible to expand in stages. Also consider whether functions will benefit by being close to the primary base or whether, using Internet and telecommunications, the new location can be remote. This requires a careful analysis of not only the company’s functions, but also the strength of the management team and the willingness of key managers to relocate.
There are trade-offs between subleasing and working directly with the landlord.
The landlord will generally offer market rates, but the company gets to determine the terms and term of the lease.
Subleasing can save money, but the company is then at the mercy of the priorities of the tenant from whom they are subleasing. When things get busy, the company may disrupt the operations of the tenant. In another company’s case this resulted in a forced move with 30 days’ notice at the end of their sublease term.
Consider the cost of both moving and having to re-outfit the space to meet the company’s needs against the savings from subleasing.
Consider leasing a larger space, one which is convenient and enough for the company’s needs, and then subleasing excess space until it is required. This may cost more short term, but it puts the company in charge of their own destiny regarding space availability and utilization.
Another option is to buy a building and sublease the excess space until it’s required for company operations.
Situation: A company is transitioning from a service model to a product model. A major challenge is meeting funding needs during the transition. Funding sources perceive the current service model as heavy on cost of sales vs. implementation and this hinders acquisition of funds. The CEO sees this as a short-term problem as the company will quickly start to generate more cash through the product model. How do you transition from service to product?
Advice from the CEOs:
In a competitive funding environment, it is important that the offering be credible. While others may be offering similar solutions, believability will prove to be a strong differentiator.
Where to focus over the short term?
Create a hybrid model as a transition between the current service offering and the planned product offering. Demonstrate that current customers have responded favorably to the product/hybrid opportunity.
Test this concept with an investor. The story is that the company needs funding to get to a saleable product model.
What is the message to investors?
Helping the company to achieve a short-term and very feasible objective gives the investor the following advantages: purchasing at a lower valuation, getting a larger share of the company for less, and at a low risk.
As the valuation of the company increases, the earliest investors will get the best deal!
During meetings with investors, ask them for advice on the current and following rounds and financing, and what they will find most appealing.
How do you mitigate the risk to the first investor?
Have a solid business plan and projections that have been vetted by others.
Have a list of referenceable clients.
Utilize the current service model and demonstrate the product/hybrid Package. Build a case on the advantages of the hybrid model including the financial case. The company is always there to provide back-up assistance to meet customer needs in the hybrid model.
Demonstrate flexibility – the customer can always choose the service model or convert to this if they wish.
A Key Point: You are selling yourself as the trustable resource, not the product or service.
Reference previous investment including founders’ investments. The founders did not invest to fail!
Situation: The CEO of a consulting company is frustrated by lumpy revenue and profits. From quarter to quarter it has been difficult to predict either number. Unpredictability reduces options in valuation and exit exercises, as banks and acquirers favor predictability. How do you generate a predictable P&L?
Advice from the CEOs:
The objective is to construct a revenue base built on predictability, even if this is at lower margins. Given a predictable base, the company can complement predictable revenue and profits with higher dollar and margin opportunities as they arise.
Analyze the projects that the company contracts for both revenue and profitability. Some projects will be bread and butter situations which are more common and predictable, but which generate less revenue and profit per project. Others will be customer crisis driven. These latter projects will have higher revenue and profit, particularly if the company is the vendor of choice; the tradeoff is that the frequency of these contracts is unpredictable.
If the objective is predictability, the company’s base should be built on bread and butter projects. As the company grows, focus on this base. Customer crisis projects can then be added as they arise to bump both revenue and profit.
The objective will be to become one of the top 2-3 outside vendors of the choicest clients. Target projects may be ongoing maintenance of older projects in the client companies’ portfolios.
How would this model be pursued?
Focus on the company’s top 5 customers. Reduce risk by optimizing customer leverage as a proven entity and offer them strategic deals.
The focus is long-term project based with guaranteed delivery at lower cost.
Identify the fear or insecurity that exists within the customer and provide sleep insurance.
This model works well in the new economy – get lean, manage infrastructure size and cost, and grow with the economy.
Alternately, identify an area where the customer may not have enough resources and provide a solution that allows them to address this without adding additional personnel or by using existing personnel more efficiently.
Another option is to develop a virtual office model. Provide resources for $X per month, with an evergreen provision.
Situation: The Founding CEO of a professional services company has always been deeply involved as a service provider and rainmaker in addition to his role as CEO. As the company has grown he sees the need to spend more time as leader of the company instead of being a doer. What can be done to facilitate this transition, and what expectations need to be created? How do you transition from doer to leader?
Advice from the CEOs:
Another CEO removed himself from day to day business development activity by bringing in a new rainmaker. These were the adjustments made to facilitate the process.
During the first year he worked with the new individual in a team or partnership role.
Compensation was results-based. Discussion of equity consideration was deferred until the individual proved herself.
The CEO moved himself out of the individual contributor role except as needed to support the new rainmaker’s efforts.
All of this was accompanied with clear communication to clients: “this adjustment will provide better service to you; here’s my number if you need help.”
Rainmakers are a different personality type. To be most effective, they must be able to say “my team.” Allowing this will ease the transition and improve the relationship.
Create teams to deliver solutions that have traditionally been provided by the founder.
Identify skill sets behind the roles that are being delegated.
Build an organization that will fill these roles.
Participate in team meetings, but as an advisor rather than as principal decision-maker.
Adapt role and behavior in phases to ease the pressure of the change on both the CEO and the team.
How does the CEO manage his own expectations as well as those of the company as he makes this transition?
Delegation initially takes more time and effort than doing the work yourself. Be patient and let the investment pay off.
Larry E. Greiner of USC was an expert on the study of organizational crisis in growth. Per Greiner’s model, the company is currently at stage one – moving from principal and founder to initial delegator. It may be a useful to study this model.
Situation: A company wants to expand to new sites. It’s business model relies on high levels of customer service, with high customer retention and efficiency. The challenge is that the model is low margin, because only a few employees are billable. How do you finance site expansion?
Advice from the CEOs:
To evaluate profitability and start-up time create a low-cost prototype site to test the model and collect data.
Develop a template with a high likelihood of survival over the first 6-12 months when investment will outweigh income.
Consider a SWAT resource team to accelerate early success for new sites.
Key areas of focus:
Understand the value of the business. For example, is it:
Improving client operational efficiency?
Building the team?
Response time to client needs?
From experience define the most important variables for success:
What is front office, what is back office?
How important are the dynamics between key people? Is it better to hire key people as the number of sites expands or grow them internally.
Determine what is being sold, with a reasonable prospect of return – methodology or services?
Consider a franchise model. The model must show a reasonable return to the prospective owner, including the cost of franchise purchase and start-up costs.
As franchisor, it is important to know what this model looks like to a prospective franchisee; however, take care not to create a representation to which would be bind the franchisor as a promise.
A successful franchise should have a branded presence.
Offer potential franchisees a guarantee: if after one year the net costs to establish and maintain the site are below a certain level, the franchisor will credit the difference between their estimate and the actual net costs in Year 2.
MacDonald’s does not allow franchisees to choose store locations. Similarly, the franchisor can choose locations, determine the availability of key talent, select anchor clients, and develop a reasonable estimate of the value of a new franchise before selling it. This increase the value for the franchise sale and creates a more predictable ROI for new franchisees.
Situation: A small tech company’s Board of Directors is made up primarily of founders and advisors. The CEO wants to know how other companies structure their Boards. Concerns include increasing accountability of management, obtaining an objective view of company operations so to counteract group-think, and accessing opportunities for strategic alignment. How do you structure a small company Board?
Advice from the CEOs:
In a small company, the fewer the number of board members and owners, the better. There are two considerations: control of the destiny of the company and complexity of the transaction in case of an investment or buy-out opportunity.
It is important to differentiate major from minor shareholders, including incentive-based owners.
What are the advantages of a Board of Directors?
Sounding Board – a group that can help management evaluate product and market opportunities.
Accountability – Board meetings provide an opportunity to assure that leadership and management are focusing on the best opportunities for the company.
Exit – knowledge of the industry, ties and introductions to potential acquirers.
Given new Federal regulations, the proper role of a Board has changed. Key responsibilities of Boards include:
Oversight of Corporate Governance.
Fiduciary Responsibility – to the shareholders.
Work with local or regional experts on Board role and structure. Experts can provide introductions to potential Board members that fit the company’s needs.
Good Board members will want Directors and Officers Insurance coverage.
Consider developing an Advisory Board, to compliment a stronger Boards of Directors.
Look at the key talents that the company is missing internally.
Ask friends, business partners and associates who they know who can add these talents.
Before kicking off a formal Advisory Board, start with informal discussions. Consider a facilitated dinner to share ideas.
One company has eight outside advisors who each receive 1/8 of a percent of the shares of the company for three years of service. The share offer required for service may be a function of the eventual forecasted exit value of the company.
Special thanks to the late Bill Rusher for his insight and contribution to this discussion.
Situation: A rapidly growing US software company has an office in Europe. Prospects for key positions have been flown from Europe to the US for interviews. Two or three good prospects have withdrawn their applications before the company could make an offer, citing cultural incompatibility as their reason. How do you hire foreign personnel?
Advice from the CEOs:
Cultural incompatibility can be an evasive non-response. It is important to dig deeper, perhaps with the assistance of a European-based consultant, to determine what the candidates perceived as the incompatibility. Do this with the candidates that have already rejected the company. Identifying the deeper reason will help to pre-screen future candidates before flying them to the US for interviews.
It is important to have a local leader. This appears to be the individual that the company is attempting to hire. The local leader will then do the hiring for the local office. Employees work for their managers and with their peers and will decide on whether to accept a position based on their feelings of compatibility with these individuals.
Given that the company is attempting to hire the leader of the European office, review and approval of the candidate by the CEO is important. Here are options to explore:
Spend some time studying the culture of the country in which the office is located (European countries vary according to local culture) and adapt the interview style so that it is more compatible with this culture.
Hire a European that the CEO trusts to do the recruiting, screening, interviewing and selection a final set of candidates. Ask this individual for their input on the best way of facilitating a meeting with the CEO. For example, instead of flying candidates to the US, once several candidates have been identified travel to Europe and instead of conducting formal interviews, have dinner with each of the candidates. This reduces the tension and makes the interview more congenial. Consider taking the head of HR with along and both of you having dinner with the candidates and their spouses. Again, this will reduce the tension in the meetings, and you will have two viewpoints on the candidates.
If, after trying the suggested alternatives, it continues to be difficult identifying a good European candidate, an alternative is hiring an American – someone with solid experience managing offices and operations in Europe – to oversee the European operation.
Situation: A company has built a solid core business and wants to expand its product portfolio by adding new business. Core functions can serve both existing and new business, reducing overhead on individual businesses. What pitfalls must the company avoid? How do you balance core and new businesses?
Advice from the CEOs:
New business activity cannot impact core business. The core business is the company’s bread and butter. It is important to make this clear to both employees and clients and to structure the handling of new business opportunities accordingly.
From a staffing standpoint, new business opportunities cannot impact marketing, service and operations staff supporting the core business. New business development activity and operations cannot result in a pull from their focus on the core business. This separation may be facilitated by placing the staff supporting new business in separate facilities, or in an area separate from the staff supporting core business.
In the case of support functions that will serve both existing and new business, recruit and hire staff to support the new business to assure that both existing and new business receive proper support.
Hire a new person, one with experience and contacts, to develop the new business opportunities. Look for a sales person who can bring in significant new business. This will pay for the individual quickly.
How does leadership communicate these changes to staff?
Meet with key managers to identify potential concerns. These may include impact on company culture and client focus. Use the responses gathered to develop a communication plan to allay employee concerns.
As new business opportunities are added, it will be necessary to bring in new, experienced personnel. Previously, the company brought in experienced personnel to build the current business. Be open and up-front about this and explain that as the company grows there will be new opportunities for existing employees.
The company’s objective is to improve the quality of the organization and to raise the boat for all. Current owners and managers will automatically benefit from the efforts of new people to expand the business.
Building new business opportunities as separate businesses diversifies the company and reduces the risk of overdependence on existing clients and key vendor relationships. This enhances the job security of current employees.