A company is moving from sole focus on servicing a market to a split focus
including developing and marketing their own products. This is a significant
transition for the team. What is the best way to organize this effort? How do
you manage a business transition?
from the CEOs:
the company’s financials are great for their market, cashflow may be
insufficient to fully fund a development company.
development of new products can create conflicts if it creates competition for
resources between internal and external projects.
avoid this, create an independent company or entity – in a separate location.
Seek outside funding whether bank, angel or partner financing. The independent
entity can then buy resources from the primary entity at competitive rates.
years ago, another CEO utilized the strategy just described. The important
that venture is properly resourced.
that there is a balance between proven structure and creative application
best resources available at same rates that key customers pay.
free guidance but not free services – peer reviews are key.
third CEO had an opportunity to open a new business using the spin-off model.
allowed infrastructure sharing – with proper compensation and incentives
both entities were successful.
Properly implemented, this model works.
are four aspects to the challenge.
business plan for the new venture must address all four.
internally (vs. externally) creates natural conflict. Workers will tolerate change
in direction from clients better than they do from insiders.
A founder CEO is faced with two options – either selling his company or buying
a complimentary company. The acquisition would fulfill his dream as CEO, but he
is concerned both about the synergy between the two entities and his ability to
manage the combined company. Should he sell, or buy the other company?
from the CEOs:
Given these concerns approach the
purchase opportunity skeptically. Be more prepared to say no than yes.
In evaluating his ability to run a
larger operation, the CEO should objectively assess his own abilities.
A good CEO is not a Superman. A good CEO
creates a viable business model and vision and hires a good team to bring that
model to reality.
Consider past accomplishments. In an
industry where nobody makes money the CEO has created a business model that is
sustainable, highly profitable, and technically superior. The only thing lacking
is size in terms of revenue.
The new opportunity – on the right terms
– can launch the company from dominance in a niche to dominance in a
significantly larger industry.
Assess the new opportunity both as a
technical and cultural match. If there is a good cultural match:
Fewer things must go right to add value.
The purchase provides a channel to a
The acquisition will rapidly speed company
The biggest concern will be the time to
manage both entities.
The most important factor will be the
chemistry between the two company teams. If the chemistry is good, the
combination offers reasonable assurance that the two teams will complement each
Look at the purchase as an opportunity to
build a win-win with enduring value.
In considering outside investors to
support the acquisition, be cautious about financial partners and the conditions
behind each financing option.
A CEO is concerned that too much of her company’s business is focused on two
few customers. The loss of a single large customer can potentially mean a significant
hit to revenue and profitability. How do you diversify your customer base?
from the CEOs:
If current cash flow is good, the company should consider purchasing diversity by buying a company.
Consider acquiring a supplier that is in good shape, but with lower margins. They will have the infrastructure to run their own operation, and the purchasing company will have the additional profitability to make the combined entity more interesting.
Given the company’s existing cash generation potential, there are creative ways to finance such an acquisition.
Why is this a good strategy?
Purchasing another company can instantly expand the customer base.
Diversifying the company opens additional options to build long-term sustainability.
A purchase strategy can bring in a ready-made and smoothly running infrastructure in the form of the purchased company.
Diversification can boost the value of the combined company on a more diversified business base. It might allow the company to combine low volume, high profit lines with high volume, lower profit lines. There are advantages to each of these business models.
Where can such a company be found?
Look both inside and outside of the current geographic base.
A candidate could be a higher volume but lower profit supplier of one of the company’s current customers that does not compete with the company’s current offering. Alternately, look at companies with more diversified customer bases in a related industry.
Look at the niches that the company’s current customers serve.
What similar niches exist? Are there acquisition candidates there?
Look at the functionality that the company’s products add for its clients. In what other industries would similar functionality be of value?
As these questions are asked, look for candidates that have complementary customer sets, customer bases, and geographical reach.
A founding CEO wants to cut back to 1-2 days per week with someone else overseeing
day-to-day operations. Her timeline to accomplish this is 3 years. Currently
she splits her time between engineering and sales support, managing operations,
overseeing the CFO and managing the company. How do you accomplish this
transition? What is your 3-year plan?
from the CEOs:
for and hire a General Manager/engineer who can understand the company’s applications
and develop unique solutions.
for and hire an understudy for the sales person. This could be someone in their
40s who is experienced, and who can act both as the sales person’s back-up and develop
additional accounts to diversify the business.
the company continues to grow it will take more time and effort to manage all
the activities. Plan the company’s organization chart and infrastructure to
account for this.
careful not create an infrastructure during good times that is unsustainable
during down times.
the new GM gains familiarity with the company, this individual will and should start
to take control. This automatically means that the founding CEO will have to
agree to release some of her control. Prepare for this.
several alternatives for the GM:
President – $400K.
with engineering talent – perhaps a consulting or engineering sales background.
Hire at $150-200K and develop into the President.
the 3-year lead time this individual could be a Technical Lead or Project
Engineer. The objective will be to develop a very talented person into the GM
or President. This alternative opens a larger pool of talent, at lower initial
are these people found?
high-quality engineer that another CEO won’t be hiring over the coming months. Talk
to friends and industry contacts.
A CEO is considering her exit strategy between five and ten years out. She
wants to do what is best both for her, the company and her employees, assuring
that both personal and company needs are met and the company is ready for
transition. What are your five- and ten-year plans?
from the CEOs:
personal side and the company’s future are closely linked. The solutions and
strategy must fit both the CEO’s priorities as well as those of the company. By
looking at the CEO’s role, the current and future needs of the company, and any
changes that need to be made, the CEO is preparing for an eventual exit.
CEO must decide what lifestyle she wants – both as she prepares for eventual
exit and as she prepares the company to continue under new leadership.
must decide what she wants to do with her time in an ideal world. What will
make her happy as she prepares for the future?
must be considered both for herself and her business partners. Have conversations
to align both business and personal expectations.
a strategic planning retreat on the future of the company as well as the
transition of leadership.
a talk with significant others to align personal expectations.
changes in leadership are necessary to implement the plan? What are the key
roles and who will fill them? What is the succession plan for each key role?
Are current personnel in place to fill these roles, or is additional hiring and
an ESOP or a virtual stock program to enhance employee incentives and sense of ownership
in the company’s future.
what exit means on a personal level.
from founder to leader gets the CEO more involved in the company.
on priorities and engage in ongoing discussions with key personnel to jointly
plan the future.
A company has a good accounting system, but the CEO is concerned that they are
not making the best use of metrics to drive the business. He senses a lack of
shared understanding of key metrics and goals. He senses the appearance of
financial disarray, despite his clear grasp of the business. Do you have
control of the numbers?
from the CEOs:
A good accounting system may be in place, but if it is not being used to drive the business and monitor the achievement of milestones then the company is not gaining the best advantage from it.
If there is a sense of financial disarray, this suggests that the company lacks financial metrics. Employees and managers may be doing their jobs, but without financial metrics it is difficult to tell how well they are doing their jobs.
Start with basic metrics:
Where are sales coming from?
What is the profitability of sales by customer segment and product line?
What is the company’s profitability?
What are the profitability trends of the company and key segments of the business?
Once a company is tracking these metrics, it is easier to focus managers and employees on products, product development, operations, sales and marketing issues that are most essential to the company’s success.
The company needs the equivalent of a CFO. This means a financial person, not an accountant. An individual who knows how to look at the numbers. A CFO will help the company to
See the strategic trends in the business,
Uncover the best opportunities for growth, and
Understand the greatest potential threats to growth of the business.
A company is losing billings because individual billings are getting lost in
their process flow. Requests for enhancements come from clients to Project
Managers. Project Managers take on development of the enhancements but are
sometimes too busy to keep track and don’t report their work to the billing
department. How do you improve quote to collections flow?
from the CEOs:
appears that two processes are missing:
formal trigger mechanism to assure that a PO is in place BEFORE Project
Managers undertake enhancement work, and
are incentivized to assure that the client is billed and revenue collected for
the work performed.
the process and do not allow Project Mangers to initiate any work until a work
request is logged in the billing system and a PO is received from the customer to
cover the expense.
a process to track customer requests, estimate development and transmission to
billing, forwarding of estimates by billing to the customer with a request for a
PO, and upon receipt of PO authorization by billing to initiate work.
can all be tracked and managed by most accounting software packages.
Facilitate tracking of
actual expense vs. estimate;
Tracking of requests
for which no POs are received, for client follow-up; and
Tracking of enhancement
requests to guide future product development.
Account Managers to track and manage the process.
an Account Manager receives a commission for enhancement work they will have an
incentive to keep track of all ongoing work, both for timely delivery and to
assure that the customer invoiced for the work.
paid to the Account Mangers will be a small percent of the extra revenue collected.
improve process management, schedule regular meetings to review all enhancement
and other work being done for clients. Review and assure that all work has
accompanying POs, that the work is being completed on a timely basis and in
line with original estimates, and that the company is invoicing and being paid
for the work. Empower Account Managers to organize and conduct these meetings. Their
incentive will be the commissions they will collect on payment for the work.
upgrades and a certain number of enhancements into the product price.
enables to company to increase prices and to collect prepayment for
enhancements and upgrades that may or may not be requested.
the process outlined above to track enhancements which are credited against the
prepaid accounts, and to assure that enhancements above the prepaid limit are
A company is concerned because recent accidents on the job have boosted their Modification
or MOD rate and increased company expenses. They have held workshops with
employees and talked about increasing safety, but employees have been lax in
complying with safety measures because these are time-consuming. How do you
boost employee ownership of job safety?
from the CEOs:
is key to the bottom line and future of the company. Enlist employees to
monitor each other and point out when others are acting unsafely.
/ encourage employees to “harass” (in a playful sense) each other if they see
someone not working safely.
caught in inappropriate unsafe behavior is penalized and required to pay $1
into a kitty which is spent on a company-wide benefit such as a pizza lunch.
a presentation, graphically showing the negative impact that a high MOD rate has
on the company, and on employees’ incomes. Hold a company meeting, give this
presentation and discuss with them how costly hazardous behavior is, and how
jobs can ultimately be lost as a result.
nothing else works, explore creating a shell corporation to employ the employees
who are subject to potential injury and effectively “outsource” them like high tech
does. This may lower the MOD rate to 100
as a new business.
for other insurers who will lower the company’s MOD rate.
consequences for flagrant violations of safety guidelines.
thorough background checks before hiring new workers. Avoid new hires with a
history of disability claims.
A CEO is concerned that all her key personnel are over 50. This includes software
engineers who are experts in languages which remain at the foundation of many
customers’ databases, but which are no longer formally taught. How do you
replace aging talent?
from the CEOs:
at which areas potentially limit the company’s growth. Is it technology and software
expertise, or marketing and sales? Based on this assessment, rank the critical
positions to be filled and start hiring staff who can grow into the most
a cue from the Japanese. For years their aging workforce was predicted to limit
the country’s growth. Instead, they chose to retain employees through their 70s
and this has helped them to maintain both productivity and employment.
Baby Boomers are finding that they don’t have the savings to retire and are
working well past the historic retirement age.
Baby Boomers retired but found themselves bored after a productive career and have
returned to the labor pool.
factors may delay the company’s need to replace aging talent.
bigger question is what to do if a key player is lost. Focus on hiring back-ups
to key personnel and allow several years for them to come up to full speed. Current
employment trends suggest that numbers of experienced people are returning to
the labor pool. Look for a few good people to add to the team.
are the plans of the company’s key clients? Do they plan to stay with the
company’s products and expertise, or to sunset these and replace them with new
technology? Adjust operational objectives, as well as the exit strategy, to achieve
desired growth given customers’ timeframes.
the grim reality. In volatile markets, forecasts are meaningless. Instead of
fretting over forecast accuracy, focus on increasing billable rates and
generate additional revenue per project, add a flat percentage charge for
project management on top of time and materials. This is often treated by
clients like a sales tax or a gasoline cost adjustment and may not penalize
it possible to build a sustainable revenue source to resolve profit lumpiness? There
maintenance projects. After building a box add a provision for maintenance/upgrades
as new capabilities and technologies are developed. This can cost-effectively
extend the life of the box and long-term profitability of the product that the
box supports, while gaining an annuity revenue stream.
a maintenance add-on service to leverage the company’s core competence on an
ongoing basis. Provide technology upgrades through a maintenance subscription similar
to software companies adding optional access to all new releases over the
course of a year for a fixed subscription cost. The cost to the company for upgrade
downloads is essentially nothing, but it gains an annual annuity revenue
a help desk service to sell via subscription to small companies. Most clients use
less than they anticipate; however, they prefer the security of a flat price
additional info can be gathered through sales to better drive sales forecasts metrics?
Look at the past several years: is there any seasonality in a multi-year
analysis. It may not occur every year, but if you there’s a pattern it may
enable the company to proactively reduce costs where there’s a predictable dip
in project demand.
sales people responsible for both maintaining client relationships and creating
new business? Most companies split these
functions because maintenance is like farming while new business development is
hunting – few sales people excel at both.
in development, the company develops IP, can this be used? When there’s
down-time can capacity be leveraged to develop the company’s IP portfolio? Look
at IP licensing opportunities. This provides an additional potential source of
it is important to figure out an annuity revenue stream, the principal lesson
from the discussion is that most CEOs say that margins are better on fixed
price projects than on time and materials. The key is to control to client
requests for add-ins or adjustments and to include provision for these in