Situation: A growing technology company is faced with several opportunities. The CEO is too busy to devote the time to analyze each of these. In addition, the CEO wants to develop her staff so that they can take on more responsibility and mature into a full organization. How do you choose between opportunities?
Advice from the CEOs:
Everything starts with a strategic plan for the company. Either the CEO or an outside consultant should coordinate a strategic planning session to develop and rank the opportunities facing the company. The ranking exercise is best done as an open departmental or company-wide exercise so that everyone is involved in the process. This helps to build consensus and commitment to the opportunities developed.
Once the opportunities have been identified assign one to each of the employees that you want to develop. Each of the employees will be the champion for that opportunity.
Ask each champion to develop a business case and plan for their opportunity. This will include a development plan and ROI analysis. Allow each champion to access all company resources as they develop their plans. Set a deadline for all champions to complete their plans.
Once the plans have been completed, reconvene the group that participated in the strategic planning session and have the champions pitch their plans to the group. The group will provide feedback and suggestions for each plan. At the end of the session repeat the ranking exercise based on the new information developed and presented.
This will provide a wonderful training opportunity for the champions as well as valuable insight into their talents and potential for future development. In addition. Because the strategic planning sessions will be conducted as a company-wide exercise, they will act as team-building exercises and excite everyone about the potential facing the company.
Situation: The CEO of a professional service company is reaching retirement age. The plan for years has been for a key field manager to take on this role; however, neither the CEO, the founder nor most employees feel that this individual is up to the job. What can be done to either better prepare the key manager for the new role, or to demonstrate that this is unfeasible? How do you transition to new leadership?
Advice from the CEOs:
For the long-term benefit of the company, it is important to create a situation that will either prepare the field manager to succeed or provide the Company with a back-up plan for ongoing leadership.
If the CEO and founder are concerned about this individual’s ability to succeed, then coordinate a plan with the founder and then meet with the key manager.
Let the key manager know that the owners plan to sell the company in 3 years.
This can be an internal sale – the CEO and founder sell their shares to the key manager – or the owners will look for an outside buyer to buy out all current owners.
See how the key manager responds.
If the key manager expresses an interest in buying the CEO’s and founder’s shares, then require this individual to make the same level of financial commitment that the CEO and founder have made.
Another CEO experienced a comparable situation with an individual who was both underperforming and a significant shareholder.
This CEO created a very public vision of what he expected this individual to achieve – in positive terms. The CEO also put an outside hire in a similar role to create a performance comparison. The result was a significant increase in performance by the inside individual and a successful transition to additional responsibility.
If the key manager is to be put on a track that leads to the CEO role there will be two challenges: assuring that this individual can acquire the skills to succeed and assuring that the individual can demonstrate successful leadership within the Company. To meet these challenges, take the following steps:
Make a public announcement of the plan to transfer the mantle of leadership to the key manager;
Raise the bar of expectations for the key manager to demonstrate his or her leadership capacity;
Define a full program of training to provide the key manager with the skills to lead the Company;
Ideally, allow the key manager to prove his or her mettle through a highly visible responsibility – like growing a key market segment – so that he or she gains the respect of the others.
Require the same level of financial commitment that the CEO and founder currently bear, so that everyone knows that the key manager has “skin in the game.”
Put the key manager on the same compensation program as the CEO and founder, as this will become his or her compensation program on becoming CEO.
Situation: The CEO of a product and service company has seen her company struggle for several years. While the overall market has turned around, her company has not. She is tired of barely staying afloat and not making the kind of money that she a decade ago. Is the glass half-full or half-empty?
Advice from the CEOs:
What keeps you from hitting the numbers? Creating a forecast, budget and objectives allows you to establish a reward system for meeting and exceeding objectives. Once there is an upside, then not hitting the numbers means that a manager misses the upside and the financial rewards that accompany this achievement. This is often consequence enough, particularly if others are hitting their numbers and getting performance bonuses.
The glass is half-full. The past few years have been difficult. Review what the company accomplished during an extended recession. Look at how the company fares versus local competitors. Review positive changes that have been made and take credit for these. This will provide energy to move forward.
Given the company’s successes, sit down with the management and show them what the company has accomplished. Celebrate. Use this opportunity to set goals for next year. A good place to start is to set a bottom line profitability objective before taxes.
To be a great manager requires more than just a revenue and profitability target. People rally around a vision and a culture that they aspire to and want to enjoy. The role of the leader is to create this vision and culture. Do this, and revenue and profitability will take care of themselves.
Two more thoughts on whether the glass is half full or half empty to check your bearings:
What is your passion? If you love what you’re doing, what else would you do?
If you were doing something else, would you be making more money or enjoying more success?
Situation: The President of a professional service company and his team are considering adjustments to their business model. The alternatives under consideration are a client-centered model and a service delivery model. What’s the right model for a service company?
Advice from the CEOs:
In the client-centered model, the emphasis is on maintenance of the customer relationship by the responsible manager, with support from the group to optimize service delivery.
Consider the service being provided and the client’s expectations. Does the client want to have a principal point of contact – a client manager – to address their needs?
This model centers on the key manager creating and maintaining an ongoing relationship with the customer, including rapid response to inquiries from the customer.
In the service delivery model, the emphasis is on a developing and maintaining a high standard of service delivery so that multiple individuals can deliver the service rapidly and reliably.
As in the client-centered model, consider the service being provided and the client’s expectations. Is the customer’s principle concern functionally rather than personally oriented – for example keeping a system up and running in the fastest time with a manageable expense? In this case, the individual technician is not as important as speed of response and assurance of a quality outcome.
The service delivery model centers on standardized and predictable delivery of a defined service, with high responsiveness to the client’s needs. Those who deliver the service are paid variably based on their skills and assigned to deliver service consistent with their abilities. A benefit of this model is that business maintenance is not as dependent on individual service providers as the client-centered model.
In choosing between these models, it is important to speak with your clients and to understand their needs and priorities. Is your model a direct business to customer relationship or a business to business relationship? Is your offering perceived by the customer as a service or a product with tangible results? Is your customer more interested in meeting short-term needs or developing a long-term relationship?
As an example, is the customer expecting a personal, customized service and desirous of maintaining a long-term relationship? For this, a Nordstrom-like model may make the most sense – a highly personalized level of service where the relationship managers on the sales floor keep detailed records of individual customer’s tastes and past purchases and will even have items pre-selected prior to the customer’s arrival at the store.
This model implies that the most important assets to client development and retention will be your account managers. A business development manager may bring in a new client and then hand off that client to “one of my best managers” who will develop the long-term client relationship. The account manager will become the principal point of contact for the client; however, they will bring in other expertise or assistance to handle specific client needs. When a customer calls in, depending on the immediate need, that customer may be triaged directly to their manager or to an individual who could, for example, perform a transaction for them. Responsiveness by the manager within a defined time frame will be an important metric to monitor.
Situation: The CEO of a specialty service company is curious about whether they have the right internal focus to drive their business. Their internal focus statement is to the most competitive, most responsive company in their market with high profit per job. One school of thought calls this focus the Main Thing driving the company. Does your company have the right Main Thing or focus?
Advice from the CEOs:
Look at the tie between your Main Thing and your financials.
Determine an appropriate measure of efficiency – for example, billable hours per field worker per day.
Look at cost per field worker versus efficiency.
Ask what will generate the profit to grow to the level that the company has established as the revenue target.
If you can boost the gross margin on services, this provides far more benefit than merely cutting expenses.
Look for market niches that support higher prices without a parallel rise in either expense or risk exposure.
Do leadership and staff have the right skills and talents to support growth objectives? What can be done to enhance skills and talents?
Consider the following – By increasing efficiency and margins from 16% to 20% on $10 million of job revenue, the company can increase the operating margin by $400,000. If certain staff cannot work within a more efficient structure, you may want to move them to jobs that are less critical to the business. Having the right staff in the right seats is critically important to bottom line results.
Look at the company’s customer selection criteria. Using the 80/20 rule – 20% of customers generate 80% of revenue and/or profits. How do you improve customer selection?
Rank all customers on measures of profitability of their business, payment time, and most importantly future business potential. Focus on customers with the highest scores, and “fire” low scoring customers.
Focus on cash flow: Look at early pay options or discounts to speed payment from large customers.
Incorporate a schedule of values in all contracts as an addendum to prompt earlier payment.
In proposals, include a payment schedule and finance the receivables through a factoring company – particularly in the case of slower paying or less desirable customers.
Situation: A company’s goal is to replace an old, established market with new technology and, by owning the technology, to reinvent the industry. Given this aggressive goal, there is a temptation to go into volume production before establishing the cost advantages to make the technology profitable. The challenge is to establish disciplined, stable, qualified, scalable and profitable manufacturing. To accomplish this, the company must decide between alternatives as they cultivate new customers. How do you optimize your pipeline?
Advice from the CEOs:
There are two sides of the market:
Mega-markets dominated by large corporations which have long lead-times and potentially huge payoffs; however, these markets present long payoff delays for the company.
Smaller, quicker markets with limited volume but which will offer rapid PO acquisition and proof of concept.
The question is how much effort to devote to which market.
Look for early customers who are cast in your own light – disruptors who can help to catapult you into the marketplace
The trade-offs are strategic vs. tactical opportunities.
The immediate tactical need is to generate cash to show that you can. This is the steak.
The strategic need is to seed a foothold in a mega opportunity – to show the potential to revolutionize the market. This is the sizzle.
Identify a killer app that will gain tactical advantage and cash and help prompt maturation of a strategic opportunity.
Another CEO shared experience landing a large client.
They used a short, low cost pilot project to prove the concept to skeptical client staff. The client was surprised and delighted by the success of the pilot project. The pilot project was then articulated into larger projects.
Over time the company used incremental steps to gain a broad presence within the large company.
Focus business development on selling killer apps.
Find low hanging fruit for quick proof of salability and to show a revenue ramp.
Small design wins exercise the machine.
Is it possible to conserve cash to raise the impact of early wins to the bottom line?
Are all current staff during the next 12 months?
Early on, the game is business development – gaining key contracts and agreements with lead customers. Sales follows, with focus on the larger market. This may be 6 months to 2 years out. How many people are needed to focus on business development?
Situation: A CEO is considering a new revenue model for his company. The existing model is profitable and stable, but not scalable. A new model, and perhaps additional locations may be needed to add scalability. How do you assess the risks of the model? What steps can be taken to reduce these risks. How to you evaluate a new revenue model?
Advice from the CEOs:
Project both the current and new models on a spreadsheet. What do profitability and return look like over time based on current trends?
Include assumptions about adding new customers within the model. Consider capacity constraints at the present location. Add start-up investment needed for the new model. Does overall profitability increase in the projections and will this adequately cover new customer acquisition costs?
Are performance standards for the current and new models different? Would it make sense to have different teams managing the models? What kind of experience will be required in the people who will build the new business? Account for personnel additions and start-up costs in the financial projections.
Critically evaluate the upfront financial exposure as new clients are signed up for the new model. Consider hybrid options which can be added to customer contracts. Examples include:
A variable flat fee model. Customers contracted under the new model will receive services up to X hours per month for the flat fee, with hours over this billed separately.
How do current time and materials rates compare with industry averages? If they are high, it is not necessary to quote existing rates to new model customers. Create a new rate schedule just for new model customers. Taking a lower rate under the flat fee model will not cover all costs and profit; however, it will at least partially cover utilization exposure and a higher rate for additional hours can make up the difference.
During the ramp up period of a new operating unit, client choice is critical. If, based on observations and responses in client questionnaires, heavy early work is anticipated, charge an initial set-up fee. Alternatively, ask for a deposit of 3-4 months to cover set-up exposure. If either at the end of the service contract or after a burn-in period some or all these funds have not been used, the client is refunded the unused deposit. This can both cover early exposure and make it easier to sign new customers for the new unit.
Draft contracts under the new model to include one-time fees in the case of certain events – e.g., a server crashes in the first 9 months of the contract, or an unplanned move within the first X months of the contract. These resemble the exceptions written into standard insurance policies. They can be explained as necessary because standard contract pricing is competitive and does not anticipate these events within the first X months of the contract. Most companies will bet against this risk. Those who do not may know something about their situation that they are not revealing. In the latter case you will be alerted to potential exposure.
Consider a variable declining rate for the new model. The contract price is X for the first year, and, assuming there are no hiccups, will be reduced by some percent in following years. This resembles auto insurance discounts for long term policy holders with good driver records.
Adding hybrid options may make it easier to sign new clients while covering cost exposure. The view of the CEOs is that most clients will underestimate their IT labor needs and will bet against their true level of risk. Provided that the new model delivers the same service that supports the company’s reputation, once clients experience the company’s service, they will be hooked.
An additional benefit to hybrid options may be faster client acquisition ramps within new satellite units and faster attainment of positive ROI.
Situation: The CEO of a privately held company wants to share company success with employees. An option that she is exploring is phantom stock. The objective is to engage employees in company success. Does a phantom stock plan make sense?
Advice from the CEOs:
Why would you use phantom stock options instead of real stock?
Phantom stock options are popular in the tech sector. Phantom stock confers the right to receive cash at a future point in time, typically a share of the proceeds received upon the sale of a company.
The principal difference between phantom stock and real stock, is that real stock must be issued in exchange for cash, property or past services. There is also a tax consequence to the receipt of real shares. When shares are issued in exchange for past services the employee must recognize taxable income, just like wage compensation. Employees may be disappointed to learn that they may face taxable income based on the fair market value of their shares received without compensating cash to pay the tax.
Let’s assume that the objective is to increase employee engagement as they observe the value of the shares increasing with company success over time.
Under phantom stock programs the value of the company is pegged on a periodic basis, based on a pre-set formula developed by the company.
In some cases, employees can “sell” their phantom stock back to the company for the differential between the price when they were awarded the stock and the current pegged price.
The structure of the program is determined by management based on company objectives.
Employees frequently don’t have the cash to purchase real stock or options at a fair price given the value of the company. Using a phantom stock plan, a company can offer the rewards of stock ownerships without a purchase requirement or tax implications at the time of award. Employees can be apprised of the value of their phantom stock based on a periodic internal accounting exercise.
Situation: An early stage company has assembled an impressive team and has a solid service offering. The immediate challenge is bringing in clients to fuel growth. The team has the capacity but needs some creative ideas on where they should focus their efforts. How do you fuel early stage growth?
Advice from the CEOs:
Fully utilize the team’s talents. Team members with established expertise can offer clinics featuring the company’s service offering at local colleges, business organizations and other venues to target audiences. Think about business organizations with members who would benefit from the company’s services. Also reach out to venture capitalists and the entrepreneurial market.
Develop a strong value proposition:
Eyeballs on the market
Links to highly qualified resources
Demonstrated expertise in your space
Claims tied to the top priorities of target clients
For start-up and entrepreneur client targets:
Offer a packaged set of services for a fixed fee. Be open to creative payment options to fit the financial needs of entrepreneurs.
Start developing a full suite of services. Start by assessing the need and developing a target list of early clients. VC portfolio companies can be a great target.
Build a good web-based communications interface for client use. Think of what is needed to create an attractive menu and let this drive service development.
Develop a separate brand for ancillary services that will complement the current offering, but which is outside of the current offering. Look at markets which would benefit from the service, including medical and nursing providers.
Situation: The CEO of a family business is anticipating retirement in the next two years. Currently, there is no succession plan. Other family members do not seem interested in running the company. What steps should the CEO be taking? How do you plan for retirement?
Advice from the CEOs:
To set the stage for your successor, make sure that you are being paid adequately for your job. If you are being paid less than some of your key employees, nobody else will want your job. Raise your salary to a point where it is appropriate for a CEO, and so it is attractive enough to entice a qualified successor. This will also help attract a buyer should you decide to sell or merge the business. Raising your salary will also help your bottom line if your company is an S Corporation.
Once you identify a potential successor, bring this individual into the business as soon as possible so they have an opportunity to understand the business fully and can receive on-the-job training from you.
Understand the numbers and red flags that give you the information and authority to run the company and the respect of your employees. Teach these to your successor so that this person has the same overview of the company that you command.
Look at what skills your successor needs to be CEO and start mentoring that person on those as soon as possible.
You may need to delay your planned retirement so that you have time to select a successor and prepare that individual to take on your responsibilities. Your current 2-year plan may not work, at least without compromises.
Without a management succession plan, the company may not bring in as much in a sale or merger as you expect. It is important that you improve the numbers to maximize the value of the firm if you choose to sell or merge the business.
Look at your current range of projects. Focus on those which are most profitable to you and emphasize these. You may be able to reduce staff and expenses by being more focused.