Situation: A company uses outsourced manufacturing but is concerned about inventory damage by the manufacturer. Tests have been established to assure both visual compliance and functional performance, overseen by a company employee. Still the company is receiving too many unacceptable parts. How do you minimize inventory damage by an outsourced manufacturer?
Advice from the CEOs:
It is perfectly acceptable for a vendor of consigned materials to bear the risk of product that is not to specification.
In any contract for manufacturing, require that the vendor carry insurance to cover the full cost of materials and processing in case of damage either during manufacturing or shipping.
It sounds like this is a new opportunity and situation for the company. In the process they have not guaranteed that both cost and risk are covered.
There is no point in assuming all this risk.
For future opportunities like this, take on the work as a time and materials project at an appropriate hourly rate for the market, and with a significant mark-up to cover risk as the project is transferred to a contract manufacturer.
Another option is to take on the project under a project management contract, and to bill engineering separately.
This situation sounds familiar for an evolving project. In the future try to unhitch the manufacturing piece from the engineering. Engineering should be more profitable, which will allow the company to more successfully manage the project into early manufacturing.
Strategically, this could be a good move for the company provided they partner with a reliable vendor to facilitate early stage manufacturing. One option for paying sub-vendors is to pay for yield – particularly if early stage work has a high failure rate.
If the market opportunity is there do two things:
Set up an organization with professionals who know early stage manufacturing.
Be aware this group will have a different culture and approach compared to design engineers.
Situation: A CEO is evaluating an acquisition which could significantly contribute to his company’s financial position. Patented technology may add value to the deal. The founders of the acquisition target are willing to work part-time to facilitate the transition of their technology to the acquirer. How do you evaluate an acquisition?
Advice from the CEOs:
Set a timetable to close the deal or walk.
Two key factors in the due diligence process will be strength of the intellectual property and cost of the acquisition long term.
Another key factor to evaluation will be how this opportunity fits into the company’s larger financing plan. Currently the company is undertaking a financing round. How much will this acquisition contribute to or distract from the financing round?
If this is a primarily a value-add opportunity, will it add to the larger financing round?
Can the larger financing round be completed on time while pursuing this opportunity?
An option is to negotiate a white label agreement – an agreement that will keep the company in the game while completing the larger round.
If the founders are not amenable to a delay, what is the cost in terms of funds and effort versus the larger round.
The technology appears interesting, but the timing is bad given your need for the larger financing round. Here’s an option.
Go to the founders and start the discussion. Secure a license or hire their programmer. Let the technology go dark until the financing round is completed.
There is value here – but do this as a side focus if it’s not too expensive. Assure that the deal includes both rights and the underlying algorithms.
Delegate this to someone else in the organization. The CEO’s focus is the larger financing round.
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
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
Situation: A company has built a very successful specialty manufacturing business in the US. Their manufacturing operations are labor intensive, with manufacturing practices optimized using motion studies and sharing best practices developed on the production floor. The CEO is evaluating whether it makes more sense to expand production in the US or to explore international options. Do you produce domestically or internationally?
Advice from the CEOs:
There are trade-offs between domestic and international production. Quality labor is available internationally at lower costs than in the US. However, risks include potential loss of quality control and higher levels of waste.
While investigating international production options, focus first on less critical operations where savings from lower labor costs outweigh the potential cost of wasted material.
Do not try to move highly controlled operations. These will include critical operations which require both an elevated level of operator skill and close supervision.
Before evaluating international options, break down the steps of manufacturing or processing to identify specific subcomponents or subprocesses that could be outsourced at reasonable risk.
For example, look at high volume parts where quality and variation in tolerances is less critical. These will be the best candidates for production in a lower cost, potentially lower quality environment.
How critical are trade secrets or patented IP to production? In the US and Europe there are strong protections for IP. However, these protections are not as strong in all countries. If production is outsourced to countries with poor IP protection, this may enable IP theft and create future low-cost competition.
Situation: A CEO is evaluating a horizontal market development opportunity to markets related to their current market. There may be branding implications. The new opportunity focused on a different sector and can add business unrelated to current customers. However, the new opportunity will stretch current resources and potentially impact current business and service delivery. How do you expand into new markets?
Advice from the CEOs:
Because the new opportunity utilizes known capabilities the company should be able to segue into the new market relatively easily.
Because the company is already familiar with security and other issues relevant to the new market, compliance should present no challenge.
Consider the impact on company time and resources. Building any new business will challenge current priorities and will require a careful balancing of efforts to assure that both current and new customers’ needs are being met.
Build workload and service schedules for both existing customers and the effort that it will take to develop the new opportunity including the time needed to create and build new customer relationships. Take your best estimate of resource utilization for the new effort and double it, then ask whether your current staff and capacity can handle both markets. If the answer is positive, then you can be more comfortable with the decision to expand into new markets.
As you evaluate the new market opportunity, look at both anticipated and unanticipated but predictable challenges that customers may face over the next five years.
For example, is there misalignment between future challenges likely to be faced and the current expertise and skill sets of managers who will be tasked with addressing these challenges? If so, tailor the sales pitch for new capacities to address these challenges.
Are there existing mismatches between products and services currently offered in the new markets, and do proposed solutions help to address these mismatches? If so, there may be significant opportunities in addressing these mismatches across multiple customers within the affected markets.
Situation: A mid-sized company faces challenges financing their growth. Investment of time, energy and resources precedes the reward of future revenue. It can be difficult to balance the cash needs of current operations with new growth opportunities. How do you finance growth?
Advice from the CEOs:
Have you analyzed growth opportunities and evaluated which could increase your cash flow? For example, if you increase manufacturing efficiency, can the savings help to finance growth?
If you produce parts or products for start-ups, can you structure the relationship so that if the start-up become successful and is subsequently purchased by a larger company there is a bonus payoff for the work that you’ve done?
Analyze – by project, not company – the jobs you’ve done that have eventually become large volume opportunities. Try segmenting your analysis based on the source of the original project: jobs for start-ups, mid-sized and large companies. This may provide insight on where to focus future efforts.
Another company performs clinical services for both big pharmaceutical companies and start-ups. To take advantage of the upside from working with start-ups they take payment both in cash and in stock.
One option is to set up a separate Investment LLC – not tied to the operating company but owned by the same people – that takes the stock position and can, at its option, provide limited venture funding to start-ups.
Start-ups are not yet threats to your large customers but are potential future acquisition targets. Because the stock financing is done outside of the operating company, it is more difficult to trace back to the operating company. Further, competing large companies have not tended to see these investments as threatening the way that they would view direct investment by the company in a competitor. At the time of acquisition by the larger company, the member’s ownership position in the start-up is liquidated.
Situation: A company has clients who are interested in projects for which the company’s partners already have partial designs. There is an opportunity to leverage these partial designs into development of full solutions for their clients. How should the company approach this in a way that satisfies their customers and is fair to their partners? How do you set up co-development partnerships?
Advice from the CEOs:
Given this opportunity it is no longer important who performed what part of the development. As long as your partners have quoted you what they believe to be a fair price for their development pieces, you are free to accept their price, complete development to your clients’ specifications, and sell the full solution to the client at market prices.
What you bring to the table is the opportunity to rapidly monetize the technology. This is something that your partners can’t do, so by filling this role you are acting in the interest of all parties.
What you charge for your work and the full solution depends on the potential value to the client. Time is money, and delivery now is worth a premium price to a client who needs your solution and wants to release their product as soon as possible.
This strategy is particularly applicable to early stage companies who need to release their initial products and start generating revenue.
Take a note from Bill Gates – sell the product for a good price and then buy or acquire the supply.
Situation: A company has been approached by a foreign company that is interested in their expertise. The foreign firm says that they are only interested in their own domestic market, and want the company’s help developing new products for their existing domestic clients. How do you develop products with a foreign firm?
Advice from the CEOs:
There is great variability between companies in different locales and on different continents. Before proceeding with negotiations, get references from the company and check them carefully. Research the company and its local market.
Relationship will be critical. You want to meet with their CEO. This is an important factor working with any company. Watch the commitment level of the CEO and top staff. Take an expert with you – someone knowledgeable about local mannerisms who can read the body language in meetings. Position this individual as someone who is assisting you in the negotiation.
If you proceed with negotiations toward an agreement, make your enforcement jurisdiction either the US or a neutral country with a western judicial system. For example, if the company is Chinese, make the enforcement jurisdiction either Hong Kong or Macao.
Will intellectual property be a factor? If so, get an IP attorney knowledgeable about both the market of the other company as well as your preferred enforcement jurisdiction.
Could this help you to augment or fund your own development? If so, ask for rights to produce and distribute products developed through the collaboration in the US and other markets outside of partner’s domestic market.
Situation: A company has run out of space and is planning a move to a new and larger facility. The biggest challenge is that they maintain a live online data center upon which their clients depend. How do you move a live online data center?
Advice from the CEOs:
This is not a rare event. Many companies with live online data centers have to upgrade their systems on a regular basis as equipment and software technologies evolve. Maintaining service during a move is not significantly different. Research what steps these companies have taken to minimize disruption during upgrades.
Don’t try to do it all by yourself. Seek outside expertise to help you plan the move, and to develop options that will minimize both downtime and service interruption.
Ask a trusted data center resource for a 3rd party audit of your move plan.
When one company moved, they overlapped their leases by one month, and their Internet connections by 2-3 months. This gave them breathing room as they completed the move and allowed them to stay live uninterrupted through the move.
Another company increased their back up servers and service. They also planned their move to occur during what they knew would be a low demand block of time. As a result, they were able to complete the move, plug in the servers and were only down for 30 minutes.
If it is feasible, consider leaving your old center in place as a back-up data center.
Conduct a number of practice shutdowns and restarts to test your systems.