Situation: The CEO of a company is wrestling with issues concerning change orders and high labor and materials cost. To get back into good financial shape, they are considering options including reduction in estimator time and selling equipment; however, either of these could gut the business. How do you manage through a difficult period?
Advice from the CEOs:
It is critical to get on top of change orders. This is potentially a big profit-loss swing for the business.
Does everyone understand what’s happening?
If the answer is yes, teach them more about the business nuts and bolts so that they can help develop solutions? Share a portion of the savings in the form of spot bonuses for those who develop solutions.
Take a lesson from The Great Game of Business. Let employees know about the challenges and challenge them to help develop solutions.
As an example, look at change orders and the percent of change orders that are not correctly completed, approved and invoiced as a critical number. Let’s say that 50% of change orders are not completed, approved and/or invoiced correctly. The objective for the year is to reduce this to 25%. Calculate the value of lost billings from the past year. If this can be reduced by half, the value will be $X. If the company can meet this objective, consider making half of $X available for distribution as gifts or prizes.
To support this, allow each new project to design its own minigame to reduce the number of incomplete and uninvoiced change orders.
The idea is to have the project and inside teams design the minigames and come up with ways to reduce incomplete and uninvoiced change orders. They will learn new ways of being more efficient from this process. This is the long-term benefit to the company.
If it is necessary to reduce staff, cut early instead of later. This is painful but laid-off employees can be hired back on a contract basis as necessary.
A common solution during a difficult period is to cut back to core, reducing overhead as a survival strategy, and focus on winning as may bids as possible to rebuild the business.
Look at all departments and the gross margin that each produces minus the overhead that each requires. Focus cutbacks on those that are not positive.
Increase annuity contracts – contracts with major companies that are growing and frequently require the company’s services.
Transfer equipment to a separate corporation. Lease it back as business requires. This increases cash flow flexibility – for example, don’t make lease payments when cash is tight.
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 tech company competes in a rapidly changing marketplace. The companies they serve constantly evolve their platforms. The company must respond rapidly to assure compatibility with both hardware and software innovations. Users adapt to new platforms at different rates, and the company must address their needs, as well. With so much time spent tending these diverse needs, how do they plan for market evolution?
Advice from the CEOs:
In the market you serve you must constantly reinvent yourselves as technology changes. Some platforms make changes on a 5-year cycle, while mobile platforms are currently on a 6-month cycle. This may force choices as to which platforms to serve. You also may want to focus on platforms where what you bring to the table is most useful.
You have made the strategic choice to tie the future of your company to a few large companies that dominate their markets. It is imperative that you cultivate close relationships with the technology as well as strategic leadership of those companies. This will give you more advanced insight into their plans, and they may even involve you in discussions about how the market evolves. If so, you will have positioned yourself for that evolution. These relationships may also become your exit strategy.
Businesses run on cash, or access to cash. As you cultivate relationships with your key customer companies, look for opportunities to invest in developing markets on a subscription basis which will provide ongoing annuity revenue. Figuring out how to leverage advertising or positioning options into your offering offers an additional revenue stream.