Situation: A software company is evaluating its distribution network. Historically they have worked with resellers who aggregate software services into packages for larger customers. Recently they were approached by a reputable distributor seeking a master distribution agreement with favorable payment terms. Is this an option that they should pursue? How do you evaluate distribution alternatives?
Advice from the CEOs:
There are at least three objectives to consider: market coverage, margin to the producer, and market risk.
For market coverage, evaluate the alternatives in terms of their ability and commitment not only to serve your current market but to expand into adjacent markets.
Regarding price and margin, there are two alternatives:
Decide what price you want, and don’t worry about the reseller or distributor’s final price to the customer, or
Establish a floor price for your product and ask for a percentage commission on sales.
Run models on each and decide which will provide the best return on sales.
Market risk is more complex. These are different approaches to the market.
In evaluating the reseller option, insist on terms in reseller agreements that the reseller disclose the terms of their sales.
Sharing of customer databases is another factor. Siemens, for example, considers their customer database as IP and only releases portions of their customer database selectively to resellers.
A master distribution agreement has different risks. It puts all of your eggs in one basket. If the distributor adjusts focus away from your software during the term of the agreement your sales and revenue will suffer.
Are there conditions where a master distribution agreement may make sense?
If the distributor is willing to sign a multi-year agreement with sales guarantees at favorable pricing this mitigates the risk.
The central issue is risk and guarantees. If you see the option as a low risk – high return proposition, it may be worth considering.
Situation: A Company has a key customer that wants to upgrade the Company’s status as an approved supplier. This comes with a catch – the customer demands that the Company reduce the amount of its total revenue represented by its business with the customer. The customer doesn’t want the Company to be overly dependent upon them or their business. One option that the Company may explore is purchasing another business. When does it make sense to buy a company?
Advice from the CEOs:
The Company may be working under a false premise.
If the Company is truly a critical supplier, the customer is not likely to go away just because they don’t like a single ratio on how the Company runs its business.
The risk that the Company takes on buying another business is that this distracts the Company and ends up jeopardizing current business both from thus customer and others.
It makes more sense to explore acquiring another company if the Company’s broader goal is to become more diversified, or if new business commitments are forthcoming from this or other current customers.
What about this strategy makes sense?
Provided that the purchase of another company makes strategic sense, it may be feasible to finance the purchase of that company through a leveraged buy-out.
Be sure to build an earn-out with incentives contingent upon the seller staying on and helping to maximize long-term value of business.
As an alternative to buying another business, it may be possible to build a new lower cost/price version of the Company’s current product or service and build a new customer base for the lower cost version. This is how automobile companies use the same or similar frames, engines and many of the same components to create different cars for different markets.
Situation: A CEO wants the sales and marketing ream to generate higher quality leads. The company already uses referrals and networking. The CEO wants to know how other companies qualify leads before passing them on to sales. How do you generate high quality leads?
Advice from the CEOs:
The first step in a good lead generation campaign is to have a clear idea of who your customers and prospects are. Who are the current customers? How do you categorize them? Can you divide them into distinct groups?
Once you have divided your customers into distinct groups, develop a detailed profile for each group, concentrating on the most promising groups first. The profile will include demographics, potential purchase value, buying behavior, social media usage and preferred social media channels. Envision each group. Create a picture that represents the buyer and their personality profile. This is an important exercise because it shifts your focus from customers as lists to customers as people, and will boost the effectiveness of both your marketing and sales efforts.
After you develop customer profiles, rank them in terms of revenue potential to the company. Pre-qualify the high end buyer, not the low end. Target the decision-makers who can make a significant purchase.
Within each profile group, establish your own criteria for a good customer. Create questions which will help you to identify this customer.
Through social media and email campaigns, develop brief questionnaires and simple contests to help you to identify potential customers based on the criteria which you have developed. Develop a more detailed questionnaire turn leads into prospects.
Once a lead responds to your social media or email outreach have a sales person go through the detailed questionnaire with the lead prior to scheduling or going out on a face-to-face call.
You want to have well-qualified people making these calls.
Situation: A CEO is concerned that his company’s sales and marketing efforts are not effective. Too often the sales team finds a good prospect, but fails to convert them to the company’s offering. How can the company improve its sales conversion rate? How do you optimize your buy/sell funnels?
Advice from the CEOs:
To improve both your marketing and sales functions, it is essential to move the company’s perspective from the Sales side of the Seller’s Funnel to the Marketing side of the Buyer’s Funnel. Only by understanding your customers can you:
Create awareness of their needs,
Acknowledge interest in a solution to their needs,
Consider options and develop preferences among the possible solutions, and
Determine how to effectively communicate with them through your marketing and sales efforts.
In today’s world, a quality web site is essential to your business. The objective of the web site is to convince the customer that they want to talk to or do business with you. Your web site must tell them:
Who you are.
What your values are.
Why you are special.
And it must include a “call to action” – a convincing reason for them to call you.
To better qualify your prospective clients:
Develop a scripted telephone interview that can be conducted by your sales people or less expensive inside sales/marketing people to qualify prospects before you spend the time and effort for an in-person sales call.
Use targeted marketing programs to leverage references to prospective customers.
Have lots of conversations with potential customers to understand their needs. Tailor your value creation process to address these needs.
Special Thanks to Craig Olson of MXL Partners for his contribution to this discussion.
Situation: A West Coast company has recently acquired an East Coast company. The two companies serve similar customers with different but complimentary services. The acquired team has a history and mode of operating. The CEO seeks advice on how much they should require the new team to operate as they do at the home office. How do you integrate a new team into your culture?
Advice from the CEOs:
Have patience. The transition and transfer of culture will take time. Your priority is for both offices to operate smoothly and profitably. Business practices differ by geography to suit their regional cultures. The remote office need not function just like the home office.
If you want a manager from your home office in the new office, take care who you select. Since you have history with the new company and office, select a manager who already has a good relationship with key senior managers in the new office. This will ease the transition, and will keep you updated on what is happening there.
Organize a dinner with your new manager and the senior managers in the new office. At dinner you will want to communicate your expectations and accelerate the transition.
Involve the senior managers from the new office in mentoring the new manager. This will give them an important role and will show respect for their knowledge and expertise.
Do all that you can to reinforce the link between the offices – in a constructive way.
Set benchmarks and plans of action, and manage to these.
Situation: A company has been approached by a customer with a proposal that the two companies combine. The customer believes that the combined companies will represent a greater market presence than either presents alone. This may make it easier for the combined entity to gain business from larger customers. How do you merge two firms under one umbrella?
Advice from the CEOs:
For a company to merge with a customer is a tricky process, assuming that the company has more than one customer. The merger places the company in competition with its other customers who may respond by seeking alternate providers. If this happens it will create a short term hit to revenue. This possibility has to be modeled into merger financial forecasts.
Different companies have different cultures. This fact is often ignored in merger discussions because culture is difficult to quantify or measure objectively. However if you ask those who have been through mergers, culture conflict between merging entities is most often the reason for their failure.
It may make more sense for the company to focus on ongoing sales to the customer than to entertain a combination that would result in the current owners losing control. In declining the proposal, it is important to emphasize your interest in maintaining a healthy ongoing relationship with the customer.
If the customer offers terms that are appealing, an alternative to a merger is a limited scope joint venture as a trial project to test the viability of collaboration.
Establish with your co-owners a price at which you are willing to give up control. This will help you to refuse offers that are below this price.
Situation: A company recently terminated their lowest performing sales representative. Prior to surrendering the company computer, the employee sent a goodbye email blast to the company and customer email lists. This action was a breach of company confidentiality policy. How do you respond to a breach in company policy?
Advice from the CEOs:
Have the human resources manager send out a company-wide message specifying how this misconduct violated company policy and the potential impact on the company. In the same message, re-emphasize company confidentiality policy and the importance of complying with policy. Follow-up with conversations between managers and employees about the importance of company confidentiality.
Consider having all employees sign a new company confidentiality agreement every 6 months. This should be accompanied by explanations of company policy and conversations to reinforce the importance of complying with policy.
As a follow-up to this situation, be proactive by informing affected clients that this individual has left the company and let clients know who their new sales representative is.
Be aware in your internal communications that this action may have been an honest mistake, not intended to harm the company. If this is the case and your internal response is too strong, this may have a negative impact on other employees.
If the individual goes to work for a competitor, send the new employer a copy of the termination agreement signed by the employee and put them on notice that you will prosecute any violations of prior confidentiality agreements.
Situation: A company wants to effectively position itself for a recovery. The CEO believes that it is time to sit down with his team and focus on those areas which will help them to emerge during the recovery not only stronger than they were when the recession started, but ahead of their competition. How do you create a value proposition?
Advice from the CEOs:
Creating your Value Proposition starts by analyzing and understanding your most important strength. Is it Product Leadership, Operational Excellence, or Customer Intimacy?
No company can succeed today trying to be all things to all people. Choosing one discipline as your most important strength is the choice of winners.
To set your Value Agenda, ask your team “How do we compete and win in our marketplace?” This is not a single discussion, but requires three rounds – best done as three different sessions.
o Round 1 focuses on understanding where you stand in your marketplace.
o Round 2 focuses on understanding what your customers perceive as your “unmatched value.”
o Round 3 focuses on building an operating model that enhances your unmatched value and helps to consistently communicate this to your clientele.
Once the three rounds are completed, formulate the top findings of each round into your Value Agenda for the company.
o A Value-Driven Operating Model gives your company the ability to deliver on your Value Proposition.
o Your Value Discipline is the combination of operating model and value proposition that will allow you to be the best in your market.
Situation: A CEO wants to build a new bonus program for the company’s professional services team. He wants to include a customer satisfaction component, because the group is historically weak in this area. Does it make sense to have a different bonus plan for professional services personnel and managers than for product development personnel and managers? Can bonus plans differ between departments?
Advice from the CEOs:
Many companies have different bonus structures for different departments. This is natural because different departments have different functions. For example, Sales may evaluated for bonuses based on a combination of revenue and gross margin achievement, while Finance is evaluated on profitability and Product Development is evaluated on hitting product launch schedules and new product sales.
Changing bonus structures can be a sensitive matter. If the team impacted is not included in the process of drafting the new plan, changes may be perceived as negative. If this is the case, it’s better to frame the new program so that you limit your commitment to it to just one year, and let the team know that this may change this next year.
How do you go about including customer satisfaction surveys as a component of bonus calculation?
If you want to use customer satisfaction as part of the plan, benchmark customer service satisfaction before you launch the plan. If you don’t benchmark, how do you know whether performance improves?
Survey response rates will be an issue – you won’t get 100% and may get a survey response rate of 10% or worse. Be prepared for this and make sure that data with a low response rate will support your objectives.
A survey is a lagging metric. If you can find a measurable leading metric to use as well this is better.
Be careful of how the survey is drafted and who conducts it. Both can bias results.
As an alternative to making customer satisfaction part of a bonus plan, consider starting a customer satisfaction or loyalty program. The most important question to ask will be: would you recommend us to your peers? Any low response guarantees a follow-up call from the company.
Situation: A company is frequently short of cash at payroll time. It has good revenue and profitability, but timing of receipts can make it difficult to meet payroll. Are the CEO and CFO doing something wrong, and what changes should they look at to better manage cash flow needs? What are best ways to boost cash flow?
All financing begins with your cash flow pattern! Your ability to manage cash flow is the foundation of credit worthiness. It is both a reflection of past performance and specific future performance expectations.
What can you do to optimize your situation?
First – put your own house in order!
Review your business model and the aspects of the business model that are causing cash flow challenges. Based on what you find, fine-tune your business model and its cash flow capacity. If receipts are the challenge, work with your customers to focus on timely payments.
Understand your financing needs in their full context. What short-term financing options are available? Will your bank offer you better terms on your line of credit to keep your business.
Stop, think and analyze before you act.
Framing: View the problem in its full context!
Alternatives: Consider all relevant choices!
Trade-offs: Get more than you are giving up!
It is important to fine tune your business model, not just in slack times when you have the time, but also in good times so that you are well-prepared for the next slack period.
When times are flush, set aside funds to invest in analysis of your business model.
Special thanks and in memory of Eric Helfert, PhD for his advice in this discussion.