Situation: A CEO has had to shift half of the company’s employees to part-time due to reduced business. This has hampered new product development. The situation has been exacerbated by slow payments from customers. Where should you focus for the next year?
Advice from the CEOs:
The company has a lot going on. Validate the company’s market potential for products in development, and start gearing up the marketing program so that it will impact this and next year’s sales.
Get a feel for how many customers want the new products in development. Invest in some market research to validate this.
The bottom line is that product development only pays if the company can sell a lot more product! The team needs to know whether customers for the new products exist, in what numbers, where and who they are, and their most critical needs. Without this market intelligence, the company is in no position to tell whether there is a market, nor is the company prepared to address it.
Assume that there is a market, that it can be quantified. Once the company knows who and where the customers are and knows their most critical needs, the next step is to prepare to attack this market. This is not something that is done in 1-2 months, after the product is ready to sell. The company needs to be starting now if marketing is to be initiated in 6-8 months.
Past practice has been to split R&D costs with the customer. The company has the expertise, the customer the money – this is close enough to 50/50. There is no need to show them the numbers. R&D should not be funded through future sales but should be making money now.
One project has been taking so much attention that it is hobbling the company. The company is so focused on getting this “just right” for the customer that sales and market development have been neglected.
For the next 3 months, focus on completing this project, getting it out the door, and getting the company’s focus back on growth. A sense of urgency is needed!
Situation: A CEO has an option to purchase another company with whom they have a long and good relationship. A smooth transition will be important. The owner’s relationship with their customers is central to their success, as is his employees’ knowledge of their key accounts. How does the CEO assure that these relationships are retained? How do you construct a business acquisition?
Advice from the CEOs:
Based on the CEO’s responses to the Forum’s questions, the owner of the other company needs this deal more than the acquiring company needs him. This creates a strong bargaining position.
The owner of the business is the business and the key to a smooth transition post acquisition. Retaining his ongoing involvement – at least for a reasonable period – is essential to gaining maximum value from this acquisition.
The value of this business is its people: the owner’s relationships, and both the owner’s and his employees’ knowledge of their key accounts. His employees know the inner workings of their customers’ businesses. These are the relationships and the knowledge needed to assure that the acquisition is profitable post-close. Retention clauses and penalties must be part of the agreement.
If the owner wants 50% of the net income generated from his piece of the surviving company during a transition period, this is fair. However, the financial and operational details of the transition and his share of the income must be spelled out in the agreement and the agreement must assure that there is proper follow-through to qualify for the payments.
The income from the owner’s accounts must support his salary. However, even with this the owner will still cost the acquirer time and energy. Plan for this and budget for it in the agreement.
Situation: The CEO of a software company has been presented with two opportunities by a large customer – international expansion to support their sales and creation of a data warehouse facility. The company has the option of pursuing either or both. The customer is not offering up-front cash to support either opportunity. Should they pursue either or both? How do you choose between opportunities?
Advice from the CEOs:
Keep pursuing both opportunities and establish a series of decision points which will yield either a Go or No-Go decision on each. The big question is to determine how either will support company growth.
The customer is interested in both opportunities so ask them for assistance such as: removing barriers, client referrals, or some form of cash or investment.
For either opportunity to succeed requires a high level of internal buy-in and support from the customer.
If the company can afford to be aggressive now, this is a great time to move.
Look carefully at the ROI on each opportunity under different scenarios.
Do background work with potential clients to validate each market opportunity.
Specifically to International Expansion
Buy-in from the customer’s head of international sales is essential – without this it will be difficult to establish a solid relationship with the international sales team. Lack of this support will be a No-Go sign.
Can the customer provide office space, access to their infrastructure, administrative support, assistance in gaining necessary licenses to do business, etc. during start-up?
Could this venture be undertaken through a joint venture with an established international company? This would save start-up costs and allow validation of the opportunity before risking the company’s investment.
Execution will require a large-scale effort – both time and money. Include both in the Go/No-Go calculation.
Specifically to the Data Warehouse Facility
A competitor’s right of first refusal on this business is a barrier. However, the opportunity may be viewed as too small for the competitor. Is it possible to buy rights from this competitor?
Ask the customer to transition their customers to your company and its product.
Situation: A software company is developing a new solution for their B2B market. The CEO has been in discussion with a potential partner to assist developing this solution. The question is whether this partner is the right partner. Is it smarter to complete development as a partnership, or on their own with the aid of subcontractors? How do you evaluate a potential partnership?
Advice from the CEOs:
Is the potential partner also a competitor? If so, is the partnership arrangement on or off the core focus of the company’s business. Is there potential for future development in the partnership, or is this just a one-shot opportunity?
What would a new partnership look like? Ask the following questions:
What is the long-term vision for the company?
Does the partnership fit this vision, and under what terms?
Is the potential partnership “sticky”? Will it bring in business that can be nurtured and developed under the company’s shingle?
Until answers to these questions become clear, soft pedal the partnership opportunity and plan for the company’s future.
Take advantage of situations that the partner presents as they benefit you, but do not let these become a distraction to the company’s focus unless the partner is open to working with you as a partner rather than as a source of bodies and skills.
Put a deadline and milestones on the partnership relationship. If they don’t pan out, walk.
Don’t burn bridges, if the partner takes off, then jump back in more strongly, but on terms that benefit the company’s strategy.
For the immediate future and until the situation becomes clear don’t let people become idle. Unless something develops quickly be ready to redeploy them.
An alternative is to stick with the company’s current customers and expertise. This involves investing resources and focusing R&D on solutions for these customers. If the market remains substantial and current customers are the largest players, this has the greatest potential for growing the company’s business.
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: Revenue for a product and craft business has been slipping. At the same time, their competition has been disappearing. It is clear to the CEO that demand is and will continue to be present because of the market that the company serves. The question is how to maintain the profitability to survive long-term. How do you build in a declining market?
Advice from the CEOs:
The keys to recovery in a business like this will be in two areas: improving sales and increasing margins.
To increase sales the choices are more aggressive marketing and selling to existing customers or creating new markets like previous generations did when they started the business. Consider services that you could bundle with your products to augment the ways that customers use them. It will be the responsibility of your sales and marketing teams to demonstrate these product/service bundles to increase sales both to new and existing customers. This will help to solve the revenue slippage.
The other side is ongoing efforts to reduce cost which will, in turn, improve your margins. Costs can be reduced in creative ways that are not obvious. These include improvements in purchasing, reduction of waste, recycling of component materials, and inventory controls. It will be the responsibility of your production, purchasing and inventory management teams to develop these solutions. Assure that these teams are recognized and rewarded for their solutions.
Look at the segments of your product offering. Are they declining at the same rate or are there differences? This will help you to focus your efforts, as a company, to grow market share even if the overall market is declining.
Other suggestions for increasing sales:
Take advantage of the craft trends. Do this with NEW talent – not tired talent.
Consider partnerships and collaborations.
Set up contests and craft classes.
Look at how other industries promote to the craft industry and follow their lead.
Situation: A CEO is renegotiating the company’s agreement with a sales person. The sales person wants a declining residual commission on sales from past customers, regardless of who is servicing the account. A consultant who knows the industry advises the CEO to focus on new sales. What are the implications of each choice? How do you manage residual commissions?
Advice from the CEOs:
There are two types of salespeople: Hunters and Farmers.
Hunters focus on new business and generally get paid first year, then in later years only on sales that come specifically through their efforts.
Farmers focus on ongoing relationships with existing customers and are the service people for those customers. If they are paid commissions, they get paid on the ongoing sales that result directly from their efforts.
It is rare to find a salesperson who can manage both of these roles well, so companies often divide responsibilities, and any commissions paid, according to responsibility.
Decide what behavior you want from your sales person and pay for this – make the distinction between hunting and farming. Then ask the sales person which they want to be. If they say “both,” challenge this and let them know that they need to make a choice.
Situation: A company serves a market with a lot of new small entrants. Clients purchase from these other companies as well as the CEO’s company. They are continuing to call and network with their client base to retain clients and build new customers. What else should they be doing? How do you deal with cut-throat competition?
Advice from the CEOs:
Make a list of those clients who are no longer purchasing from you or referring new clients. Go talk to them. Ask why they are no longer purchasing from you or referring new clients. This may open new options. You may find something new or unexpected that you can offer.
Work with an outside service to follow up with on clients lost and won. The key question for them to ask clients is why. Learn from the responses what is most important about the clients’ purchase and referral decisions.
Consider a new service. A health/happiness outcome would be a nice value-add: a quarterly report back to referral sources on how happy the clients that they referred are. The last question on the survey should be – Would you work with our firm again? Why or why not?
Consider using an outside source to gather the data for these surveys. To get more valuable responses, don’t just ask about your company, but also several of your top competitors; this will produce a richer set of responses.
There are two ways to compete: either you are low cost or have established a unique value proposition. Whatever this is, sustainability of your critical point of differentiation is essential.
Health care legislation is now in flux. Whatever the outcome, it will have an impact on your market. Become an expert resource on the implications of various outcomes.
Look at social media resources – feed valuable information to your audience via blog.
Situation: A small company wants to reduce costs by consolidating accounting and operational communications between remote divisions, with home office coordination. Can you more effectively reduce costs by consolidating services or is it better to set up parallel but complimentary accounting and operational communications in each division?
Advice from the CEOs:
There are a number of things that need to be considered, including:
Whether the existing legacy system is off the shelf with modifications or was custom designed for your operation.
Does the current system meet your needs, and do operators understand it? Is operational understanding diffuse or can only one or two people operate it?
How similar are the divisions in terms of product, customers and operations?
Do divisions serve distinct, non-overlapping customers with different product lines?
Are there important operational differences, for example are some divisions union, and others non-union?
On an ongoing basis, except for accounting, do divisions function as complimentary or distinctly separate businesses?
How complex are the product and pricing offerings? Could you consider a simple solution like QuickBooks or are there are complexities to your business model and accounting that the off-the shelf or web-based systems can’t address?
How much historical data from your current system is needed to support ongoing and future operations?
The simplest solution may be to run your current system off of a server, with multiple nodes connected to the system – a direct connection at your home office, and point-to-point lines connecting your remote offices. This will solve both your data transfer and communications needs.
Hire a computer consultant to set this up and assist you in establishing a link. It will cost some money, but will save you time and money in the long-run.
If you decide to change your accounting system, do so at the end of your current fiscal year. Trying to change accounting systems in the midst of a fiscal year creates an accounting nightmare for a small business.
Situation: A company wants to grow by acquiring companies in similar verticals that have different but complimentary offerings. The targets will most likely be boutique operations. How should they target and prospect candidates?
Advice from the CEOs:
Before you think about either targeting or prospecting an acquisition do your internal homework. Establish your strategic plan, including strategic capabilities that you want to develop. Look for synergies within your plan, and assure that any new capabilities complement these synergies.
Will current customers be interested in the new strategic capabilities, or will you have to build or buy access to new customer segments?
Determine the leveraging factors. How much incremental business can you expect to gain compared to current business? Look at both top and bottom line impact.
Do a build/buy analysis to determine whether the capability is more effectively built using your own resources or purchased.
Leverage both internal and external resources to develop a target list. Ask what current employees may be knowledgeable of potential candidates.
Use your industry network to identify and gather information about candidates.
Retain a firm to assist you in identifying candidates. They can approach candidates from a neutral position to assess interest in acquisition.
It is critical to negotiate a deal that retains key talent. Founders and key staff of the acquired company must see the combination as a means to facilitate and expand their own vision. In many successful acquisitions you will see the following traits.
The acquiring company did not change management, accounting methods, or operational procedures of the acquired company.
They acted as a bank to facilitate pursuit of the acquired company’s dreams and already successful strategies.
They took a “hands-off” approach with the acquired company and did not try to force cultural change.