Situation: A CEO’s company has experienced margin erosion due to designs that did not transfer well to manufacturing, and inefficiencies in the transfer process between design and manufacturing engineering. He wants to transform the culture without losing technical performance while meeting cost targets and delivery timelines. How do you improve internal processes and procedures?
Advice from the CEOs:
Reinventing the culture of a workforce is an organizational design challenge.
The heart of the challenge is understanding the motivations and desires of the individuals involved – particularly the natural leaders within the groups.
Learn this is by speaking with them one-on-one, either as the CEO, or through individuals with whom they will be open and trusting.
Once their emotional drivers are understood, design accountability and incentive solutions that will align their personal reliability and accountability drivers with their emotional drivers.
Tailor the language of communication with the organization so that it responds to the emotional triggers discovered during the 1-on-1s. For example, if there is a negative reaction to sales within the engineering teams, use a different term like client development.
Expose the designers to the “hot seat” that gets created when their designs produce manufacturing challenges. The objective is for the designer to see the manufacturing group as their “customer.”
Involve manufacturing engineering in design architecture meetings. Do this early in the process so that they can communicate the framework and constraints under which manufacturing occurs and suggest options that will ease manufacturability.
Shift from individual to team recognition on projects. Instead of recognizing the contributions of the design component or the manufacturing component, recognize the contributions of the team of design and manufacturing engineers that produced a project on time, on budget, with good early reliability.
To kick off the new process:
Identify some of the waste targets.
Involve individuals who are known to be early adopters.
Have them look at the problem, develop and implement a solution.
Deliver ample recognition/rewards to these individuals.
Next use these people to mentor the next level of 2nd
Situation: A company is facing the expiration of the principal patent for its main product. There are subsidiary patents which still have life. Currently, there are no competing products, but several companies understand the technology. How do you plan for patent expiration?
Advice from the CEOs:
Think of this as a two-step process:
Step 1 – Step back and look at what the company has:
Patents – including the claims that have been awarded on all company patents.
Facilities – capable of manufacturing current products, but also additional products, perhaps with a minimum of additional equipment.
People – competent staff running manufacturing operations, and tight office operations.
Step 2 – Loot at where the company could go and evaluate the markets where the existing technology is applicable:
Work with outside, imaginative people who can take a fresh look at the options.
Looks carefully at the claims in all the company’s patents.
What do they cover?
Is there an opportunity to extend current claims through process patents?
Caveat: a company can file for a process patent on anything that has been for sale on the market for less than a year. However, if they have been selling a product covered by this application for more than a year, they cannot.
Look at other markets – companies that could license the company’s technology, or with whom the company could partner to provide new consumer-oriented products:
Is there inexpensive, affordable equipment that would enable the company to produce additional products in the current location?
Think outside the box: what business is the company in? Think more broadly than the current market about where high value opportunities exist. These can be low to medium volume, high price/margin or high-volume lower price/margin.
Patents are not the only protection – trade secrets also work. 3M’s primary IP strategy, particularly on their adhesives, etc. is through trade secret – both for low and high-volume products.
“Product” patent extensions have limited utility. They are easy to design around. “Process” patents have more utility. These can be licensed at low cost per application in high volume applications and provide a nice royalty reserve stream.
A CEO is concerned that too much of her company’s business is focused on two
few customers. The loss of a single large customer can potentially mean a significant
hit to revenue and profitability. How do you diversify your customer base?
from the CEOs:
If current cash flow is good, the company should consider purchasing diversity by buying a company.
Consider acquiring a supplier that is in good shape, but with lower margins. They will have the infrastructure to run their own operation, and the purchasing company will have the additional profitability to make the combined entity more interesting.
Given the company’s existing cash generation potential, there are creative ways to finance such an acquisition.
Why is this a good strategy?
Purchasing another company can instantly expand the customer base.
Diversifying the company opens additional options to build long-term sustainability.
A purchase strategy can bring in a ready-made and smoothly running infrastructure in the form of the purchased company.
Diversification can boost the value of the combined company on a more diversified business base. It might allow the company to combine low volume, high profit lines with high volume, lower profit lines. There are advantages to each of these business models.
Where can such a company be found?
Look both inside and outside of the current geographic base.
A candidate could be a higher volume but lower profit supplier of one of the company’s current customers that does not compete with the company’s current offering. Alternately, look at companies with more diversified customer bases in a related industry.
Look at the niches that the company’s current customers serve.
What similar niches exist? Are there acquisition candidates there?
Look at the functionality that the company’s products add for its clients. In what other industries would similar functionality be of value?
As these questions are asked, look for candidates that have complementary customer sets, customer bases, and geographical reach.
Situation: The CEO of a consulting company is frustrated by lumpy revenue and profits. From quarter to quarter it has been difficult to predict either number. Unpredictability reduces options in valuation and exit exercises, as banks and acquirers favor predictability. How do you generate a predictable P&L?
Advice from the CEOs:
The objective is to construct a revenue base built on predictability, even if this is at lower margins. Given a predictable base, the company can complement predictable revenue and profits with higher dollar and margin opportunities as they arise.
Analyze the projects that the company contracts for both revenue and profitability. Some projects will be bread and butter situations which are more common and predictable, but which generate less revenue and profit per project. Others will be customer crisis driven. These latter projects will have higher revenue and profit, particularly if the company is the vendor of choice; the tradeoff is that the frequency of these contracts is unpredictable.
If the objective is predictability, the company’s base should be built on bread and butter projects. As the company grows, focus on this base. Customer crisis projects can then be added as they arise to bump both revenue and profit.
The objective will be to become one of the top 2-3 outside vendors of the choicest clients. Target projects may be ongoing maintenance of older projects in the client companies’ portfolios.
How would this model be pursued?
Focus on the company’s top 5 customers. Reduce risk by optimizing customer leverage as a proven entity and offer them strategic deals.
The focus is long-term project based with guaranteed delivery at lower cost.
Identify the fear or insecurity that exists within the customer and provide sleep insurance.
This model works well in the new economy – get lean, manage infrastructure size and cost, and grow with the economy.
Alternately, identify an area where the customer may not have enough resources and provide a solution that allows them to address this without adding additional personnel or by using existing personnel more efficiently.
Another option is to develop a virtual office model. Provide resources for $X per month, with an evergreen provision.
Situation: A company wants to expand to new sites. It’s business model relies on high levels of customer service, with high customer retention and efficiency. The challenge is that the model is low margin, because only a few employees are billable. How do you finance site expansion?
Advice from the CEOs:
To evaluate profitability and start-up time create a low-cost prototype site to test the model and collect data.
Develop a template with a high likelihood of survival over the first 6-12 months when investment will outweigh income.
Consider a SWAT resource team to accelerate early success for new sites.
Key areas of focus:
Understand the value of the business. For example, is it:
Improving client operational efficiency?
Building the team?
Response time to client needs?
From experience define the most important variables for success:
What is front office, what is back office?
How important are the dynamics between key people? Is it better to hire key people as the number of sites expands or grow them internally.
Determine what is being sold, with a reasonable prospect of return – methodology or services?
Consider a franchise model. The model must show a reasonable return to the prospective owner, including the cost of franchise purchase and start-up costs.
As franchisor, it is important to know what this model looks like to a prospective franchisee; however, take care not to create a representation to which would be bind the franchisor as a promise.
A successful franchise should have a branded presence.
Offer potential franchisees a guarantee: if after one year the net costs to establish and maintain the site are below a certain level, the franchisor will credit the difference between their estimate and the actual net costs in Year 2.
MacDonald’s does not allow franchisees to choose store locations. Similarly, the franchisor can choose locations, determine the availability of key talent, select anchor clients, and develop a reasonable estimate of the value of a new franchise before selling it. This increase the value for the franchise sale and creates a more predictable ROI for new franchisees.
Situation: A company has built a very successful single site business, and wants to expand geographically. They are investigating where it makes sense to duplicate operations in new sites and where it makes sense to consolidate operations. The company’s secret sauce is in their system and procedures. How do you plan for business expansion?
Advice from the CEOs:
Look at the shared services piece and the cost/benefit tradeoffs. What services are best centralized, and what are the critical on-site services that you want duplicate in remote sites?
Other companies use remote offices for field personnel, but centralize all shared services. Centralized shared services include invoicing and collections, financial reporting, telemarketing, anything dealing with trade names and print or trade-marked collateral, and an array of other services which would be too expensive for individual sites to duplicate, or where leaving things to the individual sites might result in inconsistency of service and erosion of the brand.
How do you replicate key talent? Consider whether key talent can be retained in the shared services side of the business, not the cloneable service delivery sites. Typical franchise operations have people who are difficult to replace or replicate so most do not try to include these roles in the service delivery operations.
You will need to provide for a sales role in your remote offices as business development will be critical to early success of new sites.
In the transition from “successful small” to “successful large” most businesses find that the medium stage is the most difficult. Issues to consider include:
Does your direction match your expertise – do you have support of individuals knowledgeable about franchising?
What are the margin differentials within the business? Do you want to clone the high or low-margin areas of the business? Develop profitability models for your central and remote sites, and assure that the sites will have sufficient profitability to assure their short-term success. This will make it easier to proliferate the remote sites.
Situation: A company has been approached by an international firm with an existing West Coast presence that is interested in expanding its US operations. A Letter of Intent is in place but will expire in weeks. The LOI is of interest because the company has cash flow challenges. The CEO seeks advice on whether and how to proceed with a sale or merger, or whether to continue as an independent entity. Do you merge, sell or keep the company?
Advice from the CEOs:
This is a personal decision. Do you want to be your own boss or to become an employee? It really is a question of what you want.
If you are burned out, there are advantages to having a boss, at least in the short term. However, 2 to 3 years out you may tire of this.
While cash may be tight, you can address this with other measures.
Can you save money by reducing office staff (hours or people) short-term until your cash flow improves?
Talk to private investors – offer up to 9% interest on a note. The company is a going concern and therefore likely to be able to pay off the note. You may be able to negotiate a note at a favorable rate.
Negotiate a 5 year note, with interest only payments for the first 3 years; sweeten the deal with an offer that if you get new business worth $X during the period of the note, you pay them Y% of upside.
You have revenue-producing business and receivables. Factor your receivables to raise the cash that you need. Adjust your prices to cover the cost of the factoring discount.
If you have the margins, or can increase prices to produce the margin, offer discounts for early payment of accounts receivable.
If you decide to sell, avoid a contract that takes away your flexibility to maximize your future payouts.
Can you be confident that the buying firm will survive until your payouts are completed?
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 provides both contract staff and consulting services. They have a large client for whom they provide staff, but not consulting. The client routinely requests discounted rates on contract staff from the company. The CEO believes that the client requests lower rates because they, in turn, offers consulting to their customers, using the company’s staff, and want to offer these services at a competitive rate. How can the CEO better respond to the next requests for discounted rates? In addition, is there a way for the company to market their consulting services directly to the large client’s customers? How do you balance two businesses?
Advice from the CEOs:
Don’t avoid the conversation on your rates. Make sure that your client knows that they are getting top quality services and that this is reflected in your rates.
Make the issue a price / quality trade-off. If cutting costs is important to the client, offer lower quality options at a lower price and let the client decide what will fill their needs. This positions you as flexible and willing to work with the client, without losing margin.
Offer modest discounts for incremental business, but not current business.
Tell the client sooner, rather than later, that your prices are as low as you can make them. Don’t wait until you are in pain.
How can you promote your own business to end customers via the staff that you provide for this client?
Give them business cards to give out that reflect your business, not your client’s.
Provide them with wear nicely embroidered “Company” shirts to wear at work.
Be aware that your desire to approach the client’s customers directly with your services will be a threat to your client and may result in them firing you as a provider of contract staff.
Situation: A company wants to open a satellite office in a lower cost geography where they can provide current services at a reduced cost to improve margins. In doing this, the company wants to maintain the same culture and controls on quality of work that they enjoy in their home office. They also need to accurately forecast revenue for the new office. How do you maintain company culture as you expand, and how would you forecast revenue for the new office?
Advice from the CEOs:
Maintaining company culture is tricky as a company expands geographically. Assign one of your current managers, someone who buys into the company culture, to head the new office. Also maintain the same hiring and personnel management policies that you have at the home office.
As the biggest concern is cost efficiency, make sure that the office manager has clear objectives to realize anticipated savings.
Look for an incubator that can handle all the peripheral office details so your staff can focus on their work instead of managing facilities.
When it comes to revenue forecasting:
Given the lower costs associated with the new geography, look for opportunities to trade margin for longer contract commitment windows to improve revenue forecasting.
Both margin and delivery can be lumpy when opening a new location. Obtain a credit line to help you smooth the rough spots in your revenue stream.
Investigate deferred revenue options to spread revenue risk – right of first refusal on next generation projects in exchange for a lower cost per project to the customer.