A company has a good accounting system, but the CEO is concerned that they are
not making the best use of metrics to drive the business. He senses a lack of
shared understanding of key metrics and goals. He senses the appearance of
financial disarray, despite his clear grasp of the business. Do you have
control of the numbers?
from the CEOs:
A good accounting system may be in place, but if it is not being used to drive the business and monitor the achievement of milestones then the company is not gaining the best advantage from it.
If there is a sense of financial disarray, this suggests that the company lacks financial metrics. Employees and managers may be doing their jobs, but without financial metrics it is difficult to tell how well they are doing their jobs.
Start with basic metrics:
Where are sales coming from?
What is the profitability of sales by customer segment and product line?
What is the company’s profitability?
What are the profitability trends of the company and key segments of the business?
Once a company is tracking these metrics, it is easier to focus managers and employees on products, product development, operations, sales and marketing issues that are most essential to the company’s success.
The company needs the equivalent of a CFO. This means a financial person, not an accountant. An individual who knows how to look at the numbers. A CFO will help the company to
See the strategic trends in the business,
Uncover the best opportunities for growth, and
Understand the greatest potential threats to growth of the business.
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 is considering purchasing a line from another company to complement its existing product line. They would split commissions with the current owner, and gain an additional employee with knowledge of the products to be acquired. The purchase would add to the company’s offering, as well as rights to additional products. The CEO sees this as a low risk move. How do you evaluate an acquisition opportunity?
Advice from the CEOs:
In evaluating a commission split opportunity, will the commissions that you would receive exceed the cost of both the additional employee which you will add, plus the support that it will require to maintain the new business? Do the new commissions cover the anticipated costs, plus a reasonable profit?
Have you vetted the numbers to demonstrate that this purchase provides a suitable return on investment vs. other potential investments that you could make? Is the marginal revenue that you will receive greater than the marginal cost that you will bear? Is the ROI of the new line greater than your cost of capital? If not, what can you do to improve the return?
Looking at your current operations, do you have your existing shop in order? Have you calculated the metrics that will allow you to understand, where you’ve been, where you are, and which provide a clear vision of where you want to go? If not, the question is whether you are ready to take on another line.
The bottom line question is – how do you know that this acquisition is the best use of your funds?
Situation: A tech company is having difficulty with a customer. Given three options – high quality, low cost and rapid delivery – the company can deliver any combination of two, but the customer wants all three. When the company asks which two are most important, the customer responds that they want all three. How do you respond to unrealistic demands?
Advice from the CEOs:
The Devil’s Advocate response to this question is to look at your processes. Is it possible to do all three, and if so under what circumstances?
Think from the perspective of the customer:
What will you need and when?
Integrate the customer into the decision process as much as possible.
Demonstrate where trade-offs exist, and work through these in binary fashion until you reach agreement on the scope of work, delivery timeline and price.
The challenges change depending upon who within the customer company you are working. For example, the engineers understand the challenges and complexity of the product in question. However, the purchasing agents do not necessarily understand the product, its complexity, or how critical it is to their final product.
In this case try bargaining with the purchasing agent – if the purchasing agent goes back to the engineers and gets their agreement that your company can change the quality or delivery spec, perhaps you can be flexible in your pricing. Put the ball in the PA’s court – but make sure that the PA knows that he/she will be responsible for any project delays for not giving you the order today
Use stories to set expectations – better yet, use stories, combined with metrics about the costs associated with attempting short-cuts to develop authoritative arguments in support of your position.
Create a User Guide for your customers – paper and web formats – to sell your story. Sell fear, uncertainty and doubt; for example, if the PA wants to go another route here are the potential costs in terms of time, market share and profits lost.
In particularly difficult negotiations, use the real estate mantra: Some Will, Some Won’t, So What, Who’s Next?
Situation: A company started a new branch office last year. This office started with three people and has remained at that level with some turnover. Morale is low because the branch office team doesn’t feel supported by the home office. The CEO is concerned that this could kill the branch office if it is not fixed. How do you boost morale in a branch office?
Advice from the CEOs:
The problem is most likely the home office, as they assert. There have been few visits from home office personnel – particularly the company president. In addition, they are being criticized in weekly reviews for not hitting the same metrics as the company’s established operations.
Remediate this situation by scheduling weekly executive visits and monthly visits by the president until things are up and running and there is a track record of profitability.
Clarify your expectations to everyone – this is a new office running to different metrics until they establish themselves. Once they are established, they will run to the same metrics as everyone else. Coach the heads of other divisions that the new office needs support, not criticism, until they establish themselves.
Allow the branch office to bid low for market share until they are established in their new location for a period – at least 6-12 months. Create a different set of metrics for a start-up office, and review these during weekly sales meetings.
The role of management is to show the colors in the new location and manage peer feedback from established locations. Help them win! Establish start-up metrics like lunches with potential clients to establish relationships. Since the branch office is generating business for other locations, create separate general performance metrics from territory specific metrics for this office and show both in staff meetings.
Situation: A company’s staff is highly paid. Historically, annual raises have been 4-5%; however some individuals are above industry salary ranges. The CEO doesn’t want to lose key individuals who would be expensive to replace. The company is planning salary increases for the end of this year. If the level is lower than historic averages they are concerned about the impact. Are planning for salary increases this year? How will you communicate your decision to employees?
Advice from the CEOs:
What’s the problem? Even in an improving economy your employees are lucky to be making what they do! On top of this, you need to consider profitability compared to last year as well as historic levels. Selectively share financial data with your employees as well as financial realities – your and their top priority are to keep the company healthy.
Gather data on salary ranges for roles in your industry. Good sources are Salary.com for national data (it may be dated) or Assets Unlimited’s Silicon Valley Survey for up-to-date salary information by industry and position. This will help you to prepare for conversations with employees who are currently paid above the range for their positions.
If you have employees above the range and do not want to give them raises, give them bonuses or spot bonuses for work well done.
Formalize your bonus system – base bonuses on performance metrics. Consider tying bonuses to net margin performance for the company or for departments that can impact new margin.
Whatever you decide, make announcements about salary levels a positive event.
Situation: A company is investigating Balanced Scorecards as a management tool. They want to get the perspective of others who have used Balanced Scorecards on how these are used and where they are effective and ineffective. Do Balanced Scorecards aid decision-making?
Advice from the CEOs:
To make good decisions in times of uncertainty one needs readily available up-to-date information on the key drivers of the business. Balanced Scorecards answer four important questions:
How does the customer view us? (Customer metrics)
At what must we excel? (Key Performance Indicators and Internal Business Processes)
How do we continue to improve and create value? (Learning/Growth & HR metrics)
How do we look to our investors? (Financial metrics)
To effectively use Balanced Scorecards employees must be empowered to make necessary changes, and there must be an effective system for prioritizing efforts – so that when a company has multiple opportunities they can decide what to do first, second, and so on.
Empowering people to make a necessary change
To improve project estimating systems, identify those who are best at estimating project timelines and costs. Have them develop a template of their process, focusing on how they complete projects on schedule. Implement this template across your estimating function.
To improve project on-time completion, shift the development focus to calendar and, if necessary, narrow specs to hit the deadlines.
To focus scope of work issues, decide test procedures up-front then work on deliverables that will determine whether requirements have been met. From this, develop project assumptions and budgets. Create a template that focuses on internal best practices and clones these for other projects.
Queuing Systems & Priorities
Define the vision of success. Then drill down to what’s most important. Look at impact of different options on the organization and performance. Finally, force this issue – if we can only do three projects what will they be?
Situation: A company has a high-powered Board of Directors. This Board is focused primarily on company strategy. The CEO wants to create a separate Advisory Board for technical and business development. How do you create and leverage an Advisory Board for technical and business development?
Advice from the CEOs:
Be clear on the role and compensation of the Advisory Board.
Create a clear set of expectations to initiate the process, and refine these expectations in early meetings of the Advisory Board.
Early stage companies often pay out of pocket expenses for attending Advisory Board meetings, plus stock options. When business development is the focus, you may want to add a percentage of any new business brought to the company by the member.
More mature companies may add a stipend for Advisory Board service.
Not all Advisory Board members may be compensated equally, particularly if members receive a percentage of business that they help to create. You may also choose to compensate members differently based on their experience and influence.
Choose Advisory Board members carefully.
Go beyond personal contacts of the CEO and company officers. Look for individuals who are known and respected within the industry. You also want individuals who have exceptional contacts and who will agree to use them to benefit you.
Look for individuals who are highly positioned within target companies – for example a VP of Operations or of Business Development. Also look for individuals who have excellent relationships with personnel in target companies
Be open and clear about your expectations of individual Advisory Board members. Celebrate success.
Establish metrics that the members are expected to fulfill.
Record commitments made by Advisory Board members and include updates against commitments as part of Advisory Board meetings, as well as updates against metrics that expected of members.
Celebrate successes of Advisory Board members and note individual and team contributions whenever the Advisory Board meets.
Situation: A CEO is evaluating her company’s employee review process and seeks input on alternative practices from other companies. What are best practices for employee reviews in terms of frequency, format and structure?
Advice from the CEOs:
Company A conducts annual reviews. They ask for written input from the employee, peers, and manager. The review is a sit-down meeting between the employee and manager.
Company B conducts formal annual reviews, with informal 6 month reviews. The annual review evaluates the employee’s performance on 15 key variables, and is prepared by the manager. The review is a sit-down meeting between the employee and manager
Company C does not conduct reviews. They have tried several formats over the life of the company, but found none satisfactory. Instead the company continually monitors key metrics on a green, yellow, red scale. As soon as yellow appears on a metric for an employee, the supervisor meets with the employee to discuss the situation and to formulate corrective action. The result is that reds do not occur.
Company D conducts annual reviews on the employment anniversary. They request written input from both the employee, and manager. The employee, manager and President meet over lunch, off-site. The objective is to communicate plus and minus points, taking a long-term approach in a conversational setting.
Company E conducts annual reviews, with quarterly self-evaluations. Both reviews and evaluations include a key question: “what can management do for me to improve my performance?” The review is a sit down meeting between employee and manager. Results of reviews are tied to quarterly profit sharing.
All companies agreed that, generally, in evaluating the options, the most important questions to ask are:
Why are we doing reviews?
What is the objective?
The answers to these questions help to evaluate review options.
Interview with Doug Merritt, President & CEO, Baynote
Situation: A company has a proven technology and satisfied customers. To achieve their goals, they need delivery on sales and service to ramp revenue. At the same time, new opportunities arise daily. How do you keep the team focused on execution and delivery?
Advice from Doug Merritt:
The first thing to focus on is focus itself. Most of us don’t suffer from lack of opportunities, but from an inability to make hard choices and diligently pursue the few critical or high pay-off options. To tell the difference between gold nuggets and distracting bright shiny objects, you must have a clear strategy and priorities on customers and channels you want to develop. It is critical to choose the right opportunities that will optimize achievement of the strategic plan and to say not to those that don’t. This must be constantly reaffirmed through a simple set of metrics around your optimal customer set, revenue ramp, and quality of services delivered.
The second thing is attracting the right talent. A small and rapidly growing company has little time and resources to effectively train fresh talent. If scale is the issue, it’s important to identify and attract experienced individuals – those who have proven their ability to deliver and who bring along a high quality, proven, loyal following. Top talent that can open the purse strings of your target customers. This means hiring rock stars who do this better than you can! The challenge for the CEO is remembering that success almost always comes from hiring people who can do their jobs much better than you ever could. The CEO’s unique talent isn’t being the smartest person in the room – it’s your ability to build and guide an organization that will achieve more than you can alone.
Third is to keep the team focused on the most important priorities. The CEO needs to generate a crisp vision and to distribute information that maintains focus on that vision. Most “Type A” overachievers want to do lots of things well. The key is doing the right things well. You do this by measuring, and by creating transparency around the few key levers that drive the strategy. It helps your cause to say no to a visible and enticing “bright shiny object” that, in the past, the team would have reluctantly accepted. Finally, it also helps to create a few large and non-negotiable milestones that get the company to focus, as a unit, on achievement. Ultimately, the CEO needs to coach and guide their team to do the right things right.