Situation: The CEO of a service company is concerned about lost income from uncaptured billing. He has identified the cause – failure to capture extra hours that haven’t been billed – but is struggling to get employees to monitor this more effectively. How do you implement a process change?
Advice from the CEOs:
The group presented two options for growth: bring in experienced outside people to develop additional systems to run the company, or a hybrid model using internal resources, augmented with outside expertise.
Bring in Experienced Outside Resources: Hire an experienced outsider with a track record in your industry to design and implement the needed systems.
Pros for this solution: the outsider will bring a fresh vision and new energy, plus the experience and know-how to make the desired changes.
Cons: impact on current business culture. This may generate resentment among employees who can no longer make decisions on the spot and may remove a path to management for existing staff. Possible negative impact on customers who receive larger bills due to change orders.
Hybrid Model: Outside person creates model and trains employees to implement it, then monitors the system and progress long-term. The key is to change expectations and behavior within the team.
Pros for this solution: more opportunity for current employee participation; involves employees in the design of the system, providing better buy-in to the solution.
Cons: as with any change, this won’t provide the full expected return. Just the fact that things are being changed impacts the efficiency of implementation. Unanticipated blocks and resistance may hinder progress – don’t be surprised by this, it is predictable.
Implement SOPs that facilitate rapid response to change orders – starting now and with whichever option is chosen.
Generate a pick list of all possible change orders with pre-calculated costs to guide employee choices and keep customers informed.
Whatever solution is chosen, be sure to communicate frequently and consistently with employees to facilitate the change.
Situation: A service company has developed the capacity to produce and sell a product. The CEO is considering two options for this new opportunity: create a separate entity for the new business or run the businesses in parallel under the current umbrella. How do you best exploit a new opportunity?
Advice from the CEOs:
Option 1: Create separate entity for the new business while the existing business continues in parallel.
How big is the potential win? The current company competes successfully for about 10% of the market. The new capability would allow the company to potentially compete for 100% of a larger market.
How different are the two opportunities? The current business requires specialized talent – it is a low volume, high margin business. The new opportunity is the reverse – high potential volume but lower margin. It is a more generic market with fewer specialized needs.
The separate entity option provides the most flexibility. The current model already functions well. A spin-off provides an additional option without losing what already exists.
Bring in another individual to develop and run the new entity. It’s a different game and requires a different focus. However, it will be a great opportunity for the right person.
The spin-off model will be more sustainable under separate management than under the current company.
Option 2: Operate both businesses under a single entity.
This option looks like a double compromise – it alters both the company’s current strengths and the fundamental business model.
A long-term alternative is to look for a financial acquisition for the current company. It produces good net margins, has good cash flow, a and spins off cash. This can be valuable to a financial buyer.
Situation: The CEO of a successful company is considering two options: sell the company or grow to the next level. She believes that the company could be sold for an amount that would satisfy her financial needs. Also, the prospect of a long vacation and more time for family is appealing. Do you sell the company or grow bigger?
Advice from the CEOs:
First Option: Pursue funding to take the company to the next level – through either private equity or venture capital. Present an optimistic, but credible, upside return for the investment; back this up with a realistic lower estimate to cover exposure.
Both funding sources only buy the home-run model. Two reasons:
They need potential and credible home runs to sell to their investors; nobody invests in solid base hits because the return is insufficient for the risk.
They assume that the funds recipient is overestimating what they can do.
Given the existence of new technology to expand the company’s presence, it has a legitimate home-run model.
Hire a pro to help obtain funding.
Second Option: Take a shot at buying the company’s principal competitor – this provides the opportunity for rapid growth at low risk in the existing market and will make the company more appealing at a higher price.
Third Option: Based on personal goals, if the company can be sold now at a good price – do it. This will enable you to fulfill your life goals.
Give the first two options 12 months. If there is no or limited progress in 12 months start taking two successive months off on vacation – allowing minimal time to monitor the company. If vacations are satisfying, sell the company.
Ask yourself a serious question – do you really want to be on extended vacation now or is this an objective for 3-5 years out? If the company already has strong momentum, why not see what can be built and then sell. There may be more adventure in this.
Fourth Option: Take some money off the table – enough to build your dream – but continue to own controlling interest in the company. This offers both choices.
Situation: The CEO of a family business faces his most difficult conversation. One brother, who makes more than anyone else, is not living up to his responsibilities. A long-term key employee currently handles most of this brother’s responsibilities at a modest salary. The CEO is intimidated by this task. How do you prepare for a difficult conversation?
Advice from the CEOs:
Call a meeting of the three brothers and the key employee. Propose putting all four into a pool. The key employee is treated like a brother. Ask: what is a fair way to split the pie and to build incentives so that each makes what their father, who built the company, made? Make it clear that all four members of the team want the same earning potential and that one team member is not more equal than the others.
Prepare and script this meeting ahead of time.
Don’t allow the under-performing brother to play the others off against each other.
Know what must be said if this brother says he will leave.
The CEO must stick with the message. If the underperformer doesn’t like the message, he is not indispensable. A replacement could be hired for far less than he is currently being paid.
What are the key points for the conversation?
Turn the question around – the brothers all joined a company model that no longer works – the three brothers, combined, make less than their father made.
Ask the underperformer – what are the proper incentives? What is fair? Is it fair that for years, he has made more than anyone else?
It’s time for each member of the team to work together to figure out how to make what their father made in this business.
The brothers have supported the underperforming brother for years. Any old debts that were owed have been paid.
Ask the underperforming brother for his voice in how to expand the company and make it more profitable.
This is a new game. If all members pull together everybody wins.
A company seeks to leverage the difference between information from traditional
media and the richer information available through social media. Their objective,
using publicly available information, is to identify individuals’ specific plans
or preferences to better target their clients’ marketing dollars. Can social
marketing leverage your competitive position?
from the CEOs:
principal value proposition is the ability to mine publicly available information
from consumers through social media and make it useful to advertisers who want
to reach those customers.
the company’s technology allows access to shared data which can be used by many
companies this is less expensive than clients’ trying to go it alone.
most important differentiation will be the timeliness of data. Many firms
collect data after the fact – for example after a key purchase is made. What
advertisers desire is the ability to anticipate purchases. An example is a
consumer’s plan to buy a house. This information is valuable to many companies.
If data is mineable, it is valuable.
essential question is how the client will make more money from data being
near-real time. If the client can use the company’s data to enhance their marketing
database, this adds value.
partnering with the agencies that B2B and B2C companies hire to advertise their
products. Even the largest consumer B2B and B2C companies work with outside ad
agencies because these companies have better access to targeted customer lists
than the companies.
a subscription model, offering access to unique, current data to many customers.
The differentiating value is the currency and timeliness of the data. A
subscription model generates an ongoing revenue stream.
A young company is in the process of hiring new employees. Good customer
service, including excellent communication skills and empathy are the most
important qualifications. Good follow-up skills are more important than
educational background. How do you train new employees?
from the CEOs:
Training new employees may be putting the cart before the horse. The first task is to solidify the company’s business model. The next task is to determine what roles and positions fill that model. Only then can the company determine how best to train employees.
Build an organizational chart for a $1 million company.
Who will the company serve?
What are the positions and roles?
This is future that the company will be building and determines how to select and train people to fill the positions.
Suggested Reading: The eMyth Revisited by Michael Gerber – a guide to envisioning the future of the company and how to build it.
A word of caution. As CEO, you don’t want to be training people like yourself. This is both difficult and risky. You may be training future competition.
As an alternative, think of a series of distinct roles or functions that make up the business, then select and train different individuals to handle each role. It’s difficult to find people who can do it all. It’s much easier to find people who can bring in new clients, establish and nurture relationships with partners, network to develop a referral base, or counsel new clients on alternative solutions to fit their needs.
Organizing this way means training and creating experts in segments of the business, but nobody knows the full business the way that the CEO does.
Each position within the company will need individualized objectives and performance evaluation criteria. What are the key metrics for each position? This helps to build efficiency.
Think about both one-time and recurring income models. This may call for different employees or at least a different sales activity to build each business segment.
Situation: A family-owned company has built a sustainable and modestly profitable business. They have built high quality, referenceable collaborations. The CEO is ambitious and wants to become a world-class company. They now seek limited partners as investors to grow the company. Which is more important – cash flow or value creation?
from the CEOs:
Both cash flow and value creation are important. There are several sub-questions to the question:
First, what is the fundamental business model?
Second, the CEO is the company’s charismatic leader. How best to follow his energy?
Finally, and most fundamentally, does the current business model make sense? Can it be simplified it to improve its scalability?
Currently there are three divisions, each with a different objective.
Operations – to be sustainable.
Services – low profit and low percentage of company revenue but also low overhead.
Investment – to achieve an acceptable rate of return.
How does the company get the best valuation?
Currently, the company is organized as a conglomerate.
Conglomerates are too diffuse and difficult to optimize to attract investors. Pure plays do better. Consider refocusing the company around its key strengths.
The family business model is fine. The question for the family – how does the CEO keep and attract the key staff like that makes this business work? Salary alone doesn’t do it. What are the future rewards for key personnel? Consider deal participation to incentivize key employees.
The investment and operations divisions are different companies – this is fine. Optimize both.
To attract the best LPs, the business model should evolve from a family to corporate model. This will make more sense to investors and improve their ability to participate in future growth and profits.
A CEO closely watches company cash flow so assure that it is enough to fund the
company during both upswings and downturns. The company is doing well, but the
CEO is concerned about a near-term potential downturn. Where so you find
sources of capital or savings?
from the CEOs:
anticipating future cash flow needs, planning to breakeven may not be enough.
Anticipate contingencies and cut enough to be profitable. This is particularly
true if a downturn is longer than anticipated.
a close look at operating capacity.
current capacity based on staff count and average billing rates.
best – worst case scenarios given market trends. Compare each against current capacity
and evaluate the gaps. This will help set staffing levels to assure that the
company is not overcommitted in case of a downturn.
future cash flow for non-payables based on experience. This may indicate the
need to cut expenses deeper to assure that the company survives an extended
a recovery, pull back those who were let go.
there is underutilized time from the team, pitch this to investors to obtain
equity financing for new IP.
selling a key customer on a royalty model. This can be a small royalty – maybe 1-2%
of products sold based on the company’s contribution. This is pure profit to the company, and provides
an annuity revenue stream, even if small.
at banks which are aggressively expanding in the region. If they are hungry for
new clients they will offer attractive rates.
are better sources of funding than investors. A good client can become a strategic
partner. Do some homework before first before making the call to a key contact.
the level of financing that is needed.
where it would be used and what kind of return the company can yield on the
Situation: A company is transitioning from a service model to a product model. A major challenge is meeting funding needs during the transition. Funding sources perceive the current service model as heavy on cost of sales vs. implementation and this hinders acquisition of funds. The CEO sees this as a short-term problem as the company will quickly start to generate more cash through the product model. How do you transition from service to product?
Advice from the CEOs:
In a competitive funding environment, it is important that the offering be credible. While others may be offering similar solutions, believability will prove to be a strong differentiator.
Where to focus over the short term?
Create a hybrid model as a transition between the current service offering and the planned product offering. Demonstrate that current customers have responded favorably to the product/hybrid opportunity.
Test this concept with an investor. The story is that the company needs funding to get to a saleable product model.
What is the message to investors?
Helping the company to achieve a short-term and very feasible objective gives the investor the following advantages: purchasing at a lower valuation, getting a larger share of the company for less, and at a low risk.
As the valuation of the company increases, the earliest investors will get the best deal!
During meetings with investors, ask them for advice on the current and following rounds and financing, and what they will find most appealing.
How do you mitigate the risk to the first investor?
Have a solid business plan and projections that have been vetted by others.
Have a list of referenceable clients.
Utilize the current service model and demonstrate the product/hybrid Package. Build a case on the advantages of the hybrid model including the financial case. The company is always there to provide back-up assistance to meet customer needs in the hybrid model.
Demonstrate flexibility – the customer can always choose the service model or convert to this if they wish.
A Key Point: You are selling yourself as the trustable resource, not the product or service.
Reference previous investment including founders’ investments. The founders did not invest to fail!
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.