Situation: A company faces a difficult situation. One of their customers placed a substantial order for custom product a year ago. They have taken delivery of some product but the bulk of the order is still in the company’s warehouse. The company negotiated a cancellation fee with the customer, but they haven’t paid. What is the best option for the company? How do you deal with a deadbeat customer?
Advice from the CEOs:
Because the customer is unresponsive, be ready to take legal action. Get an attorney. The initial process to prepare for a suit may cost $5,000-7,000. Therefore be prepared to sue for damages plus legal fees, with the threat that liens will be put on the customer’s business during the settlement process.
Once everything is ready for a suit, talk to the customer – the message is either they pay in full what they owe or you’re ready to file a suit which will cost them much more.
The Uniform Commercial Code may cover you for custom product. Check this out. This is important so that the company won’t be exposed to a countersuit for filing a frivolous suit.
A route which may be less expensive is to hire a lawyer on a contingency basis. Contingency lawyers may want up to 40% of the settlement or judgement to take a case, and the value of the case has to be large enough to attract their attention.
Situation: A company hired an experienced individual to sell for them as a consultant. The individual initially asked to be paid on an hourly basis. Results have come with surprising speed. Now the consultant is asking for a commission on sales. How much should you pay a salesperson?
Advice from the CEOs:
Tailor the commission structure to company objectives. For example, if the objective is to reward new business development, and to retain the individual, try something like:
Offer 10% commission on Year 1 sales.
If both the customer and the consultant are still with the company in Year 3, the consultant gets a 5% bonus on Year 2 and 3 sales.
Repeat this for successive years.
If the interest is a long-term relationship, determine the nature of the sales services where the consultant excels.
What is the individual’s focus?
Have a highly qualified sales expert do a telephone interview of the consultant and offer their assessment of the individual’s talents.
One successful sales model includes one measure to retain the job, and another to calculate commissions:
Set a dollar quota for sales performance – if the individual does not hit at least 85% of quota, they lose their job.
However, calculate commissions based on the gross profit that their sales generate.
This properly balances the focus between revenue and gross profit generation. To succeed, the individual must pay attention to both measures.
If the individual wants a substantial commission, then don’t pay a substantial base. Instead pay a draw against commissions to allow them to support themselves between sales.
Pay on receipt of payment, not on receipt of orders.
Situation: A company collaborates with a large client to provide services to their mutual market. The company wants to offer similar services to secondary markets not currently of interest to the client. The challenge is that the client is very conservative; their current priorities are forcing long delays responding to the company’s requests, and the primary contacts within the client will not take any risks arguing the company’s case to their upper management. How can the company approach this situation to create a win-win situation with this client?
Advice from the CEOs:
Since the services provided combine the capabilities of the two companies, it is necessary to develop a strong case to show how the proposed extension of services will benefit the client. Without their agreement the service offering is compromised.
One option is to offer a no-risk revenue share or royalty arrangement to the client in exchange for their agreement to allow you to build the secondary markets.
A second option is to offer to sell a minority share of your company to the client in exchange for your ability to develop the secondary markets. The deal could include an option to make a larger investment in your company if your strategy plays out profitably.
A third option is to raise money and purchase rights to the client’s capabilities outright. It is worth exploring whether the client would be open to this.
Find an informal setting to ask the client’s CEO for advice on how you should proceed. Have your ducks in line to offer options if the CEO responds positively.
Situation: A company wants to recruit outside members to its Board of Directors. Currently, all Board members are founders except for a single early investor. How do you recruit outside Board members?
Advice from the CEOs:
Board Member selection is a strategic matter. You want to have people on your Board who have done what you want to do strategically with the company.
A Board does not run the company. Board Members provide input and perspective to help the CEO make better choices while running the company.
Board Members have fiduciary responsibility – to the Shareholders, the government (to assure that the company is being run legally), to customers, to employees, and to vendors. Their role is to assure that the company does what it says it plans to do.
How affordable are Board Members?
Stock options are very feasible if you have little cash to pay salaries. Much will have to do with the prospective member’s buying into your vision.
You will need to secure Directors and Officers Insurance for Board Members – $3K+ per year per member.
The rationale behind payment in stock is for Board Members to have the same incentives for company success as shareholders.
Target remuneration of Board Members is, for a pre-IPO company $100K per year if the company is successful, but if not then $100K over 5 years. Members of the Audit Committee are generally paid about double what other Board Members receive.
Is there a downside of having numerous minor shareholders?
Not really, except perhaps nuisance. You run the company. As long as you retain majority share ownership, Board members can only advise.
Sitting on another Board is one of the best ways to improve your own abilities as CEO. Advising another CEO on how to run their company is a learning experience.
Special thanks for input on this topic to Bill Rusher, founder of Rusher, Loscavio and LoPresto.
Situation: A company’s contracts are based on milestones versus time and materials. This is common for their industry. However, end products are poorly defined at project outset and product requirements frequently evolve and change, making milestones squishy. How do you negotiate milestone contracts and payment schedules?
Advice from the CEOs:
In addition to payment schedule, there are four elements to a project negotiation – specifications, schedule, project flow, and budget. Tell the client that to hit their budget target, they need to give you control of any two of the other three factors. This means that if they want to specify budget and schedule, then they have to yield you control of the specs and project flow. Any change to these means that they have to be willing to change budget and/or delivery date. Finally, to keep the project going on a timely basis, they must make milestone payments on time and on schedule.
Try to transform the project, as much as possible, to time and materials. Here’s your talk line:
To give you 100 hours of effort on a fixed bid basis, we have to budget 110. Time and materials, in the long run is less expensive because you only pay for what we need to deliver your product.
Your credibility to deliver on a time and materials basis will be based on past performance and the relationships that you have developed with your clients.
Milestone contracts are especially difficult in low margin industries because of project variability. One solution is to bid 130 hours cost for 100 hours work. The challenge is that this looks uncompetitive, especially compared with offshore resources. Therefore, an option is to develop offshore capability so that you can deliver your projects using a variety of resources with variable costs. Price everything based on domestic prices, but use offshore resources to improve your margins and your ability to cover project overruns without killing your profits.
Situation: A company has received an inquiry from a large client requesting that they dedicate a significant portion of their staff to that client. The company hasn’t done this in the past, and the CEO seeks advice on the advisability of this choice. Would you dedicate significant staff to a single client?
Advice from the CEOs:
Provided that the terms offered by the client are favorable, the proposition may make sense. However, there are certain terms that you may want to assure are included in the contract:
In return for your dedicating choice staff to this project, ask for a substantial upfront payment – perhaps 50% of the total contract – to reimburse you for the opportunity costs that you incur committing your resources to the project.
Insist that the contract allows interchangeability of personnel if circumstances prevent initial personnel from continuing with the project.
Internally, work to assure that this project does not adversely impact your culture.
Talk to other companies that you know who have had similar arrangements with large clients. This will give you an understanding of the benefits and pitfalls of the arrangements.
Do everything that you can to assure that this project does not distract from your broader business strategy. Cash from the project may be nice, but if it inhibits your overall business strategy it may not be worth it.
If the employees assigned to this project are not happy with their assignment, the project may lead to unwanted turnover.
Situation: A company has a long-term client that stopped a project suddenly 6 weeks ago with no explanation. Later, the client called saying that they do not intend to pay for work completed to date. Would you pursue either arbitration or injunctive relief to settle this dispute?
Advice from the CEOs:
If you have evidence of acceptance of a project contract or other documentation that the work proceeded under agreement with the client, this strengthens your position.
There may be other circumstances of which you are unaware such as financial or cash flow difficulties. Inquire through discrete channels to clarify this. Knowledge of the inside situation provides leverage as you negotiate a settlement.
Do you want to retain this client? If they have been valuable over the years this may just be the behavior of a single individual. If this is the case, work with your key contacts to bring this situation to light and try to solve the problem without legal action.
Because you have a long-term relationship with the client, focus your communications on the President rather than the VP who shut down the project.
Established your documentation, and complete your research on whether the client has cash flow problems; then call the President to work out an amiable resolution.
While you are justified in feeling miffed about the situation, business is business, and in this case it appears that your long-term relationship and the value of the ongoing business with the client outweigh the emotion of the present situation.
Focus on resolution of the dispute between the parties and do everything possible to resolve it between the companies rather than through legal avenues. This will help preserve the relationship with the client. Provided that you continue with this client, clean up the portion of the contract specifying notification and acceptance requirements and other areas of the contract that require attention.
Situation: A company sued a customer for non-payment. The customer had a long history of slow payment or payment only on threat of denial of service. The customer countersued and has offered to settle for a $7,000 payment. How would you advise the CEO to respond to this frivolous lawsuit?
Advice from the CEOs:
One option is to let the countersuit go to trial. The challenge is that if this ends up before a jury the outcome is a crapshoot and can be very stressful. You may win, but at a higher cost than to settle, and if the other party declares insolvency you may never recover your costs. You also have to deal with the distraction of the suit.
Another option is to respond very aggressively through your lawyer. This sends a message to the other party and may prompt them to lower or drop the settlement demands. If this doesn’t work and you aren’t a gambler, give up the $7K and walk away. However, if there is a way to make this the most expensive $7K that the other party ever collected, go for it.
You may decide on principal to prosecute the case to send a strong message to the market that others should not fool around with your company.
To prevent this situation in the future, assure that you have clauses in all your agreements to prevent future repetitions of this situation. Specify binding arbitration in the case of payment or performance disputes. Arbitration can be more effective and timely than litigation.
Situation: A company is bringing in new business, but used up its cash reserves to stay afloat during the downturn. As it increases payroll and orders for components to meet production deadlines, it struggles to meet cash flow needs while waiting for customer payments. How can you increase cash flow to fund growth?
Advice from the CEOs:
Your customers need your product to meet their own deadlines. Have you talked to them about your needs and seen what they can offer? Offering modest early pay discounts on amounts due may help to ease your cash flow challenges.
Among discounts offered by other businesses is, for example 2% if they pay in 10 days.
Another option is to offer 5% off if they pay for new orders in advance.
As you bring in new business or projects, negotiate early pay options in your contracts. For example, offer the option to prepay on milestones in exchange for discounts on the final payment.
Factoring receivables is an option, but can be expensive. On the other hand with investors looking for good returns, it makes sense to check out options that are available on the web.
There are now web services which combine small contributions from a large number of investors into funds which can help you to finance short-term cash needs. There are also options which may provide lines of credit which are easier to secure than bank lines.
Look at local redevelopment options or funds which are targeted at local businesses. For example, in the San Francisco Bay area there is a organization called Working Resources which provides low interest loans local businesses to meet cash flow needs.
Situation: A company has recently introduced a disruptive business proposition. The immediate focus is pitching the solution as an attractive alternative and building early traction. What are best practices for building acceptance of a disruptive model?
Advice from Marc Rochman, CEO of Openbucks:
Any business, especially an innovative start-up, is bound to meet a wall of resistance; the key is finding the cracks in the wall. To do this, you must demonstrate a significant benefit to both the company and its customers. However, most important is finding a partner who has an early adopter attitude or culture.
Often the principal resistance is not with the product or solution being presented, but fear of being the first through the gate – particularly with a product and company who haven’t yet proven themselves. This stems from a perception that if the solution turns out badly the penalty may be severe, especially for the executive who made the decision.
Openbucks recently introduced a new payment solution for people who don’t have bank accounts or credit cards such as teenagers and people without strong credit and those hesitant to use credit cards online. The solution allows people to purchase a gift card from a retailer and use that gift card to buy in-store goods as well as to buy and pay for digital goods inside hundreds of online games.
Openbucks’ first partner is Subway. They are innovative, imaginative and not afraid to be first with a new concept. In addition, Subway also happens to have a subsidiary that specializes in payments and payment processing so they immediately understood the model.
Another early partner is CVS Pharmacy. To CVS the appeal was the model of convenience and a way to encourage repeat customer visits. Since people routinely visit pharmacies to get prescriptions and a host of other products, it is easy for them to buy a gift card during a routine visit.
The keys to overcoming objections to innovation are:
Be resilient and patient, especially when working with large companies. Once they begin to see a trend of success, they will more likely be ready for mass adoption.
Strike the right balance between persistence and a willingness to adapt your product when you see an opportunity. Pivot or tweak your model to take advantage of a new opportunity that you did not anticipate originally. The pivot allows you to take an easier path instead of banging against the wall too long. Sometimes you just have to go around the wall.
Subway has more stores than any other retailer in the US. Adopting the Openbucks solution came naturally for Subway because they understand payment processes and how to use them to create loyalty and foot traffic.
The program is simple and a win-win-win for the consumer, retail outlet, and merchants who can collect cash-like payments from the unbanked, under-banked and those who prefer not to use a credit card online. The purchase of a $10 Subway gift card can be used to buy a Subway sandwich, and inside mini digital stores in hundreds of online games. Fifty-four percent of those who buy a Subway gift card also get a sandwich – a clear value to the retailer. Further, since they have the card, they are more likely to be repeat customers.