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 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: The CEO of a company has a niece working in the company on a project basis. The niece is has helped to develop a strategic plan and has performed well. She now wants to move from part-time to full-time and to receive a raise. Does it make sense to promote a relative?
Advice from the CEOs:
If you are pleased with the individual’s work, don’t worry about the family relationship – go ahead and hire her. This is especially true if she can play a significant role developing the strategic plan and help you to improve your sales organization.
Give this individual a set of responsibilities, a budget, and a time line to do the jobs you want done.
Evaluate her performance just as you would any other employee. Don’t compromise your standards for a relative.
This may offer the opportunity to improve your sales. Have your niece work and travel with your sales people as a systems engineer. This will allow her the opportunity to learn your products, customers, and process – and will provide you with valuable input on how your sales team is performing.
You are really addressing two problems:
What is your niece’s passion? Don’t make work for her simply because she’s related and available. The work must serve your and the company’s needs.
Do you have holes in your business? Put your best people on these If your niece is one of these people, then give her a chance but don’t play favorites.
Situation: A company has clients who are interested in projects for which the company’s partners already have partial designs. There is an opportunity to leverage these partial designs into development of full solutions for their clients. How should the company approach this in a way that satisfies their customers and is fair to their partners? How do you set up co-development partnerships?
Advice from the CEOs:
Given this opportunity it is no longer important who performed what part of the development. As long as your partners have quoted you what they believe to be a fair price for their development pieces, you are free to accept their price, complete development to your clients’ specifications, and sell the full solution to the client at market prices.
What you bring to the table is the opportunity to rapidly monetize the technology. This is something that your partners can’t do, so by filling this role you are acting in the interest of all parties.
What you charge for your work and the full solution depends on the potential value to the client. Time is money, and delivery now is worth a premium price to a client who needs your solution and wants to release their product as soon as possible.
This strategy is particularly applicable to early stage companies who need to release their initial products and start generating revenue.
Take a note from Bill Gates – sell the product for a good price and then buy or acquire the supply.
Situation: A company has an opportunity to use equipment supplied by a partner to create a demonstration project that will highlight their capabilities. They want to create the best buzz possible through this effort. One idea is to work with local service agencies to create a demonstration that will be highly appealing to news outlets. How do you create the best buzz?
Advice from the CEOs:
In addition to working with local agencies in your target localities to create publicity and awareness, work with the local newspaper reporters who write about the areas served by these agencies. City reporters are always looking for fresh stories, and will help you to generate instant news that may be picked up by other local and possibly national media. This form of building awareness virally is much more effective than traditional advertising campaigns.
Use industry trade shows of potential partners as demo venues by collaborating with the trade show organizers for a live demonstration that benefits the organizers. Let technical trade publications know about your demos. Stories that catch the attention of technical publications can also get the attention of national media and give you visibility far beyond the trade shows.
Use YouTube to highlight use and the impact of your service. Assure that your YouTube videos are interesting and attention gathering. This will help generate viral awareness.
Look at how Google helped to make Mountain View, CA a wireless city. They worked with the city and created great excitement both locally and nationally.
Consider using actors to stage demonstrations, followed by actual demonstrations.
Situation: A CEO wants to push project ownership down to lower levels of the company. This is not happening unless the CEO pushes. How do you delegate yet stay informed as you push authority down the organization chart?
Advice from the CEOs:
The company needs systems and guidelines to clarify on what and when the CEO wants to either have input or hear back, and what can happen without the CEO’s knowledge.
Set levels of approval – dollar impact or decision type – and clarify what decisions can made at what level, what decisions need higher level approval and at what level, where they must inform you, and where you must sign off.
Similarly, establish regular reporting and meeting schedules, along with guidelines as to what is to be reported – again by budgetary impact or decision type – and assure that this reporting takes place.
“The Great Game of Business” by Jack Stack describes a company which has implemented these systems with astounding results. It provides a template and describes in detail how the system is implemented and what bumps they encountered along the way.
Invest more time in setting roles and responsibilities for your direct reports.
Keep reporting systems aligned across the company.
Expect over time to adjust levels of authority as individuals grow in responsibility and accountability.
Most importantly, lead by example. If a team member comes to the CEO for guidance on a project, refer them back to the proper manager for advice.
2015 Top ranked software systems to manage projects and processes from selected searches:
Capterra: Microsoft Project, Basecamp, Atlassian, Wrike, Podio
Situation: A company’s motto is that they serve the customer first. As an unintended consequence company projects get lower priority and action than customer projects. Frequently, the CEO finds that company projects are only half completed. What have you done to make company initiatives a priority? Who do you serve – the customer or the company?
Advice from the CEOs:
This is a great question. Clearly serving the customer has to be top priority. However, you also have to complete company projects, particularly those which are critical to company function or which will enhance your ability to serve your customers.
Define the company as a customer for important projects. Call this “billable hours” to the company and credit them as such on these projects. Accompany this with employee training on how to prioritize “company” versus “customer” projects when priorities conflict. It may take time to work through this, and for the message to sink in.
Add completion of company initiatives to the company kudos list. LInk company award eligibility to completion of company initiatives. For mission critical projects, grant double credit for completion of company projects. Adjustment of incentives will help to get the message across.
In employee communications, include updates on company projects along with customer projects and give equal or greater emphasis as appropriate.
Have you defined your “ideal customer”?
Include internal customers within your definition of ideal customers.
This will help to clarify and prioritize opportunities and shift the mindset.
For mission critical projects hire additional personnel or contractors.
Situation: A company’s CEO wants to segue from rainmaker-project manager to leader, with others taking the lead on projects. He has tried raising prices on his time, but clients are willing to pay the higher price so this hasn’t worked. How does the CEO set boundaries so that he is not involved in day-to-day project management?
Advice from the CEOs:
The most important question is: where’s the real battle – is it in the client’s or your own head? Is this really a client problem, or are you unwilling to let go? You need to answer this question before alternate strategies will work.
Look for the right project managers. You will change your hiring when the goal is for you to not be deeply involved.
Hire people who are better than you.
Gradually phase existing relationships to others.
In early work with a new client, set expectations so that your involvement is at the appropriate level and your team handles the heavy lifting.
Instead of attending meetings in person, use electronics – video conferencing. This saves the travel time for the meeting.
Don’t respond to client emails too quickly when you are copied – let others respond.
As one company grew, they invented new roles with high profiles but little work. These roles were figureheads for project leadership.
Project emails were set up so that all client emails went to the team, as well as the CEO, but the team would then respond to client questions.
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 is doing well, but the CEO is concerned about emerging hurdles that may stall momentum. The key issue from a systems development perspective is changing a “one-off” project based focus towards a modular mindset – essentially shifting a short-term to a long-term view. How do you align expectations across the company and transition to a broader focus?
Advice from the CEOs:
Start by clearly communicating your expectations. Work with your managers so that they communicate a consistent message to developers. Look for organizational changes to better align talents of individuals to roles taking advantage of these talents. You may want to refresh the gene pool by bringing on additional people.
One company with multiple teams creates healthy competition against performance objectives between teams with recognition and rewards to the top team.
If the change involves creating greater alignment between functions, create opportunities for individuals from different functional areas to work together. For example, have an engineer accompany a sales person on a critical call to close a deal. If the deal meets spec objectives, is closed, and the project completed on schedule and on budget, the engineer is bonused on the sale.
One company rents a lake cabin every year. Use of the cabin goes to teams recognized for meeting objectives, deadlines or other outstanding performance. An added benefit is that on the way to and from the cabin as well as while they are there, teams spend time talking about the next performance coup that will get them the next use of the cabin.
Look at your organization – both your Org Chart and the physical space. One CEO found that his engineering organization was stove-piped both in terms of reporting and incentives, and physical barriers prevented groups from easily interacting with one-another. To create better coordination between design engineering and manufacturing engineering, the teams were relocated to a new shared space, without physical barriers. Also, the Org Chart was adjusted to increase incentives for collaboration between the functions.