Situation: A small company sells consumables as its primary source of revenue and profit, and produces equipment associated with these consumables. Their challenge is that designing and producing equipment is beyond their financial capacity. They have a small, loyal staff engaged in equipment production. This is a critical trade-off that must be resolved. Where should the company focus – people or cash?
Advice from the CEOs:
This product/profit combination is common. HP sells printers and ink, as well as other products, but ink cartridges have long been their primary source of corporate profit. The question is how to produce the associated equipment at the lowest cost?
Given the shortage of financial resources, why not asks a company with expertise in equipment to build the equipment on a contract basis?
Offer the outsource company the designs and expertise to support the project. That company may even hire your employees who have developed expertise in this area.
In return for providing design and guidance, ask the contract company for a percentage of the revenue or profit on equipment that they sell. This relieves you of the payroll and cash obligations for the equipment, and provides you with a modest income stream from equipment sales.
There is an obvious question of how the small company retains its intellectual property position. Is it possible to look at critical sub-assemblies and retain the expertise within the smaller company to complete and install some of these?
If so, this will boost annual revenue. The contract partner completes all but the most critical pieces, and the small company finishes the product with its technology.
The small company, through its sales and marketing efforts, should maintain control of leads and sales of both equipment and consumables.
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.
Situation: A company wants to keep both customers and employees up to date on what is happening within the company. This includes announcements of new products, services and initiatives, changes in personnel policy and benefits, and other information important to both customers and employees. The CEO is considering a company newsletter. How do you keep customers and employees updated and what benefits do you accrue from the effort?
Advice from the CEOs:
Customers and employees are two different audiences and require different communications. Externally focused company newsletters are a value-add from a marketing perspective and enhance the image of the company in the eyes of clients and prospects. Internal company newsletters are valuable to reinforce vision, understanding of company policy, and inter-departmental alignment.
Both efforts are justified from a time and expense standpoint, and perhaps deserve even more focus.
Within the companies represented around the table, frequency of both internal and external newsletters varies from semi-annual to monthly publications.
Both print and online newsletters have value. Employees respond positively to both. Print media make it easier for them to share important updates in benefits and excitement about company developments with their families. Online media can be updated more frequently and inexpensively, and the HR department can track the number of views to measure impact.
Emailed external newsletters are valuable because they enable you to measure ROI from the effort by building in tracking mechanisms and correlating web page hits to business development and revenue.
Situation: An early principal of a company has done a lot of work on a product that no longer fits the company’s business strategy and focus. The CEO wants to reward this individual for past work. An arrangement could include equity plus a big chunk of whatever this individual can make marketing the product that he created. What is the best way to handle this side project?
Advice from the CEOs:
There may be benefits to working with this individual as proposed. Letting the individual play in his own sub-market gives you an additional customer and may lead to interesting but yet unknown opportunities. Take care that this does not impact critical timelines for the company’s principal strategy.
A set of guidelines for this arrangement may include:
o No grant of additional stock in the company – the opportunity to pursue the project should be sufficient incentive.
o Keep this side project as company property.
o Give the individual a sizable chunk of any revenue that he can gain from the product.
o Task the individual to manage and solve technical challenges so that this does not impact company priorities.
o Retain control of timelines and quality sign-off so that this project does not conflict with your higher priorities.
o Give the individual sufficient support so that he is more likely to succeed.
Are there concerns regarding brand risk?
o Draft an agreement to allow this project to operate cleanly and treat the principal an early small customer. Define the requirements of the project, release timelines, and branding options so that they do not interfere with the company’s larger goals.
Situation: A company was challenged by a client to design a product to demonstrate the capabilities of the client’s processor. The result was a wonderful success, and has received very positive press. The client does not care about the product, only about their processor. How does the company test the appeal and potential marketability of the new product?
Advice from the CEOs:
Go to a local arcade, for example one operated by Golfland USA or a multiplex theater. Show them your product and ask whether you can test it for appeal with their customers. This will enable you to measure coin-drop numbers and generate demand and market appeal data. With these data you can assess the value of either selling or licensing the product. The objective is to see whether the product generates sustainable demand, or whether it is just a short-lived curiosity.
The big issue with a product like this is very simple – is it addictive?
If your initial tests show that the product generates sustained interest and revenue it is similar to a console game. There are a number of avenues to pursue, including:
Early exclusives use agreements with casino or theater chains – it will have value if it helps them to drive traffic to their venues.
Novelty markets – corporate events, etc.
Evaluate a lease model for target venues.
Consider selling the product to air table companies as a demo unit.
Situation: The Board of a company has asked the CEO to generate to forecast of revenue for this year. Their primary technology is new and the company has just started receiving orders. An achievable revenue forecast my not please the Board. However, the company may lack manufacturing capacity to meet a higher level of demand. How do you forecast revenue for a new technology?
Be realistic in your forecast. While the Board may not like your number, the impact of setting the goal too far out of reach is potentially significant, including discouraging the team, and impairing credibility with the Board. However, if you aim realistically and significantly exceed the target you will be heroes.
How is it best to approach this in discussions with the leadership team?
Create a set of objectives and revenue targets and put probabilities around each. Also look at the obstacles to hitting the higher numbers, including manufacturing capacity and the cost of increasing capacity.
For examples if your most likely forecast is $X, then put probabilities around achievement of multiples of this number:
$X – 95%
.75X – 99%
1.5X – 75%
2X – 60%
Once your determine the objective, think through everything that must be covered to meet that goal, from sales to production, and start developing plans and contingencies to address these.
Share your probabilities with the board, as well as your plans and contingencies that may increase likelihood of reaching the higher targets. Ask for their input and assistance hitting the higher targets.
Situation: A company goes through an annual strategic planning process followed by an annual business planning process. At mid-year they do a review and correction. The challenge is that if the company is behind plan, the management team does not take ownership of plan revisions – it becomes “the CEO’s Plan.” How do you gain commitment to revisions in the annual plan?
Advice from the CEOs:
Throw out your current process and start over.
The challenge is to gain more buy-in and accountability. This only comes if the targets come from those responsible for delivering them – both for the original plan and if any revisions need to be made.
Look at who you involve within the organization – can you drive involvement deeper to generate additional buy-in across the organization?
Hire an outside facilitator to guide you through the process instead of chairing the meeting yourself. This prevents the resulting plan from becoming “your” plan. It also changes the culture of the meeting as well as the buy-in.
If you use a bottom-up / top-down process, moderate the plan results with an eye to two realities:
Bottom-up input from the sales team is rarely more pessimistic than the CEO’s input. If it is ask what is happening.
Make sure that your top-down numbers are empirical and based on the best market research that you can obtain.
If your plans have consistently fallen short over recent years:
You may be baking the targets too high.
Consider building the revenue plan optimistically, but build the expense plan conservatively. This helps control expenses and attain profitability targets.
So that the two plans are not misaligned, review them more frequently – perhaps quarterly on a formal basis with monthly reviews – so that if your revenue plan is meeting targets you can adjust spending to support production and delivery.
It is common to have one set of numbers for sales and a different, more conservative, number for expenses. As long as you conduct frequent review and adjustment of the expense number to sales performance, this works. Many companies also use different targets for operations than what they present to the Board – with the more conservative numbers for the Board.
Situation: A company experiences high revenue volatility from month to month, making it difficult to forecast expenses and personnel needs. The company has about 300 clients. Fifty percent of annual revenue is repeat business, with about 10 client projects ongoing at any one time. How do you boost revenue consistency and decrease month-to-month volatility?
Advice from the CEOs:
What you describe is the norm in a service business. Averages across service industries are for 70%-80% of revenue to be from repeat business – more than you have currently. Boosting repeat business reduces your volatility by smoothing revenue across months and quarters.
Ask how you got to this point in the first place. Here are some important questions:
Look at your account development process. Are your account managers cross-selling to other potential customers within a given client to increase service penetration within the client?
Are you talking to the right people within your client accounts? To whom do these people report – what are their most important needs?
Similarly, look at your clients’ major customers and suppliers – is additional business available here?
Do you have an account development plan for each of your major customers? Are there time and performance metrics to assure that the plan is implemented and monitored:
Plan creation by the account manager
Number of new business development meetings with client
Prospective pipeline of business within the account
Are you using the right incentives? Adjust your incentive pay package to encourage business development within existing clients.
How have your organized sales and service delivery? Consider two areas – delivery on existing business and gaining new business from existing customers vs. developing new customers. These require different skills and most likely different people
As an example, one company initially combined key account management and prospecting as a single job. Under this scenario, new customer development was dismal. As soon as the company split the effort into existing account maintenance/expansion, and new account prospecting, new customer development jumped 10x. There was an investment up-front but it quickly paid off.
Situation: A company has been very successful, but one customer represents over 60% of their sales. To grow, the company needs to diversify its customer base. How do you reduce dependence on one large customer, and what are the risks involved?
Advice from the CEOs:
The key to getting new customers is to dedicate time and resources to the task.
Consider hiring a sales professional – a commission based “hunter” who has experience landing big accounts. You may pay this person a hefty commission for brining in new business, but diversifying your customer base can be worth it.
If there is shared ownership of technology co-developed by the company and client and the client does not wish to pursue markets beyond its strategic focus, is it feasible to negotiate rights to pursue this business?
The larger client will pursue their own interests, not those of the smaller vendor. Perhaps a win-win can be worked out, but it may be difficult – particularly if the client is concerned that use of the technology in other markets could have a negative impact.
Caution. The easiest way for the client to defend itself from a perceived threat is to sue and bury the smaller vendor through legal expenses. Regardless of who is “legally right,” deep pockets can win through attrition.
Consider recreating the opportunity. Create your own adjunct proprietary product with your own software or design talent and use this to expand your horizons.
Be aware, the large client can still sue if they believe that your proprietary product impinges on their rights.