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: 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.
Situation: A company wants to up its game by focusing on service. They are evaluating different options to provide customized services to gain a sustainable differentiating advantage over their competition. How do you enhance your customer service model?
from the CEOs:
the gaming industry one CEO sees an effective model focusing on higher level customer
service. The top games have allowed user customization using generic
customization tools. This allows the provider of the tool kit to serve a larger
number of users using a single tool kit to provide a wide variety of gaming
example from the gaming industry focuses on middleware developers. These
developers create an interactive knowledge base for customer self-service. The
knowledge base is monitored by the host company, and misleading or potentially
harmful input is excluded. The benefit is that this enlists clients to provide
their input on customer service as well as product development.
CEO sees this as a useful way to drive down customer service costs by providing
more tools and fewer bodies to perform the customer service task. The model’s
objective is for the customer not to need personalized service, but to be able
to develop solutions on their own using a flexible took kit. The host company
gains additional advantage because their user agreement allows them to take the
best models used by clients to spark their own product development.
fourth CEO sees lasting value in developing close relationships with customers.
They have developed tools that allow the customer to solve simple customer
service tasks but require company assistance for the more sophisticated
solutions. The company, in exchange for this added expense, learns from the
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 professional services company wants to grow while maintaining the small company atmosphere that has been the key to its success. There is a limit to how many clients a manager can manage, and with this the reality that if the firm is to grow they will have to bring on more client managers and support personnel. How do you maintain your culture as you grow?
Advice from the CEOs:
To maintain your boutique atmosphere, consider hiring to fit your needs rather than to maintain a culture. Use team meetings to direct team members while communicating and instilling the culture that you wish to maintain.
Don’t risk diluting the strength of your client relationships. A $250K client who is fully committed to your service may have more demands than a $1M client for whom you only represent 10% of their business.
Service companies with the highest profit ratios rotate customer contact among several qualified people. What matters is the level of service provided, not the individual providing the service.
Grow by adding locations. Instead of growing vertically in the same office, grow modularly by spawning additional offices.
Create an optimally sized model for the level of service that you wish to deliver.
Design the organizational structure for this model and identify the order in which slots will be filled as business grows through each office.
Develop a service and organizational template with standard operating procedures, metrics, technology, and reporting.
Once the model is created, spawn it.
Focus your business. Define a niche that you can serve better than your competitors. Focus on this niche and develop a sustainable advantage over your competition.
Assure that your service delivery is seamless to the client and make sure that it remains seamless.
Offer a menu of service options and price options by the level of service delivered. Some will want to buy a Mercedes, and some will be happy with a reliable lower priced sedan.
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.