Tag Archives: Capacity

Is It Better to Develop Internal Resources or Hire? Four Views

Situation: A key employee will be leaving for at least 5-6 months on maternity leave. This individual is a top performer, and will be welcomed back following maternity leave should she wish to return. However, her absence will leave the company short of resources. Is it better to develop internal resources during her absence or hire a new resource?

Advice from the CEOs:

  • The company’s HR strategy should complement its strategic plan as well as the CEO’s feel for market conditions.
    • If the strategy for the next year is to grow, then plan accordingly and commit to either bringing on someone new or to aggressively growing the talent already within the firm.
    • If the strategy is to hedge bets due to lack of clarity as to where the market is headed, then plan accordingly and act more conservatively.
  • Assess the availability of resources within the company.
    • Are there internal candidates who can fill the gap created by this employee’s leave? If so, then start training and developing these resources. They will be valuable as the company grows.
    • What is the company’s current workload vs. the capacity of current staff? If there is any excess capacity that can fill the gap, short-term, then use this as an opportunity to develop this excess capacity.
  • If the company has excess capacity, and is unsure about market movement six months out, develop internal capacity first.
    • This provides both additional flexibility and time to assess signs of market movement before making an investment in additional talent.
    • Plan to revisit the situation in 3 months and make another decision.
  • Keep a close eye on the market for developments, and have rapid action back-up strategies in place to respond to market conditions.

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How Do You Add a New Capability? Four Approaches

Situation: A CEO reports that customers frequently ask whether the company can deliver a service that isn’t current in their portfolio of capabilities. In a substantial number of cases, the ability to offer this service is a key factor in their choice of vendors. The company’s experience with outside consultants offering this capacity has been disappointing. How do you add a new capability?

Advice from the CEOs:

  • Reevaluate the company’s needs and assess whether these can be better meet by bringing this capability in-house, or by restructuring how the company works with contractors. Determine whether the latter is just a negotiation and contract / payment problem.
  • Take a closer look at how the company contracts and creates incentives for outside contractors. Do they have performance objectives written into their contracts that reward them for meeting contract commitments? Can they earn bonuses for beating contract deadlines or exceeding design requirements? Are there penalties them for missing key deadlines?
    • Is it clear whether contractors are missing deadlines because of the “creative process,” because they don’t use their time efficiently, or because they have other commitments that take precedence at the company’s expense?
    • If the answer is either of the two latter situations, then contract adjustments may work. Similarly, if they have an incentive to be more creative faster to meet a bonus deadline a contract adjustment could also work to the company’s benefit.
    • Another option in working with independents is to make it clear that the company is generous, but if the contractor does not meet deadlines, they go to the bottom of the list for future opportunities.
  • An option is to hire one specialist and challenge them to grow a practice within the company. This may mean that they have to do all tasks early on, but the potential win will be the opportunity to grow a significant business and hire a team to do the lower-level work under their direction.
  • Another option – bring on a creative problem solver with appropriate experience who can support the existing team, but who will have more flexibility than a pure specialist.

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Where Do You Find Sources of Capital or Savings? Seven Suggestions

Situation: 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?

Advice from the CEOs:

  • In 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.
  • Take a close look at operating capacity.
    • Estimate current capacity based on staff count and average billing rates.
    • Forecast 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.
  • Discount 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 downturn.
    • In a recovery, pull back those who were let go.
  • If there is underutilized time from the team, pitch this to investors to obtain equity financing for new IP.
  • Consider 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.
  • Look at banks which are aggressively expanding in the region. If they are hungry for new clients they will offer attractive rates.
  • Companies 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.
    • Know the level of financing that is needed.
    • Know where it would be used and what kind of return the company can yield on the investment.

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How Do You Create Predictable Costs and Profit? Seven Suggestions

Situation: A company finds that it’s costs and profitability vary greatly by season and during economic fluctuations. Some of this is due to hourly rate fluctuation and payroll costs. They also have excess capacity during slow periods. However, new projects arise quickly, and the company must be prepared. How do you create predictable costs and profit?

Advice from the CEOs:

  • Here’s the grim reality. In volatile markets, forecasts are meaningless. Instead of fretting over forecast accuracy, focus on increasing billable rates and managing expenses.
    • To 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 contract negotiations.
  • Is it possible to build a sustainable revenue source to resolve profit lumpiness? There are options:
    • Application 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.
    • Add 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 stream.
  • Investigate 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 subscription service.
  • What 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.
  • Are 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.
  • If, 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 annuity revenue.
  • While 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 contracts.

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How Do You Transition to New Leadership? Four Perspectives

Situation: The CEO of a professional service company is reaching retirement age. The plan for years has been for a key field manager to take on this role; however, neither the CEO, the founder nor most employees feel that this individual is up to the job. What can be done to either better prepare the key manager for the new role, or to demonstrate that this is unfeasible? How do you transition to new leadership?

Advice from the CEOs:

  • For the long-term benefit of the company, it is important to create a situation that will either prepare the field manager to succeed or provide the Company with a back-up plan for ongoing leadership.
  • If the CEO and founder are concerned about this individual’s ability to succeed, then coordinate a plan with the founder and then meet with the key manager.
    • Let the key manager know that the owners plan to sell the company in 3 years.
    • This can be an internal sale – the CEO and founder sell their shares to the key manager – or the owners will look for an outside buyer to buy out all current owners.
    • See how the key manager responds.
    • If the key manager expresses an interest in buying the CEO’s and founder’s shares, then require this individual to make the same level of financial commitment that the CEO and founder have made.
  • Another CEO experienced a comparable situation with an individual who was both underperforming and a significant shareholder.
    • This CEO created a very public vision of what he expected this individual to achieve – in positive terms. The CEO also put an outside hire in a similar role to create a performance comparison. The result was a significant increase in performance by the inside individual and a successful transition to additional responsibility.
  • If the key manager is to be put on a track that leads to the CEO role there will be two challenges: assuring that this individual can acquire the skills to succeed and assuring that the individual can demonstrate successful leadership within the Company. To meet these challenges, take the following steps:
    • Make a public announcement of the plan to transfer the mantle of leadership to the key manager;
    • Raise the bar of expectations for the key manager to demonstrate his or her leadership capacity;
    • Define a full program of training to provide the key manager with the skills to lead the Company;
    • Ideally, allow the key manager to prove his or her mettle through a highly visible responsibility – like growing a key market segment – so that he or she gains the respect of the others.
    • Require the same level of financial commitment that the CEO and founder currently bear, so that everyone knows that the key manager has “skin in the game.”
    • Put the key manager on the same compensation program as the CEO and founder, as this will become his or her compensation program on becoming CEO.

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How Do You Address a Customer-Supplier End Run? Three Ideas

Situation: A company’s top customer has approached one of the company’s suppliers with a request that the supplier sell directly to them rather than through the company. The supplier normally does not sell directly to OEMs, and has neither the sales force nor the customer service capacity to work with these companies. Nevertheless, following the customer’s request, the supplier has asked the company’s CEO for a meeting. How should the CEO plan for this meeting? How do you address a customer-supplier end run?

Advice from the CEOs:

  • You need well-placed advocates both within the customer company and your supplier company. These advocates can help you to better understand what is behind the customers approach to your supplier, and what the true issues are. You will also better understand how the supplier is reacting to this request.
  • Talk to the boss of the purchasing manager who initiated this and let him know how this will impact your ability to supply other critical parts for their operation.
    • Ask for fast track approval as a preferred supplier.
    • Try to cut this off before the supplier representative arrives for your meeting.
  • You know from your history with this customer that you have had to make frequent delivery adjustments to meet their needs. Further, as a value add you make modifications to the parts supplied to meet the customer’s engineering specs. This level of flexibility is not part of your supplier’s business model. When you meet with the supplier, paint a picture of the downside of working directly with this customer to convince them that they don’t want to take this business direct.

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How Do You Identify New Customers? Four Alternatives

Situation: A company wants to expand its markets and customer base. Currently their business is dominated by a single customer. What best practices have you developed for identifying new customers and markets?

  • The key to getting new customers is to devote dedicated time to this task.
    • If your company is populated by engineer or software specialists, consider hiring a sales professional – a commission based hunter sales person who has experience landing big accounts in markets similar to yours. You may pay this person a good percentage of sales for brining in this business, but gaining the additional business can be worth it.
  • Much depends upon your relationship with your large customer. When a single client has rights over or ownership of the technology of the company but is not pursuing broader markets that the company is interested in, 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 deal can be worked out, but it may be difficult – particularly if the larger client is concerned that use of the technology in other markets could affect its interests in their primary markets.
    • Be very careful in this situation. The easiest tactic for the larger company to defend itself from a perceived threat is to sue and simply bury the smaller vendor through legal expenses. While the smaller company may be legally within its rights, deep pockets can beat shallow pockets through attrition.
  • In the case that the larger client simply continues to buy all capacity of the smaller company, an alternative is to raise rates, or perhaps to just say no.
  • Consider recreating the opportunity – create your own adjunct proprietary product with your own software or design talent and expand your horizons with this product.
    • Be aware, the large client can still sue if there is any appearance that your proprietary product impinges on their product rights. As in the case above, the larger company has the resources to bury the smaller company in legal expenses regardless of who is legally correct.

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How Do You Forecast Revenue for a New Technology? Three Ideas

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.

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