Tag Archives: Cost

How Do You Make the Most of People, Processes and Technology? Four Points

Situation: A CEO wants to improve efficiency and use of people, processes and technology. What have others learned from their experience? How do you make the most of people, processes and technology?

Advice from the CEOs:

  • One CEO gained new insights on the importance of details within the decision making process. She learned that details have had a much greater impact on the outcome of the decision process than her company had previously appreciated.
  • Cost reductions may cost more than they save. If the longer-term vision for the company isn’t considered a company may make short-term decisions that actually cost more in the long-term.
  • Difficult times equal opportunity. The key is keeping your head together and approaching challenges objectively, with an eye to long-term consequences of the choices made.
  • Always maintain balance in both choices, decisions and execution. There will be surprises along the path. Open eyes and balanced consideration will help to address these surprises constructively.

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How Do You Negotiate the Purchase of a Franchise? Seven Points

Situation: An experienced CEO is considering the purchase of a franchise. What are the key points to consider in both evaluating the opportunity and in negotiating the purchase? What advice should be sought? How do you negotiate the purchase of a franchise?

Advice from the CEOs:

  • Most franchises have a set contract in use by all of their franchisees.
    • Ask for the names of existing franchisees and ask them what works or doesn’t work both about their contract and the services provided by the franchisor.
    • Ask the franchisor whether they will agree to a side letter to cover areas of importance outside of the franchise agreement.
  • What services and are offered by the franchisor as basic infrastructure and what are offered as a percent of sales or other fee arrangements?
  • Look closely at the frequency and amount of franchise fees. What fees are set or variable? What is non-negotiable?
  • Is there a need for a professional to represent you as the buyer?
  • Closely inspect the prospectus financials – franchisors in many states are required to provide these to prospective buyers. What is the initial investment? Are there monthly or periodic minimums to be paid by the franchisee? What are typical monthly operating costs.
    • Add to these your salary replacement costs – assuming that you will have to pay yourself something over the break-even period.
    • Calculate the monthly revenue needed to break even, and to pay off the initial investment.
  • Evaluate the competitive situation facing the product/services offered by the franchise. Network with others in the market to assess both the market potential and any barriers that that will be faced as the franchise is established.
  • What other questions should be asked?
    • Why is this business interesting?
    • What is your experience and what is the experience of the franchisor?
    • How well do you understand the market that the franchise will be serving?
    • What does the franchisor bring to the table that you cannot do yourself? What are the comparable costs?
    • What is the anticipated rate of return? How is it being calculated? Can this be verified with third parties?
    • What criteria are deal makers and which are deal breakers?

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How Do You Improve Infrastructure to Manage Cash Flow? Seven Points

Situation: A CEO wants to improve management of his company’s cash flow. While this is particularly important during times of tight cash and rapidly changing market conditions, the CEO wants to know what others focus on when monitoring cash flow in their companies. How do you improve infrastructure to manage cash flow?

Advice from the CEOs:

  • Track project mix and margin contribution both in part and in total. To accomplish this estimate relative contribution margins of different project types.
  • Adjust sales targets and commissions to emphasize projects with higher contribution.
  • Segment the company’s business model by margins, overhead, and cash flow. Set targets and drive focus on profit per “X” (selecting the proper indicators).
  • Analyze contribution per direct cost factor, for example per engineer on payroll.
  • Develop detailed cash budgets on a monthly or even weekly basis when times are uncertain. For example, inflows and outflows by major category tracking actual cash receipt or disbursement.
  • Start with broad projections, and refine the analysis over time as the company better understands the factors that drive cash flow and profitability.
  • As understanding improves, formulate value propositions for salespeople which reflect the most advantageous cash flow contributors of the business.

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How Do You Manage Seasonal Gaps in Project Flow? Five Options

Situation: A company experiences seasonal gaps in project flow. This makes it difficult to project both cash flow and staffing needs into the future. In addition, monthly cash flow tends to be uneven. What can they do to improve control of internal and external resources in this environment? How do you manage seasonal gaps in project flow?

Advice from the CEOs:

  • The company currently focuses 60% on consulting and 40% on internal projects, some of which produce future projects. Relative proportions shift over time, and projects can be cancelled.
  • Try to write the company’s contracts to push revenue to early stages of a project, so that there is more cash cushion to help ride out short cash periods.
  • Look for options to change the business model to increase financial flexibility.
    • If there are significant margin differentials between different types of projects this has overhead implications when resources are shifted.
    • Look for ways to allocate less expensive resources or virtual resources with a lower cost to lower margin projects. Look for opportunities to utilize remote resources if these resources cost less.
  • Adjust staff assignments to maximize payoff, as well as staff retention options. Look for project work opportunities.
  • Analyze and evaluate the ability to switch personnel between paying projects and internal development projects.

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How Do You Manage Major Projects? Seven Points

Situation: A company conducts both engineering feasibility studies and development projects. These are high budget projects and must be managed diligently to prevent cost overruns. What have others done to assure that projects are planned and managed to budget? How do you manage major projects?

Advice from the CEOs:

  • What is the structure of most contracted projects?
    • Most projects are fixed price. They come from feasibility studies which are essentially “marketing” for future sales. Typical terms are 30% up front, with the other 30/30/10 upon achievement of milestones and completion of the project.
  • Get complete buy-in from the customer as part of the initial negotiation.
  • Stay ahead of expenses by billing in time to maintain positive cash flow from the projects.
  • Structure pricing so that custom work is profitable if the project mix is 50/50 custom vs. standard work.
  • Push-back if the customer wants to reduce project cost up-front.
  • Carefully document work papers – above what is required by the contract. Get buy-in for this in advance, during the initial negotiation.
  • Once the feasibility study is completed, revise the scope and deliverables of the work agreement based on findings from the study.
  • Separate the “concept” phase from the execution phase and charge a premium for the concept work.
    • Position this as a value to the customer.

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How Do You Fund Growth Strategically? Five Approaches

Situation: A CEO is looking at a significant investment in capital equipment. Being considered are not just the cost of the investment, but the opportunity cost of not making the investment and the impact that this will have on the business. An additional consideration is the business mix of the company and whether to shift focus from low volume/high margin to low margin/high volume products. What tools have others used to assess these trade-offs? How do you fund growth strategically?

Advice from the CEOs:

  • Review the company’s approach to contracts. It may be desirable to revise the approach in light of the new objective. The switch from low volume/high margin to low margin/high volume products impacts not only production but also marketing, sales, finance and accounting.
  • Price some early new contracts below market to finance the additional equipment expenditures, as well as to test market response to the new offering. This will help to identify additional adjustments that are needed for the new approach and offering to succeed.
  • Structure the financing options for equipment purchases creatively, for example by allowing for participation by customers and investors.
  • Watch changes in working capital at all times and keep it under control. Working capital is a commitment of resources just as is buying equipment or facilities.
  • Consider all resource commitments as investments, regardless of the way the accountants deal with them as in expensing vs. capitalizing these investments on the balance sheet. For example, a marketing program is an investment even though it will show up as an operating expense. Make sure that this can be justified in terms of future cash flows expected.

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What’s the Optimum Business Strategy: Going Broader or Deeper? Five Points

Situation: A CEO wants to expand her company’s business base, either by diversifying its client base, or by going deeper into current clients. What are some of the key questions that should be considered as they evaluate these two alternatives? What’s the optimum business strategy – going broader or deeper?

Advice of the Forum:

  • If the company diversifies, what will be the perception of current clients?
    • Will they see this as more or less beneficial to their interests?
  • What are the most important objectives – what is leadership trying to achieve? Does the response to this question weigh in favor or one or the other alternative?
  • Analyze the available markets, as well as the company’s current share of the existing market. Is the company the dominant player in its market or is there still ample growth opportunity by investing in deeper penetration of the existing market?
  • Are there important vulnerabilities regarding the current client base? Is the company too dependent on a small number of customers? What will happen if key customers decide to choose another vendor or to develop internal resources to meet their needs?
  • For the option to go deeper into the current client base, what is the resource match between the objective and current resources?
    • Do current employees have the appropriate competencies?
    • What is the available time and dollars to pursue the market?
    • What is the ROI target and what are the risks?
    • Does the company have the right infrastructure to pursue the market, or will it require developing additional infrastructure? What is the cost of development in time, money and resources?
    • It is an area in which the company can excel, and does it align with the passion and drive of the current business focus?

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How Do You Expand into a New Market? Four Points

Situation: A company is interested in expanding into new market. The CEO notes that they have little experience in this market, but it is lucrative, and they believe that their technology has effective applications in this market. How do you expand into a new market?

Advice from the CEOs:

  • If the new market is technical it is important to identify the standards that govern production in that market. Examples include ISO 9000 processes and 13485 ISO Medical Standards. Start work on these now to assure that the products and services under development meet market standards.
    • While it will take effort to become ISO compliant, this investment will bring significant benefits in terms of regularizing all the company’s processes and procedures.
    • There may be some early resistance, but the long-term benefit is worth the pain.
    • Being ISO certified helps the company to sell its services. Many clients will not consider the company as a serious vendor unless it is ISO certified.
  • Pull in an outside consultant to do a quick gap analysis between where the company’s current procedures are and where they need to meet the standards.
  • Will ISO certification provide a competitive advantage?
    • It will never disadvantage the company and may provide a competitive advantage with customers.
    • Use Blue Ocean Strategy to create a new advantage for the company around ISO certification.
    • Industry will eventually require vendors to increasingly become ISO certified. If the company is already there it will be ahead of the curve and may be able to gain a premium price for its products and services by being there ahead of others.
    • European and International companies increasingly insist on ISO certification – they are ahead of the US.
    • Create a Market Road Map. Identify the markets that the company could serve. Look at the requirements for doing business in these markets. It may be possible to find additional leverage in ISO certification that will allow the company to enter additional markets with minor incremental additional cost.
  • Will ISO certification add an additional cost structure to the company’s services?
    • Under ISO, a company can have both ISO and non-ISO projects. Company standards will simply identify which projects are which and when non-ISO standards apply. Standards can be changed under ISO as new non-ISO opportunities arise. It is just a matter of updating procedures.

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How Do You Take Advantage of a New Technology? Two Foci

Situation: A company has had early success with a promising new technology that compliments the company’s strategic direction. Their objective is to become one of the top suppliers and servicers of this technology in their service area. How do you take advantage of a new technology?

Advice from the CEOs:

  • Leverage the company’s strengths to create an early advantage in this technology.
    • Create a low-cost delivery system to take advantage of opportunities available through this technology initially at a lower margin, then offer enhancements to build margin to company norms.
    • Investigate other markets and applications where this low-cost delivery system can generate you new opportunities.
  • It is early to assess whether the new technology will become dominant, or just the latest fad. It has been on the market for less than two years and is just taking off.
    • Take the next few months to dig into what is happening within vendors of the technology, and how they are perceived by their client companies.
    • Talk to CIOs about their perceptions of the technology based on the last few quarters of experience – quality of implementation, quality of service. Other providers add a layer to the cost – is the service worth the cost or do client companies save over time through overhead reduction?
    • Talk to other vendors from other market areas – learn from their experience selling and working with the technology.
    • How do the other vendors make money? Are costs to their corporate clients offset by savings implementing the technology? What margins are the others enjoying and does this come from the initial technology, from add-on services, or complimentary sales. What is the perception of the sustainability of this technology both within the providers and to the CIOs? What about the technology really irks corporate clients? Where is the soft underbelly of this technology? Research may assist in making future decisions on how to approach the technology and clients.

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What Do You Manage as You Adapt to Market Conditions? Four Points

Situation: A company is in the process of adjusting its customer and business focus in response to changing market conditions. Gross margin on projects that have been the company mainstay in the past have fallen significantly. The CEO is evaluating different adjustments to address this. What do you manage as you adapt to market conditions?

Advice from the CEOs:

  • The company’s business model is shifting from a staffing agency to a product development model. This means that the business must be driven by a different set of parameters and metrics:
    • A different time/utilization mix.
    • Different personnel – the company needs managers.
    • Changes to the organizational chart and incentives.
  • How does the company currently charge clients for Project Management?
    • Currently it is time and materials.
    • Consider charging on a percent of project cost basis. For example, 15% of total project cost. The pitch will be that the client will be able to reduce the overall cost of the project – ideally in both dollars and time – and that the company will have increased accountability for delivering these results.
  • How will this impact the company’s cash position? How will the company retain adequate cash flow during the transition?
    • The current cash position is 4 months of projected monthly cash plus receivables.
    • If there is drop to 3 months, flag a yellow caution light.
    • Two months becomes a red light.
    • What is the backstop if the company runs shy – if, for example, some engineers are not very active? In this case, will deferral of unpaid vacation time and other options allow the company to survive without further draining cash? Have a meeting with key managers to evaluate the impact of this option.
  • Consider looking at competitors for possible collaborations. This can be delicate because they may want to steal the company’s personnel and there are other risks, but sometimes promising deals can be arranged.

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