Tag Archives: Risk

How Do You Beef Up Talent to Drive the Company? Three Questions

Situation: There is no secret that hiring is more challenging now than it was two years ago. A CEO is finding it difficult to attract and bring in the right talent to achieve her growth objectives. What are others doing to bring in new talent, especially high performers who will help to bring in new accounts and work with key customers to develop new business. How do you beef up talent to drive the company?

Advice from the CEOs:

  • What has worked best for others?
    • Hired low and developed home grown talent. This means building the capacity to train new talent to meet the company’s needs.
    • This may not produce entrepreneurs like the company’s founders but can produce solid performers.
    • Some sectors are by nature risk averse. Individuals are not dollar driven as much as by security with an acceptable salary. Good candidates who are hungry for growth are more likely to be found outside of these sectors.
  • How do you hire to match the company’s objective?
    • The objective is rapid growth – the mold of the original founders who were risk-taking entrepreneurs atypical of the sector.
    • Look for candidates who are driven by growth. The right candidate will jump at the opportunity to take a $5M book of business and grow it to $10-15M in 3 years with appropriate corporate support and compensation.
  • What has been tried or investigated in the past?
    • Looked for successful smaller businesses similar to the company as possible acquisitions. The challenge was that the people running these companies liked their independence and didn’t want a boss.
    • Looked at individuals from corporate backgrounds in the same sector. Some worked, some didn’t. Frequently, these people were not entrepreneurs or builders.
    • Talk to private equity companies. Ask who they have bought or sold in this space. Gather names of drop-in CEOs and key staff who turned companies around and did well.

[like]

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.

[like]

How Do You Optimize the Business Model? Four Suggestions

Situation: A company works on a project basis, and the CEO is concerned that the return per project is too low. She is looking for ways to boost the return per project without substantially increasing project risk. How do you optimize the business model?

Advice from the CEOs:

  • What are the risks and potential upsides surrounding the projects?
    • The principal risk is long-term liability, connected with residual liability following project completion.
    • This risk can be mitigated by purchasing a wrap policy; however, this can cut into the profit generated by the project.
    • It is possible to build scale more quickly with larger projects. The percentage return may be lower, but the dollars can be higher.
  • What are the principal components of the company’s time risk?
    • Higher cost of money and greater exposure to fluctuations in prices and interest rates over the project period.
    • This risk can be mitigated using financial derivatives particularly over longer-term projects.
  • How broad is the company’s geographical scope?
    • Currently customers are within a 30-mile radius of the company’s office primarily because company personnel are frequently at the client’s site.
    • This area will broaden as the company’s reputation becomes known.
    • Consider the creation of branch offices to extend the breadth of the company’s service area.
  • What are the key variables that the company faces completing projects?
    • Payment is not received under current contracts until a project is completed.
    • This can be mitigated by creating milestones with payments due at the completion of each milestone.
    • It may be worthwhile sacrificing a level of project profit in return for more frequent payments to boost the company’s cash flow.

[like]

What is Your 10-Year Growth Plan? Four Points

Situation: A CEO is building a 10-year growth plan for her well-established company. Options include building the company on its current track, growing through purchase of another company, or merging with another company. What are the most important considerations for each option? What is your 10-year growth plan?

Advice from the CEOs:

  • Considerations to start the process:
    • When acquiring another company or merging, the value is the reputation, relationships, and good will of the other firm. This may be more expensive but can provide a head start in the new market.
    • Perform an ROI analysis of build vs. buy. Estimate what it will cost to build. Compare this to what others are asking for their firms. In both cases generate a 5-year cash flow forecast. Discount future cash flows using the company’s desired rate of return – for example the company’s PBDI&T target – as the discount rate.
    • Also compare the relative risk of each option.
  • Build Option:
    • It’s not necessary to recreate the full home office operation.
    • Start small – sales, support, or maybe just an address.
    • Do the actual work at the home office until sufficient business is generated at the new site to support a larger local operation.
  • Buy Option:
    • Look for a company with a good local reputation, who shares the acquiring company’s values, but who wants to sell.
    • This option provides staff, relationships, and a reputation in place. They will already know the local code.
    • Structure a deal for long-term value to the owner. The ideal is to pay as much as possible with future rather than current dollars, with a premium for high retention of personnel and business
  • Spend some time in a new area and get to know it before deciding. If the company already does some business in the new locale, this simplifies the decision.
    • Some locales have been found by others to require a local head of the office who is from the area – who “talks the local talk and walks the local walk.” This will be the case whether the decision is to build or to buy.

[like]

How Do You Position the Company for Growth? Four Key Points

Situation: A company is completing the design of a new line of equipment which is expected to drive future growth. An important distributor for a company’s principal product – a consumable – also distributes equipment. The CEO is concerned that this distributor may perceive his new line of equipment as competing with their existing line. How should the CEO handle this? How do you position the company for growth?

Advice from the CEOs:

  • Meet with the CEO of the distributor and ask two questions:
    • Can they sell the company’s new line of equipment, as well?
    • Do they have any other source for the company’s consumable product?
    • If the distributor must rely on the company for the consumable, whether they decide to distribute the new equipment line or not, there should not be any risk.
  • The company has a wonderful opportunity to start doing business in a new way.
    • The company has a proprietary consumable and chemistry/formulation knowledge that will be difficult for others to copy.
    • The company now has knowledge of how to design equipment that utilizes the consumable.
    • Proprietary trade secrets may be more valuable than patents, presuming that the company can keep a lid on these secrets. Coca Cola and 3M have never sought patents on their key products. In a well-managed environment, trade secrets have a much longer life than patents.
  • Think about the sales mix in a new way, one that would address concerns about the annuity vs. capital equipment mix as well as improve overall profitability.
    • Focus on turn-key solutions. Use Hewlett Packard as a model. HP makes the most money selling paper and ink cartridges – annuity products; not from selling printers which sell less frequently than the cartridges. A busy office will spend far more on ink cartridges and paper per year than they spend on printers – and at a better margin for HP.
  • Combine the two prior points to leverage the new model.
    • Lease or provide the equipment at just above cost, in exchange for a contract commitment to purchase the consumable for a defined period.
    • Triple the cost of the consumable over time!
    • This should provide a more profitable and sustainable model. Adjust the cost of the ink upwards so that it pays. On a per-piece basis, the consumable at 3x or 4x current cost will still be a miniscule part of overall product cost. Further, the buyer won’t have to amortize the cost of the equipment over their production, making this an attractive option.
    • Concentrate on equipment design and outsource the manufacturing on a modular basis while keeping control of the one or two most critical components.

[like]

How Do You Pursue a Market Expansion Opportunity? Three Points

Situation: A CEO is considering expanding market reach to include an additional specialty niche in the market currently served. He sees the opportunity to diversify the current offering, to make significant money, and to grow the company. The principal challenge is finding a person to build this capacity. How do you pursue a market expansion opportunity?

Advice from the CEOs:

  • Without a leader to build the new capacity, an individual who already knows both the technology and the market, it will be difficult to build the new capability.
    • Bring in a heavy hitter with a proven track record in the market to develop the new capability. Someone who can build a team to offer the same quality / delivery package that has been the source of the company’s success.
  • Once this individual has been identified and is onboard, gather top management and develop clarity on the company and its values – why the company is in its current as well as the new business and what the company does for itself and its clients.
    • From this exercise develop or update the values statement and a vision / mission statement.
    • Consider hiring a consultant with proven experience in the market to help develop the value statement, mission, and some of the strategic and planning capacity that the company has not yet developed on its own.
    • Communicate these openly and reinforce them frequently with staff. This will help them understand the company culture as well as the vision for the company. It will also help them to understand the decisions made to guide the company.
  • Is there another firm – or an independent consultant – with proven expertise in in the new field to work with the company on the proposals that are being submitted for the new market?
    • This will help to evaluate the market and to get a taste of what is involved in this work before making a major investment to support the new capability.
    • It will also speed the development of expertise to address the new opportunity. If it goes well, the company can consider either a deeper joint venture, hiring the consultant, developing its own capability with internal resources, or a combination of these options.
    • In the short term, this will impact cost and margin but will substantially reduce risk.

[like]

What are the Key Points to Make in an Investor Presentation? Three Views

Situation: A CEO wants to raise money to expand the company. Target investors will be private equity investors with a minimum investment threshold of $10 million. What are the key points to make in an investor presentation?

Advice from the CEOs:

  • To demonstrate the company valuation, and the potential increase in value to investors, calculate the EBITDA trend for the last 3-4 years and project it out for the next 5 years.
    • The valuation is the whole company – not just the investment piece.
    • Show the increase in exit valuation with and without the target investment. Show impact.
    • Show revenue and EBITDA on the company’s current trend and what this will become with the investment.
  • An alternate view: Don’t focus on valuation. The company is profitable and growing. Pitch the plan and the financials associated with the plan. Let the potential investor come back with an investment proposal and terms. KISS – Keep It Simple Silly – take all the risk out.
  • There are periodic Shake the Money Tree events in Silicon Valley, sponsored by SVASE – Silicon Valley Association of Startup Entrepreneurs. Start attending these.
    • Ask for advice – not money. There is an adage in Silicon Valley is that if you ask for money you get advice; whereas if you ask for advice you get money.
    • There’s a subtle difference between the two asks. The point is that potential investors don’t just want to invest money. They want to be involved in the decisions as to how the company spends that money. By asking for advice, a potential investee demonstrates that they respect the opinions and input of potential investors and will listen to them.

[like]

How do You Minimize Inventory Damage by an Outsourced Manufacturer? Five Points

Situation: A company uses outsourced manufacturing but is concerned about inventory damage by the manufacturer. Tests have been established to assure both visual compliance and functional performance, overseen by a company employee. Still the company is receiving too many unacceptable parts. How do you minimize inventory damage by an outsourced manufacturer?

Advice from the CEOs:

  • It is perfectly acceptable for a vendor of consigned materials to bear the risk of product that is not to specification.
    • In any contract for manufacturing, require that the vendor carry insurance to cover the full cost of materials and processing in case of damage either during manufacturing or shipping.
  • It sounds like this is a new opportunity and situation for the company. In the process they have not guaranteed that both cost and risk are covered.
    • There is no point in assuming all this risk.
    • For future opportunities like this, take on the work as a time and materials project at an appropriate hourly rate for the market, and with a significant mark-up to cover risk as the project is transferred to a contract manufacturer.
    • Another option is to take on the project under a project management contract, and to bill engineering separately.
  • This situation sounds familiar for an evolving project. In the future try to unhitch the manufacturing piece from the engineering. Engineering should be more profitable, which will allow the company to more successfully manage the project into early manufacturing.
  • Strategically, this could be a good move for the company provided they partner with a reliable vendor to facilitate early stage manufacturing. One option for paying sub-vendors is to pay for yield – particularly if early stage work has a high failure rate.
  • If the market opportunity is there do two things:
    • Set up an organization with professionals who know early stage manufacturing.
    • Be aware this group will have a different culture and approach compared to design engineers.

[like]

How Do You Reprioritize Your Time? Seven Suggestions

Situation: A company delivers specialized consulting services. The founder CEO is also a lead consultant. As the company has grown, the CEO has struggled to prioritize her time as she shifts from consultant to leader. How do you reprioritize your time?

Advice from the CEOs:

  • Look at the skill sets required to run the company and compare this with the skills of current staff. While the company has excellent consultants, do some of these people also have experience in business development or management?
    • Prioritize the skill sets needed and focus hiring efforts on those that can’t be filled by current employees.
  • If the CEO is also the chief rainmaker, then a top priority is hiring a manager/leader. The next level of development within the company will require a level of management.
  • Accept that the company can’t get an A+ grade on every project or detail. Learn to accept a B when this is enough. It will do.
  • Recognize that as priorities shift, vacuums will develop. Identify what will be missing. For those vacancies:
    • Write job descriptions for the roles.
    • Replace the leader’s roles with flexible teams instead of individuals.
  • Reapply financial resources to fund the transition as incentives for individuals to take on new work and responsibilities.
    • Look at profit-sharing models. Use profit sharing to facilitate the shift in priorities by adjusting payout incentives.
  • Anticipate the risks within the plan. Think through these thoroughly and develop contingencies.
  • As CEO, you will not be able to do everything that you do now. In your new role you won’t want to do everything you do now. Your view and responsibilities will change.

[like]

How Do You Strengthen Internal Incentives and Ownership? Four Points

Situation: A technology company has established a leadership position in their niche. Nevertheless, they struggle with individual performance and buy-in to company performance. The CEO asks whether increasing ownership through stock incentives in a non-public company is an effective incentive for employees. How do you strengthen internal incentives and ownership?

Advice from the CEOs:

  • In the past, employees voiced a strong predilection for share ownership as recompense for the personal risk and sweat that they have put into the company.
    • It may be advisable to revisit this, particularly given the increased risk that comes with share ownership as a result of regulatory changes of the last 10 years.
    • As a substitute for share ownership, they may be open to some proxy that will provide them with value and the opportunity to have their opinions heard in the case of a buy-out.
  • Another company looked at this closely at the time of formation. They decided that proper recognition for contribution did not equal ownership. Ownership also entails personal liability and risk, which many don’t realize and, once they understand the implications of owners’ liability, don’t want. As an alternative they adopted a liberal profit-sharing structure that has met with employee enthusiasm.
  • Think about this discussion in terms of incentives:
    • Short Term – Annual-type incentives
      • Make sure that incentives align with desired behaviors so that individuals’ contributions contribute to business plan objectives and the next step for the company.
    • Long Term – consider the trade-offs
      • Share Ownership
        • Broadly distributed share ownership not only complicates future flexibility but may also complicate a buy-out or merger opportunity. Consider the implications of a situation where most shares are in the hands of past rather than current employees.
        • Strategic Partners wishing to invest may be reticent to work with a company with broadly distributed ownership.
      • ESOPs, while frequently referenced, tend to eat their children. They have several complications:
        • They are governed by ERISA, so you cannot discriminate. All must be able to participate.
        • Ownership is prescribed – with a maximum of 10% per employee. Will a future CEO candidate be happy with 10% when the admin assistant gets 3%? In this way ESOPs can impair succession and recruitment plans.
        • Annual valuations can be expensive.
      • Phantom or Synthetic Equity Programs
        • A company can tailor these to meet changing objectives.
        • Valuations are cheap and valuation metrics are easy to monitor.
  • To work through the options, sit and talk with the employees, and listen. Ask what concerns them. Don’t try to come up with a solution until their concerns are understood. There is an array of options available.

[like]