Situation: The CEO is moving a key employee from head of engineering to a more customer development focus. To support this, she will have to bring in or promote another employee to fill the position of leader/supervisor/manager of the engineering group. The CEO seeks advice on the best way to approach finding a replacement for this key job. How do you replace a key position?
Advice from the CEOs:
• First, it is necessary to develop a timeline for finding and transitioning the replacement. Realistically, count on 6 months to find a replacement and transition the responsibilities to a new person.
• Keep in mind that anybody you find or promote will be different from the individual who currently occupies the position, and will not handle their new responsibilities the same way as the current individual. Their motivation and their approach to their new responsibilities will be different, at least at the outset, and they will not handle their responsibilities the same way that the current individual does.
• Seek an individual, either currently within the company or an outside hire with strengths that, over time, will add significant value to the organization. Prepare for this by brainstorming and developing a profile of the ideal candidate.
• If you have qualified candidates, the ideal person will come from within the organization. This has the added advantage of demonstrating to other employees that they, also, may become candidates for future positions to grow both their skills and income.
Tag Archives: Significant
How Do You Position a Professional Services Company for Growth? Part 2 Three Suggestions
Situation: The CEO of a professional services company wants to position her company for growth. What suggestions do others have to assist her? How do you position a professional services company for growth?
Advice from the CEOs:
- Make Time for Organizational Development – Attention to organizational development and enhancing the organization so that it meets the needs of employees can yield significant dividends in terms of company performance and adaptability. When employees’ needs are met, they are motivated to extend their efforts both in performing their current roles and to develop new ideas that will benefit the company. Be sure to recognize these efforts.
- Temp to Perm (Even for Hiring Leaders) – As the economy recovers there remains a high level of uncertainty as to how robust the recovery will be. In light of this, additions to staff may be approached cautiously. The temp to perm route offers a way for a new individual and the company to get to know one another and to test mutual fit before making a full commitment to permanent employment. This can be true even for positions of significant leadership within the company.
- Meet the Unrecognized Needs of Customers – The top of the Customer Pyramid is meeting unrecognized needs – needs which the customer may not even know that they have. In a world of increased competition and rapid change, finding ways to understand, anticipate and meet these unrecognized needs of customers yields a significant competitive advantage. Brainstorm with your sales, marketing and customer service teams to identify unrecognized needs of past customers. Use the results to identify unrecognized needs of current and new customers.
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What is the Role and Value of an M&A Consultant? Four Points
Situation: The owners wish to sell a company. One option is an M&A consultant to assist with the sale. The CEO wants to know about others’ experience. What is the role and value of an M&A consultant?
Advice from the CEOs:
- The first step is to assess the strengths and weaknesses of a consultant to determine their value.
- The cost of an M&A consultant is inexpensive relative to the value of the business.
- Accounting rules and M&A practices of public companies do not always apply to private companies. Valuation is affected by variations in profits year-by-year, so consultants typically use 3 to 5 year historical results for comparison against industry standards.
- Technology companies may have a different value than service-oriented businesses, particularly if significant IP is involved. Look at the creativity of potential consultants’ solutions.
- Consultant alternatives:
- Business brokers, accountants, and valuation specialists can all offer valuations.
- Investment Bankers who charge an upfront fee may be more strategically oriented. Typically, the more strategic the valuation exercise, the more dollars involved.
- Be cautious in choosing a consultant.
- Many business owners spend a lot of time and money with accountants and lawyers when they could save by working with a business broker paid on a commission basis.
- Business brokers are skilled at getting business sold – however the deal is not necessarily in the best interest of the owner. Brokers are paid by commission and so may not have the best interests of the owner at heart.
- What should you look for in a consultant?
- Maximization of sale value with a minimal tax exposure.
- A consultant who will help the owner figure out what they want from their business and exit – who will help to establish owners’ exit objective, a key to a successful exit.
- A consultant who will help choose the right team of advisors.
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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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How Do You Build an Effective Compensation Plan? Six Suggestions
Situation: A company hires and trains engineers from outside of their field. Their pay scale is typically below market for engineers in this field. Once the company trains them, these engineers are candidates for recruitment by other firms in the field that are considered premium employers. The CEO wants to address this situation. How do you build an effective compensation plan?
Advice from the CEOs:
- In addition to compensation, a high-quality workplace and work experience are equally important.
- Give the lead engineer or team compensation tied either to engineering charges or gross profit on successful projects. This can be a small percentage – but offers them a compensation upside that they are unlikely to find at another company.
- Create a peer-recognition award like another company’s RAVE Award (Recognition, Achievement, Value, and Enthusiasm). On a regular basis – perhaps quarterly – the engineering team has the opportunity to select one of their members for this award. Components of the award may include a plaque, a free dinner or massage, or something that team members value. Ask them what they would like to see as rewards within the program.
- A similar technique is a peer recognition box. Engineers nominate peers for recognition based on performance in a team project. At regular intervals, draw a name from the peer recognition box, with the winner receiving, for example, a gift certificate. The dollars are less important to the recipient than the recognition.
- Focus on making the company “the place for talented engineers to work.” This can be as much a cultural situation as a place to make a great salary. The more that the company creates a fun and personally rewarding culture, the more it builds “stickiness” into the job. Ask the team for their input to shape the team and work environment.
- Provide performance incentives for meeting quality objectives while exceeding time objectives. This beats existing cost estimates, so share some of the savings with the team working on the project.
- Make special company celebrations a regular part of the company culture – for example, evenings out at premium restaurants and including spouses or significant others. By treating significant others well, the company creates a disincentive for the employee to leave.
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How Many Direct Reports is Too Many? Five Thoughts
Situation: A young company has been growing rapidly but hasn’t been growing its infrastructure to support its growth. The CEO now has fifteen direct reports. Things are getting hectic and the CEO wonders whether it’s time to make a change. How many direct reports is too many?
Advice from the CEOs:
- It is generally accepted that the largest number of direct reports that an individual can successfully manage is ten. Beyond this and even at this number, if the reports require significant supervision it is difficult to meet the needs of the individuals and to effectively direct their multiple activities.
- The maximum number of individuals that you can manage depends upon what you are managing.
- If the individuals are very independent, then perhaps ten can be managed.
- If the individuals require any significant levels of supervision and/or training, the number goes down rapidly.
- This is both a challenge and an opportunity. The challenge is determining the right number of reports for the CEO to manage. The benefit is the opportunity to start building a management team.
- The benefit will be that by adding managers reporting to the CEO, there is the opportunity to train individuals who can take on additional managerial responsibilities in the future. As the company continues to expand this will become critical to future growth.
- Another benefit is the ability to divide responsibilities among the teams.
- For example, one team becomes the sales team, a second the Client Services team, and a third becomes the back-office operations team.
- As the company expands, there is the opportunity to add additional subgroups to the sales and client service teams. simultaneously serviced by the existing back-office operations team.
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How Do You Strike a Healthy Work/Life Balance? Three Points
Situation: A CEO fills nearly every minute of the day with activities. All these meaningful to him and the company, and he enjoys the contribution that he is making. However, he fears that he is beginning to burn out. Is burning the candle at both ends doing harm or creating the legend? How do you strike a healthy work/life balance?
Advice from the CEOs:
- We are best at what makes us happy. We are the only individuals who can really monitor our activities, so we must set both our own priorities and the metrics.
- The priority is a positive, healthy lifestyle. What may be getting in the way?
- Getting enough sleep. Medical studies indicate that while some people can get along on 6 hours of sleep per night, most need 7-8. Those who get less than 6 hours on a regular basis are taxing their bodies as well as their psyches. Are you are not getting enough sleep to sustain your current level of activity? Is the recovery time from strenuous activity increasing? If so, your body is telling you something!
- Quality time with significant others. Are you spending enough quality time with your spouse and children? On a regular basis, not on a once-per-week evening out. Is your family receiving the time and attention that they need, or are they sending signals that they need more? Given the importance of these relationships, not just now but looking out 10-20 years, perhaps it is necessary to reallocate proprieties.
- Create monitors to assure that you are not over committing and that you are giving sufficient time to rest and your family. After all, this is a marathon. You don’t want to burn out in the first mile!
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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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How Do You Handle Open Issues from a Sale Agreement? Three Thoughts
Situation: A CEO has closed the sale of a significant company property. Due diligence was completed and was satisfactory, but the purchaser now wants to renegotiate the price. The CEO is concerned that if she yields on the price, the buyer will come up with additional changes that will further disadvantage the sale. How do you handle open issues from a sale agreement?
Advice from the CEOs:
- One member had a similar issue following the sale of a previous company. The decision was that the price at the time of close was the price. The buyer had full opportunity to perform due diligence which would have uncovered any open issues. Condition at time of sale is “buyer beware,” which is why they were allowed a full due diligence.
- The sale was “as is” including assumption of current debt on the property. It appears that the advantages to the buyer that are anticipated through the purchase will more than offset the impact of the existing debt. As a result, the buyer is, on balance, better off than they had anticipated. Thus, there is no need to yield on price.
- On the timing of events that may not occur – an indirect cost audit by the company’s prime agency should this be necessary – there is a question of the financial impact to the company.
- There is a default date on the final payment that could be held up by the negotiation, but the impact is not significant to the company.
- Otherwise, the company’s interests are covered by the sale agreement.
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What Do You Gain by Buying Out a Co-founder? Six Points
Situation: A CEO founded his company with a long-term friend. For several years, this co-founder has contributed little and has proven to be difficult with key employees. In an important sense, the co-founder has become a distraction. A challenge is that the co-founder is a significant shareholder. What do you gain by buying out a co-founder?
Advice from the CEOs:
- First and foremost – peace of mind. While the CEO and his allies control a majority of shares there is no guarantee that this remains the case. Long-term it can cause headaches to have a large block of shares in the hands of someone who could be hostile. The challenge is gaining control of a solid majority of shares at a reasonable price.
- How is the value of the co-founder’s shares determined?
- In most minority interest situations, minority interest is discounted because it is of limited value to a non-company purchaser. While it may be necessary to pay a premium to gain controlling interest in the company, this will be a premium over the discounted minority interest value, not over the fair value for all shares.
- There are two aspects to a purchase: price and terms. It is acceptable to accept the co-founder’s price, but insist on favorable terms, e.g., 10 years to pay at 5% interest.
- Set the terms so that the company guarantees the payment, not the CEO personally.
- At this point the co-founder is a disruptive force within the company. Act now before more damage is done.
- As to order of business, take action with respect to the co-founder first, then negotiate the purchase of his shares after he is no longer an employee.
- Be sure to communicate the decision effectively to the other employees. Speak to the long-term strategic value of the company, the CEO’s vision for the company, and a determination to build the company into a viable entity with a range of customers and growth opportunities for the team.
- Important steps as you move forward:
- Have a plan.
- Speak to an attorney – the company should pay but this is the CEO’s attorney, not the company’s attorney. Assure that as CEO you limit personal exposure and do things appropriately.
- Assure that the employees understand and support this action and that they clearly understand the plan going forward.
- Offer the co-founder a more generous severance package than would ordinarily be considered prudent.
- Fire the co-founder as soon as plans are in place and announce a Board Meeting 30 days hence to discuss the management restructuring.
- As a final note, this is one of the most difficult things that must be done by a CEO. The co-founder has been a long-term friend. Nothing about this is easy. It is likely to get more painful before it gets better. In the long run, however, this can be better for both individuals. Work toward that objective.
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