Monthly Archives: November 2010

Know Your “Sweet Spot” Before Considering Outside Deals

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The executives of a public relations firm that specializes in crisis communication for large corporations in the healthcare industry recently asked us if they could grow more quickly through acquisitions, joint ventures, strategic alliances, and/or subcontracting. We could move fairly quickly because they know where their “sweet spot” is.

They could possibly benefit from a joint venture with another public relations firm that serves the pharmaceutical industry and provides something other than crisis communication services.  That way both firms expand into related industries. They might consider strategic alliances with law firms that excel at risk assessment or confidentiality agreements. They could subcontract a firm that can translate sensitive messages into various languages. Or they could acquire a competitor with long term experience in crisis communication or healthcare clientele their firm has not attracted.

A web design firm posed the same question to us and the answers were not so evident.  They had resisted clarifying target markets, establishing core products/services, declaring geographic range, selecting their scale for projects, identifying the primary problems they solve, etc.  Without being centered, they could waste a lot of time and spend a great deal of money trying to do an acquisition, and then only end up with a tired Baby Boomer who is trying to eke out a little bit of money from his dying business.  How would they know how much they should invest in a subcontractor if it isn’t clear whether the services provided will be central to future growth or of marginal importance?

Before any deal can succeed, the leaders of the companies involved need to know who they are and where they want to grow. “No duh, right?” It is amazing how many times deals fall through or follow up falls apart because the individual companies weren’t centered before a relationship was explored.

It can help to use a CUBE to graphically capture your “sweet spot” to keep it in the forefront of your mind as opportunities come up. One axis could be the range of services/products provided. The second axis could convey customer size.  The third axis could convey target markets. Or you could define your sweet spot by challenges solved, geography served, or duration of contract. Where does your business stand along these various continuums?

Make Sure the Percentages Make Sense When You Are in a Strategic Alliance

Note: I wrote this because I am seeing too many companies accepting ridiculously low prices for their products and services only to become exhausted, increase their debt, and lose money.

Speakers, consultants, graphic artists, and other freelancers often rely on referrals, subcontracting, and consortiums to grow their gross revenue and handle larger projects while keeping their overhead costs down.  And some utilize bureaus, agents, or call centers to surface leads and prospects. The lessons learned by these micro-sized businesses can help larger businesses with your joint ventures and strategic alliances.

It is important to know what your account acquisition costs really are.  Most midsized companies have moved beyond the simple QuickBooks™ style of accounting with its alphabetized list of expenditures and too little information about cost of sales and true gross profit.  BUT, it is amazing how many executives of companies between $20 and 200 Mil/yr have insufficient data or understanding about what it costs to attract and land a new customer.

My strategic planning firm was approached last year with an opportunity to provide executive retreats for a training company’s clients within a niche industry. They thought it was reasonable to charge us 50% of our fee even though we would have been expected to close the sale, independently manage and staff the retreats, take the legal risks, handle logistics and administration including invoicing, etc.  Their approach would have decimated the profitability on those assignments.  In fact, we would have lost money doing them.

Speaker bureaus are paid between 25% and 30% of a speaker’s fee because that is their cost of account acquisition (including marketing and sales).  Are the account acquisition costs for that niche training company actually running 50%? WOW.  For their sake, I sure hope not.

It is important to know if you are referring, subcontracting, or in a joint venture. Yes, it’s true that when you refer another service provider, your reputation is involved.  We shouldn’t waste our customers’ time asking them to consider unqualified people.  We have always believed that a good referral is participative in that you remain involved to make sure your customer gets what they need and then you follow up later to see how things worked out. BUT, when you refer one of your customers or friends to a possible resource, the sales people of that company are responsible to assess needs, provide a proposal, negotiate, address objections, and land the account.  They have benefited from your marketing, your network, and your capacity to open a door, but most referrals do not involve the referring party retaining responsibility to also close the sale. The commission assessed for a high quality referral is often around 15% which is the typical cost of marketing and opening doors.  And that is for the first project.

When you are subcontracting a freelancer or another firm, your business has the expenses associated with marketing, sales, account and project management, supervision of the subcontractor(s), administration, insurance, overhead, etc. I have seen some inexperienced freelancers become offended when they are offered 40-60% of the project or hourly fee, when they should be complimented and completely satisfied.  Do the math. This means that the subcontracting company keeps 40-60% of the project fee.  15% is marketing. 10 – 15% is sales. 15-30% is for those other responsibilities you must perform as “the prime.” The range depends on the degree of specialization and how independently the subcontractor can be trusted to work.  But when your firm is the primary contractor, it is more than just your reputation on the line.  That is your client, your legal risk, your contract, your license or certification, your bonding, your accounts receivable…everything!

Make Sure You Know the Desired Results Before Selecting a Consultant for a Board Retreat

It’s tough to be a board member these days.  Before you know it, board meetings are so dominated by compliance, governance, audit, and executive compensation that financial performance and strategic decisions get put on the back burner.  That may be almost acceptable during stronger economies, but that doesn’t work very well for corporations these days.

Imagine that you find yourself facing flat gross revenue, are struggling to maintain gross profit, and keep trying to stop the erosion of net profit and price per share.

When that happens, your board of directors may conclude that this is a great time for a board retreat.  Sounds good, right? But what is the purpose of the board event?  And what type of consultant will you need to bring in?

Do they/you need a strategic planning retreat where important decisions are made?  If so, would a shift in decision making authority be implied?  Would the results be better if you brought in an experienced strategic planner? Be careful here.  It becomes tempting to bring in a “facilitator” with a standard template that includes phrases like “vision & mission and SWOT analysis,” but would the typical facilitator actually understand the strategic questions, be able to help prioritize issues, and provide enough structure to the process that you can focus more on strategic content?  Most “facilitators” do not have the experience to recognize data that cues consideration of acquisitions, divestiture, reorganization, succession, geographic expansion, repositioning, store closings, etc.  Part of what most companies need from their strategic planning process is reduced risk of being blindsided.

Does your board need training about how to do strategic planning or learn ways to include discussion of important strategic issues in their board meetings? A training event is very different from actual strategic planning.  Not every strategic planner is a good trainer (and vice versa). If your situation has some urgency (like dramatically eroding profits), can the one event be asked to include some training and some strategic planning?

Do your board and perhaps your executive team need some guidance about board/executive roles?  Does your executive team and perhaps your board need an assessment of process and techniques to pick up the pace of decision making?

The right consultant depends on whether you need to:

- make strategic decisions,

- acquire new knowledge, skills and agendas,

- clarify and strengthen roles and relationships,

- analyze, improve, or speed up decision making or

- a combination of these elements

Why Wouldn’t Your Business Plan Call for Tripling Quickly?

No, I’m not nuts!

Objection #1:  “Banks aren’t lending.  We can’t finance that kind of growth on our own.”

Response:  Actually, new regulations have forced most banks to have three times the reserves they carried a few years ago.  Even the most conservative banker knows that they have to make loans.  They just aren’t going to be interested in bland stories with no potential.  Do you have a compelling story?

Objection #2:  “This recession has scared many people.  Our sales are down.  Flat is the new growth.”

Response:  OK, that is a nice sound byte.  How long will you continue to say it?  If your sales are flat or down, that’s not the bankers’ fault.  With unemployment levels as high as they are in most areas, top talent is more available and affordable than ever.  If you retain non-performers and don’t take advantage of the few benefits recessions provide, when will you clean house?

Objection #3:  “We can’t even imagine tripling right now.  Our people are in survival mode.”

Response:  OK, then maybe you need to shake up the leadership team, too, and not just the sales force.  It’s impossible to triple quickly if you can’t even envision it.

Objection #4:  “Why should we triple?  That seems so drastic!”

Response:  Most of the time, stubborn plateaus are not just caused by the economy.  It’s about leadership.  Often it takes creating a much bigger company to shake up the status quo, attract top talent, bring in fresh ideas, start to innovate again, move beyond old habits.

So let me ask you two questions:

Who would be on your executive team when your company has tripled from where it is now?  What’s stopping you from interviewing these people right now to help you get moving?

Are You Considering Acquisitions In an Attempt to Avoid Important Problem Solving Decisions?

During an ABC interview about the Dairy Queen® restaurant chain, Warren Buffet said that he likes to buy “businesses he understands.”  Granted this is a man who understands companies like Goldman Sachs, too.  But, it is still good advice.

Over the past few years, I have seen more and more businesses expanding into products and services the owners simply do not understand.  OK.  The poor economy has stressed just about everyone.  It can be very tempting to develop the “grass is always greener on the other side” syndrome.  Entrepreneurs jumping in over their heads are adding to the existing problems related to lost trust, poor customer service, and lack of follow through. Continue reading

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