Nov 19, 2021 | Leadership, Sales
Cash is the final arbiter of commercial success. You cannot live without it, too much of it and you get lazy, too little and you are wheezing, struggling to breathe, living moment to moment.
There is a lot of advice around about how to manage your cash, reduction of debtor days, management of inventory, project progress payments, pricing structures and the ret. All are valid and should be managed explicitly.
One item not often considered in the context of cash is the sales process, the pre-order or sales pipeline, time and resources consumed in that process.
The Cash Conversion Cycle is usually started at the point where there is a direct cost to filling an order, or buying materials for inventory.
It is a small leap to extend it to a point at the beginning of the sales process. That might be at the point where a lead becomes a sales qualified prospect, whatever nomenclature you use. The point at which the odds of closing the sale increase past an inflection point of some sort.
Many sales pipelines I have seen are long, torturous, ambiguous, and subject to gaming by sales people to make their ‘numbers’. The advent of CRM systems, and the logging of prospects and the expected conversion rates to generate revenue forecasts has made fools of many senior executives.
In the absence of a disciplined and regular review of the numbers, they always tend to be optimistic, until the crunch comes, then it is a nasty surprise.
Sales, like everything else in a business that is repeated, is a process that can be broken down to its component bits, systematised and optimised. While normally hidden in the fixed costs of a business, the expenses incurred in generating sales consumes working capital. Any reduction in the working capital required to run a business, increases the value and profitability of the business. Therefore, treating the sales pipeline as a process to be optimised makes both financial and strategic sense.
Ask yourself how any sporting team that is successful over a period of time does it. The personnel changes, the opposition changes, but the success stays. An exemplar is the Melbourne Storm rugby league team. Few believed they could continue their long-term success in the absence of their three superstars, Slater, Cronk, and Smith, but they defied the expectations. How? I bet coach Bellamy has a playbook that contains all their standard plays leveraging the skills of the individuals in every position, which are practised and practised over and over until they are second nature. There will also be a set of plays tailored to the weekly opposition, and the individuals they expect to meet on the field, which are run over and over in the week leading to the game, so they are also second nature. In the heat of the game, nobody has to wonder what to do next, they have practised it.
How many businesses practice their sales game? Mapping out each stage, looking for the friction points and practising how they will be addressed, workshopping the best responses to all possible objections, and ways to smoothly move to the next ‘mini-close’ in the process.
Very few.
If you were to practice and practise while optimising, do you think the sales cycle would shorten?
Clearly it would, and it would also confirm those who are likely to become a customer earlier, and probably increase the net price at which they were converted.
Together that would shorten the lead time and optimise the leverage from the resources committed, leveraging the relationship between sales and financial outcomes.
As the old saying goes, ‘More sweat in training means less blood in battle’
Nov 17, 2021 | Leadership, Strategy
Strategy is an essential ingredient for success. Without a clear, unambiguous, and well communicated strategy, there will be wasted effort, sub-optimal decision making, lack of alignment between functional responsibilities, and any number of other problems.
Therein lies the problem with strategy.
You spend time and money researching, developing, road testing and implementing strategy. You build a deep commitment to it, the CEO if he/she is doing their job well spends a significant percentage of their time building the engagement of all stakeholders in the strategy.
What if it is the wrong strategy?
What if one of the core fundamentals suddenly turns against you, or becomes irrelevant to the customer purchase decision?
Not only have you wasted the resources getting to that point, but the whole point is also to generate commitment. It is very hard then to turn around and say, Oh Crap, we got it wrong!
The inclination is to double down, work harder, not throw the sunk cost against the wall and change tack.
Blockbuster did not survive this challenge. Suddenly the core assumption that people would rent videos from a central location, then incur late fees when they finally brought them back, failed. When Netflix emerged as a subscription DVD by mail service, Blockbuster management saw it as an odd, fringe product that would never take on. Netflix management, virtually broke, offered to sell the business to Blockbuster for $50 million, an opportunity they declined. Technology caught up with Netflix, streaming became a viable option, and Blockbuster took only 3 years to go from king of the multi-billion dollar castle to broke.
Blockbusters strategy sucked. It assumed no change to the business model that had made them successful, could not pivot to a new model, and disappeared, because their strategy was wrong.
Kodak made the same mistake, and so did a local bottle shop that set out to compete with Dan Murphey’s on price and range.
Consider the strategic foundations of the current Australian Government’s commitment to the continuation of fossil fuel. Despite the spin of the last few weeks, their actions display that continuing commitment to the ‘Gas led recovery’ and options such as Carbon Capture and Storage, dismissed as fantasy by serious scientists. Business on the other hand recognises the inevitable failure of this strategy, and have been taking steps for the last few years to pivot their own operations. Now even the business lobby groups have publicly stated the government’s strategy sucks.
Tesla by contrast, founded in 2003, went public in 2010 for $17 a share. It took a few years before the strategy became an evidently powerful one. You could have bought a Tesla share in early 2020 for $70. That same share today is hovering around $1100. Tesla holds almost 80% of the US market for EV’s, 20% share worldwide. The market for EV’s is about 3% of total vehicle sales, but has doubled for the last three years: compounding is at work. All the major car manufacturers are fighting for a share, but I wonder if they missed the boat, In the US at least, you do not buy an EV, you buy a Tesla. A bit like Hoover, the brand becomes the verb describing the category.
The problem with strategy is that when it is well locked into the decision making and performance measurement of an organisation, it is very hard to change. Vested interests, personal, professional, and institutional all get in the way, and actively work against the change until too late.
To be effective, strategy also must be agile, subject to continuous evolution, as well as being the ‘North star’ of decision-making. The alternative is that you follow it into irrelevance at best, but often extinction.
Header cartoon credit: Scott Adams via the wisdom of Dilbert
Nov 15, 2021 | Leadership, Management, Small business
The term ‘Washing Machine Brain’ was used recently by a client as we sorted through all the competing tasks and priorities of his role running a small, rapidly expanding business. Everything was mixed up, tangled, swirling at a rate he found difficult to keep up with, let alone get on top of any of the seeming endless list of tasks.
Common problem, and a very expressive descriptor.
Over the 18 months I have been working with him, the number of tasks and the complexity of those tasks seems to have increased geometrically, while the revenue has increased arithmetically.
Again, a common problem in a rapidly growing business. Every advance delivers a new set of management challenges, until a tipping point is reached. After that point, the scaling of operations can be done off the established base, and the ratio is reversed.
Over the 18 months, we have achieved a number of milestones, and left some significant tasks underdone. The product is a bespoke manufactured product with a sizeable number of customer driven variables, many of which are challenging to explain to the customer base.
We have:
- A very clear strategy, well understood by the small number of employees. .
- Implemented an operational planning process from order to installation that works pretty well. This uses Trello as the formal communication tool, enabling transparency across the operational staff, as well as encouraging input and accountability.
- Developed an electronic customer record in Dropbox that is the storage and reference point of all design and operational data that relates to individual customers.
- Automated the quotation process, although there is manual intervention still required, and given the nature of the product, may always be required. However, there are still many ‘wrinkles’ to be sorted out.
- Partially implemented a powerful CRM system to manage the outbound sales effort and lead funnel. Like many of these products, every time we turn a corner, there is more to do, but the promise of further automation to assist scaling is seductive.
- Generated more sales leads than can be managed with the existing operational and sales resources.
- Moved from break even to making sufficient profit to reinforce the owners faith in the product, and ensures the business has the resources to fund growth internally.
We have not:
- Successfully implemented a systematic qualification process to optimise the time spent in the pre-sale stage. We need a process to identify tyre kickers and potentially difficult customers & jobs early enough to either walk away, or price them accordingly.
- We do not have an adequate handle on cash flow, or the accounts generally. As a reformed accountant, this disturbs me greatly. These ‘back-office’ tasks require robust processes and resources, and remain a work in progress,
- The supply chain on which we rely is disorganised and hugely wasteful, much of which we wear in lead time uncertainty. While we do not control a key part of the manufacturing, the incentive to find a way to exert control is compelling.
- Labour availability is a profound challenge. The product relies on physical installation which can be complex, depending on the site. It has a range of variables new to this country and finding experienced people has proven almost impossible, and finding suitable trainees at least as hard.
None of this is unusual in growing successful businesses, but knowing that does not make the challenge any easier.
The only antidote is focus. Relentless focus.
Pick the few things that can be done today, this week, this month, and focus on getting them done, before moving onto the next source of value to be addressed. In so doing, spend the time and effort to complete each activity as well as possible. It is inevitable that in a growing business, the requirements will change, so processes need to be able to evolve, but there is little more frustrating and wasteful than having to re-cover areas you had thought behind you. Over time the washing machine will become significantly less chaotic as we iron out the wrinkles and scale the business. (Sorry, could not resist the obvious pun)
Nov 11, 2021 | Change, Leadership
Too often dissent is seen as just negative. Sometimes it is, particularly when the dissent is from a course of action that demands change, but even that can be useful.
The nature of dissent, when removed from becoming personalised, is usually hugely positive, as it opens conversation, points up otherwise glossed over weaknesses in an argument or proposal, and provides ‘safety’ for others to voice their views, dissent or otherwise.
These positive outcomes from dissent to an idea, proposal, or course of action, usually become consumed when the dissent is seen as an attack on the ideas, status or qualifications of the individual who made the proposal. In this case, it becomes even more important that someone speaks up, be the first, and it is a measure of leadership that those ‘in charge’ accept, and even encourage the dissent as a positive contribution to the process of decision making and risk assessment.
Dissent is the only real antidote to confirmation bias.
We see the factors that reinforce the views we already hold, while not seeing those that conflict. We all ‘suffer’ from such biases, it is an evolutionary tool that serves to maximise the cognitive capacity we have, but in business it can be terminal. I am sure there were those inside Kodak who thought the digital camera might be a good idea after Steven Sasson invented it, but they were not heard. Gary Starkweather, the inventor of laser printing inside Xerox, was almost fired, until someone in PARC, on the other side of the country recognised a good idea, unencumbered by the weight of the status quo, and the rest is history. Netflix blundered mightily when they tried to separate their DVD and nascent streaming businesses into two companies. CEO Reed Hastings later recognised his mistake in (unintentionally) allowing his voice to be the only one heard, and later put in explicit processes to enable dissent.
Dissent should be encouraged and made ‘safe’ for the dissenters.
However, when you are the dissenter, there are a few ground rules to follow.
- Ensure the dissent is to the proposal, the facts or foundation assumptions, not the person making the proposal.
- Base the dissent on arguable grounds, quantifiable outcomes, reasonable extrapolations based on robust assumptions, informed opinion, and experience.
- Be very concise and clear
- Use both narrative and facts to make your case, not just one or the other.
All progress depends on doing something differently.
The absence of dissent leaves the status quo as an unquestioned fact, from which no progress can be made.
Encourage, nurture, engage, and value constructive dissenters.
Header cartoon credit: Scott Adams and Dilbert. Again.
Nov 8, 2021 | Customers, Marketing
Many small businesses operate a job-shop business model for some or all of their revenue.
They do not produce products, then sell from inventory, they sell a product as specified by the buyer, which in the detail will be unique. However, from a higher perspective, there will be great similarity to many other jobs they have done, the experience from which is valuable.
This extends from engineering workshops, toolmakers, smash repairs, printers, and many others. Many SME’s I have seen deploy fancy estimating software that can and does cost the individual jobs down to the last fraction of a cent. The downside of this otherwise admirable level of detail is fourfold:
- It is too easy to make a mistake telling the software what to cost, and what comes out of the computer is rarely adequately questioned. This trust in the output of software can lead to significant blunders.
- The time it often takes from the initial request, to estimate production costs, price approval, and communication to the potential customer
- The customer does not give a toss about your costs, they only want the price so they can make a choice, almost always on a set of factors of which price is only one. Often a major one, but still only one of several.
- The conversion rate from request to sale is often very low, particularly in commoditised industries like printing, so many resources are wasted, or margins are cut to secure a job because the operational equipment may be otherwise idle.
In these circumstances, a guesstimate based on industry knowledge and intimate understanding of the operational costs that comes from long association may be enough. It may not be as accurate in the detail, but will be close, and may meet one of the increasingly potent drives of customer behaviour:
Immediacy.
Take printing for example, an industry where I have had some exposure.
At the ‘small’ end, much of the volume has been taken by local instant print shops. They all operate with the same equipment, same material costs, at standard machine costs per piece printed. The total cost therefore becomes a function of set-up time, wastage, and overheads. In these cases, the conversion rate is more a function of turnaround time and convenience for the customer than anything else.
At the ‘bigger’ end, multicolour offset, and even more bespoke letterpress, price does become a larger factor, but still only one of a number: quality, service relationships, value add services such as storage and part delivery, artwork services, and turnaround times. In these cases, the profitability is obviously impacted by price to the customer, but also very heavily by the flow of jobs through the factory and machine utilisation achieved, to which customers are oblivious and uncaring.
The impact of increasing the flow of jobs that have the costings ‘roughly’ right, but delivered ‘on the spot’ to potential customers is huge. The resultant machine utilisation, combined with the conversion attraction of the quick turnaround sought by customers dwarfs the job profitability added by taking time to accurately estimate the last few percentage points of cost.
In one case, a printer I was working guaranteed a firm price and turnaround time within four working hours of receipt of the request. This often required judgements to be made based on deep knowledge of costs from experience, and a high level of control of the workflow. Early on, some mistakes were made, but the ‘guestimates’ became increasingly accurate when measured against the detailed software estimations, to the point where we needed only a small number of basic job parameters to be crunched by the software to get what proved to be a very accurate costing. Meanwhile, the immediacy of quoting increased the conversion rate substantially, which flowed into greater machine utilisation, which together delivered big increases in profit in an industry suffering poor profitability.
Sometimes informed guestimates of costs are the best way to build profit.
Header photo courtesy Wiki Media.
