Execution Tips That Might Help

The problem with recessions is that you don’t have time to be patient. But patience and belief in your execution is exactly what you need. I’ve listed some stuff below that does work and for many may act as a validation that you are doing the right things:

Business Models:
1. Revisit your cost breakdown between variable and fixed and drop that breakeven point as low as possible. I’ve created a helpful look-up table here that shows how far your sales can drop before you start losing money.
2. Look at all the delivery models for getting your product to market e.g. the academic publisher Springer announced that over the next few years greater than 50% of their book revenue will come from e-books. They see great growth from e-books because of the way scientific books are consumed.
3. Understand the stories that generate money. Summarize the data by product families, by region, by sales team. Seek deep granular reasons for sales traction and dig deep with existing customer relationships to understand failures.
4. Play with all possible cost scenarios to maximize the margins of best selling products.

Sales growth:
1. Go to the “coal face” and ask your sales team to sell to you in a role play. Do you hear compelling business results that will be achieved? Are they articulating the special ingredients that your company executes so well?
2. Examine the diagnostic questions your sales teams are weaving into their rich conversations. Do they sound insightful and focused on the improved performance of the prospect?
3. Does your sales commission reconcile with your business objectives? If it solely based on POs, given the difficulty of this market, you will build a demotivated sales force with nowhere to go. Consider an incentive to get the CEO appointments with the key influencers in the prospect company. In this market it’s imperative to spend face time with the correct people to clarify priorities. E.g. in a recent E&Y survey whilst large banks are executing swingeing cuts in IT and Supply Chain Management, they are investing heavily in Legal and Audit departments to control risk.
4. Ensure your sales teams have adjusted their “cookbooks” (metrics that lead to a salesman going to the bank!) to reflect the fiscally tight marketplace. Hint, it may take dramatically new and improved tactics.

Marketing:
1. Simplify your messaging to articulate instant gratification.
2. Master social media for your business.
3. Stop writing long winded parochial blogs > 600 words.
4. Write in plain English, describing the business results being achieved for clients today.
5. Measure everything and work closely with sales teams to maximize their opportunities.
6. Get on site to hear the vocabulary of your clients. Tailor everything you can to make the collateral feel personal to their issues.
Costs:
1. Link every single cost to sales and study the strength of the relationship. Eliminate or scale down all costs starting with those with little impact on short term (12 months) sales.
2. Revisit the mix of fixed and bonus elements of every employee’s package, starting with the CEO.
3. In a low sales growth environment, brutal decisions are needed on cost priorities. Be smart about achieving your goals by deploying free/low cost software. This is a time to substitute over priced, average suppliers with hungry, attentive, efficient service providers.

Call to action
Twice a week I reserve half a day to meet with owners for a free review to validate their tactics. July and August are booked.

VC Industry - lost the plot

So I'm looking at the latest VC investment numbers, 3 months to June 09 and I'm thinking the VC world has lost the plot!

Let me share with you some very simple numbers. My arms will not leave my body at anytime during this presentation.

2009 figures (3 months to June) show that on average $8.7m was invested in 309 companies. Let us assume that the VC on average held 60% of the equity. Let us assume they are aiming at 10 times their investment. That would mean that all 309 companies would have to sell out on average at a valuation of $145m or $45 Bn in total!

You see I think that logic is broken. There are so few companies that sell out for $145m, never mind 309 of them!

Now let us suppose instead of investing $8.7m on a huge bet we invested $500,000. To achieve the exact same return over 5 years the target company would have to exit at $8.3m. This seems so much more believable. I know so many great start up companies that would benefit from $500,000 and they would blow away an exit valuation of $8.7 million in 5 years time.

Just a thought.

Check out the web site in the link for more fun free stuff.

What I know about Management Dashboards

As we struggle to manage our businesses in these challenging times, I’m a little surprised there is not much air-time given to – what we should be measuring and how we should use it. So here are a few ideas - Things I know about Management Dashboards:

1. Monthly financial results need to be available by the 7^th working day after the month end. Any longer and your operations team are asleep and the information is becoming more useless by the second.
2. Every material metric should be accompanied by a “significance statement” explaining why you should be worried or happy. (even a few words helps)
3. All actual metrics should have comparables under budget, forecast and last year.
4. Financials of all business units should explain the story of what just happened using the great secret truth – there are only two reasons for every financial variance – volume and yield. E.g. you sold $2.4m more software (that would be nice) because – you sold 100 more units at $19k = $1.9m and you sold 500 units in total at $1k more each unit = $0.5m, making up the $2.4m. Important to know stuff like that.
5. Trends over time are much easier to see from graphs.
6. Graphs need to be clearly labeled and their meaning understood by a 7^th grader.
7. Written reports should be one/two pages long with relevant and interesting backups relegated to appendices.
8. 70% of businesses that go bust are forecasting profits for the three months post going bust.
9. Technology has leveled the playing field of knowledge – a great curious question can now be answered almost every time by the system or if you like – work out, what questions you need answers to, before revamping your metrics system.
10. Sales metrics need to be traced back to the behavior of a specific salesmen before accountability kicks in (and therefore action).
11. Salesmen behavior is influenced by reliable real time data, long before the failure to produce a PO is public knowledge.
12. Trailing 12 graphs are powerful visual tools that extract the distraction of seasonality.
13. There is only ever one Approved Annual Budget – subsequent changes are called Revised Forecasts otherwise you will be in a hell of a state!
14. A Budget is a spreadsheet interpretation of a set of material, comprehensive policy statements.
15. In almost all occasions if metrics look interesting their wrong.
16. All metrics covering all departments are connected – metrics don’t recognize silos, departments – they just keep coming at you from every direction.
17. A cash flow and a profit & loss are merely the difference between your two balance sheets produced at the beginning and end of a time period.
18. Perfectly accurate monthly financial statements 10 days late are useless.
19. What you measure relates directly to what you are - the business you are in. Parochial ratios that you need to measure, not relevant to 90% of other companies, are a good thing.
20. Walls are great places to show accurate sales data measured on a consistent basis and displayed in a recognizable format.
21. Measuring the reliability of forecasts improves the reliability of forecasts.
22. Stopping the facts getting in the way of a good story can prove fatal.
23. Understanding why we are successful is as important as why we fail.

MITX Events - Free Social Media Tools

There were so many great tips and tricks given out at yesterday's MITX event I felt the need to blog about my take from the session. Panellist details are here:

Web Sites/Tips mentioned:

1. Slideshare.com - open an account and start sharing, get your words picked up by the search engines
2. ACME.com - see who links to you and your Google ranking
3. Flickr - turn your powerpoints into jpgs and upload your manifesto
4. Twitter Grader - Explore your ranking on Twitter and much more
5. Do one really good white paper and syndicate like crazy, push it through all the channels
6. GetSatisfaction.com a great site for connecting with customers and employees
7. Give more than you get in the social media world
8. Always link your blog to clear next steps, e.g. a potential webinar, web site resources, graduate your audience towards engagement and ultimately sales
9. The objectives of your marketing campaigns are key to the metrics you measure. I would put it more fundamentally than that - the business you are in, the unique market you intend to dominate -- determines what you measure.
10. Twitalyzer - fascinating analysis on how influential your are at tweeting
11. Facebook Insights - check out new metrics using Facebook Advertising
12. Check out Linkscape - optimize SEO rankings
13. Check out Ad Lab Microsoft - for metrics guidance
14. Spydermate -another great SEO tool to improve rankings

The overall picture in this exploding world of social marketing is that it is possible to obtain jugular dashboards as a start for free but I would encourage bringing in the experts to really maximize your exposure.

Good luck! More general advice on growing businesses can be found here where I've published some great one pagers.

The Compelling Arguments for SaaS

Around $9 Billion of the $284 Billion software market is currently sold using an online method, Software as a Service or SaaS. The online market is growing at 40%, the traditional market at 3%. So what's all the fuss about? Well I am convinced that buyers of software get a great deal with SaaS but it could lead to seriously reduced margins for the vast majority of software vendors.

The good news for buyers:

1. Great concept for tight budget, pay and play
2. Reduce admin costs and hassle of rolling out new software across all the users
3. Reduced hardware costs
4. Great for cash flow, no more large enterprise license payments
5. Software always up to date with all the new features
6. Difficult to customize however CIOs are now recognizing the huge wasted effort and expense of underutilized features in tailored software
7. Switching costs relatively low
8. Concerns over security and data leaving the business, outside the firewall. Watch Sox exposure. However you have to ask, is your internal security really any better than an outside supplier.
9. Clearly certain defense, intelligence, Pharma type companies may resist the SaaS model because of security worries but even this is changing
10. Difficult to integrate SaaS software with existing in-house software eg to achieve smooth workflow processes. (however this is also the case with existing disparate client/server systems
11. Ultimately after SaaS software gains enough users it is usual for the buyer to sit down with the vendor to talk about volume pricing deals (as they would in traditional software deals)
12. However cost savings may be less over longer periods (see Gartner analysts comments)

The issues for software vendors:

1. Building/renting sever capacity for
   hosting the service is becoming easier using Cloud Computing
2. Metrics management is key, eg Monthly Recurring Revenue or Committed Monthly Recurring Revenue (CMRR), CMRR growth, Churn (attrition rates) and cash generation.
3. Customer acquisition costs (CAC) are vital. Customer Lifetime Value ratios are vital. The web architecture allows deep and detailed analysis of customer behavior which allows dashboard type metrics worth measuring.
4. Watch scaling sales force too quickly
5. Sales lead times can be shorter than traditional sales model
6. Commission structures tricky but manageable – watch rewarding the correct behavior (no maintenance renewals in SaaS models)
7. US seems to be a few years ahead of Europe
8. No shelf ware concept ie if the customer isn’t using your product you are in trouble. It’s on demand computing like switching on the lights – need to over-service clients
9. Watch bandwidth of service regarding outages and servicing the customer
10. Avoids customizations of software (most of the time)
11. Staffing needs: Inside sales teams and how to motivate them.Outside sales teams needed eventually to close the enterprise type deals. Customer service professionals and technical support vital, VP Marketing probably more important than VP of sales
12. Ability to use aggregated data to share trends with your customer

Large software groups have a massive cultural issue on their hands (see WSJ article here) and many may need to hit the acquisition trail to garner that knowledge and culture quickly enough. Smaller software companies need to wake up to the fact that their overpriced client/server/maintenance model is over or at least build SaaS product offerings into their Product Road Map.

Twitter: Why and How I use it

How:

1. Go to Twitter.com and sign up.

2. Start Tweeting on key messages you care about.

3. Big difference between Facebook and Twitter. On the former you have "friends" who see each other's stuff. On Twitter you "follow" someone, bit like stalking, and hopefully they follow you but it is not guaranteed.

4. Think of Twitter more as an "announcement' based micro-blog.

5. I've found the best way to control and engage in conversations is through "Tweetdeck". Download Tweetdeck (or Seesmic Twitter) for free which gives you a great Dashboard to manage the tweets from people you follow in one column, then add a column for your own tweets so you can instantly see what you have said. Add a further column to spot tweets on key subjects say on Software as a Service (SaaS) by typing #SaaS in the search box along the top or #Bing, the new search engine by Microsoft. That # sign is very important. Twitter arranges stuff using # prior to words as a signal to trap those words.

6. At the top of Tweetdeck just type your 140 characters, anymore the screen goes red alerting you to cut it down. Spelling errors underlined in red.

7. People that follow you and that you follow are now connected. Therefore you can now Direct Message them eg say you are going to a function that evening and you want to know whether IanDSmith is going too! Just go to IanDSmith’s picture, hover over it, pick the top right hand box and DM. Type your message to Ian and hit enter.

8. Again with Tweetdeck in front of you, look at the top right hand corner, tick the Facebook box and now you have a live stream of all your Facebook updates.

9. I look for tweeters that share my interests and start to follow them.

10. I focus my tweets on ideas, quotes, articles, information that will help owners of businesses maximize growth. I’m looking for remarkable thinking, action, making things happen.

11. To maximize the impact of my 140 characters, I use tiny.url to shorten my links, thus maximizing my ability to say something useful.

12. Really good stuff is Re-Tweeted by me, as I spot it. Dead easy with Tweetdeck, hover over picture, bottom left square is Re-Tweet.

13. Occasionally I’ll give a personal update on my hobby of competitive masters track.

Why:

1. It’s another opportunity to get your manifesto out there, to add value to your community, to give something back, to add value.

2. It incentivizes me to stay current, blogs, FT, WSJ, HBR, Inc Magazine etc. Once read i grab great content and tweet it.

3. It allows me to cross-reference stuff happening on my web site or my blog.

4. It allows me to join conversations on events in real time. (Although clearly full scale blogging is better)

5. I can follow the companies I’m working with and spot conversations they are having and thus stay on point when I’m making observations.

6. I expected to meet like minded software entrepreneurs and I have: and because some of them were New England based, I was able to meet for coffee and start collaborations on a personal level.


Fears Overcome:

1. A big time suck: solution, I try to keep tweets to 10 minutes every day around lunchtime.

2. Watch spammers: I don’t follow everyone who follows me.

3. Nothing to say: Solution, surprise yourself. I think it forces you to define what your strong coat is, what you really feel strongly about.

Where is it going?

Who knows, but it is a very effective tool to keep aware of the big issues that impact your sector, communicate with your customer base, signpost great knowledge to your community and build your influence.

Negotiations – A Checklist to Improve the Odds

There are a million books on negotiation but busy executives don’t need a book, they need a cheat sheet! I offer these tips based on buying & selling businesses, negotiating with unions, negotiating with venture capitalists, turning around a software group and best of all winning arguments occasionally with my two teenage daughters! We negotiate every day of our lives: sales meetings, staff salaries, policy changes, vacation locations, budget cuts, acquisitions. Life is a negotiation.
I’m framing this advice around a major commercial negotiation between two reasonable parties.

Possible Tactics

1. Always clarify the up to date position. e.g. you mentioned that a new sales order was imminent the last time we met, tell me more.

2. Try to establish the housekeeping of the meeting; prospective agenda, time allowed, anyone joining via conference call. (this has the subtle advantage of establishing you as de-facto chairperson)

3. It is essential that your team stay relaxed and focused. Think of it as gears in a car. If you start the meeting in fifth gear and you get stressed, excited, over zealous – you have very little emotional capacity to go upwards and you will explode! Stay in first gear and seamlessly move up the gears to make a critical point but remember to come back down again. (see here)

4. Your team leader dictates the pace. Never speak unless invited to do so by the team leader. Don’t interrupt a silence. A professional team can make this look very natural.

5. Use questions to understand a specific stance, assumptions can be dangerous.

6. On the other hand if you are relying on key assumptions in making a point e.g. the price of a company, please state clearly the main facts you believe to be true including forecasts to allow yourself an escape route if circumstances change.

7. Be yourself which in my case means never bluffing.

8. Don’t try to be smart e.g. with respect it is clear from your spreadsheets presented that there is a flaw in your numbers.

9. Watch body language very carefully especially of the people not talking.

10. Difficult issues should be put to one side to keep the momentum moving forward.

11. Use time outs sparingly but effectively to gather your thoughts and garner input from the team.

12. On big points please believe in what you say. It will show.

13. If advisers are involved it is highly recommended that on really big points you deploy the “Principals Only” tactic. e.g. the acquirer and the seller excuse themselves to retreat to a separate room to agree a deal on that key point.

14. The word “help” is underutilized. As in, perhaps you could help me understand how you win the majority of your business.

15. Rudeness and sarcasm don’t work even if you’re British.

16. Document agreements along the way and make great theatre of the volume of points agreed.

17. Close on clear next steps with a timetable and agree action for non-compliance.

Strategies to Acquire World Class Talent

One of the key drivers of shareholder value is the quality of second tier management. Buyers of companies, sponsors of IPOs, and PE & VC companies invest in products, people and markets..... but especially people! As a recent WSJ article put it so well, investing in great talent (as opposed to one superstar) assists in four key areas:

• the creation of knowledge, sources of information.
• insightful and honest feedback.
• provides a critical link to clients.
• allows senior management to shine.

Practiced acquirers don’t have a warehouse of post acquisition specialists that run the acquired target for the next 5 years! They need a plentiful supply of world class and effective talent.

Now is an unusually attractive time for small and medium sized companies to acquire this talent. It’s more available and at a better price than at any time in the past twenty years!

The key is to think proactively. Ideas worth considering include:

• Employer branding; a recent WSJ article highlighted using segmentation techniques to find the talent you need.
• Discard job specifications and instead create “performance profiles” that set out the various roles that the business needs to see being performed well. Many of these profiles will describe roles in say, “social media measurement”, which are badly done today.
• Review new ideas from HR specialists like Dr John Sullivan. His web site is packed with great strategies on acquiring talent.
• Build a tight and meaningful relationship with an outside recruitment house.
• Deploy state of the art technology to control your recruitment process.
• Educate all staff on your compelling story, turning it into an evangelistic message. Passion is infectious to prospective candidates.
• Attract similar passionate people to you, by publicizing your culture, Google, Pixar, Apple and smaller private companies such as MathWorks come to mind.
• Create a University concept. Teamstudio, a small successful software company, was able to create an identical induction experience for new staff covering their first 6 weeks whether they were joining the US, EMEA or APAC offices.
• Encourage the execution of projects by the use of multi-disciplinary teams cutting through old fashioned silo departments. Then advertise this approach to prospective candidates. You are competing for the best talent in the marketplace. Attractive training and job experience are often higher priorities than marginally better salaries.
• Create innovative, clear and precise long-term incentive plans. In private companies, subject to tax advice, it is possible to create really smart capital instruments that return lower rewards if someone leaves but offer attractive returns on achievement of strategic goals. Public companies should look beyond share options to offer a more direct and granular reward for second tier management.

The acquisition and retention of great talent should be high on the list of any CEO’s agenda. Next to positioning, it’s the one thing that makes a material impact on shareholder value.

Best Industries in Recession - Inc.com suggestions

Those clever guys at Inc.com pushed out a great little thought provoking piece titled
The Best Industries for Starting a Business Right Now.

So I thought it would be useful to list them and offer a few comments:

#1 Candy - industry grew 3.7% - think niche and value, be remarkable

#2 iPhone Apps - 30,000 apps to date - keep the day job, 95% of these apps will not make money for the developer

#3 Health-Care Technology - $19Bn pledged in the stimulus bill for health-information tracking systems - Great part of the software space, but be clear on your business result and the customer you are trying to impress

#4 Beer, wine wholesale - export of American whiskey grew 8% last year - stay close to the value argument, still very price sensitive

#5 Software as a Service - software as a sector expected to grow at around 5% but SaaS potentially at much higher levels - the on demand, subscription model is very compelling for buyers but vendors need to be crystal clear on their business model

#6 Home Health Care - demographics on your side -the key is choosing a niche you can dominate

#7 Yoga Products & Services - staggering to think Americans spent $5.7Bn on yoga stuff in 2008 - think about what has not been done in this industry

#8 Technical & Trade Schools - plenty of potential candidates - think about repeat business and revenue model carefully

#9 Fast- Casual Dining - Panera Bread grew 16% last year - see my twitter ref to food trucks

#10 Green Construction -green building space taking off - perhaps a good time to train your staff on the issues affecting this sector to get ahead of the curve

#11 Niche Consulting - saving money, pr damage control mentioned - it will take much longer than you think to build a brand - allow 9 months for your first client

#12 Education Technology - US still emerging market - great opportunities for hardware and software but again you will need to be remarkable and niche to stand out

#13 Temp Staffing Firms - in theory yes - but in practice, we need to be much closer to recovery to see this industry pick up - long term the trend of senior temp execs will be big in the US like Europe

#14 Government Services - Huge growth stats being thrown off this sector - invest in quality RFP and documentation preparers

#15 Accounting Services - cash flow management driving growth - great opportunity for regional practices to steal market share. The public are very cynical of the big brands

#16 Repair Services - if it's worth repairing why buy a new one -quality of service will separate the winners from the losers

#17 Self Improvement - historically seen strong growth - pricing of these products and services will be key, need to show remarkable value

#18 Energy - fastest growing sector of the Inc 500 -watch the divergence between investor appetite and entrepreneurial passion, bootstrap for as long as you can

Good luck!

How VCs Price Deals

At some point in your career you may encounter the VC or PE world (see helpful list). You might: sell a non-core subsidiary to them, use their funds to start a company, use their money to buy a company, or buy out your partners, or even take a company private from the public markets. Whatever the transaction, their pricing model seldom varies.
The VC needs to value the business before their money goes in and of course on exit. Depending on their perceived risk they will be shooting for an Internal Rate of Return (IRR) of 40% to 60% or in plain English they expect their money to produce a compound annualized rate of return of vast proportions. Now many of their deals will not work out so they need to aim high. In two tables below I have summarized a fictitious example based on many deals completed.

The target company is purchased for $16m using valuation methods described in my previous Briefing Paper #4, let’s assume this time it’s based on an EBITDA multiple of 8 on $2m. It is assumed to exit in 2014 for an EBITDA multiple of 10 on $6m EBITDA. The VC exits the deals owning 65% of the equity. The VC expects to achieve an IRR of 47.85%.

How far can my sales drop?

I thought my entrepreneurial friends might find it helpful to review the look-up table above, which tells you - the maximum reduction in sales before you lose money:

First identify your company on the table by your Gross Margin and your Net Margin (after fixed costs) e.g. say you make 80% Gross Margin and 15% Net Margin, on an annualized basis, your sales could drop 18.75% and you would still breakeven. Proof, Sales are say $50m, reduced to $40.525m, GM now $32.5m, FC were $32.5m, still breaking even. It basically shows you that in high fixed costs businesses you can't afford to lose too many sales or of course you need to cut that breakeven-point down to size!

I find it's always useful to understand just how sensitive your business is to fluctuations in sales. This is especially true of software businesses where high operational gearing means that once you've set up your infrastructure you can really scale quickly and turn in some great margins.

XPO New England - Compelling Stories & the Dip

I had the pleasure of addressing some smart people at the first New England XPO on Compelling Stories and building remarkable businesses. Here is a version of my speech:

Growing a private company is about being the best in the world at something. It's about defining and dominating your unique market, your micro-market, your sliver of the world.

It's about Positioning & Performance. Today's business climate has one upside, there is more time to focus on choosing who you want to be. To be the best in the world. You see the best, the number one gets an unfair share of the spoils, eg vanilla ice cream, Google, number one selling CD, the fastest man in the world. Often second is not close in terms of reward. Being competitive I love running the 800m on the track. It is a hobby but one I like to do with passion. My goal this year is to produce the fastest time in the world for a 50 year old at that event. I've started well with my first race pushing me to #1 in the US. I've carefully chosen a specific event, trained for it every day at 6am and on race day I compete well knowing I'm ready.

Companies need to do the same. Are they going to be remarkable or invisible? Here is the good news - management get to choose. You get to tell your compelling story. Cirque du Soleil, Pixar, Apple, all got to choose what they could be the best at. All defined their unique market.

You see management follow the pyramid principal but they have it upside down. The pointy bit is at the bottom, that's execution and performance. Often this is done in a simplistic, naive manner and the top of their pyramid is long and flat, that's their over-complicated strategy. As we know the pyramid is pointy at the top, that's the myopic, focused strategy of who you are and what you do. The bottom is long and flat representing the multi-tasks and multi facets of execution.

In building your compelling story think about the following questions:

Why you are remarkable?
How you will make money?
Why is your team effective?
Where do you fit in the landscape?

It pays to be a contrarian thinker; Paul Fireman, the founder of Reebok is investing in a high end designer jean's business. VF Corp is rolling out more stores not less. As Borders struggles, Barnes & Noble is acquiring fast moving e-book retailers.

But strategy is what you leave out. It's easier writing a long report than a short one page executive summary. Entrepreneurs get restless. They can't get through the Dip, push past the boredom and the pain, hanging in past logic. It's about taking things out and pushing on with being really remarkable at one thing. E Bay are retreating from competing across the board with Amazon, Tiffanys are closing pearl jewellery stores to stick with their knitting. ING announced in April a $10bn divestment plan to simply their business. Simply and focus. Think Google home page v Yahoo.

You see Positioning, nailing that compelling story drives everything.

Think marketing - social media, blogs, facebook, twitter are all geared up to bring you qualified leads. But you have to be crystal clear who you are.
Think sales scripts - sales processes like Sandler or Jeff Thull books give great frameworks and words to use but they need a starting point, they need a compelling story to spread. You need to be clear on the business result you will achieve for your clients.
Think Product Road Maps - Apple have created amazing products and an amazing eco-system for apps for the i-phone but they've done it with a strong compelling identity.
Even recruitment, the acquisition of world class talents needs an evangelistic message to attract the best.
It's about choosing a space where competition is light or bringing to the market a fresh story that will disrupt the old guard. eg a potential competitor to Google called WolframAlpha

In summary, find your story, describe the business result you will achieve for your prospects and go build a remarkable business.

Stress Tests for Private Companies

Much publicity has been given to the stress tests handed down by the Supervisory Capital Assessment Program and applied to the Banking Industry. These tests are designed amongst other things to ensure banks have sufficient capital reserves to trade safely. What about the rest of the population? What stress tests would you apply to private companies to ensure they have a healthy, robust, sustainable future?
Here are a few:

#1: Cash Balances are fit for purpose.
Gold Standard: Under all reasonable future rolling 12 month sales forecasts, your cash flow can pay for your cost base over that period.
Comment: You need to think like a start up, take a very cynical view of sales lead times.

#2: Your compelling story defines your unique market.
Gold Standard: Your positioning in the marketplace articulates how you will dominate your unique market and the business result you will achieve for clients.
Comment: You embrace the phrase, companies are either invisible or remarkable.

#3: Drive passion, talk the walk.
Gold Standard: Staff need to be educated about your compelling story, inspire with your vision but remember to lead with action.
Comment: Executives need to spell out their message in a laconic (terse to the point of being rude) with clear expectations from staff.

#4: Recruitment of quality world class staff is a constant process not an event.
Gold Standard: You are constantly interviewing people, looking to upgrade staff and build a stronger team.
Comment: Think virtual bench, constantly in recruitment mode even during times of hiring freezes!

#5: Product & Service Innovation never stops.
Gold Standard: Think simplicity, clear out products that suck up resources and generate low margins, constantly create new relevant features for the winners and consider holes in your unique market worth filling.
Comment: Surprisingly, large corporations have not turned off R&D but in fact many show increased ratios, R&D as % of sales.

#6: Dependency is dangerous.
Gold Standard: Largest customers account for less than 10% of sales.
Comment: Use dependency in the short term to build cash but aggressively seek new enterprise deals to avoid being trapped.

#7: Private Company growth should be double digit.
Gold Standard: Smaller private companies (sub $100m sales) should be shooting for 10 to 15% growth despite the recession. (some are achieving 70%)
Comment: If you believe you have defined your unique market you need to be ambitious on growth

Scenario Planning

Over the last few weeks it's funny how certain phrases start to rise to the top of the noise.Three phrases have jumped out at me, economic recovery, behavioural economics and scenario planning. In one sense it's not suprising, we all want to know the future is better, it has to be!
Economic recovery appeared in Google search results 6,991 times in January, 7831 times in February and in the first week in May - 24,443 times. Another two I predict will gather momentum as well - Behavioural Economics and Scenario Planning. The new book Animal Spirits will propel behavioural economics into the spotlight arguing that our ideas and feelings about the economy embodied in our "sentiment" drives economic growth. But it's the last phrase Scenario Planning that is having a renaissance. I was involved in two major exercises in the 80s with Thomson and in the 90s with Shell building stronger businesses using this technique. For the un-initiated, the technique involves building a detailed picture of several possible future worlds in which your company will play in! It is not a prediction of the future. That would be to miss the point. It is a set of stress tests to determine what gaps , skills, products, resources exist in the current business to make it more robust going forward.
e.g. in the Thomson example the result of the exercise demonstrated how badly prepared we were for an advertising slump and what we needed to do to lessen our dependencies. Several years later, the advertising slump came but we had already sold the division for a premium price by then!
Small and large companies would benefit greatly in this current marketplace from using Scenario Planning to deliver revised policies for their businesses that are comprehensive, rigorous, forward looking and highly collaborative.

Positioning & Performance

There was a great piece by Robert Weisman in the Sunday Globe yesterday highlighting some lessons learned from the last recession. It described how Akamai Technologies realized that e-commerce would grow as traditional companies migrated online as opposed to chasing down new web companies that were disappearing every week. Thermo Fisher Scientific refocused on scientific instruments and sold off activities non-core to that new vision. Staples closed non performing stores but opened new stores in faster growing markets.
Recessions require a myopic focus on cash in the first 100 days but then it should be about positioning and performance. The next few years will reward companies large and small who take the baggage, the padding out of their strategy. You need to figure out what you can be great at and then execute your strategy with passion and skillful delivery. Most companies have an overly complex strategy and a naive simplistic approach to execution. It's the other way round. Simple strategy but a clever, measured, multifaceted execution.

Can we learn from Bloomberg?

Over the last few years Bloomberg has been investing in content from a number of suppliers, Agence France Presse, Xinhua News Agency and it will soon announce a tie up with Associated Press. All designed to enhance the value sitting at a Bloomberg terminal. It will bring breaking news from around the globe, sophisticated filters to present it to users the way users want it, and a searchable archive to add historical content.

As Tom Secunda, who helped found the company 27 years ago, says, investment in news content is vital to persuade customers to keep paying $1590 a month for its service. "Our goal is to increase the value of Bloomberg dramatically more than the cost of Bloomberg".

So looking at your own business within your unique market - are you looking through the end of the user's lens? Do you really understand how your product is deployed at the sharp end?
Do you know how your users are thinking in the current climate? Are you aware of their changing needs? Don't think price reduction, think higher value.

If you look at every employee role currently being done. Do they all relate to tasks that are needed today? If you had to start the business from scratch tomorrow would you staff it differently? Could you redesign a number of roles within your staff to add more value to the customer and perhaps drop the number of bodies performing a lower priority function?

This is a time for reinventing how to serve the needs of your precious existing customers and as you excel, you will attract great new customers who want to be serviced the same way!

Dependency - The Paradox of Growth

Almost all businesses from time to time, somewhere on their growth curve, hit the dependency issue. Over dependent on a large customer, on a large supplier, on a market segment or on a government contract or on a technology platform.

In the UK many clothing related companies in the late 90s had become dependent on Marks & Spencer for survival, Daks Simpson, William Baird, Courtaulds Textiles. When Marks & Spencers axed these suppliers, the pain was high and in some instances terminal.

Anchor in Canada has sales of around $129m and is dependent on the automotive industry. Approximately 85% of its sales were tied to that sector and now its down to 70%. It has taken 5 years to drop 15%. It now supplies the wind turbine industry, medical, mining, and construction sectors. Evidence suggests that many didn't make the switch to non-automotive sectors in time, perhaps up to 60 suppliers have gone bust in recent times.

Britain's naval shipbuilders and designers are looking to diversify into other markets and target international opportunities in perhaps army and air force sectors around the globe. As the CEO of the JV between BAE Systems and VT Group said last June, we need to reduce our dependency on a single customer!

Equally dangerous is the reliance on one key supply chain. In regulated industries, approvals of new suppliers can take months further putting pressure on the one supplier model.
Insurers such as Zurich Financial Services are starting to offer insurance against disruption of the supply chain.

Even large successful companies can fall into a reliance trap. Thomson's acquisition in April 2008 of Reuters diluted down the dependence on Wall Street and the City by bringing in strong tax, legal and scientific databases. However Wall Street and the City still account for 60% of sales and around 50% of profits.

Owners of private companies need to understand the massive long term impact of these dependencies. That large order is great for cash flow but there is downside unless key strategies are deployed. Left unchecked, it is easy to let that one customer dominate your sales line for the next 5 years. Your culture, your identity and your margins are then shaped by the actions of that one large customer.

Use dependencies to grow your business quickly. Use large customers as testimonial, showcase sites to help you win further landmark clients. Let key supplier relationships create stability to allow you to put in place more strategic supplier partnerships.

Learn from your dependencies quickly and build a more diverse, sustainable business using these special relationships as a springboard for more success.

Do you know why you are successful?

In Malcolm Gladwell's latest book, Outliers, he poses the question, do we really understand why we are successful? Counter-intuitive propositions are often the hallmark of truly insightful observations. Take his example from Canadian hockey. Many of the most successful 18 year old Canadian ice hockey players were not only very skillful, they were really big nine and ten year olds. Because the age cut off for boys ice hockey is Jan 1st, then any kid with a birthday in January to March has a huge advantage to look good or at least dominate physically.
They are then selected for the rep squad, they get more games, better coaching etc etc. By the time they are 18 they have lived and breathed ice hockey their whole life! Same goes for baseball with a July 31st cut off. Other fascinating examples include the Beatles and Bill Gates.

The Beatles were an amazing band but it did them no harm that between 1960 and 1962 they played Hamburg gigs, off and on for 270 nights. By the time they had a burst of success in 1964 they had played an estimated 1200 times!

Bill Gates is a genius but Lakeside School where he attended as an eighth grader had a computer club with access to a mainframe computer in downtown Seattle. This was 1968 and for the next 5 years Gates racked up an extraordinary amount of time on the terminal!

We must be careful when analysing our successes. Do leadership teams really understand what makes their business tick? Are our accounts departments really generating all the real time key performance indicators we need.

Remember this, there are only two reasons that a financial number moves. Only two. Volume and yield. As you try to understand the stories behind your business, the reasons for failure and success - make sure you start with the obvious big volume and yield reasons or you might jump to the wrong conclusions!

Time To Be a Contrarian Thinker

So the recession is hurting, you've attacked costs, you've polished up your sales scripts and you still feel in trouble and in need of inspiration. The next five years will be an unusually attractive time to build a business! Enter a collection of contrarian views.

VF Corp, the world’s largest apparel maker by revenue, is continuing to add new retail stores and plans to snap up new brands.

Ticketmaster and Tickets.com are launching services to let customers buy tickets directly from their mobile phones.

Liquor giants are rolling out pre-mixed products to entice recession-weary Americans to serve more cocktails at home.

Valeant, a small Orange County, California drug maker is cutting its R&D budget by 50% to allow it to buy companies and execute licensing deals.

Paul Fireman, the man who founded Reebok, is in talks to invest $33m in a small LA based company, that makes $175 designer jeans.

In late January, as the US banking system was in turmoil, a tiny Hanover Community Bank on Long Island opened for business.

Wal-Mart is re-launching its Great Value Brand to establish an even stronger grip on the private label segment of the market.

As Borders struggles to cope with the recession, Barnes & Noble buys Top E-Book Retailer.

What unique market are you going to define and dominate over the next 5 years using contrarian thinking?

Positioning - Cherchez le creneaux

I've just read the classic book on positioning by Al Ries and Jack Trout, Positioning: The Battle for your Mind. It is amazing to think that this was published in 1981. The 20th anniversary edition, 2001, has great new commentary from the authors. The key message of the book is the concept of finding the hole in the mind of your prospect or as the French say, Cherchez le creneaux. I believe recessions expose weak positioning. Downtimes really test your compelling story. The book highlights the importance of defining and dominating your unique market. Management teams today, desperately need to revisit the notional hole they are filling!

IBM didn't invent the computer. Sperry-Rand did. But IBM was the first company to build a computer position in the mind of the prospect. Michelob wasn't the first high-priced beer to get inside the beer-drinker's mind Heineken was. Michelob's strategy? Define yourself as the first high priced imported beer. Of course positioning requires years of reinforcement which in the author's view stopped happening at Michelob.

However the mind has no room for what's new and different unless it's related to the old eg the first car was called the horseless carriage, cleaner gas was called lead-free gas. So it's not just about nailing your category, it's also about positioning yourself against the existing players. Prospects need geography.

When I tell people that my hobby is competitive masters athletics, they say oh, do you do marathons! So I have to explain my events of 400m and 800m relative to marathons.

Even my new business, The Portfolio Partnership, only makes sense when I relate it to something people understand e.g. I prepare companies over a 5 year period to ensure they achieve huge premiums when Investments Banks sell them.

There are so many great examples in this book of repositioning strategies to drive growth in these tight economic times. We all need inspiration to find our niche, our reason to exist, so perhaps this book can inspire you to articulate a new compelling story.

Repositioning: Why IBM is buying Sun

Executing on positioning, establishing your unique identity is never easy however a well timed acquisition can hit the spot. Here are seven reasons why IBM might buy Sun:

Timing; Market value of Sun at the peak was $205 billion, purchase price today, around $8 billion.
Customer dollars; IBM gains higher market share in key sectors, government, telecoms, financial services.
New trends; IBM covers Cisco’s move into the server market and builds it’s own capacity to remain a dominant player in the fast emerging Cloud Computing Market (renting of software over the web in a SaaS model)
Services boost; IBM have the potential to do a Red Hat/Linux business model by applying IBM’s global service team to add value to Sun’s free software platforms.
Middleware Sales; Boosted by cross-selling to the new hardware customers it acquires.
Hardware business; Overnight it improves the economies of scale of its own struggling hardware business.
Competitive edge; Deal helps in the battle against Microsoft and Oracle in their relevant competitive segments.

Why Positioning Drives Growth

Firstly no one can argue with the proposition that cash stability for any business is essential. Cash losses need to be stopped. However it is vital that management quickly define their unique space. Stuck in the middle of the envelope with no clear definition of who you are is risky not safe. Carbonite are growing very fast because they have defined a clear identity in prospects heads. Automatic efficient back up of your hard drives - because your life is on your computer. The web, blogs, all social networks cry out for tags to describe yourself. The whole search engine industry is saying -- please define yourself very carefully because we can then send lots of pre-qualified prospects your way.

EBay, Pacific Sunwear, Abercrombie, American Eagle, News Corp, Sara Lee all announced repositioning actions last week. Defining your unique market allows you to consider strategies to dominate it. Play by your rules. Why play by a competitor's set of rules? Sales and marketing campaigns, speeches, white papers are all so much easier to execute when you know who you are! The acquisition of new talent and the motivation of existing talent is certainly easier with a clear compelling story. Product road maps have a driving vision. Best of all, sales conversations have greater traction.

The most compelling sales conversations that create action in a prospects head (yes even in this economy) are those that address one clear thing -- improved performance of your prospect's business. Think of it as your client's client. How will your product allow your client to perform better for their client. To even begin to think with that level of clarity requires management to define who they are. Of course when sales start to get traction please reinforce again and again who you are.

The next five years are a great opportunity for companies to stake out their unique market, claim their space and work tirelessly to open huge gaps on the competition and emerge out of this recession, a world class, high growth, remarkable business.

Biotech Companies - Potential solution

Recent articles in the WSJ and FT have turned the spotlight on an interesting set of issues for the drug industry and the world of public biotech companies.

Firstly the FT states, facing an estimated drop of $100bn in sales in the next five years as block-buster patents expire and drug pipelines come under threat from generic rivals means big pharma has little choice but to consolidate. But as the WSJ points out megadeals haven't cured the problem in the past.Pfizer paid $116 billion for Warner-Lambert in 2000 and an additional $54 billion for Pharmacia in 2003, yet still needed to acquire Wyeth this year to help replenish an anemic pipeline.

Enter the other issue,180, or 45% of public biotech companies have less than a year of cash on their balance sheet according to BIO, based in Washington.

Are smaller acquisitions the answer? Perhaps, however small acquisitions of biotechs have downsides - little opportunity for cost savings and founders and scientists might leave,basically the cultural fit is tricky.

There is a solution! These types of situations are exactly what earn out deals are very good at handling. A fair price is paid today to own the small biotech but the business is kept separate, with a clear, easily understood earnout formula wrapped around future sales success. Seller management get some reward on the way up but are highly incentivized to hang around and execute their dream. Alternatively a minority stake could be purchased with put & call options around the remaining shares based on a similar formula to the earn-out. Both achieve similar results, the difference is mainly psychological for sellers. In earn-outs you sell 100% of the company on day one. Just a thought.

Barnes & Noble Buys Top E-Book Retailer

I read today's article in the WSJ on Barnes & Noble's latest acquisition with great interest. Let me share with you my observations in bold and how it relates to Repositioning & Corporate Development.
Barnes & Noble purchased Fictionwise for $15.7 million - seems a reasonable price to take out a leading player in one of the fastest growing publishing categories.
Amid the industry downturn Borders on Thursday said it is laying off 742 employees -
i.e. not only is Barnes & Noble acquiring a high growth niche, one of its competitors is going in a different direction.
The vendors decided to sell because "the business is exploding and we needed to partner with a corporation that could provide us with necessary firepower" - Brilliant, it makes the buyer look great, it makes the seller look great and it's a credible reason for selling, brilliant compelling story.
and there's more.................
Fictionwise will operate as an independent subsidiary -
think of the seller's staff reading this, great motivating point
Barnes & Noble even admit they got it wrong first time - in September 2003 they closed the online arm down because of lack of public interest - again brilliant honesty
And just to ram home the economics of online books - the article highlights customers are able to download best sellers for $9.99 compared to $25 in the bookstores.

Lesson: audit the signals of your marketplace and continually check that your positioning and business models are still relevant.

Due Diligence

Why are we so bad at due diligence? Investment Funds, college choices, overpriced houses, buying companies. We just don't seem to have the ability to look beyond the emotion and pressure of the transaction, the event, the decision to buy, and ask some pretty basic questions. Here is a tip that works for most buying decisions. Whatever the event is, whether its choosing a college (helping your kid make the correct decision) or buying a company -- think about the first 100 days after the decision is made. Imagine that life post decision, in tiny details. How many acquirers really focus their due diligence around how they will run that company under their ownership. I mean a very detailed post acquisition plan, operational area by area, person by person. Until acquirers get better at post acquisition planning, due diligence will continue to be done badly. Until we force ourselves to imagine the implications of these material decisions in our lives, we will continue to make bad choices and the consequences are unreasonably important.

The Tipping Point Revisited

I've just finished re-reading the Tipping Point by Malcolm Gladwell.(the new book Outliers will be covered in a later blog) There is so much in this book to inspire entrepreneurs to think outside the box. The central thesis is that epidemics happen because they tip. They potter along, (Airwalk shoes, crime rates, Sesame Street, Winston cigarettes, suicide rates, hush puppies) at a pedestrian rate and then bang something changes and the volume (sales, viewing figures, crime rates) takes off. This book examines three reasons: Stickiness, the need for a compelling story, Contagiousness, why the messenger is unreasonably important and finally the importance of Context, how human beings are ultra sensitive to their environment.

Read it and let it inspire you to improve your compelling story, to gain traction, to reposition your company and build a remarkable business.