How to make your recurring revenues oil and not glue

Some types of businesses generate more and more recurring revenues over time, often growing to a size where recurring revenues pay all of the overhead of the company – an enviable position.

There is a phenomenon I have observed time after time with mature companies receiving Raising moneyover 75% of their revenues from recurring sources.  Management undertakes a simple exercise of calculating the increased profitability of shutting down all R&D, sales and subordinate operations, and universally notes with shock the high net profit that results – from shutting down all operations except customer service to recurring customers (as in software support operations.)

Depending upon the type of business, customers are loyal often because they are creatures of habit, enjoying the existing relationship and service, not wanting to disrupt a working resource.  In fact, I am involved with one such company whose customer base extends back to the 1980’s when first purchasing their systems, still paying a regular quarterly maintenance fee to a company that services them well, but has no remaining sales staff or R&D functions. The customers are happy and the company profitable.  What’s not to like?

[Email readers, continue here…] Well, there are two problems here. The company dooms itself to a slow death over the passage of time as customers desert to newer products.  So the decision to “go into maintenance mode” is known as “milking the cash cow” for a reason.  And second, there is no excitement in such a company to retain employees looking for advancement.  Employees who leave are replaced with people who are likely not “A” players, often causing future levels of customer service to decline.

And yet, there are many companies where the cost of product renewal and R&D are just too high to keep up with competition.  Companies in this predicament often can be sold for their recurring revenue stream, but the multiples they command are not high.  In such a case, milking the cash cow may well be the best decision for management rather than selling the company.

Recurring revenues are oil for companies growing, reinvesting in R&D and expanded sales efforts. Those same revenues are glue to those choosing the alternative route of milking the cash cow.  In those cases, they are attractive slow, sticky streams of glue, slowing a company until it ultimately dies of old age.

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How to plan to make a successful acquisition

One of my company CEO’s recently described his rule for acquisition success, and it resonated with me as a great goal for planning during acquisition exercises.  This CEO states that he has made it work twice when acquiring companies, and that is enough for him to make it his rule for all future acquisitions.

If the target company is able to show a ten percent EBITDA (earnings before interest, tax, acquisitionsdepreciation and amortization), then the acquisition team should be able to create a way to make the resulting acquisition yield forty percent EBITDA after re–engineering the combined entity.

That’s quite a goal to achieve.  But there are obvious and not–so obvious ways to make it happen, even if over time.

Dual layers of senior management remain only during the transition period and transfer of institutional knowledge from acquired to acquirer.  The best performers from the acquired become candidates to outrank or replace their counterparts, showing that a business combination is not all one–sided.

[Email readers, continue here…] Accounting and HR operations are combined as quickly as possible, as are customer service call centers, retaining specific product skills on the front line from the acquired company.  R&D efforts may remain separate for a period or forever, but R&D management is consolidated as soon as possible to avoid territorial disputes and retention of inefficient development processes.

Sales organizations may or may not be combined, but senior sales management is consolidated so that commissioning, territorial management and product management functions all harmonize.

Facilities may become redundant or oversized after these efforts, allowing for consolidation of facilities as well.

If we follow the reasoning of our CEO who proposed the rule, we can drop an additional 30% of the net revenues (after cost of sales) from the acquired company to the bottom line.  Not a bad goal, and certainly not a bad result.

Posted in Growth!, Protecting the business | 1 Comment

How to think like a growth CEO

Growth CEO’s differ from those who merely station–keep their way into the status quo, protecting the enterprise by reducing risk and cost – without creating a vision and action plan for growth.

Here is a way to test yourself with a tool useful for any leader seeking to create positive ceo1change. Authors Jeanne Liedtka and Tim Oglivie have created a framework for creation of a new product or service – one worth spending at least a cycle of time for review.  From their book, “Designing for Growth,” they iterate a four question matrix, each with steps for creation through launch.  We’ll use this loosely to frame our process.

What is?  What is the problem, the marketplace, the value added?  What is the urgent need, the reason people will pay, the positive effect upon the enterprise by making this happen?

What if?  What if we could do it better, do it in a new way, do it to attract new customers, do it to distance ourselves form the competition?

What wows?  Can we rapid prototype this idea into a product and try it out on potential customers?  Would it wow them to action or anticipation?  Are we missing something those customers think they need, or want so badly they will wait and later pay? Then let’s design it so it will wow.

[Email readers, continue here…]  What works?  Do we need to co–create this with a “teacher–customer?” Can we launch this with a limited audience to see if it works as expected?  And if the response is less than we expected, what can we do differently?  Should we start the “what” cycle again to refine the concept?

There is a word for the initiation of this process, used successfully by the best CEOs and the best companies: “ideation.”  The word encompasses the entire design process from conception to prototype and sometimes beyond.

The Stanford Design School teaches ideation as a five step process, fitting nicely into the four questions above.

Empathize –learn about the audience for whom you are designing.   Define – construct a point of view based upon the user’s needs and insights.   Ideate – brainstorm creative solutions.   Prototype – build a representation of one or more of the ideas to show to others.  And test – return to your original user group for feedback.  Two ways to think like a CEO.  And easy to instigate.

You’ve just got to remember to discipline yourself to follow the process.  The rewards will surely follow.

Posted in Growth!, Surrounding yourself with talent | Leave a comment

Five ways we are surviving long term

Dave’s note: This week we invite long-time CEO of Quicksilver Software to respond to our question: “How have you remained relevant in the gaming software business over so many years?” He and his company have worked in the video game business since the very earliest generation of games in the early 1980’s.  His company is one of the oldest independent studios in the business.  Bill’s response is valuable for all of us…

By William Fisher

I think the number one factor in my endurance is building strong relationships with members of my team, so that they are supportive when things go badly, as they sometimes do in this business. I’ve gotten into a bit of a hole in the past few years because of the bus-survivalslowdown, but always tried to bend over backward to help people out and treat them as well as possible. Even when they feel they have to leave, they always tell me that their time working for me has been very positive. I develop people, and they know/appreciate that. I support them in moving on. We have a large alumni base now, some of whom bring me work now that they’re in positions of strength at other companies.

The second factor is that we deliver. In a business that’s known for contractors who perform poorly or completely collapse, we have a very solid track record. Not perfect –– there’s always the one situation where something went awry –– but for us those are few and far between. I think that comes from our ability to truly understand the problem and to propose technically realistic solutions. I get a lot of calls from people who say “I worked with you X years ago and it was great, so I want to do that again.” Recently visited one Fortune 500 company, for example, because our producer on a previous product was very happy with us and wanted her bosses to consider using our team. That’s a big win.

[Email readers, continue here…]  Third is flexibility. I once tried to focus on a single type of business, on the advice of a business development guy. Huge mistake. When we were unable to get traction in that one business, we just about lost it all. We’re successful because we specialize in “hard problems” but not in any one vertical market. It turns out that that’s a good way for small, nimble companies to survive. Interestingly, we’ve won a number of deals by being the not–offshore alternative. Most people I know have had extremely bad experiences with offshore development. I’m working with a friend who’s got a Silicon Valley startup which made the mistake of hiring a Romanian development team. They’ve promised me founders stock in their company if I fish them out of the hole, which I’m well on my way to doing.

Fourth is embracing change. We know that the market changes every few years, and we’re always looking over the horizon at new technologies. Often, I can get clients to fund efforts to learn new tech because nobody else knows it, either, and we all need to learn it. Did that with iPhone/iPad, for example, which is now a big part of our business. Now we’re doing it again with various Web toolkits, since everything we do now has a heavy back–end component. I hire people who are eager to do new things and work hard not to become obsolete.

Fifth is having a solid ability to understand client needs. Most of the time in meetings, potential customers come away with the impression that I really understand their requirements. When trying to sell your skills, that’s critical. I can do it because I’ve gotten good at drilling down below the surface and seeing the real problem that they’re trying to solve. Plus, I tend to enjoy learning about new subject matter. It’s fun to see what people are doing and to create novel solutions. We’re just starting a new project in the medical field, for example. We are uniquely effective at solving complex user interface issues, and that’s what they need more than anything else. Yet we also understand how to deal with patient privacy laws, which are critical possible points of failure.

Posted in Depending upon others, Finding your ideal niche, Hedging against downturns | Leave a comment

How to network like a ninja

Dave’s comment:  This week we welcome our perennial favorite contributor, Kim Shepherd, CEO of Decision Toolbox, to offer us her sage advice on a subject where she is expert.  Outgoing, full of creative ideas, and certainly the best person to teach us how, here is Kim on networking…

By Kim Shepherd 

Networking with others you want to meet is second nature to some, but it fills others with dread. For these people, a little structure can go a long way toward helping diminish the dread. After all, networking is much more than cocktail parties and trading business cards. Professionals who do it well can generate millions in revenue for their companies.

First, do your homework before attending an event. To find out who will be there, Google last year’s event to find pictures and articles. If it’s a fundraiser, the people who ninja-networkingwere there last year are likely to be there again this year. Charity events are also great because the organization’s board of directors will be well represented.

Now go to sites like LinkedIn and Facebook to find out more about the people you want to meet. What are their hobbies? Do they have children? Where did they go to college? As you commit the intel to memory, make sure you don’t mix things up. You probably don’t want to lead with, “How about those Trojans?” if the person is a Stanford grad.

[Email readers, continue here…]  Next, be fearless. If your first thought is “But I don’t know anyone,” stop and think: that’s not an excuse, it’s an opportunity. We’re afraid of what we don’t know, but the homework minimizes that fear. Once at the event, screw up your courage, walk right up to a prospect, and introduce yourself. Use your intel to warm up the conversation –– the ideal scenario is that you have something in common.

If you happen upon someone who wasn’t part of your homework, you have a fallback tactic: your smartphone. Get the person’s name, exchange pleasantries, and move on. You can circle back in a while. But before you do, check out that person online. You might be surprised –– maybe both of you have kids who play softball at the YMCA. Small world.

If you go with a colleague, you can tag team. True story, fake names: two executives, Jackie and Jeff, went to an event. Jackie wanted to connect with a particular entrepreneur, Carla, but couldn’t remember if she had met Carla before. Jeff definitely had NOT met her, so Jackie went to the restroom while Jeff introduced himself to Carla. After a few minutes Jeff rendezvoused with Jackie, gave her the 411, and Jackie was off to shake Carla’s hand.

Find the Octopus. There always are one or two people “holding court,” surrounded by eight people –– an octopus. When you connect with the octopus, you automatically connect with eight more people (at least). By the way, if for some reason it’s not appropriate to ask for a business card, be sure to record the person’s name, such as on your smartphone.

Follow up after the event. Congratulate yourself on overcoming those fears and making contacts, but you’re not done yet. The next day, enter those contacts in your CRM. Send them an invitation to connect on LinkedIn. Follow that with an InMail or email saying how nice it was to meet them.

So far we’ve been talking about people who are “newbies” to networking. However, if you’re already super–networker, you might consider taking it up a notch and becoming an über–networker. Put yourself out there as a subject matter expert and book some speaking engagements. The registration list for that engagement adds dozens to your network.

With a little planning, networking becomes easy. Keep at it, and in no time you’ll be networking like a ninja.

Posted in Surrounding yourself with talent | Leave a comment

Who cares about customer loyalty?

Repeat customers, raving fans, angry backlashers, commodity shoppers.  Oh boy, what a range of loyalty these represent.  And in your years, you may have experienced all of these.

Here’s another way to look at the ladder to an ideal customer loyalty relationship.  But customer-loyaltyfirst, let’s examine the three kinds of loyalty you don’t want to engender…

How about forced loyalty, if you happen to have a monopoly in your niche?  Customers hate this, especially when they have a complaint.  I am not suggesting that you create a competitor, only that if this is the case, you should find a way to exceed customer expectations greatly.  Often.

Loyalty by habit works, until it doesn’t.  Think of the supermarket you use regularly.  You know the layout well, are comfortable with the selection, and even recognize the checkers, sometimes by name.  That’s habit–shopping.  A competitor could find easy pickings here, with direct marketing to habit shoppers with coupons, special prices, and exciting promotions.  You don’t want your customers to buy strictly because you have become their “habit of comfort.”

[Email readers, continue here…]  Then, you can buy your customers, usually an expensive and very tenuous proposition.  Consider this attempt to be a bribe at best.   Your discount coupons, use of Groupon or other third party source, predatory pricing, or the high cost of ad word purchases is rarely sustainable.  Worse yet, customers attained through these sources are rarely loyal at all.

So how do we create real, emotional, easily measured loyalty?

We engage the customer at the time and place most appealing to that person. We under–promise and over–deliver – every time. We react positively to suggestions, reward their loyalty with recognition, and make this important cohort not just seem to be, but actually be the ideal example of our mission personified.

It takes work.

And the reward will surprise you.  Engaged customers spend more, generate higher margins, and become passionate influencers.  Free advertising. High margins.  What’s more to like?

Well, how about the satisfaction that – at least for some of our customers – we have achieved that lofty mission we set out to create way back when all this started.  And that has to be priceless.

Posted in Growth! | Leave a comment

How to be a dictator enforcing sales offer deadlines

Everyone who manages a company or its sales force wants to write as many new deals as possible, and is usually warry about doing anything that might threaten the positive outcome of a pending sale.

So, it is common practice to leave an offer containing a discount open, following up

Deadline stamp

Deadlines are an important sales tool.

periodically to attempt to nudge a prospect into signing.  But without a firm, meaningful deadline, many of these bid-in-hand prospects will want to shop around, or delay a “yes” for budgetary reasons, or just ignore the offer for the short run.

If a potential customer’s cash is tight, or if the relationship between the customer and sales rep is not close enough to move the customer to at least respond, then an offer can sit for months or longer with no acceptance.

[Email readers, continue here…] There is a proven way to cause enough discomfort to move a potential customer to act, but is carries a degree of risk.  Place a firm deadline upon any discount, and make it clear that the date is real, after which the discount will no longer be available.  Do so within the offer document and with a personal comment with delivery of the offer.

And plan to enforce this deadline, even at the peril of losing the deal.  Creating a line in the sand and sticking to it will assure that your prospect takes the discount seriously.   If the deadline expires and the potential customer finally acts, expecting the discount, a significant degree of sales power returns to you.  From a simple, “Well, we’ll extend it for a week” to “Our board is firm, and the best I can do now is (something less.)”

The most powerful tool you have in a sales environment is a deadline.  If your prospect continually misses a deadline for no good reason, you have an earlier reason than usual to reduce the percentage of close to near zero in your sales prospect system, and that is a good move in making sales forecasts more realistic, if nothing else.

Yes, it takes a little extra gut to pull the plug on an offer or discount.  Ask yourself: “How many long-open offers are actually accepted?”  You’ll have you answer and a tool to enforce change.

Posted in Positioning | Leave a comment

Rinse and repeat: revitalizing your business

Here’s a statement that you never thought would apply to your business planning.  Sometimes we get stuck in the muck with our marketing, product, management focus, and in keeping up with trends. It is natural for executives and entrepreneurs with lots on their plate and little extra time – to just keep up the same activities that have made the company a success.

But…

Isn’t this a good time to look again at these processes, refreshing those that work – and working on replacing or repairing those that don’t?  Keep on doing what works and grows rinse-repeatthe company (rinse and repeat) and actively work on the rest?

Customers feel better about a company always showing its innovation with new products and ideas to help increase customer revenues, decrease costs or better serve their customers.  Is it time to enhance, replace or invent toward achieving that set of goals?

[Email readers, continue here…] Employees love progress and excitement when involved in something refreshing and new.  Good ones tend to stay with the company longer. Everyone tends to give more effort when we refresh or revitalize.

The industry takes notice when you change up the same old marketing methods and message.  A company that uses the best and enhances or replaces the rest will be noticed and rewarded with increased revenues.

Rinse and repeat. What’s wrong with a thorough cleaning and then showing off a bit of innovation, even with older offerings?

Posted in Growth!, Surrounding yourself with talent | Leave a comment

After 20 years: Updating the Berkus Method of valuation

Well, it had to happen.  Originally created in the mid 1990’s to help with the imprecise problem of how to value early stage companies, especially those in technology, I developed what soon became known as “The Berkus Method” when published in the popular book, “Winning Angels” by Harvard’s Amis and Stevenson with my permission in 2001.  But a lot of time has passed since then.

There is a universal truth: fewer than one in a thousand start-ups meet or exceed their projected revenues in the periods planned.  So how do you use financial projections as valuation metrics when you know the odds of those being accurate predictors of the future are so very unreliable?

I thought then that the best way to value a start-up is to give value to those elements of progress by the entrepreneur or team that reduce risk of success.  It is the exact opposite of giving value to projected financial success, except for the hurdle which I use to filter out smaller opportunities.  I must believe that the candidate company, if successful, could achieve some level of gross revenue at the end of the fifth year in business.  Today, for me, that hurdle number is $20 million.

[Email readers, continue here…]  The Berkus Method assigns a number, a financial valuation, to each of four major elements of risk faced by all young companies – after crediting the entrepreneur some basic value for the quality and potential of the idea itself. Today, the method as explained, adds $500,000 in value for each of the following risk-reduction elements:

original_berkus_method

Note that these numbers are maximums that can be “earned” to form a valuation, allowing for a pre-revenue valuation of up to $2 million (or a post roll-out value of up to $2.5 million), but certainly also allowing the investor to put much lower values into each test, resulting in valuations well below that amount.

In 2005, Alan McCann created a graphic representation of the Method:

the_berkus_method

Note that Allan changed the title of the risks from technology-execution-market-production to investment-marketing-execution-development.  And he added the cohort responsible for each, a nice touch.  I should have done more about this subtle interpretation when first seeing this, and will attempt to make up for that now.

Because the Internet has such a long memory and documents from the distant past can be found with ease, a search the “The Berkus Method” today will yield any number of conflicting valuation criteria and element amounts culled from the many subsequent publications of the method over the ensuing years.

It has occurred to me lately that the original matrix is too restrictive, and should be a suggestion rather than a rigid form.  That is: a user of the Method should be able to list those risks that are most important to the target company and to the investor, and assign maximum values to each that are appropriate to the industry and to the times.

For example, $500,000 maximum value to each element yields either a maximum pre-money enterprise valuation of $$2 million or $2.5 million if all elements are “perfect” for a target in the eyes of the investor.  Yet, the current HALO Report from the Angel Capital Association containing average pre-money valuations for angel investors demonstrates that the US average, at least for the moment, is higher than this amount.  Valuations are higher in Silicon Valley, Silicon Beach, New York and the North Carolina corridor than in Oklahoma City, Kansas City or Miami.  The Method should allow for this.

The Method should be flexible enough for its users to negotiate or create a maximum valuation they are willing to accept in a perfect situation, and to assign risk elements that might be more important to them than those listed above.  For example, in Silicon Valley, a “big data” startup might competitively call for a $1.5 million maximum value per element, while the same startup in Nebraska might find $500,000 appropriate.  As for listed elements, a medical device startup might replace “marketing risk” with “FDA approvals risk.”

There is no question that start-up valuations must be kept at a low enough amount to allow for the extreme risk taken by the investor and to provide some opportunity for the investment to achieve a ten-times increase in value over its life.

Once a company is in revenues, the Method is no longer applicable, as most everyone will use actual revenues to project value over time.

The risk is that these options will make a very simple process two steps more complex, frustrating the original purpose of elegant simplicity. But hopefully, the relaxation of restrictions listed here will allow The Berkus Method to live into another generation, survive the effects of inflation, and address better the specific needs of niche market valuations.

Posted in Ignition! Starting up, Raising money | 4 Comments

How do you focus your team for action?

How do you get your team to focus and move forward effectively?  A fellow CEO recently told me of her method of assuring positive movement within her team.  She holds a weekly meeting of her direct reports, and asks them to find three important but actionable items for the group to work on if not complete during the following week.

She claims that, by reducing the number of issues to three, her team is better able to startegy+4_smbfdevote mental and physical resources to a solution than if she allowed her meetings to address a laundry list of issues faced by each of its members.

There is a theory about agile leadership that has been advanced by a number of business book authors, and this CEO’s method fits within that concept.  A group moves in a much more agile manner if it can be directed to focus all of its resources on just a few issues.

[Email readers, continue here…] She encourages her group to make fast, fact–based decisions on which alternatives to pursue, prioritizing their actions and those of their direct reports toward achievement of a goal or a solution quickly and efficiently.

We all can benefit from this lesson.  There are three kinds of agile focuses for such group meetings:

Market agility, in which potential opportunities are being created by changes in the market (such as cloud computing for technology companies);

Decision agility, where members generate creative alternatives to attack problems or opportunities quickly and innovatively; and

Execution agility, where members of the group inspire the organization to execute in a new direction and adjust course as events unfold.

The lesson is powerful but simple.  Keep your management meetings focused upon overcoming no more than three actionable problems or opportunities each week.  Delegate to empower those members to work in the most agile and effective manner.  Follow through with a check of progress to show support and interest.

Posted in Growth!, Surrounding yourself with talent | 2 Comments