Month: January 2014
I have been very fortunate throughout my career. There have been incredible opportunities, risks with big rewards, and lessons learned from mistakes and failure (e.g., one of the biggest lessons learned early is that most mistakes will not kill you, and therefore you can find a way to recover from them). In hindsight, I believe was has been most valuable in shaping my career are the people who saw something in me and invested in my career – my mentors.
None of these people had to help me. It’s possible that they did so for their own benefit (i.e., the better I do my job the easier it is for them), but I believe they were passing along a valuable gift. I was lucky have been given these gifts early in my career as they have been invaluable both personally and professionally.
As a mentee may not recognize either the value of what you are receiving, or the effort that has gone into providing that gift to you. It is only years later that you fully appreciate what others have done for you.
In my first programming job I had a manager (Jim) who assigned me to work with different key people and would follow-up every time to ask what I had learned. Then one day he gave me my first project. I was excited but anxious because I did not want to fail my mentor.
I only had six months of experience and this was a big project for an important automotive customer (Subaru, for the first customer loyalty coupon system for a major auto manufacturer in late 1980s). It was a stretch for me, and the system had to be production ready in six months.
He let me build it, checked daily to see if I had questions, would provide feedback and direction if I asked, but pretty much left me alone. He seemed much more calm and confident in my success than I did at the time.
After two months I thought I was finished. We reviewed everything and he picked the system apart – showing me the flaws and then discussing the logic and reasoning behind my decisions. We spent half a day on this exercise and it was only years later that I realized that he was helping me learn more than validating the system design.
After another two months or so we reviewed the second iteration of this system. He told me while this version would work and would be acceptable from anyone else, I still had time remaining and he was confident that I could do even better next time. He provided a couple of tips about high-level areas he focused on while designing and developing systems and left it at that.
When I came back with the third iteration system he reviewed it, smiled, and said that he could not have done this better himself. At first I was proud of successfully completing my first independent project, but later I realized how much I had learned in those six months. This experience had provided me with a lifelong benefit as well as provided the motivation to help others in a similar manner. My mentor was (and still is) a great leader!
As a manager this person had so many reasons not to give me the project, to just tell me what to do, and to not let me redo it (twice). From a short-term management perspective what he did was wasteful. But, from a big picture perspective he was doing things that helped me create so much more value for the company for the 3-4 years I continued to work there. The benefit certainly outweighed the cost, and this person was wise enough to see that.
Several years ago there was a young woman in Australia that contacted me via LinkedIn, asking for suggestions on improving her skills in order to advance her career. I gave her many assignments over the course of a year and she did amazing work. She advanced in her company, later relocated to another country, and then switched industries. She currently holds a high-level position and has been very successful. It made me feel good knowing that my efforts played a small part in her advancement.
From my perspective it all comes down to how you view people and relationships. Are they like commodities that are used and replaced as needed, or are they assets that can grow in value? I like to think that I have helped the “career portfolio” of several people – which helps ensure that business is not a zero sum game. Hopefully those people will do the same thing, creating leverage on those investments.
So, what do you think?
As an entrepreneur you will typically get advice like, “Fail fast and fail often.” I always found this somewhat amusing, similar to the saying, “It takes money to make money” (a lot of bad investments are made using that philosophy). Living this yourself is an amazing experience – especially when things turn out well. But as I have written about before, you learn as much from the good experiences as you do from the bad ones.
Innovating is tough. You need people who are always thinking of different and better ways of doing things, or who question why something has to be done or made a certain way. It takes confidence to ask questions that many would view as stupid (“Why would you do that, it’s always been done this way.”) But, when you have the right mix of people and culture, amazing things can and do happen, and it feels great.
Innovating also takes a willingness to lose time and money, with the hope of winning something big enough later to make it all worthwhile. This is where a lot of companies fall short because they lack the patience, budget, or appetite to fail. I personally believe that this is the reason why innovation often flows from small companies and small teams. For them, the prospect of doing something really cool or making a big impact is motivation enough to give something a try.
It takes a lot of discipline to follow a plan when a project appears to be failing, but it takes even more discipline to kill a project that has demonstrated real potential but isn’t meeting expectations. That was one of my first, and probably most important lessons learned in this area. Let me explain…
In 2000 we looked at franchising our “Consulting System” – processes, procedures, tools, metrics, etc. that had been developed and proven in my business. We believed that this approach could help average consultants deliver above average work products. The idea seemed to have real potential.
It took a lot of work finding an attorney who would even consider this idea. Most believed it would be impossible to proceduralize a somewhat ambiguous task like solving a business or technical problem. We finally found an attorney who, after a 2-hour no-cost interview, agreed to work with us. When I later asked him about his approach, he replied “I did not want to waste my [his] time or our money on a fool’s errand.”
We estimated it would take 12 months and cost approximately $100,000 to fully develop our consulting system. We met with potential prospects to validate the idea (it would have been illegal to pre-sell the system) and then got to work. Twelve months turned into 18, and the original $100K budget increased nearly 50%. All indications were positive and we felt very good about the success and business potential for this effort.
Then, the terror attacks occurred on Sept. 11th and businesses everywhere saw a decline. In early 2002 we reevaluated the project and felt that it could be completed within the next 6-8 months and would cost another $50K+.
After a long and emotional debate we decided to kill the project – not because we felt it would not work, but rather because there was less of a target market and now the payback period (time to value) would double or triple. This was one of the most difficult business decisions that I ever made.
A big lesson learned from this experience was that our approach needed to be more analytical.
- From that point forward we created a budget for “time off” (we bought our own time, as opposed to waiting for bench time) and for other project related items.
- We developed a simple system for collecting and tracking ideas and feedback. When an idea felt right we would take the next steps and create a plan with a defined budget, milestones, and timeline. If the project failed to meet any of the defined objectives it would be killed – No questions asked.
- We documented what we did, why we decided to do it, our goals, and expected outcomes. Regardless of success or failure we would have postmortem reviews to learn and document as much as possible from every effort.
We still had failures, but with each one we took less time and spent less money. More importantly, we learned how to do this better, and that helped us realize several successes. It provided both the structure and the freedom to create some amazing things. And, since failing was an acceptable outcome it was never feared.
This approach was much more than just, “failing fast and failing often,” it was intelligent failure, and it served us well for nearly a decade.
In my last post, I discussed the importance of proper pricing for profitability and success. As most people know, you increase profitability by increasing revenue and/or decreasing costs. But, cost reduction does not necessarily mean slashing headcount, wages, benefits, or other factors that often negatively affect morale and cascade negatively on quality and customer satisfaction. There is often a better way.
The best businesses generally focus on repeatability, realizing that the more that you do something – anything, the better you should get at doing it. You develop a compelling selling story based on past successes, develop a solid reference base, and have identified the sweet spot from a pricing perspective. People keep buying what you are selling, and if your pricing is right there is money available at the end of the month to fund organic growth and operational efficiency efforts.
Finding ways to increase operational efficiency is the ideal way to reduce costs, but it does take time and effort to accomplish. Sometimes this is realized through increases in experience and skill. But, often optimization occurs through standardization and automation. Developing a system that works well, consistently applying it, measuring and analyzing the results, and then making changes to improve the process. An added benefit is that this approach increases quality as well, making your offering even more attractive.
Metrics should be collected at a “work package” level or lower (e.g., task level), which means they are related tasks at the lowest level that produce a discrete deliverable. This is a project management concept, and it works whether you are manufacturing something (although Bill of Materials may be a better analogy in this segment), building something, or creating something. This allows you to accurately create and validate cost and time estimates. And, when you are analyzing work at this level of detail it becomes easier to identify ways to simplify or automate the process.
When I had my company we leveraged this approach to win more business with competitive fixed price project bids that provided healthy profit margins for us while minimizing risk for our clients. Bigger profit margins allowed us to invest in our own growth and success by funding ongoing employee training and education, innovation efforts, international expansion, as well as experiment with new things (products, technology, methodology, etc.) that were fun and often taught us something valuable.
Those growth activities were only possible because of our focus on doing everything as efficiently and effectively as possible, learning from everything we did– good and bad, and having a tangible way to measure and prove that we were constantly improving.
Think like a CEO, act like a COO, and measure like a CFO. Do this and make a real difference in your own business!
Pricing is one of those things that can make or break a company. Doing it right takes an understanding of your business (cost structure and growth / profitability goals), the market, your competition, and more. Doing it wrong can mean the death of your business (fast or slow), the inability to attract and retain the best talent, as well as creating a situation where you will no longer have the opportunity to reach your full potential.
These problems apply to companies of all sizes – although large organizations are often in a better position to absorb the impact of bad pricing decisions or sustain an unprofitable business unit. Understanding all possible outcomes is an important aspect of pricing as it related to risk and risk tolerance.
When I started my consulting company in 1999 the plan was to win business by pricing our services 10%-15% lower than the competition. It was a bad plan that didn’t work. Unfortunately, this approach is something you see all too often in businesses today.
In our case we only began to grow once we increased our prices (about 10% more than the competition) and focused on justifying that with our expertise and the value provided. We were (correctly) perceived as being a premium alternative, and that positioning helped us grow.
Several years ago I had a management consulting engagement with a small software company. The business owner told me that they were, “an overnight success that was 10 years in the making.” His concern was that they might not be able to capitalize on recent success so he was looking for an outside opinion.
I analyzed his business, product, customers, and competition. His largest competitor is the industry leader in this space, and products from both companies were evenly matched from a feature perspective. My client’s product even had a few key features that better for management and compliance in Healthcare and Union environments that his larger and more popular competitor lacked. So, why weren’t they growing faster?
What I found is that competition was priced 400% higher for the base product. When I asked the owner, he told me their goal was to be priced 75% – 80% less than the competition. He could not explain why he did this, other than to state that he believed that his customers would be unwilling to pay any more than that. His lack of confidence with his own product became evident to companies interested in his solution.
In many cases he lost head-to-head competition against that competitor, but almost never on features. Areas of concern were generally on the size and profitability of the company, and the risk created by each for prospects considering his product.
I shared the graph (below) with this person, explaining how proper pricing would increase their profitability and annual revenue, and how both of those items would help provide customers and prospects with confidence. Moreover, this would allow the company to grow, eliminate single points of failure in key areas (Engineering and Customer Support), add features, and even spend money on marketing. Success breeds success!
In another example I worked with the Product Manager of a large software company who was responsible for producing quarterly product package distributions. This work was outsourced and each build cost approximately $50K. I asked a simple question, “What is the break-even point for each distribution?” That person replied, “There really isn’t a good way to tell.”
By the end of the day I provided a Cost-Volume-Profit (CVP) analysis spreadsheet that showed the break-even point. Even more important, it showed the contribution margin and demonstrated there was very little operating leverage provided these products (i.e., they weren’t very profitable even if you sold a lot of them).
My recommendations included increasing prices (which could negatively impact sales), invest in fewer releases per year, or find a more cost-effective way of releasing those products. Without this analysis their “business as usual” approach would have likely continued for several years.
Companies are in business to make money – pure and simple. Everything you do as a business owner or leader needs to be focused on growth. Growth is the result of a combination of factors, such as uniqueness of product or services provided, quality, reputation, efficiency and repeatability. Many of these are the same factors that also drive profitability. Proper pricing can help drive profitability, and having excess profits to invest can significantly impact growth.
Some customers and prospects will do everything possible to whittle your profit margins down to nothing. They are focused on their own short-term gain, and not on the long-term risk created for their suppliers. Those same “frugal” companies expect to make a profit on their own business, so it is unreasonable to expect anything less from own suppliers.
My feeling is that, “Not all business is good business” so it is better to walk away from bad business in order to focus on the business that helps your company grow and be successful.
One of the best books on pricing that I’ve ever found is, “The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making” by Thomas T. Nagle and Reed K. Holden. This is an extremely comprehensive and practical book that I recommend to anyone responsible for pricing or who has P&L responsibility within an organization. It addresses the many complexities of pricing and is truly an invaluable reference.
In a future posts I will write about the metrics that I use to understand efficiency and profitability. Metrics can be your best friend when it comes to finding ways to optimize pricing and maximizing profitability. This can help you create a systematic approach to business that increases efficiency, consistency, and quality.
At my company we developed a system where we know how long common tasks would take to complete, and had efficiency factors for each consultant. This allowed us to create estimates based on the type of work and the people most likely to work on the task, and fix bid the work. Our bids were competitive, and even when we were the highest priced bid we often won because we would be the only (or one of the few) companies to guarantee prices and results. Our level of effort estimates were +/- 4%, and that helped us maintain a 40%+ minimum gross margin for every project. This analytical approach helped our business double in revenue without doubling in size.
There are many causes of poor pricing, including: Lack of understanding of cost structure; Lack of understanding of the value provided by a product or service; Lack of understanding of the level of effort to create, maintain, deliver, and improve a product or service; and Lack of concern for profitability (e.g., salespeople who are paid on the size of the deal, and not on margins or profitability).
But, with a little understanding and effort you can make small adjustments to your pricing approach and models that can have a huge impact to the bottom line of your business.