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Why the Time to Check Your Strategy is When It’s Working

2013-04-21T16:23:09Z

By Robert Sher

Any company that has weathered the recession of 2008-2009 well should congratulate itself for exemplary performance amidst truly trying times. And with the stock market at new heights and the broader economy on the upswing, the leaders of many high-flying companies could not be blamed for feeling that now is the time to double down on their strategy. Yet ironically this could sow the seeds of trouble.

This lesson was brought home to me in a recent Alliance meeting. One CEO’s firm, with a nine-figure top line, is growing at nearly triple-digit rates. He and his team are working overtime to hire, train and serve customers. Yet the board is pushing management for a full-blown strategic planning process. Is this a waste of time—or worse, a distraction—given the rapid growth? Two examples suggest not.

The first is Blackberry (previously known as Research in Motion Ltd.-RIM), whose once-ubiquitous Blackberry was an early leader in smart phones. Today, Blackberry is struggling to remain relevant and profitable as a one-product company amidst mega-firms. The time for Blackberry to lay down a new strategy was before 2007, the year before its stock peaked (at 140) and long before the stock fell below 60 in early 2011 (it now trades in the low teens). 2007 was also the year that Apple introduced its iPhone, which upended the smartphone market that Blackberry had ruled.

The second example is JC Penney, which had long clung to the ever-narrowing market space between discounters and high-end department stores. In what looked like a last-ditch effort to ignite growth, the company switched strategies with a new CEO in November 2011. The following year, however, its revenue plunged 25% and years of slim profits turned into a net loss of nearly $1 billion. Penney now needs a turnaround. The new CEO, Ron Johnson (who had helped Apple become a hugely successful retailer in the last decade), won’t be the one to lead it. He was fired.

Companies that make a big shift in strategy need to start early, long before a crisis envelopes them. That will increase the odds that they plan carefully. Success on short-term execution is no guarantee of longer-term stability and growth.

So what is the problem that runs through such companies? It’s that they aren’t rigorous about strategic and operational planning, often don’t realize the difference between the two, and even if when they do, they don’t connect them well. In the most successful companies I’ve seen, CEOs separate strategic from operational planning and set a cadence for each. They call out pre-determined early warning signs focused on underlying assumptions that support the strategy. A change in these assumptions triggers a reevaluation of the strategy.

While all company leaders think about their strategy, the level of formality varies greatly. Many firms blend strategic and operational planning into one process (often referred to as business planning). Some emphasize operational planning but aren’t rigorous about long-term strategic planning. Others spend hundreds of thousands of dollars on big consulting firms to assess and capture the macro-economic trends and competitive shifts, but don’t translate it well to actionable tactics. Still other leadership teams work hard every day but don’t plan much at all. What is the right balance between strategic and operational planning?

Conducting and connecting strategic and operational planning effectively first requires clearly delineating the two. This may seem obvious. However, many managers use the term “strategic planning” and “operational planning” interchangeably. Let us be specific about how we’re using the terms.

Strategic Planning
Strategic planning is a deep examination of a company’s business model -- its position in the marketplace three to five years out (or longer for big or capital-intensive firms). It sets aside the strengths, weaknesses, opportunities and threats (SWOT) of today, and strives to envision the SWOT of the future—and how the company must adapt to that future. For example, strategic planning led IBM, which used to be a products company, to largely become a consulting firm today.

A diligent effort on a strategic plan can take hundreds of hours of top management’s time—time away from running the business. A solid strategic planning process looks at competitive positioning, shifts in customer demand and preferences, substitutes, adjacent industries, industry maturation and more. Consulting firms like Bain and McKinsey love to lead strategic planning exercises. But the investment is significant, and often too much for middle market firms. This is altogether different from operational planning.

Operational Planning
Operational planning focuses on the year ahead. It identifies priority projects for each person on the leadership team, with deadlines & scope identified in writing. It includes monthly objectives/KPIs for each leader, and the strategies that each function will use to perform at a high level. Good operational planning requires that all the functions confer, so that the overall plan is synchronized, and support functions (finance, IT, HR) have the capacity and willingness to support all the planned activities of the other functions.

The Balancing Act
Most firms do formal operational planning annually, although some fast-growing companies in dynamic industries find a half-year rhythm is best. This should be guided by the firm’s existing strategy.

Many firms do a full strategic planning process every three to five years. If it has been longer, it is without doubt time to kick off a formal strategic planning process. If not, revisit the assumptions (and their proof points) that support the company’s strategy. List them all, along with a cursory check of key competitors and their moves. For each, do enough homework every year to validate that those assumptions are still solid—still substantiated in today’s environment. That might mean as little as 30-40 hours of research followed by a one-day “strategy check-up” offsite with the leadership team.

If at the end of the day, all the key assumptions are still valid, most of leadership’s planning focus can return to execution. However, if the environment has changed enough to challenge those assumptions, then begin a deeper strategic planning process. At the end of that process, identify a written list of key assumptions and other triggers so management knows what to watch for on the horizon. One type of trigger is a big competitor’s investment in your sector.

Alliance member firm Jamba Juice had focused on fruit-based smoothies for years while maintaining a small offering of carrot, orange and wheat grass fresh squeezed juices. When Starbucks announced the acquisition of juice maker Evolution Fresh in November 2011, it triggered a strategic re-evaluation at Jamba. Jamba’s CEO James White took notice that very same day, saying, “We will continue to accelerate our product innovation and, while we welcome new entrants to the marketplace, we will adjust our strategy as needed.”

Adjust they did, long before Starbucks’ real intentions were demonstrated. Jamba Juice jumped to action, and has been testing stores in the San Francisco area with fresh juice blends including beets, kale, apples, ginger, and pineapple juices. It also has a new store design that puts juice at the forefront, a test that will expand to more stores this year.

A thriving business today does not mean your strategy will be effective over the long term. Instead, diligently re-check the assumptions that underlie your current strategy on an annual basis. Further, the management team should scan the horizon for pre-determined, specific triggers that signal the need to kick off a full planning process.

How Much Should you Risk for Growth?

2013-01-23T22:35:23Z

At one of many Alliance of Chief Executives meetings I participated in recently, I watched one member present his thinking on some significant but risky growth strategies. His $300M+ revenue company is a cash-machine with strong and accelerating profitability, mid-teens annual revenue growth and a dominant market share. The risky strategies he proposed were designed to propel even faster growth. I had to wonder how much risk he should take on for the sake of faster growth. How will he know (in advance) the level of risk he’s undertaking?

It’s tempting for mid-market executives to believe that the only time their companies could face a liquidity crisis is when revenue is dropping off a cliff. On the contrary: mid-sized firms striving for growth are just as susceptible to becoming cash-dry, perhaps even more so. Simply put, they can spend too much too fast, or spend too little too late. It’s like the driver who braves oncoming traffic to pass in the passing lane—misjudging speed, distance and timing can be deadly.

Unless management can incisively gauge the speed with which their expenses and revenues are likely to grow, mid-market companies with robust growth face the prospect of running out of money and all its ugly consequences – e.g., shelving new product development or cutting the sales force. Indeed, those moves will save cash. But they will also erode revenue over time, extending the cash drought. I’ll talk about how Alliance member Rick Martig, then CFO of data storage company BlueArc avoided falling into this cash black hole.

The dilemma is real and broad-based. A clear majority of the U.S. mid-market companies surveyed in the fourth quarter of 2012 (released January 23rd 2013) by Ohio State University and GE Capital were highly concerned about costs. (OSU and GE Capital say the companies, which range in revenue from $10 million to $1 billion, are representative of the 195,000 mid-market companies in the U.S.) When asked about their key challenges, 90% pointed to the cost of health care; 85% worried about the overall cost of doing business and 85% complained about their ability to maintain margins. Hanging onto cash is critical for mid-market companies. Driving the top line upward to offset expenses isn’t an easy option either, with 86% of surveyed mid-market companies having concerns about their ability to grow revenues.

Examples abound of mid-market companies that couldn’t or didn’t adjust the velocity of their spending in a timely fashion. When a giftware company merged with another, company leaders were optimistic about the opportunities for growth as a larger player. But they greatly underestimated the cost and time of integration. While expenses mounted, integration hiccups angered customers and hurt sales. Undercut by growing customer defections and a deep industry downturn, the giftware company’s revenue plunged 40% in one year. The business was operated at a loss for more than a year since they were ever hopeful that a higher top line was just around the corner. But the crumbling balance sheet grew less and less able to support its burgeoning debt. Last-ditch spending reductions cut to the bone, delaying production and subsequent billings. The downward spiral continues to this day.

CEOs and the boards of mid-market companies deal with negative cash flow from operations in numerous ways. Those with everything at stake act to defend what they have and become intensely frugal. By curbing investments in new products, marketing, sales and technology, they let cash-rich competitors gain market share and often never catch up. The business shrinks and delivers less cash to its owners over time. More aggressive CEOs try to spend their way out of the problem with the conviction that cash inflow will increase. But in all cases, they know they are making a critical judgment call , and most lose a lot of sleep over the decision.

From our research and consulting experience, we have found three elements of sound decision making when cash flow goes negative. Getting to the heart of these issues increases the odds of achieving positive cash flow:

Market predictability. Will sufficient market demand exist for your product when you need it?
Execution confidence. Will your team be able to build the product or capture the sales at the level you require when you need it?
Forecasting acumen. Are the pro-forma financial statements comprehensive and accurate? If the market is there and the team executes, will the financial reality match the pro-forma?

Assuming excellent forecasting acumen (a big assumption), spending velocity should be determined as follows:

If only it were as easy as this chart makes it look! Most CEOs believe in their vision and mission—too much so. They believe the market is more predictable than it turns out to be. They have false confidence in their team’s ability to execute. So many surprises pop up that weren’t accounted for in the pro-forma.

Making a Sober Assessment of Demand

To assess market demand, the CEO and his top team must get out of the office and into the marketplace. Trade shows and industry association meetings are excellent venues for meeting other business people and asking their opinions. Customer visits are also invaluable. With your customers’ permission, you should record their responses to a standard set of questions (asked conversationally) and then look for patterns. For more ideas on this, read the article “Get Out!”

You can gain further insights on the status of your marketplace by tracking competitors and measuring objective indicators of their success. For those industries large enough to be followed by research firms (like Gartner in the IT industry), plenty of secondary data is available. Regular meetings with investment bankers who study your industry will yield more pieces of information. New data trumps old data; what you learned last year may not be relevant today.

But investigating the marketplace is not just the job of the CEO. Every member of the top team and sales department must collect this type of data. The CFO in particular should be involved since he will be the ultimate architect of the pro-forma financial forecast. Letting the management team – not just the CEO and CFO – gather and jointly discuss this market data will greatly reduce the chances of acting on biases and pre-dispositions.

I put far more trust in executives who have a stake in a business than in those who have only their job at stake. Venture capital firms often insist that all top management executives have stock or stock options. They have so much more to lose if they’re under- or over-aggressive. But mid-market companies are established enterprises, not startups, and so distributing equity is a little trickier. I’m not suggesting changing ownership in the short term. But as your executives weigh in about the state of your marketplace and the company’s ability to compete in it, you must carefully consider the source. Those with real skin in the game are much more likely to strive for the truth.

These dynamics helped the company I mentioned at the beginning of the article – BlueArc, a venture-backed data storage manufacturer – build cash despite having to make huge, risky investments. In 2008, BlueArc’s chief financial officer, Rick Martig, saw a worrisome trend: negative cash flow from operations and the macro environment started to decline by the end of calendar 2008. From getting out into its fast-changing marketplace, Martig and other BlueArc executives realized they had to add a mid-range product to complement their high performance product portfolio. However, this required continued investment in product development and thus significant investment in R&D when cash from operations was not improving. Based on the information they received from customers and market experts they knew this was vital for the continued growth of their company in midst of declining economy and cash flow.

Several larger competitors had started down the initial public offering path (before being snapped up pre-IPO by Dell, EMC and HP), so their financial and operating results suddenly became visible and were critical to proving that sales growth and market expansion via a mid range product was a way to expand their market. On the strength of all the research from Rick and the senior team Rick initially raised $7 million in venture debt to bridge the company to complete the R&D work to complete the mid range product and introduce it in the market. The senior team knew they needed longer term cash to continue investing in the business which the team did raise another $21 million in subsequent years prior to the acquisition. The new mid range product became a major market success, which enabled BlueArc to hit its targets and contributed to getting the company to EBITDA break-even a year and a half after market introduction. As the company prepared for its own IPO in 2011 (by that time, BlueArc’s revenue was $85 million, according to its stock prospectus), it was acquired by Hitachi Data Systems at excellent multiples of both revenue and earnings. The BlueArc team knew it was critical during a tough market and cash times to find resources in any way possible to invest where they thought the product would be successful and help the company grow in future years.

I doubt that this is your first time trying to assess your marketplace. But have you been caught by surprises where sales spiked up or down without a clear reason? Have you introduced new products or run promotional campaigns and received a very different result than you expected? Your past market assessment accuracy is a strong indicator of future accuracy.

Following the process suggested above takes time and resources. Some owners and CEOs of mid-market companies have a level of hubris that leaves them feeling invincible. Some of their sales leaders are very aggressive—cowboy style—and don’t have the patience for it.

But the key to not running out of cash in good times or bad is making a market assessment an ongoing process. Once it is part of your company’s DNA, all your forecasts and decisions will be far better informed.

I wish I could tell you that all markets are predictable. But they are not. You may have a gut feeling about the marketplace and you might be right. But your risk of failure is high, and it could well take you two or three adjustments to get it right. Reserving enough cash to finance several attempts to bring in new revenues is the best approach.

Step one in gauging how much cash should go out the door is getting clear on the predictability of your market.

Calculating the Odds of Successful Execution

How likely is it that your team will ascend the learning curve and deliver the expected results on time? Examine our Optimal Spending Velocity illustration. You’ll see that low execution confidence - even in a highly predictable market - warrants proceeding slowly and keeping extra financial reserves on hand.

Too often, we accept false confidence from our executive team. Just like the football squad in the locker room, the adrenaline-fueled excitement of the project whips up a lather of bravado in our team and they exude confidence. In the face of such passion, we get carried away and our businesses spend more than they should.

To calculate your execution odds objectively, consider these five critical pillars of execution success:

A proven team. The ultimate proven team has worked together before and recently succeeded on similar projects. With both the learning curve and team-bonding risks out of the way, such a team can focus single-mindedly on the task at hand. For example, one management team in the aviation industry became redundant because of an acquisition; the entire team joined an industry startup. On the other hand, a team whose individuals don’t have specific work experience relevant to the function they will be playing (even if they are quick and intelligent) cannot be considered proven. Likewise, if the collection of individuals has not worked together before, there is increased risk that the team will not gel.
A realistic budget. While it is true that there are successes on a shoestring budget, more often than not underfunded efforts fail. Salaries are too low to attract top talent. The vendors selected are lower priced and lower quality. High quality partners, if they are enticed to participate, give lower priority to the project because of pricing concessions. In the rush for expediency, we take short cuts like sacrificing testing time or product quality.
Strong vendors/partners. It is popular to outsource the aspects of a project that lie beyond our core competency. Yet with the benefits, like less overhead and sharper focus, come the risks that your partners won’t perform well. They often don’t. The ideal vendor/partner should need your project to succeed as much as you do, so they’ll fight through obstacles and strive to keep you happy. Ideally, they’ll have executed successfully in many similar projects and be financially and technically strong. Read an excellent case study on partnering best practices here.
Tested, proven processes. Assumptions are the enemy of good execution, and testing is your secret weapon. Kicking off a project that will devour significant budget without establishing at least small scale testing is risky. At the very least, test the sales process with one or two people, even on a part time basis. Perform small scale testing in a development environment and project management processes. Draft several training protocols and test them on a few people.
Technical risk low. Technology can be a great barrier to throw in front of competitors, assuming that we have surmounted the same barrier ourselves. It is easy to say, “We’ll figure it out—it’s easy”, but actually delivering on a technological breakthrough is seldom easy. Executive leadership must listen carefully to the concerns and opinions of those performing the technical work. CEOs with too strong a mindset can stifle truth from bubbling up; trust your technical experts to identify obstacles. Strong technical oversight is required to confirm the level of risk. Ultimately, testing is your final proof. Read this case study about how poorly assessing technical risk cost one company millions of dollars and months of delay.

This specific case, the failed installation of a warehouse automation system by a $50M revenue clothing distributor, illustrates a number of these five critical pillars of execution success. An executive with no systems integration experience took charge of installing the system, with the help of the firm’s in house programmer (an un-proven team). They didn’t want to spend money on outside experts: the firm was tight on cash, having just acquired another firm and bought a new building for their headquarters (insufficient budget). They decided not to run parallel systems since they were making the change just in time for the peak season (unproven, unwise processes). Not surprisingly, the cutover was a month late and still failed, triggering massive shipping delays, a pile-up of excess inventory, a list of angry customers who refused to pay, millions of dollar in losses and a full-blown liquidity crisis. The firm barely survived.

Forecasting Acumen

It is not enough to have a great team who can get the job done, and a marketplace ready to buy. We must predict the future with enough specificity to plan in detail, so we have what we need, when we need it. It isn’t safe to spend on plan, if the plan is flawed to begin with.

Forecasting is difficult. Most of the time, projects take longer than planned, cost more than expected and are full of surprises. That’s bad forecasting. Even if the project exceeds forecast and sales are higher than planned, unplanned success brings its own set of problems, like working capital stress, materials shortages and a poor customer experience.

Effective forecasting also provides the opportunity to strike bargains with the external parties we will need for success. That includes investors, public markets, suppliers, contract manufacturers and others. If we want to gain their trust and access their resources the next time we come to the table, we must deliver on our promises this time—and hit our targets on plan.

If we are likely to miss our forecast, we must reserve more cash to handle the surprises, or perhaps even to make a second try for success. So what are the best predictors of forecasting acumen?

Past forecasting performance of the company
If a company has previously been successful in forecasting, there is a strong likelihood they’ve acquired that competency. It matters that most of the same people are on board. Also look to the kind of forecasts they succeeded in making. Forecasts for a line extension or new service line can be difficult, but they’re not nearly as complex as a large acquisition, or developing a new business unit in a nearby adjacency. If the past forecasting performance of the company is poor, look out!

Past forecasting performance of the CFO
While many people will provide input to your forecast, there is one person—often the CFO in a mid-market company—who drives the forecast. That person’s track record is crucial. Only through much experience can a forecaster learn where slippage usually occurs. They know where the surprises often lurk. Additionally and most critically, they learn to include the costs and items which inevitably make an impact on the forecast, but are usually overlooked.
Creating the forecast is only the first step. Staying on forecast requires an active financial manager, who not only monitors what has happened, but projects what is going to happen—or fail to happen—in the immediate future. Having such a CFO on board (or acquiring one) significantly increases your accuracy of forecasting, provided this person is not overruled too often, or sidelined.

Past commitment to hitting forecasts by the CEO
Companies often miss forecasts because the CEO drives off “the reservation”. He or she may decide that priorities have shifted and want to pursue another direction, or may panic and start to look for other solutions. In some cases, the CEO just does not like the discipline of sticking to plan.

It is true that circumstances sometimes call for a change. Yet this implies that the management team was unable to foresee the situation when the forecast was originally created, a failure just as bad as undisciplined spending or insufficient sales. The CEO can singlehandedly cause the company to miss its forecast. Looking at his or her past behavior is critical to any assessment of probability for hitting the next forecast.

Number and clarity of fallback plans
It is naïve to think that the path to hitting a forecast is a straight line. Management must usually make significant adjustments along the way. In a mid-market firm, those adjustments must come early, before too much damage (over-spending, missing critical timing windows) can be done. Good forecasters identify the areas of risk up front, building in triggers that spur implementation of backup plans to keep on target. The presence of triggers—in writing—and the visibility of those triggers increase the likelihood of staying on forecast.

In the case of Alliance Member Rick Martig, then CFO of BlueArc, a manufacturer of hard drives, the firm was just coming off a poor quarter during the 2008 and 2009 financial crisis. The team knew they needed to make some tough decisions and cuts to the organization. In doing so, they focused on preserving a key focus in developing their next generation product but had to make cuts in sales and other teams. They built a longer term plan around preserving cash, focusing on delivering the next generation product and then adding more sales people as things improved in the macro environment. The plan was a long term business plan that drove the organization to certain metrics and profitability was critical to enable a possible exit in the public market. As it turned out, sales delivered, and the firm was ultimately sold at very competitive multiples to Hitatchi Data Systems.

The likelihood of distasteful consequences if management misses its forecast
The stock market punishes public companies immediately if they fail to meet their forecasts. As a result, they are more likely to pour time and effort into setting realistic benchmarks and fighting hard to achieve them. Yet in many private companies, missed forecasts are met with shoulder shrugs. There are no consequences for poor forecasters.

In fact, there is often more pressure to agree to an overly optimistic forecast than there is to achieving the forecast. This is a mistake of great consequence. Pressure to perform is a critical factor in all business operations. Identifying missed forecasts as failures and delineating serious consequences for those failures increase your likelihood of hitting forecast.

If we have confidence in our forecast, we can spend more aggressively. If we do not, we must hold more cash in reserve, to allow us to recover from surprises or potentially to try again.

Determination of optimal spending velocity stems from understanding the level of market predictability, the proven ability of your team to execute, and the likely accuracy of your forecast.

Spending too much too fast can leave a company at a dead end—with no money to shoot for success a second time, and owning a track record that won’t impress any new money sources. On the other hand, spending too cautiously when a strong team sees a strong opportunity often results in the loss of that opportunity to competitors.

Before you lay down a significant bet, spend time and effort on assessing market predictability, execution competency and your team’s forecasting acumen. Then make the decision about your spending velocity and the level of risk that is prudent.

How to Avoid the Killer Acquisition

2012-10-29T13:58:06Z

The odds of successful acquisitions are dismal. A Federal Trade Commission paper says 50% of deals for companies large and small are not successful. This is troubling news for mid-sized firms, which can’t afford the losses of a bad deal as easily as a Forbes Global 2000 company can. In fact, it’s especially troubling because many mid-market CEOs assume they merely need to avoid acquiring sizable companies and opt for small, “bolt-on” firms instead. I wish it were that simple. But it isn’t.

Mid-market firms are big enough to make sizable acquisitions but are often not big enough to have dedicated acquisition teams or the management bandwidth to integrate a newly acquired firm. One disastrous acquisition can push a mid-market company into bankruptcy court. Knowing that, their CEOs use size as the most common qualifier. They view the acquisition of a company with similar revenue has having greater risk that could “sink the ship.” They see much smaller firms as far safer to fold in.

Other mid-market CEOs look at their track record of acquisitions as a key indicator. Doing one successful deal emboldens them to do another. Yet interviews I’ve done this year with more than 65 mid-market CEOs, CFOs and corporate development executives suggest that acquisition size and track record shouldn’t be the only screens used to evaluate a potential acquisition. In fact, the most successful mid-market acquirers evaluate each deal for risk and complexity. They then determine whether they have the requisite competencies in dealing with the complexities, making sure the strategic rationale for the deal will make some of the inevitable headaches worthwhile. In other words, they do deals with their eyes wide open.

While there are in fact twelve categories of risk & complexity that an acquisition opportunity must be reviewed against, it helps to start the discussion with a simple low, medium and high approach.

Low: Acquiring a relatively small company that is in the same line of business. For example, Alliance member Alex Hehmeyer executed a private equity fueled rollup of career colleges under the name Career Choices, Inc. and sold them to Corinthian Colleges for $56M. Having had experience running a cooking school, they understood the business. As they acquired one small college after another, they left the faculty and local management alone, consolidating only the back offices. They kept it simple. Another good example is one from my own past, where as an art print publisher, I bought a fellow art-print publisher whose revenue was only 8% of my firm’s size but had imagery that diversified my offerings. I completely understood her cost structure, customers, manufacturing process and logistics. We packed up her warehouse and dropped it into mine. It went wonderfully. But if I had instead bought a small IT services firm (for example), the risk and complexity would have been much higher, as I would have known little about the IT services business at that time.

Medium: Acquiring a substantial company in a different line of business whose integration requires a transformation in the acquirer. Imagine a restaurant chain buys a competitor a quarter its size in part because it uses consumer-facing technology in an innovative manner. If the acquirer intends to immediately imbed that technology into its own operation to achieve a competitive edge and accelerate revenue, it dramatically raises the risk of the deal. The acquirer’s need to big changes in the way it does business increases the complexity and urgency of the integration.

High: Doing a merger of equals to create a new entity. When two similar-sized companies merge, the leadership team usually changes. The new team must then choose which firm’s business processes and information systems to adopt (generally best of breed wins in each area). That induces tremendous operational change. Further, most such mergers have profound strategic implications – an expanded set of customers, a broader product and service offering, or a larger geographic market in which to play. As a result, the new top team must re-think the business’s vision and mission. Add to that a name change with all the external marketing, positioning and brand building work to be done. Mergers of equals are incredibly complex and high risk. Consider the 2009 merger of two sizable mid-market companies: $400 million revenues Bookham (NASDAQ:BKHM) and $200 million Avanex (NASDAQ:AVNX). The two merged and became a new company, Oclaro (NASDAQ:OCLR) in the optical components space. Read this case study to get a greater feel for the incredible level of complexity of this deal.

Assessing what kind of deal is on the table is a crucial step to avoiding difficult deals you’re unprepared to tackle. From our research, we’ve built an on-line assessment tool (no cost). Click here to try it on a past acquisition (as a test) or an upcoming deal. For each critical factor, you’ll read a description of the risk, then you’ll be able to rate your acquisition. At the end, a total risk score is shared.

There are good reasons to do very risky and complex strategic acquisitions, and there are also many opportunities to do easy, bolt-on acquisitions. But unknowingly biting off more than your team can chew must be avoided.

Creating and Maintaining a High-Performance Workplace

2012-07-28T19:45:46Z

Keeping your team in a healthy state of dissatisfaction is an underlying element of any high-performance work environment. This presentation and event dove into this controversial notion developed from a deep pool of research into high-performance environments. Four key levers to change the performance environment were introduced and debated in this lively session with 50 CEOs and top executives. Attached are the presenter’s slides and the data captured in live polling of the participants.

How Mid-Market Companies Can Develop High-Performers

2012-07-25T20:51:05Z

By Robert Sher

For the last 12 years, Gallup polls consistently indicate that more than two-thirds of employees at U.S. companies are not motivated to be productive. They are either “not engaged” or “actively disengaged.” Even more important, companies with high “employee engagement” financially outperform those with low engagement. Clearly, low morale is widespread – and costly. But how does this apply to middle-market companies?

A 2011 survey of 2,700 middle market companies by Ohio State/GE Capital’s National Center for the Middle Market found that one of their biggest concerns was about talent management -- the development of future leaders -- with 80% highlighting this area as one of their most pressing challenges. In addition, around three quarters were challenged in attracting top talent and providing development opportunities that increase retention.

So how important is it for mid-market companies to have employees who consistently strive to perform at high levels? Knowing that the atmosphere at every company goes through highs and lows, should mid-market CEOs worry when some employees are unenthused with their work? The answer is an emphatic yes – if strong company growth is crucial. The OSU/GE Capital survey found that creating a culture of high performance can make a real difference for middle market companies. That survey grouped the best-performing companies into a category called “Growth Champions.” These firms tend to invest more in employee skill development, with 29% putting greater emphasis on employee training and education compared with only 17% for other companies. A larger percentage of the Growth Champions (24%) emphasize measuring employee performance through reviews, compared to 16% for the rest of survey population.

Members of the Alliance of Chief Executives agree. A February 2012 survey of 126 Alliance companies ranked a dedicated workforce as the third most important element of success. (No. 1 was a solid growth strategy and No. 2 was a cohesive top team.)

But even though they recognize the importance of strong employee morale, middle-market CEOs don’t make it an investment priority. In an April 2012 survey by OSU/GE Capital’s National Center for the Middle Market, only 4% of the 1,000 respondents said they would allocate an additional dollar of investment into increasing HR training and development. They considered other priorities – building up cash, investing and other capital expenses, making acquisitions and others – to be far more important.

Lack of investment in HR and training isn’t the primary cause of low workplace performance. A bigger factor is that many mid-market CEOs do not take a strategic and disciplined approach to shaping the workplace environment. The workplace environment is the sum total of what it feels like to work at the firm. Most CEOs I know feel responsible for achieving the company’s mission by using their management team and resources. They need their team to perform. But creating a highly productive working environment beyond the top team requires far more: a CEO and top team with a long-term commitment to create such an environment, and then a step-by-step plan to put it in place.

Paul Limbrey and Andrew Meikle of Elkiem, a firm that researches human high performance, spent 15 years investigating high-performance environments (workplace and otherwise). They found and developed:
1) a way of describing such environments,
2) a way of measuring those environments, and
3) an approach to changing the environment for better performance.

There are five common causes of low-performance environments.

1. The measures of individual and team performance are not spelled out and accepted. People aren’t clear about what they should do and how their success will be accounted for. Without good measures, people become political and try to stay on the boss’ “good side.” Only 7% of Alliance members believe they have completely clear performance measures. In fact, 60% do not measure employee performance.
2. The definitions of success and failure are not crystal clear. Even if measures are in place, people aren’t sure at what point they have succeeded and will be commensurately rewarded. More often, they aren’t sure at what level of poor performance —the failure point— they will they be dismissed.
3. Individual and team performance are not sufficiently visible throughout the organization. Without such exposure, low performers can hide behind their team’s performance without detection or peer pressure. Without enough team exposure, people may act selfishly and not work as a team for the greater good—since nobody can tell how the team is performing.
4. The leader is not willing to make it emotionally uncomfortable for low performers. People aren’t held accountable. Deadlines are missed, results fall short and there are no consequences. The leader doesn’t counsel poor performers, doesn’t push them or give them “extra attention.” They’re not put on notice that if they don’t improve, they may be demoted or dismissed. In the Alliance survey, only 18% of CEOs report that their underperformers are “very uncomfortable,” with another 46% saying underperformers are “uncomfortable.”
5. The range between high performers and low performers is too great. Average performers know that others on their team do much less, so they feel safe about easing up. Top performers become arrogant and hard to manage since they are “so much better” than their peers. From the recent survey, 82% of Alliance members believe they have an A player on the team, yet 50% believe their worst-performing executive rates a C+ or lower. This means at least half the Alliance firms report an A player and a C+ or lower player on the same team.

The Elkiem research has shown that the workplace environment affects the behavior of the people in that environment. In institutions from Harvard, Julliard and the Olympics to the Special Forces and corporate America, the research shows that shaping the environment around any population—including the workforce of a company—has profound effects on performance.

Over and over again, Elkiem has measured work environment, applied changes, then re-measured to observe the effect. While such measurement is the ideal approach to any new environment, the following is an approach that I have found to work well in a number of middle-market companies: Every six months, the CEO and the leadership team must review five “levers” that correspond to the root causes of low-performance environments noted above. No more than two levers should be chosen for adjustment in the given six-month period. Making two changes is a sufficiently ambitious challenge, since each move requires follow-through.

For firms with very low-performance environments, starting with the first and second levers makes sense. But most firms are not starting at ground zero—they have some level of proficiency in applying each of the levers. They may choose the two that will best shape the performance environment.

Lever 1: Clear and accepted measurements. At the company level, there are business plan objectives, and in addition each department often has supporting objectives. Now extend this discipline to the individual level. Each employee should have one to three key objectives that, if achieved, represent success. Ideally, these objectives are agreed upon and communicated at the start of the review period, then evaluated at the end of the period. This notion of individual measures (management by objectives, or “MBO”) is not new (Peter Drucker, 1957). But individual measurement is seldom implemented properly and with full commitment. In a 1991 comprehensive review of 30 years of research on the impact of management by objectives, Robert Rodgers and John Hunter concluded that companies whose CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in productivity. Companies with CEOs who showed low commitment only saw a 6% gain in productivity.

Lever 2: Clarity on the definition of success and of failure. The next step after measuring the right results is to define the point at which we are successful, and the point at which we have failed. For example, we might say that if our year-end gross margin lands below 32%, we have failed and that if it is above 41% we have succeeded. Avoiding failure is a huge motivator. Winning by “planting the flag at the top of the hill” is a powerful motivator too. Don’t throw away the emotional incentive tucked away in a crisp definition of failure and success for each person and each team. For maximum performance, have a small number of goals, so that failure or success is a black or white matter. For example, a biotechnology firm had a major opportunity to release a revolutionary product before year-end in 2011. Normal product development forecasting pointed to late Q1 2012. After sharpening its definition of success and failure, the firm decided that releasing the product later than Dec. 15, 2011 would constitute failure for the VP of product development, and releasing by Nov. 1 would constitute success. There were no other measures of success or failure. Other members of the leadership team had similar definitions of failure and success. The product was released on Sept. 1, 2011, two months earlier than the target, with excellent results.

If there is clarity on success and failure, a list can easily be generated of employees who succeeded and those who failed. Many will most likely fall in the middle.

Lever 3: Team and Individual Visibility. Visibility means that individual, team and/or departmental performance is exposed for all employees to see. It is a vastly underutilized motivator. Would our Olympic athletes strive to be the world’s best if nobody knew whether they got the gold medal or not? The emotional pleasure of standing on the top podium and wearing the gold medal for the whole world to see is a powerful motivator. Likewise, the thought of video footage of a last-place finish playing before their countrymen is motivating.

In a firm I once ran, such exposure worked well. My shipping department had a high error rate. When we exposed the error rates to the entire company, the team’s pride was at stake, and errors dropped. We never chose to expose individual error rates, but we counseled poor performers and moved them out if they didn’t improve. I’m not advocating complete exposure in all cases. But CEOs must consider exposure as a lever they need to use. People deeply care what their peers think of them.

Lever 4: Emotional discomfort with low performance. Too many of us have been taught that people should be happy and secure about their work. We’re taught that self-esteem and self-worth issues are paramount, and that the “I’m ok, you’re ok” philosophy must be our modus operandi. I disagree. Adults who join any high-performance company must know that the modus operandi for the CEO and the team is, “Acceptance is conditional on performance.” Low performers must feel uncomfortable. They should feel under the gun. They ought to question their own ability to deliver value. They must seek help to step up their game and their company should help them. They should feel the scrutiny of their peers. If they’ve got what it takes, they’ll improve, performance will recover, and all will be well. If it doesn’t recover, they will be dismissed. Of course, this applies to the CEO too!

Being the tough leader who holds people accountable, has more frequent review sessions, measures more closely and otherwise keeps the pressure on is not a fun job. But any leader owes it to the underperformer, to the team and to the company to signal the need for improvement. That signal is emotional discomfort. If the signal isn’t heeded, move on to Lever 5.

Lever 5: Tighten the Range. People naturally measure themselves against their peers. Imagine “Joe” the sales executive whose performance has him in the middle of his six-person team. He’s not at risk of getting fired; his performance is average. But after the two lower performers get fired, Joe’s becomes the worst of four salespeople. He’ll feel the pressure immediately and will step up his game to try and avoid being the worst performer. The range has been tightened. The sales manager will continually be hiring people she believes will challenge their best performer. If they don’t, she fires them quickly and tries again. As she collects high performers, she narrows the range again, dismissing the poorer performers. She knows she’s arrived when most of her team are “A” players who know they must run hard to stay ahead of their peers since they are all talented. This is high performance.

This article only touches the tip of the iceberg flowing from the research and model pictured above. Yet these five levers are an excellent starting point for many firms to begin actively managing the work environment.

Think of all the money, time and effort companies pour into finding, training and retaining talent in the hopes of seeing performance rise. But high performance is a combination of individual attributes and the environment that surrounds those individuals. CEOs who put effort into tuning the work environment will be rewarded with higher performance all around.

Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.

Member Survey: CEO Compensation

2012-07-03T19:20:08Z

CEOs put their heart and soul into the companies they lead or found. But with a poor contract or weak negotiations, the board or a sale can leave them significantly under-rewarded. Alliance members gathered on June 29th to help each other with these issues. Robert Sher led a discussion around pay for performance and conducted live audience polling - the results of which are available for downloading here.

Getting Ready for the Exit Day

2012-06-01T01:57:56Z

Many mid-market CEOs sell their companies for far less than what they hoped because they are unprepared for the “Exit Day”.

CEOs underinvest in preparing themselves and their firms for an exit, and in building business acumen for exiting. Because most CEOs are inexperienced with selling a business, and because it usually doesn't feel urgent, they don't build skill or knowledge around it and other priorities crowd it out until the event is upon them. When the event is upon us, many seek to turn it over to investment bankers, and while they play a critical part in many exits, there is much that they cannot do, or where their incentives are not perfectly aligned with the seller.

We held a round table discussion on this issue on May 30, 2012, and we've attached survey results and point of view on this topic by Robert Sher.

Why a Loyal CEO Can Be Deadly

2012-04-30T22:34:46Z

Having participated in hundreds of Alliance meetings, I’ve come to the conclusion that most all the groups talk tough about replacing underperforming executives. But why do the groups have to dispense this advice over and over again? And why are they so vehement about making changes quickly?

Chief executives who are loyal to their lieutenants can be the enemies of performance. Such CEOs have kept many a company from hitting its numbers and sunk more than a few. A company whose senior managers are coasting on long ago accomplishments is a company that isn’t firing on all cylinders.

Download the pdf (link above) to read the full article written by Robert Sher, and to read Alliance member's reactions to the story.

Survey: DETERMINED to Build Enterprise Value

2012-03-29T03:59:44Z

Many mid-market companies need to accelerate their financial value quickly.. For example:

Closely held firms: Get big enough to buy competitors
Family-owned firms: Maximize the approaching payday from selling out
Private equity-owned firms: Make the exit date more lucrative
Public companies: Get shareholders off their back

But mid-market firms face big risks to accelerating value that don’t plague big companies and startups to the same degree. For example:

Killing the golden goose while looking for other fish to fry (unlike startups)
Not being able to easily write off investments if the innovation initiatives produce duds (unlike large companies)
Lacking a deep bench that can pursue on new markets, new products and new services (unlike the large companies)

We surveyed Alliance members who want to aggressively increase the value of their firms:

Three year time frame. No quick hits.
Only aggressive companies took the survey.
Significantly build enterprise value at a faster clip.

We looked for a subset of the Alliance community, since we can all learn from those on the edge....

Download the survey results and analysis that we presented at the March 23rd Alliance Round Table.

Defying Gravity: Preparing for the Inevitable Downturn in Your Core Business

2012-03-29T01:07:41Z

By Robert Sher

Nearly every successful middle-market company eventually faces a swarm of competition. When their core business contracts, single-product companies can find themselves fighting for their lives. But the companies which plan highly-related diversifications before such downturns grow in good times and bad.

Many middle-market companies have one core business and tend to it well. They are often the first to market and enjoy tremendous growth before any competitors are able to catch up. But as the business matures and the competition becomes entrenched, growth slows. So when the economy turns south, mature middle-market companies get squeezed and performance drops.

Here’s an example: syrup flavoring company Torani’s core market was the café industry. When this business was young, the market supported phenomenal growth rates in the 50 percent range. But in the late 1990s, the growth slowed down to the 20 percent range, then to single digits by 2005. By the time the 2007 downturn hit, Torani’s growth was flat.

Obviously, mid-market companies would love to maintain a high growth rate in all economic conditions and side-step the inevitable waning of their core business. But how?

Most companies address this problem through conventional strategies – finding new customers for existing products, creating new products for existing customers, adjusting prices, or ramping up sales and marketing. These are all valid tactics and ought to be considered at all times, yet they usually deliver only incremental improvements that produce less impact over time.

In addition, merely tweaking existing products and services leaves companies vulnerable to cheaper or better innovations. For example, improvements to the fax machine during the 1980s and 1990s helped extend its lifecycle. But thanks to fresh Internet-based alternatives, no one is pouring resources into new fax machines today.

Something else happens to many mid-market companies that experience healthy growth: they get too comfortable with it. They devote all of their resources to maximizing the core product and do nothing to prepare for the day when it will no longer be competitive.

The optimal solution is to find new or adjacent markets long before a company’s growth rate starts to wane, when times are good. Large companies often do this by developing a portfolio of business units—some with stable positions in mature markets, and others focused on new, high-growth markets. Through this approach, a company like General Electric is able to generate strong growth year after year.

Of course, middle market companies do not have the bandwidth GE does—but they can utilize the same thinking. While growth in their core business is still healthy, they can start pilot programs. These may explore new or adjacent markets, new market needs, or frankly anything that leverages their core competencies into a new business with the potential for long-term growth.

For mid-market companies, the key is to focus on core competencies. Large companies have the cash and bandwidth to jump into areas in which they have not yet developed or acquired a core competency. But mid-market firms do not have this luxury. For them, building a new core competency takes an enormous amount of effort and is fraught with risk. On the other hand, leveraging existing expertise on a pilot program keeps the expense of pursuing new products, services or markets within budget, simultaneously allowing enough time to do it right until the new opportunity proves itself.

In 2008, 20-year software veteran Pete Daffern took the helm of Clairmail, a seven-figure company which connected mobile technology to back office software in multiple markets. One year later, having experimented with many verticals, Pete shifted Clairmail's focus to retail banks—a segment that had undergone enormous pain due to the collapse of capital markets and the accompanying economic downturn.

The move seemed risky. Yet Clairmail had something the retail banks really needed, and it turned out to be the firm’s next big thing. Today, Clairmail’s revenues approach $100 million. Moreover, the company recently won the Bank Administration Institute's MobileLink Pace Setter Award for increasing mobile usage and furthering mobile innovation in retail banking.

Building the Future into the Present

Keep in mind that when you really, really need a green field—a new business with big potential—it's usually too late. The idea is to consistently look for the next big thing, or at least start five years before your core business peaks. You need to bake this into your strategic priorities with a separate budget and a team which is completely detached from the one assigned to your core products/ services.

Here are some key elements of this effort:

Allocate time from your best strategic thinkers. From great minds come great ideas. But those great minds must be committed to finding the next big thing, and must set aside time specifically for working on this task. Torani, for example, hired strategic sales experts to supplement the CEO's years of experience, then ran a disciplined process of ideation, including regular meetings and discussions.

Conduct market research every year to assess competitors and markets. While purchased research can help, many mid-market businesses are in niches that are not heavily studied and reported on. Their executives need to leave the office and get intimate with customers, products and consumer behaviors. Forget about selling. Instead focus on what the customer needs but isn’t getting, or why the customer buys from a competitor. This job-to-be-done approach is being studied and popularized by Harvard Business School professor Clay Christensen (you can find his recent Harvard Business Review case study).

Consider Flexstar Technology, a private equity-based company with revenues of about $40 million. Flexstar sold quality assurance test equipment for computer hard drive manufacturers, but as CEO Tony Lavia explains, the company’s sales were constrained by a small number of large manufacturers buying new test equipment only when they changed form factors. By 2008, Flexstar’s top line was growing slowly, in the single digits.

Every year, Tony went to industry conferences and listened to the growing debate between mechanical hard drives and newer, solid-state drives (SSDs). In 2009, he took a gamble and developed test equipment for high-volume production of SSDs. Flexstar now has the lead in this new adjacent market, which is fueling growth dramatically. Revenue from SSD test equipment in just three years has surpassed 50% of total sales, and the product is delivering a growth rate more than five times the company’s conventional hard drive test equipment product line. Since 2009, SSD test equipment sales have doubled or more every year.

Give it a budget every year. This is especially difficult during a downturn because money is tight all around. In fact, it is very easy to cut the budget for the next big thing, and many companies do. This must be resisted. Making this component of your budget sacrosanct not only presents the initiative as doable, it establishes it as a priority in the minds of your team.

Develop and test a set of hypotheses about the “next hot area.” You may see several avenues for growth, but not know which is best. You can find out by creating quick, low-cost tests to get feedback. These might be small region market tests, or “bubble gum and tape” prototypes to demo in front of key customers, or outsourcing manufacturing of a short-run product to get a quick test completed. Torani, for example, created a three-year, “test and invest” program, which included new organic food products and vegetable-based flavors, as well as new distribution channels, such as consumer retailers and restaurants. Ultimately, they chose to sell their core flavorings products through retail channels, and it has been driving double-digit growth for the past three years.

“Winning” ideas advance to a second test. There may be five concepts worth considering, and among them, three really good ones. Ditch the other two. Then test those three until you find the one that can drive you forward.

Scale the winner. Testing the new product or service carefully will give you a much higher probability of success. Scaling the operations that support a new offering is always costly, but doing it when the core business is robust can help cushion the expense.

Obstacles to Expect and How to Address Them

CEOs should expect internal resistance to exploring a new business avenue. Here’s how I’ve seen it play out, and ideas on how to address it:

Complacency. The management teams of fast-growing mid-market companies never seem to have the time, bandwidth or urgency to look for the next big opportunity. They know intellectually that it is important, but nothing ever happens. Set up a dedicated team with a clear mission and its own budget to drive this process forward. (It may mean pulling some talent out of the core business, which of course will need to be backfilled.)

Fear. Many companies find that looking so far into the future is a distraction for their teams. Confusion erupts as to what the “core” of the business is, and why the firm is “abandoning” the core. Let your people know that you’re not abandoning the core business, but in fact are trying to ensure the future health of the company. Care and effort should be put into communicating to the entire organization the message that innovation is an important part of assuring your company’s long-term growth. Meanwhile, having pilot programs and tests contained within a diversification team helps keep the core team focused on today’s business but aware of tomorrow’s business.

Perception of waste. Long-term planning is often derailed by short-sighted shareholders who are used to strong dividends and high profit margins. To them, a new budget with an uncertain, long-term payoff seems like a waste. To offset this perception, it’s important to communicate the realities of your maturing market and show a clear, measurable plan for your diversification efforts. If you start the process early enough, the budget will feel small and will be more likely to gain approval.

For companies facing imminent insolvency, it may be too late to begin these efforts. When survival is truly at stake, cutting away non-core expenses is usually advisable. Yet many companies with tight cash and declining growth are years away from insolvency. In some cases, it is better to stop tinkering with incremental improvements that aren’t moving the needle in favor of more dramatic changes.

Even for healthy, growing companies, finding an adjacent market with big potential is hard work with uncertain results. It usually takes years of sorting through many potential opportunities to find one with proven potential. Torani worked for two to three years before it became clear the retail channel would be its next big growth area. Since no one knows at the outset when the new business will be ready to scale, starting immediately is paramount.

But in spite of this uncertainty, not looking for the next big thing represents the greatest danger to a mid-market company’s long-term future. No one knows for sure when the current core business will begin to decline and no one can foresee the severity of that decline. In the absence of change, gravity takes over, and the time that any existing business remains viable decreases with each passing day. This gravitational process accelerates when the economy turns south or when new, aggressive competition emerges from the pack.

It takes real discipline on an ongoing basis to identify, prepare and explore new opportunities beyond your core business. But the potential payoff is nothing less than the ability to defy gravity by constantly generating new growth – in good times and bad.

This article is by Robert Sher, the founding principal of CEO to CEO, a firm that advises chief executives of mid-market companies who are navigating major shifts in their business or marketplace. He is the author of the book The Feel of the Deal.

Member Survey: Building Top Teams

2012-02-20T03:13:20Z

We asked our members a battery of questions about how their top teams function and how they were built. The results were presented at our February 15, 2012 Round Table. Attached are the slides that were presented, with some of the takeaways from the private table discussions that followed. See file available for download to view the slides.

Member Survey: Acquisitions Best Practices

2012-02-19T18:14:28Z

This survey was sent to over 300 Alliance of Chief Executives members in the greater Bay Area between January 13th and January 22nd, 2012. It is part of a larger research effort being conducted byRobert Sher, principal of CEO to CEO, in cooperation with the Alliance of Chief Executives. The focus of the research is to better understand how mid-market companies can improve the likelihood and magnitude of acquisition success. In addition to the survey, in-depth interviews are being conducted with leaders of mid-market companies who have acquisition experience. See download for full report.

Preparing to Plant your Acquisition

2012-01-26T22:24:22Z

Acquisitions take root well when placed in companies that are prepared
By Robert Sher

Growing through acquisition is an enticing prospect for many mid-market companies. Indeed, about 5,300 transactions among businesses valued between $5M to $1B took place in 2010, according to Dealogic and Robert W. Baird & Co., with the vast majority of involving deals valued at less than $100 million. Sadly, though, many of these deals fail to fulfill expectations. In fact, most evidence suggests that mergers can boast a mere 50 percent success rate – and even that figure may be generous.

Among members of the Alliance, CEOs who run mid-market companies seem to fare slightly better when measured by M&A success. A recent survey of Alliance of CEOs members found that nearly 60 percent reported completing deals which achieved their non-financial objectives. Still, those are not great odds, considering that 40 percent of respondents did not. The matter becomes even more serious when you consider the increasing importance of M&A activity as a path to growth. In the same survey, more than half of Alliance CEOs rated acquisitions as “important,” “very important” or of “prime importance” to their company’s success over this decade. With so much at stake, it is critical that we do deals right – and the truth is we can.

Mark Iwanowski, an Alliance alumni and now Managing Director at Trident Capital, a private equity and venture firm, has been on both sides of the M&A scenario. Iwanowski once worked as COO for a consulting services firm which stood at the top end of the middle market. Acquisitions accounted for 25 percent of the company’s growth rate, as the firm acquired businesses and integrated them or operated them as stand-alone business units.

When approaching these deals, Iwanowski said, his company’s goal was to set expectations with the seller’s management team early – no surprises. “In the case of a stand-alone business unit bringing new technology, new offerings and new capabilities, the context of the discussion was around working within the corporate culture,” Iwanowski said. “The one thing we did ahead of time is cross-check the cultures, set expectations, so that everyone’s eyes were wide open going in.”

Once they truly understood what it would be like to work in his firm’s culture and to execute the new business plan, 20% to 30% of target firms actually walked away from the deal. But Iwanowski’s company was happy about that, since the talent would have walked away after the deal closed anyway. More importantly, perhaps, is that his company had an acquisition failure rate of between 10 and 20 percent. We should all be so fortunate. But the truth is that doing deals right involves allocating enough real resources to make them work.

Alliance Member Laura Stark’s firm, Rambus (NASDAQ: RMBS, Rev $320M), one of the world's premier technology licensing companies, has done several business acquisitions (in addition to over a dozen asset acquisitions) over the past three years. Rambus examined acquisitions in two phases – tactical onboarding and integration followed by strategic integration. Altogether, the process takes a very involved and intense 90 days. However, Rambus has a corporate development team of five people who report to Laura (SVP Corporate Development), who only do corporate development work, nothing else. She also has two dedicated M&A team members – one in the corporate legal organization, and one in the company’s licensing division. Plus Rambus has a project management office (PMO) that is currently hiring a manager to focus specifically on managing integrations. “Basically, it will help us develop our playbook a little bit better for integrations,” says Stark. “This person will be involved with helping on the diligence side, but then will be a resource specifically on the integration side to help pull together best practices for us.”

This is a lesson to us all that regardless of our scale, we must be generous with our resources if we want a higher success rate. While it is true that many mid-market firms do not have a corporate development team or even staff whose primary focus is M&A activity, there are still ways to increase the likelihood of acquisition success by making conditions just right. In other words, they must “prepare the soil for the planting of the acquisition.” Here’s how:

1. Aggressively gather market intelligence. We must step up our competitive intelligence, marketplace awareness, and scouting for candidates to acquire. This will help us make better, faster decisions – and it will give us options, so we will be better able to walk away from bad deals.

2. Build management ranks. Build up your management bandwidth, so that when crunch time comes, you’re able to focus on the acquisition – due diligence and integration – while not neglecting your core business.

3. Employ project management resources. Someone with project management expertise and know-how can be used across the organization, but can be specifically directed to focus on M&A integration.

4. Grow cash reserves. Companies need money beyond the financing of the deal to outsource due diligence and other services as needed. They must both pay for the acquisition and adequately fund the integration – which has costs of its own.

5. Stay aligned and committed. For any company seeking to grow through acquisitions, all M&A activity must align with and serve the company’s overall strategy. Both buyer and seller management teams must be committed to the same goals. The overall strategy itself has to be clear. All deals that do not meet these basic requirements must be avoided.

Companies that put in the work and investment to prepare the acquisition soil will find the harvest exciting. Just ask Alliance Director Ken Ansin. Ansin bought a $15M portable toilet firm, Handy House, and within his start-up United Site Services, grew it to a $120M business through a series of approximately 30 acquisitions. He “thickened” middle management to help integrate the smaller, mom-and-pop type businesses it began buying in one local area after another. Once United Site Services had enough business in one metro area, it used the same management bandwidth to move onto a new area. “It was much easier to sprinkle middle management into the contiguous market as we grew,” Ansin says.

United Site Services had properly conditioned its “soil” and suitably prepared for acquisition growth. When companies do this, they have the capacity to do the following:

Perform thorough due diligence and deal sourcing. Having extra bandwidth to do proper due diligence means your managers won’t be pulled away from regular tasks and core operations will not be neglected. Keep in mind, however, that you can outsource legal and accounting due diligence, but you can’t really outsource operations, culture and people due diligence. These critical tasks must be done by your team.

Plan the integration. Integration planning runs concurrently with due diligence before the deal closes, so it will be an extra drain on resources. It also continues for 30 to 90 days after the deal closes. It is at this stage that project management expertise is critical, since complex action must be coordinated throughout both buyer and seller teams

Execute the integration. Although it is a gargantuan task in most cases, many CEOs who look back at past integrations wish that they had pushed the pace more aggressively. Don’t be afraid of going faster! Putting in extra time and resources can help your organization get past attending only to the urgent work, to doing the important work like building relationships between people. Allocation of sufficient resources also makes it easier to measure progress and adjust course, if necessary.

To insure that a new acquisition takes root quickly, consider keeping post-close some of the outside resources that helped with due diligence. Says Iwanowski: “What tends to happen is you bring those teams in, they do the due diligence, they help get things done, and then it’s basically thrown over the fence to the organic operational team to figure out now how to move the process through to completion.”

Some more food for thought when it comes to finding “seeds” for planting deals: Kiss a lot of frogs. Alliance Member & Director Marty Reed, who serves as a Principal of The Roda Group, a venture capital and private equity firm, encourages companies to “be incredibly open” to acquisition opportunities. Reed recalls one acquisition opportunity during his time as Director of Finance with Ask Jeeves, a fast-growing search engine, that did not look interesting on the surface, but by opening up the conversation, “it got a little interesting, then it got a little more interesting, and we did the deal. Two years later it was, in some ways, the smartest deal we could have possibly done.” The deal would not have happened if Reed had not left open the door to the possibility.

While bandwidth is often the toughest challenge for mid-market firms, having enough of it is absolutely critical to getting deals done, because a lack of bandwidth usually leads to a lack of due diligence. Consider the fact that more than half of all Alliance members surveyed with experience in acquisitions, when asked if they would do anything differently to prepare for their last acquisition, said they would have done more due diligence around the people, culture, customers and integration planning. And Alliance members named “excellent due diligence” the number one factor in making a successful acquisition – followed by post-close execution/integration.

Here’s one example of how due diligence can save time and effort. Sabine Castagnet is COO of Data Physics Corporation, a provider of high performance solutions in signal processing to the noise and vibration community. Her company acquired a French company in 2000, but it took a whopping ten years to fully unite the teams. Why? "There were two founding owners in France, and the teams didn’t fully bond until after they retired,” she says. “I guess 'rivalry' is the right word. Between the U.S. team and the French engineering team, they could never say 'we' -- it was always a 'they' and 'us' type of orientation. It didn't stop us from having good products and getting sales and profits, but it was painful internally, unfortunately.”

The truth is that doing deals right requires the CEO to ensure that these five uncommon elements are in place: market intelligence to deeply understand the target company, management bandwidth, project managers to orchestrate the integration, a cash reserve beyond just the financing to buy the company, and management teams on both sides who are committed to the same goals. There are no shortcuts, and no second chances once the trigger is pulled. When it comes to M&A, better bandwidth equals better results.

Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.

Developing Dual Core Competencies

2011-11-04T17:42:01Z

By Robert Sher

Construction company, Webcor Builders, proved its competency in the building industry long before the computer became such a powerful force in business. But Alliance member and Webcor President Andy Ball always had the gut feeling that technology held great promise for his industry. For years he pushed his firm to be an early adopter. Today he has invested millions in supporting and developing software that allows him to reduce building costs by as much as 10% and shave an average of 30% off the time to complete a building. He developed a second core competency that helped fuel the firm’s growth from $400M in 2005 to $1.4B in 2008.

Andy has loved computers since his college days in the early ‘80s. He was the first one with a laptop on a job site in Irvine, California, and was quick to write macros for Lotus 123 to process project data and streamline workflow. He even bought a technology support company in the late ‘90s to increase Webcor’s internal capabilities.

As the new century started, Andy grew impatient with the limited features that building industry software firms were providing. AutoCAD had automated drafting, but the lines on the screen were as “dumb” as those on paper. Working two-dimensionally was still the norm, and the 3D programs that were available didn’t integrate with other programs. The Building Information Management (BIM) concept as a discipline was in its early stages.

Too often, Andy’s teams—and thousands of other teams like them globally—came to a crashing halt on a jobsite when following their 2D drawings led to an impossibility, like a beam running through a stairway. The architect was called out while crews would stand by. The delay could be days or weeks, and too often re-work was involved. How often have you passed a construction project with no activity—for days or weeks? Andy kept thinking about how the Empire State Building was built in only 13 months, well before Webcor’s time and the advent of computers. Today it would take 10 years to design and build the Empire State building, with seven years to get approvals, and three years for construction. He felt using computing technology to avoid all the delays had the potential to make building projects dramatically faster.

It wasn’t just a case of avoiding construction problems. Although manufacturers could access programs that included bills of materials, standard costs and Just in Time logistics, nothing close to that existed for the building industry. The process, especially for large projects, was inefficient and hard to manage closely against planned timelines and budgets.

It is all too easy to grow comfortable with wasteful practices if they are normal in your industry. If you don’t have an evangelist like Andy with a vision for move-the-needle change, make sure you carve out time as part of your annual strategic planning process to think outside-the-box. Spend enough time to entertain all the ideas, no matter how novel they may seem. For those suggestions where a positive outcome could really change your ability to compete, ask yourselves how you might validate the concept without breaking the bank.

In 2005, Andy decided to invest his time and share his vision. He teamed up with the Center for Integrated Facility Engineering (CIFE) at Stanford to create software that would allow builders to pre-construct a building virtually, one step at a time. The virtual builders could see the building in 3D, observe and manage the passage of time, and track the materials and labor costs at each step.

Webcor also joined CIFE and pays annual dues as well as being actively involved in the creation of the tool, now known as Vico Constructor. It didn’t work at first, but step by step, the commercial applications became clear. In 2007, Webcor went all in, investing millions in learning to use the system, and in building a “parts” database, with materials, subassemblies, productivity costs, and other data that would make the system usable and would make building more cost effective. Webcor’s intimate knowledge of the program put the company years ahead of their competition. Its investment in the database created a barrier that competitors would have to hurdle to leverage the Vico Constructor in the most powerful manner.

In 2002, Webcor formulated a proposal for the new California Academy of Sciences, promising to complete it in 24 months versus the next fastest competitor at 36 months. The Academy didn’t believe the company could deliver on its promise, but after Webcor showed them the step by step sequencing of the construction process, it was selected and completed it on schedule.

Webcor also leveraged CIFE to keep early development costs down. The work at CIFE was available to the entire industry, but Webcor was willing to give up exclusivity to reduce development risk. The stunning success on the Academy of Sciences project was the company’s beta test. It became clear that there would be a race over the next ten years to implement this complex technology, and that the winner could emerge well ahead of the pack. Staged development of a new core competency with planned de-risking makes good business sense.

Webcor created a Virtual Building Group as a service function within the organization to continue to build expertise. They staffed up, often hiring people out of the CIFE project team at graduation. The changes to workflow were massive. Not only were projects pre-built virtually, but the actual construction was tightly managed, with budget and timeline developed by the Virtual Building Group. For example, a construction team would be told that they have three men and 90 minutes per column assembly. Responding to a call to action from Andy, the firm continued using the application as it was developed, and a string of high profile successes rolled on.

Webcor won and is in the process of building the $750M San Francisco General Hospital. It won and is building the $1B Transbay Terminal project. It won and is rebuilding the California Memorial Stadium at U.C. Berkeley—on a very tight, one-season time frame.

Over the past 10 years, Webcor has consistently ranked in the top 50 of U.S. building contractors. Yet none of its competitors have fully embraced virtual building to the same degree. They might claim to use building information management, and may well think that they are leveraging technology. But since none of them have been part of the development and evolution of Vico Constructor, they don’t quite know what they are missing. Additionally, the cost to build their own database of materials and processes may appear daunting.

On the other hand, the fact that virtual building is not an industry standard or recognized best practice means that it is harder for Webcor to convince its prospects of its value. The company’s sales process has been modified accordingly. In the end, lower prices and quicker builds speak for themselves, so the track record of Webcor’s Vico successes is growing.

Another challenge Webcor faces is getting the internal organization to adopt all the changes in workflow and process that the new Virtual Building Group brings. It has required strong leadership from the top to support the pace of change. Younger team members seem the most eager to jump right in. With pressure from above, and eagerness on the front lines, the middle of the organization has followed suit.

Even though the Virtual Building Group has begun to sell its services to other builders and is becoming a profit center of its own, making money from software was never a goal. Because Webcor focused on a strategic competency rather than making a direct profit, they stayed focused on essential features that could be applied in the field, rather than “flashy” features that would sell to the broader marketplace. This focus on functionality rather than marketability minimized the costs and maximized the results. A venture-backed startup may well have failed to succeed.

I asked Andy what this might mean for Webcor’s growth or ranking in his industry. Instead of a concern with rankings, he said the company stays focused on the main goal—continual improvement of their construction process—all in keeping with its vision of delivering exceptional value through innovation.

Maybe Webcor will innovate its way to constructing the equivalent of the Empire State Building in 13 months.

Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of two books, Defeating Corporate Distraction and The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.

Developing in the Developing World

2011-07-25T18:17:39Z

By Robert Sher

He dropped the cold, hard fact on the table between us. 90% of global urbanization—the building of new cities—is happening in developing countries. Not in the U.S., and not in Europe.

David Gensler leads Gensler, a 3,000-person global architecture and design firm that was once primarily domestic. In the late 1980’s, Gensler’s global customers began building abroad, and they asked the firm to support them there. Gensler said yes, and then began the odyssey of learning to build thriving, high performing offices in China and other developing countries. Today the firm has secured its position as a truly global organization and is poised to benefit from the shift toward urban development in developing countries.

Gensler’s first step into the developing world was China, and it was a difficult beginning. Its first attempt in-country was the ex-pat solution, sending over Americans steeped in the firm’s corporate culture and processes. That got the firm started, but the ex-pats didn’t have local relationships and couldn’t develop new relationships to the level that was required. They tried joint ventures with local firms and hiring veteran architects already in the country. But they found this seriously eroded the cultural cohesion and created as many problems as it solved. Ten years later, the office had only 30 people in total and was still led by ex-pats. Given that real estate is fundamentally local and Gensler’s ex-pat team was not, it became obvious a fresh approach was needed.

Meanwhile, as Gensler expanded domestically, it was experiencing a growing base of foreign-born employees who had come to the U.S. to study and live. One such man was Jun Xia, who had graduated from one of China’s most prestigious architecture schools. He started his architecture career in China, moved to the U.S. and began working at Gensler, and had been with the firm for 14 years. Jun was a utility player who could lead, design and sell. After working on several projects in China (from the U.S.) he eventually put his hand up to return to China and take a leadership role in the Shanghai office in 2004. That one change began a dramatic shift in Gensler’s practice.

Jun took with him the organizational values, systems and practices that maintained the firm’s culture, but enabled a Chinese personality. He allowed the office to feel and think Chinese and to connect with its customers and suppliers in a distinctly Chinese manner, which helped establish a level of comfort and trust. He worked to reestablish contacts and relationships in the area, many of which stemmed from his university days and early work colleagues who had risen in Chinese government and industry over the intervening years.

The Gensler secret to growing offices abroad began to take shape. To start a new office in a new region in a developing country, it needed:

1. Existing customers — having active clients with projects in country is a strong kick-start.
2. Leadership born and raised in that country.
3. Leaders with the cultural DNA of the firm and employees who understand the inherent company culture.
4. Utility players with strong knowledge/expertise, emotional intelligence, and the ability to lead and build relationships in the country.
5. A willingness and desire to live in the country again.

Over time, additional Gensler staff—some China born, others just willing to commit for longer durations—moved to the Shanghai office. The firm kept hiring locally as well, slowly building a foundation of culturally aligned professionals in the office. This process is what David calls the “wealth-building phase” of a new office. During this period, the office grows leaders and a team that increasingly becomes self-sustaining. It wasn’t until 2008 that the office entered the “wealth distribution phase,” in which had sufficient management bandwidth to consider exporting leadership to Beijing, the next office to open in the region.

David estimates that building a mature, self-sustaining professional service office in a new region takes ten years. Ten years! Given the pace at which urbanization is happening, the firm’s customers can’t wait ten years. When Gensler decided to enter the Indian market in 2008 through a joint venture, the firm reached out to their 35 Indian nationals employed domestically, but there was not overwhelming interest amongst the group in moving back. Now, as the Indian market continues to mature, many are showing signs of interest. Likewise, Gensler has steadily been building awareness and relationships in the Indian market and expects to open an office in the coming months.

In an effort to expedite the office-growing process, Gensler is taking the following steps:

1. It invests in lots of physical meetings to enhance the network of relationships that holds the firm together.
2. It shares profits company-wide, incenting people across offices to collaborate and support each other because they understand their common destiny.
3. It invests in growing key regional offices, accelerating their development and trying to speed them from the “wealth-building phase” to the “wealth-distribution phase,” which allows the start and support of additional offices.
4. It has cultural orientation programs in place.
5. It has strong oversight and metrics so it can quickly tell if an office is thriving or languishing.

David Gensler is not claiming victory. While the firm has a process that works, it is still not fast enough to keep up, and success is far from automatic. But the team at Gensler is dedicated to growing the firm. That means they keep pushing the limits, and keep innovating new solutions.

Nine of the firm’s 38 locations are in developing countries today. Given that 90% of the urbanization is in developing countries, they have their work cut out for them. So many new offices abroad to start and grow.

Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.