Strategic Planning in a Recovering Market (1-3)

September 28, 2010

Many companies begin their annual planning process in Q4 of each year. So, I thought that I would pass along some of the insights of Don Roberts, Exotek. He is a principal of a consulting and operations-support company focused solely on the systems integrator. At NIWeek 2010, Don offered his advice on strategic planning as our market recovers.

More than 75% of the average company’s market value comes from intangible assets that traditional metrics don’t measure

                                -Kaplan and Norton HBR 2000

Strategic Planning

The primary goal of strategic planning is to build organizational focus and competency. It gives you the opportunity to balance short term pressures with your long term goals. You can also assess your market situation and react to the changing environment proactively. Then, you can establish organizational alignment.

Strategic planning also provides a recurring process whereby your organization makes choices:

  • Why do we exist?
  • What are our major goals?
  • What resources do we need for a successful future?
  • Who will be our customers?

But, strategic planning is not a way of making future decisions. You can’t create a blueprint of the future because there is no guarantee that things will not change. So, strategic planning should not be a long and drawn out process, but rather an efficient annual assessment of your business to make necessary course adjustments.

Getting Started

Don recommends beginning your strategic planning process, but clarifying:

  • Mission – Why do we exist
  • Core Values – What is important to us
  • Vision – What we want to be

He cautions that semantics not important. The real goal is develop a consensus on the fundamental aspects of your company that will govern your strategic decisions.

Next, consider your product and/or service offering. Review what you are currently selling from your customer’s perspective. Why are they buying from you? What is your competitive strategy? Is your offering valued by customers? Sustainable? Hard to match?

Next, you can define what you want to accomplish in the coming year.  These objectives can be hard or soft, but there can only be one set. Consider organizing them into four perspectives:

  • Financial
  • Customer
  • Internal Processes
  • Learning and Growth

Once your objectives are set, you can drive them into your annual operating plans. For instance, determine how these objectives translate into specific goals for your leaders and how they affect the personal development of your employees. How do your objectives impact the development plans for your products and services? And, what are your marketing and sales plans to capture business for those products and services.

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Surviving and Thriving as a SI (2 of 3)

July 13, 2010

Sales Training

Rick recommends sales training materials from Dale Carnegie and Sandler. In the Sandler Training, you focus on identifying on the ‘customer pain’. You learn to probe to see if you can help thereby clarifying the project scope, requirements, stakeholders, ….

Terms and Conditions

Rick has several interesting recommendations with respect to an integrator’s terms and conditions. For instance, their billing terms are:

  • 40% of total system cost due upon Superior Controls receipt of order
  • 30% upon submittal of the detailed I/O List and Functional Specification
  • 20% upon execution of SFAT or shipment, whichever comes first
  • 10% upon completion of SAT execution, but no later than 30 days after shipment
    Payment of invoices is net 30 days. Payment of field engineering services is net due upon receipt of invoice. Interest of 1.5% per month will be charged to all invoices outstanding after 30 days.

They also specify their delivery relative to the acceptance of the Functional Specification. No need to get caught with a time constraint because the customer could not agreed to work that needs to be done. Rick also believes it is important to include a non-solicitation clause. And, they maintain intellectual property rights – but licenses the customer to use and copy (but not resell or redistribute) that IP.

Company Overhead

Rick also had several recommendations for reducing company overhead. For instance, he prefers to keep the organization flat (minimal management) and expect more from employees. But, he does recommend an ‘Estimator’ to oversee all ordering. He also advocates the use of administrative assistants responsible for minimizing time and effort of engineering (i.e. documentation set up). And, he says that they have no receptionist or operator – instead relying on technology.

Performance Monitoring

With reduced management, there is an increased need for good performance monitoring. So, for fixed price projects, it is important to track all engineering hours and material costs – both estimates and actual. It is critical that your engineering staff are completing projects to the specifications and not just filling the available time.


Surviving and Thriving as a System Integrator (1 of 3)

July 7, 2010

Another one of my favorite CSIA 2010 presentations was given by Rick Pierro, President of Superior Controls, Inc.  After benefiting from the association for many years, Rick graciously decided to give back by discussing the Top 10 Concrete Business Tips Learned over 25 years as a system integrator.

Recruiting

Rick had several interesting suggestions for about the recruiting process.  For instance, he recommends giving a candidate a written test in which a problem is given without adequate information.  This simulates the common experience of an integrator who must work on a poorly defined customer requirement. You can then gauge their demeanor with respect to these constraints. If he is successful, you can continue the interview. If not, be polite and respectful. Keep in mind he may be hired by your best customer. So, give him a way to save face (e.g. it looks like your strengths lie elsewhere).

 Contractors

Superior Control does advocate the use of contractors. As a matter of fact, he recommends giving them the same test (mentioned above). But, they only hire them on a time and materials basis – and make them sign a non-compete. The contractors are paid bi-weekly and expected to keep good timesheets. He also says that they have been successful at paying less by paying early (net 10).

Emergency Support Contracts

With customers reducing head count during these tough economic times, they may be more interested in emergency (24-7) contracts. Superior Control will often sign a 1 year agreement which automatically renews if not cancelled 30 days before the expiration date. Charges for support hours include 1 hour minimum for phone support, 4 hour minimum for on-site support, plus travel time. Then, pay your engineers a nominal coverage fee and an hourly rate with minimums. They also include a quarterly half-day ‘maintenance visit’ to identify any potential issues  — as well as look for new opportunities.

Surviving and Thriving as a SI (2 of 3)


Customer Selection (Part 4-4) – Customer Migration Techniques

June 29, 2010

In his Are You Selecting Your Customers…Or Are They Selecting You?  presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, offers ways to assess the value of your customers. Based on this analysis, you may reach the conclusion that some of your customers are more valuable than others. And, some, well, they just aren’t worth keeping.

Loyalty Ladder

Beyond the dollar value assigned by a Customer Lifetime Value assessment, it may be helpful to rank your customers according to the ‘Loyalty Ladder’.  The higher the position on the ladder, the more that the customer prefers and actually advocate the use of your services:

  • Loyalty Ladder
  • Willing to pay a premium
  • Enthusiastic Advocate
  • Actively seeks to expand relationship
  • Invests in the relationship
  • Buys a bundle of products
  • Switcher – will buy if the price is right
  • Skeptic – willing to be convinced
  • Cynic – won’t buy at all

Customer Management Effort (CME) Matrix

You can then position the customer in a matrix comparing their loyalty position and the cost of managing that customer. The combined result obviates which customers are the ‘most’ valuable (a.k.a. partner) and well as the ‘least’ valuable (the Switcher).

Start by identifying the customer management activities required to support a relationship at each rung. Then, quantify the buyer benefits associated with each ladder rung. You can then calculate the cost incurred in moving a customer from one rung to another using a combination of historical data and account manager’s experience. And, map Customers Current Position.

You can also devise strategies for moving customers to the partner level. For instance, perform a Root Cause Analysis for a customer. Are there difficulties due to competitive effort, ineffective account management, or simply idiosyncrasies?  Based on the results, you can define activities and timelines to move the customer to a more valuable position.

Finally, you must determine how to deal with the least valuable customers. Perhaps, you can engage them in a frank conversation about how they are too difficult or expensive to retain your services any longer. If they are unwilling to help you change this situation, you may be better off ‘firing’ them and find a better customer. But, keep in mind that shifting customers and industries can be very costly and time consuming.

Conclusion

Dean concluded his presentation in much the same way he began. We have the customers that we have because we choose the orders and transactions that we take.  In the end:

Who we are -> Who we can then serve -> Who we serve -> Who we are


Customer Selection (3 of 4) – Activity-Based Costing

June 22, 2010

In his Are You Selecting Your Customers…Or Are They Selecting You?  presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, encourages the use of Activity-Based Costing (ABC) to identify, describe, assign costs to, and report on operational performance. A more accurate cost management system than traditional cost accounting; ABC identifies opportunities to improve business process effectiveness and efficiency by determining the “true” cost of a product or service. ABC principles are used:

  1. To focus management attention on the total cost to produce a product or service, and
  2. As the basis for full and accurate cost recovery.

Support services are particularly suitable for activity-based resourcing because they produce identifiable and measurable units of output.

4 Steps to Knowing Your ABCs

Dean goes on to recommend some basic steps to implementing your Activity-based Costing system.

Identify activities—perform an in-depth analysis of the operating processes of each responsibility segment. Each process may consist of one or more activities required by outputs.

Assign resource costs to activities—this is sometimes called “tracing.” Traceability refers to tracing costs to cost objects to determine why costs were incurred.

Identify outputs—identify all of the outputs for which an activity segment performs activities and consumes resources. Outputs can be products, services, or customers.

Assign activity costs to outputs—assign activity costs to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs’ consumption or demand for activities. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver).

As also discussed in my project cost accounting post, this is a vital step in an integrator’s ability to maximize the profitability. It becomes impossible to run the business from macro-level – simply tracking overall receivables and payables versus the total labor cost. You must be able to account for your finances on a project-by-project basis.

Customer Lifetime Value

By performing Activity-Based Accounting, you can ultimately assign a customer lifetime value(CLV) for your accounts. The CLV is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.

Customer Selection (Part 4-4) – Customer Migration Techniques


Customer Selection (Part 2 of 4) – Know Thy Customer

June 15, 2010

In his Are You Selecting Your Customers…Or Are They Selecting You?  presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, Dean starts with recommendation to ‘Know Thyself.’  You must first figure out who you are as a company today and the company that you want to be. Then, you can be proactive about selecting the customers that will help you achieve your goals.  In part 2, he then describes methods to ‘Know Thy Customer.”

The 80/20 Rule

The role 80-20 rule, also known as the Pareto principle applies. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population. It is a common rule of thumb in business: 80% of your sales come from 20% of your clients.

Whale of a Tale

Dean goes further to show that your top 20% of your business actually generates 180% of the profits. The middle 60% of your business is basically breakeven. And bottom 20% of your business loses the 80% of potential profits.

So What Then Must We Do

The revelation that 20% of your customers generate the bulk of your profit and the ‘other’ 20 percent cost you most of that profit, then raises the question. What should I do about it? Should I just focus on the top 20%? Should I fire the rest? What about everyone in between. In the next couple of posts, we will look at techniques to deal with these issues.

Customer Selection (3 of 4) – Activity-Based Costing


Customer Selection – Part 1 of 4

June 8, 2010

Continuing with my series of my favorite CSIA presentations from 2010, I very much enjoyed the Are You Selecting Your Customers…Or Are They Selecting You? by Dean Streck, CEO of V I Engineering who is an NI Select Alliance Partner.  In his presentation, he astutely illustrates that customer selection defines everything about your company from how you quote and the prices you can charge, to your process model and how you work, to the people you hire and the skills they need, and ultimately to your profitability and your ability to control the destiny of your company. Dean offers a fresh perspective on your customers and offers advice on your selection process, so you can truly understand your customer contributions to your business.

Know Thyself

Dean starts with the premise that it is hard to pick your customers if you don’t first clearly understand who you are. He recommends several tools that can guide you in this self-evaluation including some methods already mentioned in this blog.

Porters’s Five Forces – a look at the most common factors that affect your business.: Your buyers Your suppliers, Your Rivals, Substitutes, and Barriers .

Where You Play – what is your competitive position and how are you choosing a unique point on the Productivity Frontier.

OAS Statement – What are you Objectives (ends), Advantages (means), and Scope (domain). The OAS statement is basically your business strategy. Check out these tips for your annual planning process.

Strategy Map – is a visual representation of the strategy of an organization. It illustrates how your organization plans to achieve its mission and vision by means of a linked chain of continuous improvements.

Balanced scorecard (BSC) – is a strategic performance management tool – a semi-standard structured report supported by proven design methods and automation tools that you can use to keep track of the execution of activities by your staff within their control and monitor the consequences arising from these actions.

Your Customer Selection Process – who in your organization is responsible for your customer selection. That starts with the CEO who develops and communicates the customer selection criteria. It then falls to marketing and sales to identify the accounts and create the opportunities that fit the criterion. Then, the rest of the operations on both the technical and business side must work to meet the needs of those clients.

Looking Into the Mirror

As you can see, customer selection is as much about you as it is the customer. You must first figure out who you are as a company today and the company that you want to be. Then, you can be proactive about selecting the customers that will help you achieve your goals.

Customer Selection (Part 2 of 4) – Know Thy Customer