The Value Equation

2009 Small and Medium Best Places to Work Award Winners

Each year, the Great Place to Work^® Institute produces Best Companies to Work for lists in the United States including FORTUNE 100 Best Companies to Work For^® in America.

What Makes a Great Place to Work^®?

At the heart of the institute’s definition of a great place to work is a place where employees "trust the people they work for, have pride in what they do, and enjoy the people they work with." A great workplace is measured by the quality of the three, interconnected relationships that exist within any organization:

1. The relationship between employees and management.
2. The relationship between employees and their jobs/company.
3. The relationship between employees and other employees.

Enhancing the workplace delivers results including:

• Receive more qualified job applications (get more than your fair share of ‘A’ Players).
• Experience a lower level of turnover.
• Experience reductions in health care costs.
• Enjoy higher levels of customer satisfaction and customer loyalty.
• Foster greater innovation, creativity and risk taking.
• Benefit from higher productivity and profitability.

Best Companies Outperform Their Peers

When you invest in your people, you invest in your organization's success. A comprehensive review by the Department of Labor of more than 100 studies that examined the link between progressive people practices and improved bottom line results concluded that:

• There is a positive relationship between training, motivating, and empowering employees and improvements in productivity, employee satisfaction and financial performance.
• When developing and implementing a people strategy with progressive people practices, a combination of practices is more effective than a single practice
• The impact of progressive people practices is greater over the long term (3 plus years), indicating that practices need to be integrated into the work environment to provide benefits

· Fortune "100 Best" versus Stock Market 1998-2008

Any company can be a Great Place to Work^®!  For more information on Best Places to Work checkout:

• 2009 Top 25 Small Business Award Winners
  
• Best Places to Work Articles and Case Studies
  
• Best Small & Medium Companies to Work for in America Nomination and Application Process

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Words of Wisdom, Quotes From Jack Welch

An Update from the 2009 SHRM Annual Conference & Exposition

Once a year HR professionals gather for the world’s largest HR conference to network with participants from over 140 countries, including prominent business, policy, and HR thought-leaders.  This year in New Orleans, SHRM’s (Society of Human Resource Management) annual conference  attendees acquired tools, got questions answered, and participated in more than 150 learning sessions.

This year’s keynote speaker was the infamous, and Forbes’ CEO of the Century, Mr. Jack Welch. Through an interview style dialogue format, Mr. Welch spoke on the mandate for HR, the economy, and business strategies.  Jack Welch reiterated the message that strong HR is absolutely vital to the success of any organization in the new economy.

Jack Welch’s Words of Wisdom (quotes not translated word for word, but the general idea and meanings expressed below):

• HR’s role in the organization: “Right alongside the CFO.”
• “HR equals constant upgrading.  100% transparency into performance. Take care of the best and move up the averages, much like a GM/ player personnel director in sports. The only way to win is to have a great team.”
• “Get out of the picnics, birthdays, insurance form business. Nobody wants to see some crazy HR cheerleader in there while [the organization] is leaking. Making a company informal is a very big deal.”
• On Management: “Layers of bureaucracy… that game is over.”
• On Performance Improvement: “I guarantee you that your compensation plan is stale. You get the behavior you measure and reward. Well thought, long-term focused comp. programs work.”
• “Longer-term compensation will be a great outcome from this economy. It’s all about getting the best team.”
• On Effective Management for these turbulent times:  “Over-communicate, and communicate like hell to improve performance.
• On ramifications of the recent economic woes on: [Many workers are now looking to become entrepreneurs as they believe] “The hell with corporate America. That change is real.”
• For job seekers: “Pick the job that turns your crank. Don’t pick by industry.”
• One Trend: “Online education is the real deal.” (Jack and his wife have started an “online MBA”)
• On the economy: “Enormous chance [for businesses] to change and reset, but takes a culture of innovation. The one thing you have to do in a time like this is communicate like hell… so your people know every move that is going on. You don’t go in and just slash positions and they don’t know why. HR defines a company in bad times.”

For more Human Capital and HR Best Practices checkout the official 2009 SHRM Annual Conference Blog.

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Top Operating Partner Pitfalls to Avoid

The Business Case for Operating Partner support is clear:

Today’s market and economic environment requires proven and experienced management expertise and a methodology that increases the probability of consistent success.  Wealth Creation occurs with Timely Strategic and Operational Execution coupled with consistent improvement.

Common Pitfalls Working with an Operating Partner:

1. Hiring single focused functional consultants as opposed to holistic advisors;
2. Divorcing the executive team from operational value enhancement;
3. Failure to respond to changing market dynamics including lack of commitment of resources to drive and manage change;
4. Confusing oversight and poor governance practices with effective management; and
5. Focusing on short-term targets.

Technorati Tags: Operating Partner,management best practices,wealth creation checklist,strategic effectiveness

Using Consultants and Advisors to Drive Change

The complexity of middle market enterprises requires investors to play coach, designated hitter, free safety, GM, agent, and team mother.

While some investors have the time and expertise to provide strategic advice on operational issues; many seek out operating advisors to drive business improvement (Four out of 10 private equity firms have retained consultants or operating partners to help their portfolio companies according to latest Thompson Reuters research).

Moreover, it is becoming increasingly common for private equity groups and institutional investors to utilize operating partners for intellectual capital, functional expertise, and change management.

Operating advisors benefit companies by tying operational improvement (better margins and better daily results) to strategic opportunities being created by our new economy.

For example, the current reduction of small and mid-market businesses creates a sea of opportunity to acquire customer bases and top talent. Operating advisors bring proven practices and methodologies to acquiring, partnering, and changing existing enterprises to take advantage of the market changes. Businesses that clumsily attempt to change will end up making things worse and can potentially negatively impact customer service, frighten away ‘A’ players, have the potential to thoroughly de-motivate the entire organization.

While not the first thought, especially when a business is cash constrained, outside help is often required to combat root-cause issues that are multi-pronged across an organization. Without a holistic approach, trying to solve singular or functional issues can cause “slinky” problems elsewhere in the business.

Companies need holistic, strategic advice that is actionable and also granular hand-holding, change management, and tactical support.

Moreover, their are advisors that aren’t fee-driven that will put some of their own “chips on the table” (i.e. flexible fee structures). From ACG’s magazine Mergers and Acquisition” in the June article titled “The Consultant Dilemma”: many of these engagement “…cost $250,000 and return $1.5 or $2 million.”

Common Value Creation Levers Initiated by Operating Advisors:

1. Applying Matching Principle (Resizing Customer Acquisition, Service, or Operating Costs to New Economy)

2. Targeting, Productization, and Brand Equities Improvement

3. Operational Improvements that improve margins and generate EBITDA improvement (optimization and maximization strategy and tactics)

4. Analytics Driven Decision-Making (Augment decision making with reporting, dashboards, primary market research and competitive intelligence)

5. Create Value-Added Alliances, Joint Ventures, and Partnerships

6. Create a Pipeline of Acquisition potentials based on organizational and strategic fit

7. Alternative Distribution Creation

Technorati Tags: value dirvers,value levers,value creation,operating scale,operating partners,consultants,advisory board,board of advisors

Investment Criteria Due Diligence Checklist for Technology, Services, and Outsourcing Businesses

Did you know that the majority of M&As never realize their value?

In fact less than half realize positive returns.  Here are a few of the most common reasons:

1. Due diligence that is limited to financial and contractual perspectives only (versus operational, positioning, resource based analysis, etc.);
2. Lack of incentive compensation for corporate development and merger implementation team to achieve milestones and targets within specified time frames pre AND post-merger; and
3. Failure to utilize an experienced corporate development team.

Before embarking down the time consuming and expensive due diligence process a high level “Shared Vision Check” should be undertaken by all involved constituents.

The check is simple: Is there an agreed upon Shared Vision for what the Happy Ending is for all constituents?

When discussing the “Shared Vision” putting together a preliminary due diligence packet consisting of some of the following items will help steer the conversation (major items to review as part of due diligence prep):

• Annual sales-by-sales rep and by lead source
• Clients, years as customers, frequencies, revenue and services by client
• Technology roadmap and customer usage
• Review of service delivery processes, tools, and playbooks
• Review of third-party partnerships and alliances
• Client satisfaction (measurement by client and product as applicable)
• Annual lost revenue (by client and product as applicable)
• Current pricing schedule and rates
• Unique service/product offerings
• Vision, mission and other pertinent organizational DNA / cultural materials
• Substitute (competitor) offerings

Many misunderstand the true value of due diligence. To the misinformed, it’s the time to review a company’s financials. However, when done right effective due diligence creates an “Investment Thesis;” otherwise to be used as a detailed action plan to steer the business forward to ensure goals and milestones are realized.

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Maximizing Value Checklist: Sizing Your Potential for Wealth Creation

New businesses are created for a variety of reasons (more than 600,000 each year according to the SBA!), but less than 1% reach $10M in annual revenues in less than ten years.  This is often because most companies have multiple daily challenges that mask the root barriers to value-creation and growth. 

The checklist questionnaire below is based on a learned set of “attributes” that all high-performance, fast-growth technology-enabled business services possess. 

Each question below is worth 5 points.  If you can answer YES to the question, add five (5) points. (Maximum score is 100 points.)

Positioning Issues Checklist

1. Have you verified that the target market is of sufficient size? (This includes creating a database of contacts)
2. Are you in a red ocean (blood cutting intensely competitive market) or blue ocean (open sea of opportunity)? (If in blue ocean marketplace then sail on and add 5 points)
3. Are you the dominant player in your market or niche currently?
4. Is the business model of such nature that it has the potential to be a “branded” model in the sector?
5. Have strategic alternatives and alternative distribution (alliances, joint ventures, partners, channels) been identified and created?

Management Discipline Checklist

1. Is operational performance in the top quartile?  (Benchmarking performance is key to justifying above average market valuation)
2. Does your organization administer and achieve corporate targets and rely on forecasting?
3. Are the business processes scalable and can they stand the test of exponential growth?
4. Does your organization provide a dashboard of eight to twelve metrics for top management and the Board of Directors?
5. Do you have the functional support (in-house or outsourced relationships) that is needed at each position?
6. Are there current incentive programs aligning all stakeholders?
7. Have leadership and training programs been implemented?

Tactical & Operational Checklist

1. Do you know the effect customer satisfaction leads to referrals and cross sell opportunities?
2. Does each team member from the executive team to front-line staff have a clear “definition of success”?
3. Does the business have monthly, quarterly and annual corporate targets broken down to daily activity metrics for each location, department, and team member?
4. Do you regularly identify classes of performers?
5. Are IT/MIS and HR (Human Resources) both contributing to the strategy and financial performance of the business?

Financial Engine Checklist

1. Is your capital structure adequate to ensure growth?
2. Does the capital structure motivate management and facilitate additional funding needs?
3. Does the capital structure support the long-term strategy of the company? (Versus settling for “good for now”)

Total Score: _________________

Evaluating Your Score: Checklist for Assessing Potential for Wealth Creation

Anything below an ‘A’ highlights the room for improvement.

Score: 40 – 71 Percent: Opportunity For Rapid Improvement

Your organization is clearly not living up to its potential and the opportunity for improvement is sizable.  The fix starts with tackling your root-cause deficiencies while enabling your key executives and employees to focus on improving daily performance.

A full assessment and analysis should be completed immediately by an outside firm. By first analyzing the business holistically including strategy, operations, and financial, and unbiased from what the opinions of management, board members, or other stakeholder’s believe ensures that the right issues are identified and resolved.

Often, strategic issues are affecting the effectiveness of the organization and execution flaws are impeding strategy.  Since one is caused by the other, the issues cannot be resolved without first identifying the underlying root cause issues.  Improving performance starts with solving the real issues, not the perceived!

Score: 71 – 89 Percent: Rising All-Star

Your organization is well on its way to creating exponential wealth and shareholder value. While many processes and systems are in place there appears to be some areas that need attention and improvement.

Many times organizations pinpoint a singular barrier, but ninety percent of the time the solution needs a combination of strategic guidance, operational improvement, management augmentation, or capital in order to solve the root underlying issues. Shore up your deficient areas and your organization will be well on its way.

Score: 90 Percent Plus: Superior Performing Organization

Your organization is in an elite group! Congratulations on building such a refined and robust organization. Superior processes and systems are in place and generating above average returns.

The next step is for the entire executive team and all Board of Directors to complete this checklist to determine if there is agreement and alignment.

 

Where to start? Management augmentation is standard procedure for generating operating improvement, but first start with a business assessment and analysis to determine the underlying issues before throwing away resources on a singular functional challenge.

1. Assess people capabilities against performance goals;
2. Assess internal capabilities: process, system (software, technology, and tools);
3. Assess external opportunities and threats;
4. Create detailed change management action plan towards constituency alignment;
5. Collaboratively create roadmap of action items with RRM (Roles, Responsibilities, and Measurements). 

 

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The Role of the Chief Strategy Officer

Question: Why do most small business owners fail at strategy?

It is well documented that small businesses do fail at strategy: according to the SBA approximately 600,000 small businesses are created every year and less than 1% make it to ten years and $10M in revenues. 

Ephor Research has found that failure is primarily because of resource constraints (capital and talent), lack of defined processes and operating model, and shortage of strategic options.

A “Chief Strategy Officer” (CSO) can create an effective and relevant strategy which addresses resource constraints resulting in strategic options with scenario plans as well as connection of the strategy to both the financials and daily execution of the business. 

While the CEO makes the ultimate decisions; a CSO explores alternatives and creates options.

The role of the CSO is not one of “business planning;” as the job of budgeting/forecasting should be left to the department heads and finance. 

The CSO’s job is focused on exploring strategic alternatives, examining potential acquisitions and alliances, ensuring healthy dialogues, and facilitating creative tension among executives and the Company’s Board.  CSOs perform primary market research, market intelligence gathering and ensure that the executive team and Company Board are able to understand implications of various choices in order to make informed decisions. 

A CSO is a consultative role; part leader and part doer, an experienced visionary with the responsibility of ensuring execution follows the company’s strategy.  This unique background takes a multitude of different operating experiences, must include being both a creative thinker and influential collaborator (not a dictator or “me first” commando), and must ultimately be a detailed tactician / project manager.

A small businesses by its nature has limited options: either grow organically, increase the financing, merge, or sell.  Ultimately, the #1 job of the CSO is to create “Optionality” for the team.  As a business grows and becomes profitable it creates options for itself and the stakeholders such as:

1. Financial and Capital Raises
2. Strategic Partnerships and/or Technology Partnerships
3. Joint Ventures and Alliances
4. Market and/or Product/Service Expansion
5. Strategic Investor
6. Alternative Product Distribution

The CSO role need not be an internal or dedicated resource.  Many firms have elected to outsource this role to domain experts and advisory firms that can bring experience, intellectual capital and best-of-breed processes.

 

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Creating Scale: Playbooks Drive Employee Accountability and Improve Daily Performance

Playbooks are informative instruction manuals for employees that create scale in a business by improving new employee onboarding success rates and by ensuring that employees daily activities are aligned with a firm’s objectives.    

An effective Playbook ensures accountability of daily performance by providing a framework for onboarding, training, coaching, employee discipline and incentives.

An effective Playbook includes:

• The employee’s objectives and metrics.
• The approach, programs, and activities that will enable the employee to meet their near and long‐term activity and results goals.
• Clear how-to instructions for team members to  support the financial objectives of the company through their daily activities.
• Methodology for the functional aspect (sales, manufacturing, customer service, etc.) of the business model that pertains to the employee.
• Narrative and descriptive text as well as images, visuals, audio, assessments, checklists, and evaluation tests as needed.

Technorati Tags: playbook,employee playbook,creating scale,operational scale,operational best practices,management best practices

Creating Operating Scale

Have you ever wondered why Fortune 500 companies have significantly higher revenues and profits per employee? 

Creating operating scale in a business is one of the main responsibilities of effective managers (and a requirement for both growth and efficient use of capital).  

Methods for Creating Operating Scale:

1. Over-communicate corporate mission, vision, values, and both near and long-term financial objectives on a regular basis. 
2. Ensure transparency of corporate and individual performance.  Start by publishing monthly operating reports that detail the operating performance of the business including current gaps and bottlenecks.
3. Institute Playbooks for every role in your organization (Playbooks are instruction manuals that guide daily performance and hold the employee accountable.)
4. Implement a lock-step onboarding program for all new employees which details the first 30 and 90 days in granular detail including activities, goals, and the definition of success. 
5. Initiate regular department, function, and team communication rhythms (i.e. routine, scheduled meeting times) to ensure effective top-down AND bottom-up communication at the “team level.” Improvement of “Team” dynamics is always a requisite for improvement.
6. Create a Yearly Initiative.  Examples:
1. Implement a culture of “Service Excellence”
2. Productize all services
3. Validate and refine expansion economics including customer acquisition and service model
4. Implement company-wide reporting and dashboards
5. Start benchmarking against top competitors or substitutes
7. Have everyone sell.  Teach everyone how-to sell including having all employees be proficient at delivering the value-proposition, elevator pitch, and outline of core products and services.
8. Create Lifecycle “Productization” for your buyer so that at each stage of their business you make it easy to buy.  Both customer referrals and retention is enhanced with each and every additional product, service, or “tie-in” to the customer (technology for example).
9. Utilize Targeting (market segmentation) to increase your probabilities of success as well as cost-effectiveness of your sales and marketing efforts. 
10. Implement Human Capital Best Practices including: Strategic Workforce Planning, Screening and Assessments (Top-Grading and Birkman for example), Leadership Planning, Employer Branding, and Talent Management System (HRIS).

The business case for operating scale is simple: today’s market and economic environment requires effective management to survive; and wealth creation is achieved with timely operational execution coupled with consistent improvement. (Strategic effectiveness creates exponential wealth.)

Technorati Tags: operational scale,operating scale,management best practices,management scale

 

Business Owners Need to Get Paid > How-To Create an Institutional Investment

Business owners always say to me, “Why would I need capital and advice once I get to $5M?”  

This is a short-sighted view and one of the main reasons why less than 1% of all companies reach ten years and $10M in revenues (SBA Department of Labor finding). AND also why very few business owners achieve financial freedom. 

An executive team is effective, healthy, and wise when it creates “Optionality” for itself. 

While the days of angel investors and “hockey-stick funding” went away with the stock market losses in 2008; enterprises with a unique business model, effective management, and positive cash flows have access to institutional investors (private equity, SPIC,  family office investors, strategic investors, to name a few options) whom can provide Optionality.  

A small business has the following limited options:

1. Grow organically;
2. Merge to become bigger; or
3. Sell.

Institutional Investment creates additional options such as:

1. Get paid for the business you created by selling a percentage to institutional investors while still retaining majority control;
2. Grow by acquiring additional locations, competitors/substitutes, technology add-ons, or distressed revenues;
3. Expand into new products/services or markets; or
4. Acquire top talent.  

Ten Criteria for Institutional Investment

1. Repeat Customers. The main reason why most small businesses fail is that they run out of cash. By building a business with a recurring revenue model a firm not only creates more stable financial footing, but also opens the door for institutional investment.  
2. Easy to Realize 5X+ Revenue Growth.  Growth capital investors are seeking companies that can grow at 40% per year or more and realize a 40% return on invested capital.
3. Significant Barriers To Entry. What is in place to prevent other companies from copying what you’re doing?
4. Strong Financial Indicators. EBITDA of at least 10%, above industry average Gross Profit, cost-effective customer acquisition costs. Understanding of these key metrics is requirement before scaling and growing. 
5. Consistent Operational Performance.  This means steady margins, EBITDA, and new customers quarter after quarter.
6. #1 or #2 Market Targeting.  Unless you are positioned #1 or #2 in your market your branding and strategy needs work.  At the same time investors like to see some competition because it validates that a market exists.
7. 30 Named, Referenceable Clients.
8. Investable Market Sector. There are a plethora of investable industry sectors.  A few “hot” investment sectors for the second half of 2009 include:
   • Healthcare business services
   • Healthcare technology-enabled business service-oriented solutions
   • Business Process Outsourcing (BPO) including Human Resources Outsourcing (HRO) and Finance and Accounting Outsourcing (FAO)
   • IT mobility solutions
   • Marketing and online technology-enabled business solutions
   • Workforce software and technology
   • Small and mid-market focused SaaS solutions
   • In summary: anything that improves productivity while simultaneously reducing costs.
9. Scalable operating processes.  Does each new dollar invested at the field-level result in a higher percentage return of profit?  If not, additional operational refinement is needed. 
10. Effective management processes.  Monthly operating, sales, and financial performance is known, reported, and effectively communicated to all employees.

The institutional investment criteria listed above is a roadmap for wealth creation.  Are you and your firm ready for analysis by outsiders on a regular basis? 

It all depends on your “Happy Ending.”  Is your “Happy Ending” to create wealth and ensure a lifetime of financial stability for your family or to have 100% control of your business?

 

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