Inorganic Growth: Applying Leverage

So we are at the point we are going to try to redeploy the capital that we have saved in the transaction by our Cost Replacement strategy.  I am going to talk about the ways to deploy this money in a Revenue Enhancement mode.  The challenge with Cost Reduction is that all companies are different in their ability to save cost.  This makes it difficult to come up with a plan that will work for most if not all businesses.

On the other hand, Sales and Marketing are functions of every business.  These are areas that can have capital applied to them effectively and so make a great Leverage model to talk about.

Now, you can hire additional Sales People or increase the value of the partnership to Sales Channels.  These are both viable, given that you are really hiring them to increase the number and quality of the prospects that you get.  What this means you are using these resources primarily for Lead Generation which is a Marketing function in any case.

So, we are back to the ways to increase Lead Generation so that the business will expand.  Choosing to increase the Sales budget, but this should be compared to other increases in the Marketing Budget.  One thing to think about when you do think about it is Scaling as it relates to Lead Generation.  Many Marketing activities (Cold Calling, Networking, Referrals as examples) require an investment of time as a resource.  This means that the ability to scale these depends on people and time.  One of those examples, Cold Calling, can be outsourced for scaling purposes.  But Networking and Referral Marketing are both tough to scale because of this.

What this means is that you should look at any Marketing Strategy (SEO, PPC, Radio, TV, Print) that uses money and generates leads first.  There will be an ongoing expense for a campaign, but these time frames can be limited.  This allows an owner to measure the results and reallocate the money to other areas that are working better.

So, there you have it.  A first step in growing a business that you have acquired is to take the savings and apply it to Marketing and Advertising.  You may have come up with some better ideas on the cost side, but Marketing should be in consideration in any case.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

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Sonoma County: News and Notes

I apologize for being slow in getting these out.  Post-Fire Business Activity has been quite high and I have had some trouble getting these out.  I want to start by talking about Calix.  The company announced results before Valentine’s Day and I want to talk about that.  Revenue for the quarter was $137M and the company lost $0.15 per share.  This was slightly lower than Wall Streets estimates but at the low end of the company guidance.

Once this release was out the company was down in aftermarket trading.  The stock has since gone positive and I want to talk about both of these items.

I believe the intial negative reaction was due to two items.  The company has had lower product revenue in 2017 than it did in 2016.  The total revenue is up but is skewed by the increase in services revenue.  The challenge is that this service revenue is negative gross margin (sold at a loss) today and predicted to be substantially below product gross margins (products are a lot more profitable).  All of this came at a cost of more Operating Expense (OPEX) than in the past, though this trend has reversed itself in the 4th Quarter.

That lowered OPEX is the first reason that I think the stock has recovered.  It has been very clear that the company has been spending too much money.  By lowering these costs, there seems to be a recognition for what I have been asking the company to do for the past year.

The wild card here is the announced contract and trial deployments with Verizon.  The analysts have done a terrible job with this.  Verizon already has a substantial Fiber To The Home (FTTH) project with FiOS.  It seems unlikely that Verizon will be doing this new trial for FTTH.  It seems much more likely to part of the 5G Wireless deployments that Verizon has also announced.  There is good news and bad news for this.  A FTTH home deployment in Verizon represented millions of endpoints.  It is unclear what a 5G rollout would represent.  This is partly because the density of 5G stations is unclear.  Verizon believes that it will be able to get several hundred megabits per second with distances of say 1,000 ft (3 football fields).  Other carriers (in other spectrums) think the distance will be more like 300 feet (1 football field).  I think the issue is up for debate and you may want to look at this article as an introduction.

Wireless cells would be a nationwide rollout which would be good, but again it probably won’t be millions.  Imagine rolling out a cell antenna every couple of thousand feet across Montana on I-90.  So 5G coverage will be less than 4G for a long time.

What this means to me is that you are buying an option on this Verizon business with the stock.  Verizon will not stand for high prices and I suspect analysts question the gross margins on the deal.  No public information is available, but you would have to think that this will be a squeeze.

Finally, this notion of a multi-year ramp in Verizon is flawed (see the Q & A with Christian Schwab on the call).  The company quoted past Fiber Rollouts.  I take that to mean FiOS.  Within the 2 years from first deployment, Verizon was building FiOS at $150M/quarter business rate.  By setting the expectation at about 10% of that, I would guess that Calix is really unsure what is going to happen here.

Have a great day and weekend!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Inorganic Growth: Leverage

When I talked about a Strategy associated with Inorganic Growth, I did this in two steps.  The first step was to provide a context to talk about a specific strategy.  I will approach Leverage in the same way.  We will end up with a way to look at our Cost Replacement strategy and where we might find some of the best Leverage.  Today, we will focus on the context for that discussion.

First, let us return to what Leverage is.  Leverage in this context is all about how to apply the pot of money from our strategy to provide the greatest improvement in the numbers once that money is spent.  We are going to be evaluating this improvement based on profit improvement.

There are 2 dimensions that I want to talk about spending the money.  The first dimension is whether the money will be spent on Revenue Generation or Cost Reduction.  In financial terms, cost reductions are going to be the most attractive ways to spend money.  Every dollar saved becomes a dollar of profit.  Revenue dollars fall through to profit only after the cost to make the product or service happens.  There are many ways to spend money for Revenue enhancement.  This makes these types of spends much more attractive.

The other dimension is whether this is a one-time expense or an ongoing expense.  One-time expenses are more attractive because they have end dates associated with them.  Ongoing expenses are generally related to hiring but can be other expenses as well.

Now, I know you are thinking:  How can you have an ongoing expense that is a cost reduction?  I will admit that these situations are specific and not always available.  One example would be an improvement in benefits that would allow employees to reduce their dependence on Worker’s Compensation for medical treatment.  The reduction in Worker’s Compensation may more than pay for the increased costs for benefits.

I want to return to an example from our Strategy discussion.  We were talking about hiring a Salesperson.  In that case, to make a company more profitable than the amount of Gross Profit from the Salesperson has to exceed their fully burdened cost.  Gross Profit is the Revenue of that business minus the costs to make it happen.  Fully burdened cost is the total cost of an employee not just their salary.

To be specific, let us say you hire a Salesperson for $50,000.  Most burdens can be estimated at 30% of salary or in this case $15,000.  This means that fully burdened cost is $65,000.  To make this hire profitable, that means that the business generated by this person must generate over $65,000 in profit.  Let us say that you get to keep 50 cents on every dollar sold (aka 50% Gross Margin).  That means the Salesperson needs to generate at least $135,000 in business to be profitable.  If I was setting a quota for that person, I would do it above $150,000.  That quota might be substantially higher.

I hope now that we have set the context, we can talk about some ideas.  Have a great day!

 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Inorganic Growth: A Basic Strategy

There are lots of very complex Mergers and Acquisitions Strategies.  Some of them are multi-step or require a significant amount of Business Transformation expertise.  I want to provide here a solid strategy that is relatively straightforward to implement.

Let me call this Strategy the “Cost Replacement” strategy.  When two companies merge, there is some extra cost associated with the transaction and integration of the businesses.  If we set that aside, there will be a number of redundancies – people in the same position in both companies.  There is also likely duplicate spending beyond that.  For example, you won’t need to file 2 tax returns.  What this means is that there are “synergy savings”.  These are the natural savings from being bigger.  Our goal is to spend these savings wisely.

Let me use an straightforward example for small businesses.  In most small businesses, the Owner/CEO is the primary salesperson for the firm.  Now that the two firms are one, you can replace the outgoing CEO with at least one permanent Salesperson – perhaps more.  If you do that, then you will have replaced a more expensive position with a less expensive position, and gotten a person dedicated 100% to Sales. This approach can lead to significant business increases if executed well.

An overall methodology would be to calculate all the synergy savings and put them in a bucket.  This is before we rationalize things like advertising budgets.  That pool of money creates the ability to hire people to grow the business.  So when you go into this, you need to understand where your highest leverage positions are.  For most small businesses this will be in Sales and Marketing.

This strategy is not the most elegant or precise model, but it is simple and really executable.  The big challenge for this or any model to understand where the best leverage in the business is.  This requires an honest understanding of the business.  I worked in one company that was acquired where the entire Sales team was dismissed 3 months after the deal closed.  And they wondered why Sales decreased.  They had thought they had this finely tuned Sales team.  Of course, if that were true it would be saying the current team was lazy.  They should have been working all day to close deals with the existing products.  It makes no sense to assume a Sales team can pick up a new product, push this product effectively, and remain as productive as they are.  This is true even if you are buying a competitor.  Part of the reason to do this is to have more feet on the street landing customers.  In any case, that leverage is where we go next.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!