One Year Thirty Minute Challenge

The One Year, Thirty Minute Challenge :: Week 27 :: Finance :: Lifetime Customer Value

July 5, 2020 Tags: , , Mike Chirveno

I remember it vividly. I was a freshly minted consultant. It was one of my first engagements. The client’s business was growing quickly, but at the end of every month, he barely had any money left.

So, I did an individual profit and lost statement for every single customer. I did some quick math and calculated the percent of each revenue dollar (at his current volume) that went to cover fixed costs, then applied the remainder of that dollar to the variable costs associated with each individual customer. Not a perfect methodology, but it worked well for quickly flushing out the problem. Eureka – the lightbulb moment. For every revenue dollar from the client’s biggest customer, he was breaking even (the reasons why are interesting, but that’s another story for another day). The more this giant customer spent, the more my client “broke even”. We applied the same methodology to every other customer and even found a couple that he went backward on for every dollar the customer spent.

I’m a strong proponent for a P/L for every customer. I realize it only makes sense in certain industries, but if it works in yours, you should do it.

That’s not the topic for this week’s One Year, Thirty Minute Challenge, but that type of math is at the heart of this week’s exercise.

In many industries, a company is upside down financially when they first begin a relationship with a customer. The costs associated with marketing, advertising, selling, onboarding and servicing the customer the first time exceed the revenue from the customer’s initial purchase. Hopefully, just a few purchases in, the company is right side up and making money. In the course of calculating the acquisition and onboarding costs, the company should be projecting and making customer experience decisions based on the potential lifetime value of the customer. Loyal, happy customers, depending on the industry, could represent a lifetime revenue stream of 1000s, 10000s or even 100000s of dollars. Happy customers tell their friends. That can translate into even more lucrative customers.

This week’s One Year, Thirty Minute Challenge is to identify the factors that constitute the lifetime customer value calculation for your products and services.

Let’s jump into this week’s exercise.

  • What are the costs associated with acquiring a new customer? Depending on your industry, it could include annual marketing and advertising expenses (divided by the number of new customers each year), direct selling costs (lead generation, sales technology, sales salaries, sales commission), onboarding costs (customer training, installations services).
  • What does the customer pay for the product?
  • How many times will the customer buy the product? What is the range from the most sporadic customer to the most loyal customer?
  • What does it cost to produce each copy of the product? Depending on your product or service, it will include cost of goods sold, plus additional costs for packaging and delivery.
  • What does it cost to service already acquired customers? There might be customer service calls, technical support calls or costs for billing and collecting.

 

The math should look something like this –

Number of times purchased * purchase price

– number of times purchased * cost of goods sold (and additional costs)

– initial acquisition costs

– ongoing support costs

= total lifetime value

You’ll probably want to do some math that’s similar to what I did in my initial illustration to reduce the top line purchase price number to reflect the impact of fixed costs.

So, what do you do with this information once you have it? Here are some ideas –

  • What are the primary drivers of purchase frequency? How can we move less frequent purchasers to more frequent purchasers allowing us to spread the acquisition cost over more units and consequently increase lifetime customer value?
  • Can we draw any correlation between purchase frequency and acquisition costs or support costs? Does a more expensive acquisition equal a more frequent purchaser? If so, maybe the extra acquisition cost is desirable? Maybe there’s an inverse relationship between frequency and support cost – the more they use the product or service, the less they need support.
  • If a customer is ready to defect, what can we do to save them? Is there any correlation between defecting customers and their use of support? Based on their potential lifetime customer value, what can we afford to spend to keep them?
  • How can we leverage the personal networks of high total lifetime value customers to find more like them? They should be our best brand ambassadors.
  • Since high total lifetime value customers have demonstrated a willingness to spend money with our company, are there other products or services that might be of interest to them?

 

Once you’ve completed your exercise, begin educating your team on the importance of lifetime customer value. The first time that new customer walks through the door could be the beginning of a long and profitable relationship. Treat the opportunity that way.

The One Year, Thirty Minute Challenge :: Week 26 :: Culture :: Imperatives

June 28, 2020 Tags: , , , Mike Chirveno

“Culture eats strategy for breakfast.” This quote from Peter Drucker has surfaced multiple times over the course of the One Year, Thirty Minute Challenge. The best strategies and tactics are dead on arrival when they’re unleashed into a company with a toxic culture. This week, we’re focusing on culture for the third time in the series. During the course of a consulting engagement, I’m occasionally asked if I have a list of cultural imperatives, that is, attitudes, approaches to work and actions that should absolutely be baked into the DNA of the organization. I do and we’ve already talked about two of them in earlier One Year, Thirty Minute Challenges – Mentor Mindset in week 4 and Lifelong Learning in week 16.

Here’s my complete list –

  • Vulnerability – The willingness to be transparent, admit weakness, and ask for help when we need it, is the shortcut to building trust inside the organization. Trust is the currency we spend with one another as we build an effective team.
  • Confront the Brutal Facts – Jim Collins reminds us that accurately assessing ourselves, our team, our products and services, our operations, our financial situation, and our competitive environment is mandatory. No rose-colored glasses allowed.
  • Sacrifice of Sacred Cows – No idea, no product, no service, no “that’s the way we’ve always done it” is out of bounds. Cling tight to core values. Nothing else escapes scrutiny.
  • Team First – When making decisions, the good of the organization comes first. Self-serving, self-promoting and personal advantage have no place in the organization. That must apply from the business owner down to the most recent entry-level hire.
  • Learning Orientation – The minute we think we know it all is the minute the countdown clock to the death of the organization begins. The organization will never grow beyond those who lead it, so we must continue to improve and learn – personally and professionally.
  • Mentor Mindset – Every team member is there for the good of the other team members. Owners and managers are committed to staff development, teaching not just the “what” but also the “why”.
  • Bias for Action – Doing is better than thinking or talking. Dive for the ball when a teammate drops it. If you promise to do something, do it.
  • Over-communication – Information is lubrication for the wheels of the organization. Tell what you know, quickly and completely. If owners want employees to make the same decisions they would make, employees need access to the same information the owners have.

 

Later in the One Year, Thirty Minute Challenge at least one of these will merit their own thirty-minute exercise, but that’s not the goal of this week’s exercise.

Let’s jump in.

This week, I want you create your own list of cultural imperatives – those attitudes, approaches to work, actions, and commitments to one another that must be present in your organization. Every organization is different, so your cultural imperatives will be different – but if they truly are imperative – i.e. you must have them baked into your corporate DNA or the organization will fail in living out its mission, reaching its vision and living up to its core values – you must identify them, live them out, talk about them, train on them and drive them deeper into the fabric of the organization.

One note before you begin – let’s quickly talk about how core values differ from culture. Core values are the shared, intrinsic beliefs of those in the organization. It might be a love for small business owners, a passion for camping, a desire to make learning available to those who previously did not have it or a commitment to treat client resources (money, house, car) as if they were your own. Someone who didn’t share those beliefs would continually find themselves uncomfortable in the organization. Everyone else would be rowing in harmony with the values and the outlier would feel like they were being dragged along.

Culture is how we live inside the organization. After we’ve been admitted by virtue of our shared values, culture is the mashup of our attitudes, approach to work, commitment to one another, commitment to customers and commitment to the ideals and health of the organization.

So, pull out your pen and notepad or open Evernote and begin. I’m giving you five questions as thought starters for identifying your cultural imperatives. Underneath each question, I’ve included some statements. Some are positive, some are negative, and others are neutral. I’m not asking if they apply in your organization. I’m tossing out examples of attitudes and actions that might be indicative of company culture. I’m wanting you to identify the cultural must-haves you want and possibly identify some current attitudes and behaviors you should jettison.

  • What are the non-optional behaviors in your organization?
    • Show up on time
    • Work hours are flexible as long as the work is done
    • Arrive at meetings on time
    • Always use all your vacation days
    • Never use all your vacation days
    • Work through lunch
    • It’s ok to disagree with a superior in a meeting
    • It’s never ok to disagree with a superior in a meeting
    • Answer an email no matter what time it comes
    • Only answer emails Monday through Friday
  • What are the attitudes you display in your interactions with one another?
    • There’s clearly a pecking order – the highest paid person’s opinion matters most
    • We have a true meritocracy when it comes to opinions – the best idea wins the argument
    • It’s ok to ask for help when I’m stuck
    • Departmental in-fighting is the order of the day
    • We work hard to work as a team – there’s no blaming – just solid cross-discipline problem solving
    • We’re good with ambiguity – we know there’s plenty we don’t know and welcome new situations that challenge the status quo
    • We’re committed to one another – my boss and coworkers have my back
  • What is your approach to work?
    • Good enough is good enough – if it’s not broke – don’t fix it
    • We strive for excellence in everything and nothing less is acceptable
    • We dive for the ball when someone drops it
    • If someone screws up – it’s on them – they bear the consequences of their own mistake
    • Good ideas can come from anywhere
    • All the good ideas come from our creative people – that’s their job
    • When we tackle a problem, we do our research – we want to know the truth even if it hurts – that the only way we can create great solutions
  • What is your approach to customers?
    • We take care of each customer like they’re the only one
    • Some customers are unreasonable and if they leave it’s ok
    • We’re always looking for new ways to serve existing customers and gain new customers – making our products and services better
    • We want not only our products and services to be superior, we want the customer to have a great customer experience
  • How do you view the organization?
    • I’m just a small cog in the machinery – doing what I’m told
    • I have a chance to leave my mark in the organization – my work matters
    • There’s more going on here than just making money – we’re making life better for our customers
    • All the company cares about is money
    • The people who lead the organization fairly balance the interests of employees, customers and shareholders
  • How do you communicate in the organization?
    • There are lots of islands of information
    • There are single points of failure in the organization – people, who alone, know specific information or how to do that job
    • Information flows freely from the top of the organization down
    • Information flows freely from the bottom of the organization up
    • Some conversations are off limits

 

After you’ve worked through the questions and have your own personalized list of cultural imperatives, sleep on it for a day or two and review the list. What did you miss?

Then roll out your list to the leaders in your organization. Does it describe the kind of place they’d be proud to work? If so, why? If not, what needs to be tweaked and why?

The implementation merits its own One Year, Thirty Minute Challenge and that will come later, but knowing the kind of workplace you’re after is the right place to start.

Here’s a sneak peek on implementation. Once you have your culture described, how do you codify it? How do you live it out? How can the leaders in the organization model it? How can you recognize and reward it? How can you extinguish attitudes and behaviors that don’t fit? How can you reinforce it in one-on-one and group training? How can you reinforce it in day-to-day work interactions?

The One Year, Thirty Minute Challenge :: Week 25 :: Operations :: Processes

June 21, 2020 Tags: , , , Mike Chirveno

If you want to be tied to your desk, be forced to solve every problem yourself, never enjoy a day off and worry constantly about whether or not work is done the way you want it done, ignore this week’s One Year, Thirty Minute Challenge.

Creating processes is the key to delivering a great customer experience, ensuring quality, scaling your business, decreasing mistakes and defects, empowering employees and increasing velocity.

New business owners struggle with early hires. To the detriment of the organization, they often hire people “just like them” so they can feel confident that the work will be done just like they would do it. The better alternative is to create detailed processes for everything so that every new hire, as they follow the processes, can do the work just as the founder intended. Then, as new talent is added to the organization, those with different skill sets, personalities and gifts can add new strength to the organization and bring increased clarity and refinement to the processes.

Let’s quickly clarify the distinction between processes and policies. Processes are for those tasks where there is no wiggle room – the way we mass-produce widgets, the way we pay a vendor invoice, the way we complete new employee documentation. Policies are for those tasks where there might be some gray areas – when do we give a refund, when do we allow a reservation to be cancelled without a cancellation fee, how many bereavement days do we allow when an employee’s family member dies. Processes are like railroad tracks – you can’t veer at all from the track without negative consequences. Policies are like guardrails – if you drive anywhere between them, you’re safe. With processes, follow the letter of the law. With policies, follow the spirit of the law.

Back to this week’s challenge. In thirty minutes, you won’t be able document all the vital processes in your organization. So, in this week’s challenge, we want to construct the framework that you’re going to use to create your process documentation. For processes to be most effective, they must be complete and have sufficient granularity for those who have to follow them.

Here are some suggestions for putting your process documentation together –

  • Why does this process exist? What is the endgame? Is it part of a larger task (for example, if this is the process for invoicing a customer, how and where does it fit in the larger task of obtaining, processing, and filling a customer order)?
  • Who is responsible for this task? Who is the backup person if the primary person is unavailable?
  • What is the requisite knowledge for this task? What is the requisite experience for this task? Where can that knowledge and experience be obtained.
  • If the person responsible for this task has a problem or question, who do they ask?
  • What resources are required for the task? If software is required for the task, who adds new users or assigns privileges? If there’s a software problem, how do you get technical support? If equipment is required, where is it located? Who provides support if the equipment breaks down? If materials are required, where are those materials stored? What vendors supply those materials? What is the process for reordering those materials?
  • What are the steps in the process itself? Describe the steps in detail, including why that step is done? As you’re documenting the steps, be especially sensitive to the things that are done by instinct or that “everyone knows”. Make sure that even the most intuitive, well-know and obvious things are included in the documentation. For example, if the last step is to drop something in the mail slot, spell out the location of the mail slot.
  • Who is notified when the process is completed? How are they notified (even if they are notified automatically via software)? What do those people do with the notification after they have received it?
  • How is completion of the process measured? Are the number of widgets manufactured counted? Is the insurance claim reviewed for accuracy? If so, who is responsible for the tracking or auditing the process? How do they give feedback or scoring to the person or people who did the work?
  • How is the person executing the process invited into the improvement of the process? How can they question the process or recommend changes?
  • Where is the most updated copy of the process stored (paper, shared drive, collaboration software (Slack, Microsoft Teams, Basecamp, etc)? How are any “remote” copies of the process updated when changes to the process are made? How are changes to the process rolled out? What is the training mechanism? (demonstration, checklist, class, video, podcast, collaboration software)

Use these suggestions, then add and customize to create your own framework for documenting processes. Then, beginning with the most critical value creation activities, work your way through all the processes in your organization.

When you’re finished, the goal is to create a “company in a box”. That is, if someone with the requisite knowledge and experience picked up your process documentation, they should be able to carry out all the core value creation activities in the company. And, perform the work just the way the founder intended (with the modifications and enhancements made by other smart staff members along the way).

The One Year, Thirty Minute Challenge :: Week 24 :: Business Continuity :: Operations

June 13, 2020 Tags: , , , , Mike Chirveno

2020 has been the poster child for disruption. From global pandemic to localized rioting, business owners and managers have faced situations they’ve most likely never seen before. These events and the fallout from them have magnified the importance of a solid business continuity plan.

In the second One Year, Thirty Minute Challenge, we discussed business continuity in the context of protecting the data that powers your organization. This week we turn our attention to operations.

Let’s jump into the exercise.

People

Operations pivot on people and on the skills they bring to the workplace. To mitigate people risk in the context of business continuity –

  • Identify any processes that are not thoroughly documented. If a current employee becomes unavailable, it’s imperative that the processes surrounding their job are accurately and thoroughly recorded. Document not just what they do, but why it is done, when it is done (including deadlines) and to whom the finished work product is distributed. During this week’s thirty-minute exercise, you won’t be able to complete the documentation itself, but you want a complete list of all undocumented or under-documented processes in the organization.
  • Identify options for completing critical work if a large percentage of your workforce is unavailable (as we saw with COVID-19).
    • Can work be completed by other personnel?
    • Are those personnel cross-trained and do they have access to the process documentation from the previous step?
    • Can you access contractors, temp workers, or consultants to complete critical work?
    • If so, who are those people and how quickly can you mobilize them?
  • If your workforce if formally organized (unionized), work proactively before a work stoppage to engineer an agreement that allows the company and the unionized workers to benefit from the company’s success.
  • Make training an ongoing part of the company’s employee development process so that all workers are continually honing their skills and building a broader base of expertise.

 

Infrastructure

Clearly, some businesses, like a hotel, are location dependent and remote work is not an option, but for many other businesses, work can be portable. Depending on the nature of the event that triggers use of the business continuity plan, there are multiple options.

  • If onsite work is required and the primary location is destroyed or inaccessible, a “hot site” can be activated. Typically, hot sites are abbreviated replicas of a primary location complete with equipment and tech. In the event of a disaster, the hot site is activated and workers report to the new site and begin work. Cloud-based systems are accessed from the hot site location and business continues as usual. Obviously an expensive solution, but sometimes necessary.
  • If your business is multi-location, consider moving operations to what would normally be a branch office.
  • If the need will be longer-term (maybe due to something like a fire or flood), consider a coworking space for temporarily housing your operations.
  • In a world of ubiquitous broadband internet service, cloud-based systems and video conferencing, working from home is a more-than-viable option. If you don’t have a work from home policy, work from home procedures or tech that supports work from home, add the development of those things to your to-do list during this week’s exercise. Once you have those things in place, schedule some practice work-from-home days to make sure everything functions as it should.

 

Resources

There are multiple critical-path resources in a business. The absence of any of them can diminish or destroy the organization’s value creation activity. Effective business continuity planning puts those resources back in play as soon as possible – ideally without any interruption to value creation activities.

  • If your organization is dependent on specialty vehicles or other large equipment for which rentals are not available (e.g. tow trucks), craft a plan with a competitor for a shared business continuity plan. You’ll be each other’s back up and you’ll do a pre-negotiated revenue share.
  • If your organization uses specialty tools and those tools become damaged or destroyed, identify multiple sources for replacement tools.
  • Identify multiple vendors for raw materials. Craft agreements with primary, secondary, and even, tertiary vendors for essential items. Nurture the relationships so that each one represents a win-win for both parties. If a primary vendor fails, make it easy for the other vendors to respond quickly. Always track vendor performance in pricing, quality, and service.

 

Finance

Even a brief business disruption can have an oversized impact on sales revenue. Unchecked discretionary spending can quickly deplete cash reserves. Activating the business continuity plan might have its own built in costs (rental charges, overtime), so acting quickly is a necessity.

  • Build a cash reserve much like you’d do for your household. Three to six months of fixed costs, plus all “automatic” business continuity expenses is a good start.
  • Quickly assess the severity (and anticipated length) of the disruption. If necessary, quickly stop all discretionary spending.

 

Communication

Create a communication procedure as part of the business continuity plan. Where do team members go to get the most up-to-date and best information. Who do they contact if they have questions?

One Final Tool

For the final part of this week’s exercise, I’d encourage you to conduct a “pre-mortem”. We know all about post-mortems from every episodes of CSI (or one its spinoffs) that we’ve watched. When someone dies, the coroner examines them closely to determine the cause of death. A pre-mortem is similar, except, for purposes of this exercise, we propel ourselves into the future and pretend that our business continuity plan has failed miserably. Then we ask, “What did we miss?”, “What fell through the cracks?”, “What procedure broke down?”, “Who was unprepared and why?”, “How did we fail the customer?” You get the idea. It’s looking backward at the event from an imagined failed future state. Anything that helps us create another perspective of our response to the disruption is beneficial. Take the results of the pre-mortem and work them back into business continuity plan.

After you have the plan in place, review it with your team and put a reminder on your calendar to review it every six month to make sure everything still makes sense.

The One Year, Thirty Minute Challenge :: Week 23 :: People :: Employee Development

June 7, 2020 Tags: , , , , Mike Chirveno

Nobody wants to be a screw-up at their job. In fact, Dan Pink explains in his excellent 2009 book Drive, that the social sciences teach us that one of the three things people seek in their work is mastery. Pink briefly describes mastery as, “the urge to get better and better at something that matters.”

There are two things that you, as an employer, can do to tap into an employee’s intrinsic desire for mastery – provide resources, time and support for the employee’s self-initiated efforts for personal and professional growth and build an effective employee development program inside the organization.

Effective employee development programs align the interests of the employee with the interests of the company. With an effective employee development program, you are, concurrently, making a better person and a better employee.

This week’s One Year, Thirty Minute Challenge is to design a framework to start your program. The graphic above will provide direction.

The company’s interest in the employee can be view through four lenses –

  • Employees as assets to be developed. Answer these questions –
    • What resources can we provide to make this employee more valuable to the organization (formal education, additional experiences inside the organization, continuing education units (CEUs), professional certifications, webinars, industry meetings)?
    • How will this employee’s compensation reflect his/her additional value to the organization?
    • What should the accompanying gains in productivity or value creation look like?
    • How can we leverage this employee’s new skills into mentoring for other employees?
    • What soft skills does this employee need to develop in addition to technical or industry-specific skills?
  • Employees as people to be understood. Answer these questions –
    • How does this employee embody the organization’s core values?
    • How does this employee embrace the organization’s culture?
    • What motivates this employee in addition to or instead of monetary compensation? Pink’s book tells us they want autonomy (a measure of control over their work), mastery (the opportunity to improve their work skills), and purpose (a feeling that their work has meaning beyond a paycheck).
  • Employees as team members to be deployed. Answer these questions –
    • How well is this employee suited to their current position?
    • If the employee is not well suited, can they be coached or transferred?
    • If they no longer fit in the organization, should they be terminated?
    • Is the employee trusted by other team members?
    • Does the employ skillfully navigate conflict?
    • Does the employee take responsibility for mistakes without making excuses?
    • Does the employee respect and learn from the diverse viewpoints of other team members?
    • Does the employee display good absorptive capacity for new ideas, procedures, and environments?
    • Does the employee have a mentor mindset?
  • Employees as indispensable. Answer these questions –
    • Are there employees who, if they left, would put the health of the organization in jeopardy?
    • How can you most quickly mitigate this risk with additional hiring, training, or outsourcing?

 

The employee’s interest can be viewed through four lenses –

  • What does my future look like?
    • Is there a career path here for someone with my interests and skills?
    • If so, what does it look like?
    • What happens if my interests change over time (e.g. I want to move from IT to sales)?
    • Is there a path for advancement for a skilled practitioner that doesn’t include management?
    • What is the company’s policy on intellectual property?
  • Can I learn and grow in the organization (skills, aptitudes, experiences)?
    • Will you invest in my growth?
    • If so, how?
    • Will I be mentored?
    • Will you give me opportunities to try my hand at several things?
    • Will I have the opportunity to work in other parts of the country or other countries?
  • Can I keep my priorities intact if I work here?
    • Can I live the way I want to live (core values, hours, time off, great co-workers, benefits that are important to me)?
    • Will the organization morph as my life changes – realizing that my priorities might have to change over the course of my employment – children, illness, aging parents?
  • Will the organization help me navigate roadblocks as they surface?
    • Can I escape a boss that isn’t committed to my development?
    • Can I recover from involvement in a failed project?

 

Use the section above to construct two things – a questionnaire for employees and an initial outline of the growth opportunities you can include in your employee development program. Once your employee questionnaire is done, begin meeting with employees one by one and gather their responses. Take their feedback and revisit your initial employee development plan. Add items that are important to employees, fit in your budget but were absent from your original list. Remove items that, based on your interviews, are not important to employees.

Begin rolling out your plan. The conversations should be something like, “You said you were interested in Balanced Scorecards. If we had a Balance Scorecard in our organization, that would be great. If I sent you to a class for Balance Scorecards, would you come back and work with me personally to make one for the company. When we’re done, I’d like for you to present to all the department heads and explain our work. Would you be up for that?”

Have a conversation like this with everyone on your team. When you knock out one of the things important to the employee and the company, move to the next thing and keep the growth going.

The One Year, Thirty Minute Challenge :: Week 22 :: Strategic Planning :: Mergers and Acquisitions

May 31, 2020 Tags: , , , , Mike Chirveno

Mergers and acquisitions are things that multi-billion-dollar companies do, right? Certainly, companies of that size do merge with and acquire other companies, but these strategies can be employed by companies of almost any size.

In this week’s One Year, Thirty Minute Challenge, we want to dig into the mechanics of surveying the competitive landscape, identifying synergies that might exist between us and our competitors and crafting a plan to bring two businesses together.

Let’s do a quick definition of terms. In a merger, two equals come together and craft a new business entity that most likely features leadership from both businesses, products from both businesses and a consolidated customer base. In an acquisition, one business purchases the assets, products, and customer base of another business. It’s possible that the leadership of the acquired business will be no longer be present. Its brand might be swallowed completely by the acquiring business.

Before we jump into this week’s exercise, let’s lay out the case for a merger or acquisition –

  • Consolidated back office functions reduce cost – two HR departments become one, two finance departments become one – you get the idea.
  • Distinctive competencies of each entity are leveraged across the new entity.
  • The new entity has a broader product offering.
  • Market share for the new entity automatically increases.
  • It reduces rivalry in the industry.
  • It increases bargaining power with vendors and customers.

 

Here are a few observations before we start on the exercise –

  • Companies who have grown rapidly through mergers and acquisitions all say the same thing – nothing is more important than culture fit. If the cultures of the merging companies clash, the synergy never happens and value dissipates (sometimes costing companies incredible amounts of money to separate the entities). Occasionally, the companies don’t survive.
  • Merging companies operationally is hard. There are systems and processes that must be combined. Which accounting system will the new entity use? How will we reconfigure the sales pipeline? And much, much more.
  • Most likely, some people will lose their job. That’s part of the improved value proposition. You need to create a separation process that, as much as possible, allows departing people to keep their dignity, positions them for future success, and gives them adequate financial resources for a transition. You also need a plan for the people who are staying – who are grieving the loss of their coworkers.
  • You might be looking at your bank account and thinking, “I can’t acquire a box of pencils, let alone another company.” The current climate has created incredible uncertainty. There might be companies you could acquire for just an assumption of debt or for a stream of future payments instead of a lump sum upfront.
  • Acquire or merge with positive cash flow. A company with negative cash flow might seem like an easy acquisition target, but unless the reason for negative cash flow is readily apparent and easily fixable, you want to acquire or merge with a company that is “paying its own way.”
  • If you’re acquiring a company just for their book of business, be cautious. Unless the company has a locked-in customer base (e.g. the only factory-authorized service center for XYZ brand widgets in six states), customers could defect to competitors and significantly diminish the value of the acquisition.
  • I understand that every bullet point above this seems fraught with peril. These are two hard strategies and they require a lot of soul-searching and empirical analysis before they are utilized. But, when executed correctly, they can create incredible value and opportunity for the owners and companies who utilize them. Companies can quickly experience every one of the benefits spelled out earlier in the post.

 

Here’s this week’s 30-minute exercise –

  • List 3-5 merger or acquisition targets. Remember, you’re looking for culture fit, complimentary product offerings and organizational synergy. When thinking about complimentary products, consider adjacent industries. For example, an HVAC company might find a good merger/acquisition target with a plumber.

_______________________________________________________

_______________________________________________________

_______________________________________________________

_______________________________________________________

_______________________________________________________

  • Write a few notes after each one regarding why you think they make a good merger or acquisition target. Be specific – cite products, services, people, similar marketing communication.
  • Sleep on it for a night or two. Revisit the list and the notes and see if they still make sense.
  • If it still makes sense in a day or two, introduce the idea to a couple of trusted lieutenants in your organization and get their take on it. Discuss all of the challenges listed above and any additional ones that you identify.

 

If after this internal deliberation, you still think it’s a promising idea –

  • Initiate a conversation with the principal of the target company. Suggest lunch or coffee. This is your first opportunity to gauge the culture of the organization, because culture flows down from the top.
  • If the conversation is positive, introduce the merger/acquisition topic. If there is interest from both sides, sign a mutual non-disclosure agreement. This will ensure that any financials or trade secrets disclosed during the following discussions will remain private.
  • Arrange a meeting with a small group from both entities. Invite operations people, finance people and tech people. In this meeting you’re still checking for culture fit and you’re starting to dig into overarching operational questions. It might be a good idea to engage a third-party to manage this meeting. Their job is to make sure everyone’s concerns are aired and addressed.
  • Each entity needs to have a debrief after this meeting to discuss culture, markets, operations, finance, and tech.
  • If everyone involved is still feeling positive, it’s time to involve legal counsel, accountants and possibly consultants with experience in merging operations (if you haven’t involved them up until now).

 

This One Year, Thirty Minute Challenge was a thought-starter for one of the more ground-shifting topics in the series. If you decide to undertake one of these strategies, think long and hard, and get help.

The One Year, Thirty Minute Challenge :: Week 21 :: Marketing :: Social Media

May 24, 2020 Tags: , , , , , , , , Mike Chirveno

Unless your current and potential clients constitute a very obscure part of the business-to-consumer or business-to-business landscape, you need an effective social media presence. Look at these statistics from Hootsuite (a social media management tool vendor) Source: https://blog.hootsuite.com/social-media-statistics-for-social-media-managers/.

  • 50% of the global population (3.8 billion people) uses social media
  • 84% of people with access to the internet use social media
  • In 2019, people spent, on average, 2 hours and 24 minutes on social media every day
  • The average social media user has 8.3 different social accounts
  • 43% of internet users use social media for work purposes
  • 43% of internet users use social media to research potential purchases
  • 90% of internet users say they watch video online at least once a month
  • Social ad spending is forecast to increase 20% to $43 billion USD in 2020
  • Active users by platform
    • Instagram – 1 billion
    • Facebook – 2.5 billion
    • Twitter – 152 million
    • YouTube – 2 billion
    • Pinterest – 335 million
    • LinkedIn – 675 million
    • Snapchat – 218 million
    • TikTok – 800 million

 

This week’s One Year, Thirty Minute Challenge is to reexamine your social media strategy. Some of you might have ignored this marketing, messaging, and customer service channel, but you’re probably ignoring it at your own peril. Your customers, potential customers and competitors are most likely already there. Some of you might be active in social media but are not maximizing the results. Some of you might be knocking it out of the park.

There are two things that are unique and wonderful about social media. The first thing is that the best social media content is “useful”. The plumber is posting a list of the 10 worst foods for clogging garbage disposals. The chiropractor is sharing an infographic on how to lift heavy items without hurting your back. You’ll occasionally see a “hard sell” on social media, but they aren’t prevalent. The second thing is that, unlike almost every other marketing and advertising medium, social media is a conversation – business-to-customer, customer-to-business, and customer-to-customer (in front of the business). And those conversations are enabled and encouraged by the platform provider. Some platforms include tools that help the customer rate, review, and recommend the business.

One more thing before jumping into this week’s exercise. Some business owners and managers live in fear of what might be posted on social media. They dread the one-star review or the lengthy post from the irate customer. That content represents one of the best opportunities on social media. Customers don’t expect companies to be perfect, but they do expect companies to make things right when they make a mistake. When the poor review or the flaming complaint comes, jump right in. Apologize for the missed expectation, commit to making it right and give the complaining customer the first step in repairing the relationship. I recommend something like this, “Jim Smith, I am sorry that was your experience in our office. We want every customer to feel like they were treated well and received incredible value by purchasing our product. I’d like to talk with you about your experience. Would you call me at 888-555-5555 or email me at johnjones@email.com, so we can see what happened.” Again, in front of this complaining customer, all your other customers and any potential customers, you’ve voiced your commitment to making this right. If you’re able to resolve the complaining customer’s problem, invite them back to the post to share the resolution (without all the gory details).

Let’s jump into this week’s exercise –

Create a social media manifesto –

  • Describe what you want to accomplish (position my company as an expert in the field, showcase the talented people on my team, generate sales leads, provide industry and company information so people can understand what we do, sell products or services online)
  • Define what winning looks like (reach, number of views, number of followers, number of engagements – clicks, likes, replies, pins, saves, number of leads, number of mentions, number of tags, number of reposts, shares or retweets)
  • Identify 6 – 8 themes that you want to consistently communicate (these might revolve around core values, products, people, community involvement)

 

Stake out your place on social media – I suggest creating accounts on the platforms you think you might want to use, just so you have the account name claimed. You can build them out as it makes sense (you have a plan that fits the platform, the ability to create meaningful content and the bandwidth to interact with customers on the platform).

Identify the best place or places to talk to your customers and potential customers on social media – If you don’t know where they hang out on social media, ask them. Each social media network has detailed demographics of its users. Review those and see if your customers are there.

Create a social media calendar – Using the themes from your manifesto, create a content calendar with dates, platforms, and messages. Content can be original (created by you or your team) or curated (useful to your audience, consistent with the messages of the manifesto but created by someone else). Schedule in “big” content and the run up to it. For example, if you’re going to be at a trade show, announce it in advance, ask followers to meet you there (scheduling appointments would be great), show pictures of preparation and broadcast live from the event when you get there. Track results from the content you share. Check levels of engagement and use it to refine future content. Periodically extend the invitation for more interaction outside of social media (if that makes sense in your business model). Download a sample social media calendar here.

Execute – Social media requires consistent care and feeding. Create good content, consistently share it, track the results, engage with your audience.

This is the most rudimentary of social media information. There’s much more to learn if you want to go deeper. Here are some good resources if you want to take your research further.

https://www.socialmediaexaminer.com/

https://www.socialfresh.com/

https://socialmediaexplorer.com/

https://www.marismith.com/

https://sproutsocial.com/

The One Year, Thirty Minute Challenge :: Week 20 :: Value Creation :: Economic Value Creation

May 17, 2020 Tags: , , , , , Mike Chirveno

Earlier in the One Year, Thirty Minute Challenge (week 11) we examined Experiential Value Creation – the gap between what the customer pays for our product or service and the worth and enjoyment they experience from the purchase. The goal is to widen that gap as much as possible, so the customer’s enjoyment of their purchase far exceeds the monetary investment. In that exercise, we explained the three ways that customers interact with purchases and how to maximize those interactions to create the greatest experiential value. Experiential value creation involves the sometimes-subjective evaluation of customers.

This week’s One Year, Thirty Minute Challenge is the purely objective exercise of economic value creation. Economic Value Creation is the gap between the sales price of our product or service and the cost to produce that product or service.


In economic value creation, we want to push the Sales Price and the Cost as far apart as possible. This is the money we get to keep. It’s fairly easy to track because we know all of the numbers. Successful Experiential Value Creation allows us to push the sales price up. In this week’s exercise, we want to work on pushing the cost down.

Costs fall into two categories – variable and fixed. Variable costs (expressed as cost of goods sold when broken down by sold unit) are those costs that go up and down based on the number of times the product or service is delivered – every cheeseburger sold has a bun, a piece of cheese, a hamburger patty, a squirt of mustard, three pickle slices, a wax paper wrapper and 4 minutes of employee time devoted to frying, dressing, wrapping and delivering the finished product. Every therapy session has 55 minutes of the counselor’s time. The more times the product or service is delivered, the more costs we incur. Fixed costs are those we incur simply by being open. If we serve 2 or 200 customers, they do not change. Rent, utilities, communications, hardware, software, and insurance typically fall into this bucket.

I want to discuss variable costs in the context of the value creation chain.This week’s exercise is devoted primarily to variable costs, but certainly attention should be devoted to reducing fixed costs. We should be regularly checking price vs. value on our office space, insurance, technology and more.

Inputs > Transformation Activities > Outputs

Here are a couple of samples of value creation chains from very different industries.

Economic value creation improves by moving through the value creation chain better, faster and cheaper.

One manifestation of better can be quality – that could be evidenced by fewer defects – i.e. your quality control people find fewer parts that don’t meet your specifications or that need to be reworked. Better could also mean that the raw materials are free from problems. That opens up the entire vendor or supplier discussion – do all of the vendor’s raw materials for your product perform as expected. Is the quality consistent or do they vary wildly from batch to batch? Do you have tools in place to measure vendor performance so you can identify underperforming vendors and defective batches? Do you have initiatives in place that stop or reduce defects in the process? Initiatives that keep your production people from making mistakes? If you’ve visited someone in the hospital lately and been there when the nurse has administered medication, you’ve seen a procedure that makes patient care “better” – the nurse scanned the wristband on the patient’s arm, then scanned a barcode on the medicine he or she was about to administer. That allows the EMR system to alert them if a wrong medication is about to given to the patient. Better might be more effective use of personnel, materials or machinery. In short, “better” can represent exploiting a host of operational opportunities.

The second improvement you can make in the value creation chain is faster. Faster is desirable for several reasons. First, it hastens the moment you get paid. If you can put a product in a customer’s hand quicker, you can be paid quicker. I realize that collecting money, paying for raw materials on terms and credit card processing times all constitute a bunch of moving parts when it comes to money, but suffice it to say, faster is almost always better. Faster on the shop floor means that the same resource can do more work in the same amount of time. If you can automate or organize so that a worker can make 10 widgets in an hour instead of 8, you can significantly increase profitability. Any time you can create more units of output with the same units of input with no degradation in quality, that’s a good thing. Faster also applies in the delivery of raw materials before transportation and delivery after the product is transformed. I know that most of us automatically switch into manufacturing mode when we’re talking about value creation but let me remind you of the value of faster when it comes to stroke treatment. If you can begin the transformation activities (i.e. treatment) faster, the patient’s prognosis improves dramatically, since during a stroke, 1.9 million neurons die every minute. Speed is almost always a competitive advantage.

The final improvement you want to make in the value creation chain is cheaper. This probably seems like a no-brainer and it is. You certainly want to cut the cost of your processes anytime you can. Cheaper can translate into higher margins or in the ability to reduce prices to consumers making your product or service more competitive and hopefully driving more volume. Certainly, improvements in speed as we discussed earlier can cut costs, but there are other opportunities for cheaper as well – more preferable pricing from vendors, cheaper transportation costs before and after the transformation activities and lowering administrative costs (that are typically spread across all produced units).

For this week’s 30-minute exercise, map your value creation chain.

How can inputs be obtained “faster” or “cheaper”. How can you keep a minimal number of inputs on hand (saving on inventory holding costs) while still making sure you never impact the ability to start the value creation process? If the input is a skilled employee, how can you develop them, so they are “better”? How can transformation activities become more streamlined? Be more accurately measured? Require less rework? Be touched by fewer people? How can outputs be delivered to the final customer quicker or in a more convenient way?

Explain the value creation chain to the people involved in each of these steps. Ask them to critically examine their responsibilities in the light of better, faster, and cheaper. Offer them financial incentives when their recommendations for improvement drive more money to the bottom line.

The One Year, Thirty Minute Challenge :: Week 19 :: Finance :: Financial Literacy

May 10, 2020 Tags: , , , , Mike Chirveno

If you want employees to make decisions like you make decisions, they’re going to need access to the same data you have and they’re going to need to know how to make sense of that data. That includes a big dose of financial literacy.

Rudimentary financial literacy doesn’t require that everyone in the organization take an accounting class and it doesn’t mean that everyone knows what everyone else makes. Basic financial literacy rallies everyone in the organization around common goals, gives them a common language and increases their value to the organization.

This week’s One Year, Thirty Minute Challenge lays out the first financial literacy concepts that everyone in your organization should understand and gives some ideas on how to begin financial literacy education in the organization.

Profitability is built on creating an economic value surplus. The formula is –

Revenue (units sold * cost per unit)

– Cost of Goods Sold (materials + labor)

– Fixed Costs

= Profit

It’s important for your team to understand each of these components. Revenue is a combination of two things – volume and price. The price for your good or service must be enough to cover the cost of goods sold (the materials and labor required to make the product). The remaining money, in aggregate, must be enough to cover the fixed costs of the business (rent, utilities, insurance, phones, desks, trucks, office supplies and more). Volume represents the number of people that are interested and willing to pay for your good or service at the price you’ve established. The money left over after paying the cost of goods sold and the overhead expenses is profit. The accumulated profit must be enough to build a surplus so the business can survive temporary downturns in volume or can capitalize on emerging opportunities.

The real magic happens when team members see how their day-to-day responsibilities drive each of these components. Price must be high enough to cover the fixed and variable costs and must also create a favorable value proposition for the customer (the price paid must be equal to the benefit derived by the customer). Pricing plays into decisions on marketing and advertising.

Cost of goods sold represents an incredible opportunity for inviting team members into financial literacy. If they can streamline the creation of the good or service, it drives the labor cost per unit down – allowing the company to make more units in the same amount of time. That increases profitability. If they can negotiate more favorable rates with suppliers, driving the cost of materials down, that increases profitability. If they can obtain higher quality materials for the same price, thus increasing quality and lowering the defect or warranty rate, that increases profitability. Greater profitability enables the company to create a larger surplus and be more prepared to weather economic storms. The COVID-19 crisis has shown us the importance of financial resilience. A report by JP Morgan Chase showed that only half of all small businesses have enough cash on hand to survive for 27 days.

Fixed costs are those incurred by the business just by being open – rent, utilities, insurance and more. When team members understand how co-working or working from home can lessen the need for office space – pushing rents down or how staying healthy can help push down insurance costs, they begin to get an understanding of the financial calculations that you are making every day. That understanding leads to engagement and empathy.

These actions move team members to the same side of the equation as owners. Instead of owners being adversaries – the employee’s loss is the owner’s gain – team members are now rowing in the same direction as the owners because they understand the owner’s endgame – building a viable, sustainable, and stable enterprise – one that can continue to offer employment and opportunity for years to come.

So, where do you start? First, I’d convene a meeting with all employees (if the company size allows it, if not, do several meetings) and explain the economic value surplus equation above. Explain that from this time forward, you’re going to share some of the company’s financial information so they can see how these pieces work. Then ask for their help in increasing revenue and decreasing expense. Finally, explain what’s in it for them. I’d suggest giving them skin in the game. If revenue increases, expense decreases, profitability increases (whatever information you’re willing to share), give them a cut of the savings or increased profits. You’ve now created common goals and explained it with, what is now, common language. You’re on your way.

Reconvene the meeting each month and report results.

Where do you go next? I’d suggest explaining double entry accounting – every financial transaction is recorded in two ways – when you sell a product, cash is debited and revenue is credited, when you buy copy paper, cash is credited and office supplies are debited. This prepares team members for the next, very important step.

Introduce the three primary financial reports – the Profit and Loss Statement, Balance Sheet and Cash Flow Statement.

The Profit and Loss Statement reports income and expenses for the business for a time period.

The Balance Sheet shows the organization’s financial health by tracking what the company owns and owes.

The Cash Flow Statement shows the movement of money in and out of the business. It differs from the income statement because all money coming into a business might not be income. For example, if a company takes out a loan, it receives money but did not generate any income. Conversely, if a company pays back a loan, it spent money but did not incur an expense. Instead it decreased a liability.

In your thirty minute exercise this week, decide how you can best engage your team in financial literacy by inviting them into some of the difficult decisions you make on a daily basis.

 

 

The One Year, Thirty Minute Challenge :: Week 18 :: Governance :: Legal Organization

May 2, 2020 Tags: , , , , Mike Chirveno

This week’s One Year, Thirty Minute Challenge isn’t too sexy, but it could –

  • impact your ability to shield yourself, your family and your assets from legal liability
  • impact your ability to raise capital for your business
  • impact your personal tax liability
  • and more

My purpose this week isn’t to offer advice, because the topic is outside my area of expertise. The real answers will have to come from your accountant and/or tax attorney. My purpose this week is to offer education and encourage you to consider your options for the legal organization of your company.

Typically, most small business are legally organized one of these 5 ways –

Sole Proprietorship

Sole proprietorships are the simplest form of business organization. They do not produce a separate business entity but can register a separate trade name (Super Good Plumbing vs. Jim Smith, Plumber). Business assets and liabilities are mingled with personal assets and liabilities. Consequently, sole proprietors can be held financially liable for business debts and can be held personally liable for the actions of the business (which could put personal assets at risk). Sole proprietors can sometimes have greater difficulty in raising money than those who choose other business organizations.

Partnership

This is for a business owned by two or more individuals. In “General partnerships”, partners share profits, losses and liability. In “Limited partnerships”, one partner has control of the operation and bears unlimited liability while the other partner(s) contributes, shares profits and has limited liability. Limited Liability Partnerships (LLP) give limited liability to each partner, protecting them from the actions of other partners. Partnerships can sometimes more effectively raise money versus sole proprietors since lenders can consider the combined creditworthiness of all partners.

Limited Liability Companies

Limited Liability Companies (LLC) are hybrids of partnerships and corporations. They allow owners to protect their personal assets by separating them from the business’ assets. They also protect owner’s assets in the event someone sues the business. Business profits and losses are passed through to the owner’s personal income. Members of an LLC are considered self-employed.

Corporation

A corporation is an entity unto itself, separate from its owners. It can own assets, sell assets, sue, be sued and sell part of itself to other entities (stockholders). The corporation is responsible for its own debts and liabilities. Shareholders are protected from liability, but should the corporation become worthless (loss of all asset value, bankruptcy, a large legal judgement, etc.), the shareholder’s stock could be worth nothing. There are several flavors of corporations, but here are three common ones.

  • C Corp – it is owned by shareholders and is taxed as its own entity. In some cases, the profits are taxed twice – the corporation pays taxes and, when dividends are paid to shareholders, they are taxed again when the shareholder pays personal taxes. C Corps can raise money through the sale of stock.
  • S Corp – it is owned by shareholders, but profits are passed through to shareholders to be taxed at each shareholder’s individual tax rate. There are limits on the number of shareholders in an S Corp.
  • B Corp – these are for profit entities, but shareholders hold the company accountable to make some tangible public benefit besides making a profit. Some states require an annual filing that documents their public benefit.

 

Cooperative

Cooperatives are owned and operated by those who benefit from its services. Profits are disbursed to the members of the cooperative. A frequent use of cooperatives is farmers banding together to market their products as one entity to regular buyers – distributors, grocery store chains, food service suppliers.

If you want more detail, check out the Small Business Administration Page on business structure at https://www.sba.gov/business-guide/launch-your-business/choose-business-structure.

This week’s exercise is to consider what you’ve just read and examine, with your accounting and tax advisors, whether or not you can find more favorable tax treatment, better financial resources, better protection for personal assets, better options for employee compensation or any other additional benefits by changing your legal structure.