Category Archives: Finances

For the Money

“One for the money, two for the show, three to get ready, and four—-to—-go—-!”

In case you are wondering, the earliest attribution for this phrase that I could find is in the children’s book, “Striking for the Right” By Julia Arabella Eastman, in 1872.

Some of you however may be more familiar with the 1955 variation that Carl Perkins included in his song “Blue Suede Shoes’:

“Well, it’s one for the money,
Two for the show,
Three to get ready,
Now go, cat, go.”

I think Elvis did it better than Carl, but that really isn’t relevant to today’s discussion.

In either case, as you might guess, my focus here is going to be on “for the money” as I think we may have lost track of this part of the phrase, particularly as it relates to sales.

A phrase that is generally thought of as a countdown to the start of a children’s race or contest, is becoming more and more germane to the increasingly high-pressure contest of business to business sales. However, in many instances it appears that organizations are skipping the first line of the phrase and focusing on the second, third and fourth lines. Now usually to some form of hardship.

As we go through what might be described as tectonic shifts in the business, capital and sales markets and processes, brought on by the evolution of the cloud, the Internet of Things (IoT), and the multiplicity of other technological discontinuities they have engendered, “for the money” is probably going to take on an increasingly important role, particularly in the sales process. It is probably time to start steering away from the age old, tired sales phrases associated with focusing on quality, or value, or any other direction from a past time.

We have all been aware of “Moore’s Law”, which in its simplest iteration generally states that new products arrive with essentially double the previous product’s capacities every eighteen to twenty-four months. What this postulate also infers is that products can be expected to become obsolete every two years as well. This is now an important concept since previous views of product life expectancies were once much longer.

The difference now is that as new capabilities and applications are developed, they are more and more dependent on the latest generation of technology for their functionalities.

As an example: What would you pay for a car today, if you expected that in two years it would not be able to efficiently run on, or possibly even be able to access the new highways that are being built? What would you pay for that car if in two years it would not be capable of allowing you to drive to all the new destinations that would be available then?

Would it change your car buying patterns? Probably.
Would it change how much you would be willing to spend on a car, knowing that your time horizon for needing to purchase the next new car – which would then allow to run on the new highways and go to the new destinations – was going to be so short? I think so as well.

Such is the situation for just about every company and organization when it comes to their information technology needs.

Eureka. This sounds like every vendor’s paradise. Knowing that your customer is going to have to buy a new product every two years. What could be better?

I guess the first thing would be to make sure that all capabilities and applications that are developed are equally applicable across all customers.

Uh oh. That doesn’t seem to be the case since different companies need and demand different capabilities. And since vendors do not have infinite resources to develop all possible applications and capabilities in parallel, we cannot expect a continued alignment of applications, capabilities and the platforms required to run them.

And since customers do not have infinite capital to be able to afford each and every application, capability and platform as they come out, we return the new catch phrase, “for the money”.

Customers do not want the best solution.

I know this sounds like heresy but this has been proven time and time again. They want the best solution – for the money. They do not want the best service. They want the best service – for the money. Value and quality are good, but they are table stakes, not differentiators. And make no mistake about it, since the product life cycles and associated obsolescence are now so short, there is corresponding less money for each customer to spend on each purchase iteration. With the reduction in customer capital available to purchase each new product iteration the question is no longer how much functionality can a customer afford, but what is good enough to serve their purposes for now.

Whether it is said or not, it should be implied that every sentence used in communications between the vendor and customer, should end with the phrase “for the money”.

With this concept in mind it becomes a little easier to understand the changing landscapes for sales in the business to business world. Buying new higher capacity platforms in anticipation of being prepared for future applications or capabilities probably will no longer occur. The fear of platform obsolescence before the capabilities are available, along with new constrictions on purchase funds will probably preclude that.

Future capabilities will be purchased in the future, when they have been developed and can demonstrate immediate (not future) value to the customer.

Because of the direct relationship between purchase capital and product capability, reliability, capacity, speed, etc., all those factors have become negotiable as “for the money” comes into play. Communications networks that had essentially one hundred percent reliability and twenty-year life expectancies are being superseded by far less reliable but faster terrestrial and more convenient but equally less reliable wireless networks. They are good enough, at a far lower cost.

Personal computers and laptops that used to cost thousands of dollars are now costing a couple hundred dollars and are expected to be outdated, and disposable within two years. They are not repaired, they are replaced, at a far lower cost.

I have said that if customers are not buying it is probably because the sales team has not generated the appropriate business case for that customer’s business to justify the purchase. Immediate expenditures will require immediate value generation to offset them.

For the money is emerging as the prime parameter associated with this same customer business case sales process. Customers are recognizing that the lowest common denominator functionalities are what are required for their business. By way of example, Sprint seems to have fully embraced this approach to wireless services in that they are openly touting that they are “within one percent of the coverage / reliability” of their competitors, but only half the cost.

Their catch phrase is: “Why would you pay twice as much for only one percent more?”

We had all better take note of this approach to the market. In case you are wondering, Sprint grew more than any of its competitors in the last quarter. (https://www.cnet.com/news/even-sprint-topped-at-t-verizon-in-customer-growth/). And this is after several previous poor quarter performances.

In the article, it is noted:
“…Sprint with a campaign that essentially boils down to this: We’re good enough for your business. The company’s commercials play up its half-off plans versus the competition (the rates go up after two years) and a mere 1 percent difference between the quality of its network and that of Verizon.”

The key comment for me is “…good enough for your business.” I think this approach is becoming the new norm. Being the best is great, but being good enough, for half the price, is probably going to be better. It seems to be resonating with the market as they continue to attract new customers.

There will always be exceptions to every norm. There will be those customers that truly want the elevated capabilities, and will be willing to pay for them. There are those that want luxury cars as their form of transportation, when there are almost any number of less expensive models that will deliver the same functionality at a far lower cost. Most companies, like most of us, do not have the luxury of preferring luxury.

They are moving more and more toward the Sprint model that good enough, at half the price, is better than the best at double the cost. As budgets continue to constrict, for both consumers and companies, the comparison of what is wanted versus what is good enough for the money, will continue to change the landscape for sales. It is probably time for many businesses to change their sales model to focus on what is good enough for the money.

What is a “Plug”?

For some reason, I have been reading and thinking about forecasting for the last little while. One of the words that seems to be popping up more and more frequently in the business literature with respect to forecasting is the word “plug”. I have actually heard this word in past forecasting meetings that I have attended. I thought I might delve in a level deeper than just understanding forecasting, and look into one of the more favored words in the forecasting vernacular: “plug”.

Plug is an interesting word. The dictionary defines it as both a noun (a thing) and a verb (an action). I’ve also talked about words like this before. You used to go to a party, and now you can also go and party. I think that plug is a much earlier iteration of this particular phenomena. Usually a word is used as either a noun or a verb. I am not so sure that this is the case with the word plug when it comes to its business usage. I think that when you hear the word “plug” in business, it is both a thing and an action at the same time.

As a noun plug can usually mean either:

“an obstruction blocking a hole, pipe, etc.” or “a device for making an electrical connection, especially between an appliance and a power supply…”.

As a verb Plug can usually mean either:

“block or fill in (a hole or cavity)” or “mention (a product, event, or establishment) publicly in order to promote it.”

For now, I think I’ll ignore the appliance power cord and product promotion definitions for obvious reasons, and focus on the other two.

As the ends of various months, quarters, and years come into view, forecasting takes on a role of increased importance. Depending on the business performance, as these end of period times roll around forecasting can take on both a greater frequency and intensity, especially if the numbers are not in management’s desired range. As I have noted, forecasting is essentially the comparing of what you think the numbers are going to be with what you want the numbers to be.

I have also noted the “volumetric force” associated with forecasts. This is the management drive and desire for all forecasts to be either at or exceeding the desired targets. This desire to respond to or please management has a tendency to render forecasts possibly slightly more optimistic than what they might normally be, so that management can smile. But what do you do when the forecast obviously does not meet the desired levels?

You insert what is called a plug into the forecast.

You find a way to provide the management desired levels in the forecast numbers. You forecast the performance that is defined, and then you add in an amount equal to the difference between the goal and the defined forecast, which is undefined. This undefined amount is known as the “plug”.

You are in effect using the verb definition of the word “plug” as a noun. You are essentially filling a hole (a verb) in the forecast with a plug (a thing). It is normally the noun function that is turned into a verb, but here we have the verb function that is turned into a noun.

I guess it is a little thing (a very little thing) but it amuses me, so I have included it.

I have also noted in the past that if a forecast is knowingly presented to management, and it does not at least meet the desired targets, that whoever submits such a lacking forecast could be subject to a significant amount of incremental management attention and assistance. As I also noted this attention and assistance will usually continue until the forecast realigns with the desired targets.

The quicker the plug is inserted into the forecast; the faster management can feel better about the forecast.

I think this may somehow be related to the genesis of the saying “The beatings will continue until morale improves.” This quote is attributed to Captain Bligh, or the HMS Bounty, when told of the forecast associated with how the crew felt about reaching Pitcairn’s Island. It is also apparently quite applicable to a multitude of other management groups.

Plugs were developed in forecasts as a way to create a real and accurate forecast (that potentially does not meet management expectations), yet also provide an acknowledgement of the expectations of management in order to avoid the incremental assistance of management. Plugs are the as yet unidentified portion of a forecast, that will (hopefully) be defined in the future, and will result in the meeting of the desired targets.

This results in the equation:

Actual Forecast + Unidentified Forecast (Plug) = Presented Forecast

Plugs are an acknowledgement that the actual forecast doesn’t meet the desired levels, but the miss to forecast has been identified and is being worked, so that extra management reviews of the forecast (or beatings, as the case may be) are not going to be necessary.

On the surface, this type of forecasting technique sounds great. The actual forecast can be presented to management, as well as the desired number that management wants to see. They get both reality and what they want.

However, if you are going to use the Plug Gambit in a forecast, you need to understand that it is a double-edged sword, and it has a limited shelf life. It is a double-edged sword in that a forecast is being presented to management that is in essence telling them that their desired number is going to be achieved. If it is not, then there will be significant, and now merited management attention visited upon those that delivered such a faulty forecast.

The plug in a forecast also has a limited shelf life in that it is expected to reduce as time passes, and the measurement period draws to a close. An example is that a plug in a forecast during the first month of a three-month quarter might be acceptable. However, the same plug in the third month of a quarter should definitely garner incremental management attention.

So, there you have it. A plug is an artifice, inserted into a forecast in order to avoid (at least temporarily) unwanted incremental management attention associated with the forecast. It is an identified amount, but from an unidentified source. It can be sales to unidentified customers, or cost reduction from unidentified actions.

Once a plug has been inserted into a forecast, it is almost impossible to improve the level of the forecast. This is because as new opportunities are identified, they reduce the amount of the plug, as opposed to actually improving the forecast.

With this in mind, it is my understanding that the latest management approach to limiting the use of plugs in forecast is to in fact request and drive for improvements to any forecast that does contain a plug. This has the effect of requiring double the desired growth as the plug must first be filled before the forecast can be increased. This move by management will no doubt engender some as yet unknown, new methodology for forecasting, as the ongoing escalation associated with business forecasting continues.

This is very similar to the idea that the fastest cheetahs only caught the slowest gazelles. This natural selection meant that only the fastest gazelles (and cheetahs) survived. The ongoing evolutionary race is forecasted to continue going forward on the African Savannah.

However, I think it is pretty obvious that in this example, gazelles do not get to insert plugs into their speed forecast.

Growth Industry

I think it is safe to say that most everyone is looking for their next career opportunity. What do they do next? Where do they go next? What is the next step in their career progression? When I have been asked in the past what someone’s next career step might ought to be I have invariably said that everyone should spend some time in sales, and that everyone should do whatever they can to be able to understand the business numbers.

I am not going to back away from that comment. Good leadership needs to understand what it takes (and just how difficult it is) to generate a top line. No matter what everyone who has not been in sales may think, I have found that it is just not that easy to get someone to give you their money, regardless of how good the product or service is that you are selling. (Apple products don’t count here. I truly believe that customer set has been brain washed.) Even so, I think we have all been in situations where management has predicated all of their well scripted strategies for sales growth, regardless of product, business or market conditions, only to miss those growth targets and then try to deal with the business consequences.

I also stand by the assertion that numbers, and derivation of such numbers (or in some cases the divination of said numbers) is required for business and organizational operation. I have cited several quotes on numbers in the past. Robert Heinlein said “If it can’t be expressed in numbers it is opinion not science.” Mark Twain said “There are lies, damn lies, and then there are statistics.” A leader’s long term (and short term) success will be based on their ability to understand and communicate what the business’ numbers are, and why they are what they are.

What I think I am now going to add to these two suggested experiential requirement sets is that leadership needs to spend some time in what my experience has proven to be the only consistent growth industry that I have seen across all industries, markets and businesses: Cost Reduction.

In business there are many things that can (hopefully) be influenced in business performance, but very few things that can truly be controlled. Businesses can try and influence the market to perceive them differently. They can employ various media and advertizing to try and create a progressive image in the market for their goods and services. They are in essence trying to convince the market of their particular product or service advantages and benefits.

Whether or not the market accepts, agrees or is influenced by this positioning is outside the direct control of the business. The business will always try and craft its market message in the most beneficial light possible, but it is the market which gets to decide which parts if any in the message and value proposition are accepted. Entire industries of analysts and consultants have grown up around this market value proposition analysis in efforts to try and actually decipher the facts associated with these messages.

Whether individual customers accept or agree with the proposed business value proposition is also somewhat outside the control of the business. The business can employ dedicated sales staffs and teams to tailor the message specifically to each customer as well as work to identify the value of the solution to that customer. This provides greater input and positioning for the business, but yet again it is the customer that ultimately controls the relative success of the business proposition. They get to say “yes” or “no” to the proposition.

The point here is that a business can do absolutely everything right in the dissemination of its message to the market and its pursuit of the ever elusive customer order, and still fail, sometimes for reasons that are entirely outside the control of the business. They can work and influence and sell in every way imaginable and still not get the order, or enjoy the top line growth they have planned for and need.

Herein lays the rub.

Senior management doesn’t really care about that. A plan has been made and the numbers have been committed. Those numbers have been combined with the overall organization’s other business’s numbers and an total organizational plan has been committed to the corporate leadership. You don’t get to easily miss your financial commitments to the organization.

Where do you think all those ideas for those colorful punishments on your favorite Game of Thrones or Walking Dead television shows came from? Exactly, people who missed their planned or forecasted targets.

While it may be generally frowned upon by senior management to miss the top line plans and forecasts for growth, it is wholly unacceptable and more than likely to be a punishable offense to miss the business profitability and earnings commitments. Herein lies the squeeze: While the top line may not be achieving the required heights, the profitability and earnings commitments to the organization cannot be reduced proportionately, if at all.

The only solution is to cost reduce.

I don’t want to make it sound as if cost reduction is only something to be taken on in times of business stress or top line under performance. It may have once been that way, although I cannot remember it. Suffice it to say in today’s day and age that for a healthy business cost reduction is both a growth business and a never ending process. If you are not doing it now, you had better get started because it will probably be necessary sooner rather than later.

It is well known that the sooner you can make adjustments of any kind in a business year, the less drastic the adjustments need to be. If you can recognize in month two that there is an issue, you have ten months to correct. If the issue is not recognized until month seven, you only have five months to correct, and now the correction must be twice as large.

What I mean here is that if there is a one million dollar short fall in the earnings commitment / forecast and it is recognized in February, you can correct spending (costs) to the tune of one hundred thousand dollars a month. If the same one million dollar issue is recognized in July, you will need to reduce costs by two hundred thousand dollars a month to recoup the same million dollar correction.

Remember that. The later you wait, the more drastic the cost reduction action will have to be. Plan early, act early. Hoping things that are not fully within your control (sales) will improve usually results in much more painful activities associated with those things that you can in fact control – costs.

There are all kinds of costs associated with a business, not just people costs. Here is where knowing the numbers thing comes into play. What are these costs? How do you control or reduce them? And, almost more importantly, how long will it take to implement the changes associated with reducing them?

We have probably all seen these knee-jerk cost reduction actions:

Travel bans – which basically just limited the people who should be traveling and not so much reducing the number of people who shouldn’t have been traveling in the first place. Travel is not a light switch with only the “On” and “Off” positions.

Hiring Freezes – that really aren’t freezes because there will always be the need for the flow of the life blood of new talent that every organization requires.

I have even seen the removal of coffee and other amenities from the corporate break rooms. I don’t know how much was saved, but it did succeed in generating a significant number of grumpy people.

There are any number of other “cost reductions” of these types, but they are for the most part superficial. They do not address the specific issue that the business’s basic cost structure does not match its revenue and hence earnings positions. True cost reduction comes from addressing the long term and fixed costs associated with a business. Can fixed assets be reduced? If so, how and how long till they are affected? Is there outsourcing or off shoring that may be needed? Not everyone can be the best at everything, so looking for external help may be a potential solution. Are there allocations or other programs that need to be reviewed? The list goes on, but the costs must be dug out, isolated and analyzed before action can or should be taken.

This activity will serve to teach the leader, or would be leader what the costs are, in human terms or otherwise, associated with cost reduction. Changing the course or the costs associated with a business is much more fundamental than just freezing travel or hiring. It is also much more invasive. It’s not easy. You have to challenge yourself, your team and your business to change, and that is never easy. No preconceptions regarding business costs should be exempt. All costs should be questioned. When addressing cost reduction, remember what Sun Tzu said about war (as in this case they will be somewhat similar):

“The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.”

So is the art of cost reduction.

Follow the Money

Organizations today come in many forms and structures. They can be created along geographic lines, product lines, markets and even customers. In most major corporations today there are usually aspects of each of these organizational structures present. This has given rise to the organizational “Matrix”. While this structure probably was not the basis for the popular movie trilogy, it can be comparably confusing.

 
The drives to specialize and push repetitive labor intensive functions into low cost labor environments and to take advantage of low cost manufacturing while streamlining supply chain operations have resulted in an organization structure where ownership for the business and its associated processes is fragmented, while the responsibility for the overall solution usually remains centrally vested. Despite all of this diversification and fragmentation of the business structure, there is one thread running through the business that enables the business leader to draw it all together and drive the solution.

Follow the money.

No organization within the corporation does anything for free. They have people, equipment and overhead that they need to pay for. The way they sustain and pay for these items is to provide or “sell” their particular service to you as the business owner. In this corporate structure, certain specific functions may not report to the business unit (Matrix) but they are funded by it.

Over time it is possible for these business funded functional groups to assume and believe that they are in fact entitled to the ongoing funding of the business group. They normally have multiple businesses providing funding to them in addition to delivering on their own organizational commitments. It is possible for them to lose their focus and begin to deliver what they chose and prioritize to provide, not what the business has chosen and required of them.

This should not the case.

As the business owner it is your responsibility to require performance from all aspects of the business, whether they are internal or external to the business or corporation. And just as is the case with external suppliers, the way this is accomplished with Matrix reporting internal providers is with money. Setting clear expectations of deliverables, requiring year over year efficiencies and business improvements, and yes in some instances refusing to pay (fund) unacceptable performance are some of the tools that can be used to assure desired performance of the Matrix group.

In today’s Matrix based organizational environment the business owner may not and probably does not own all of the aspects and functions that go into running the business, but more often than not they still own the checkbook. And while they may not have direct reporting control over the prioritization and performance of those Matrix organizations, no group (internal or external) is “entitled” to their funding. Today’s business owner needs to understand and remember that they can no longer simply direct other organizations on what needs to be done. They also need to understand that they are not at the mercy of internal organizations and must pay whatever is required by the functional group. They can and must remind the Matrix organizations that if the desired work is not performed, that the business will in return stop paying (for) them, just as they would any other under-performing supplier. The health and performance of the business should always more important than any of the functions that supply and support it.