Category Archives: Risk and Return

Business Cases

“My mind is aglow with whirling, transient nodes of thought careening through a cosmic vapor of invention. My mind is a raging torrent, flooded with rivulets of thought, cascading into a waterfall of creative alternatives…”

(Hedley (not Hedy) Lamarr in Mel Brooks’ “Blazing Saddles”.)

Ditto.
Extra points if you knew who said that as well as who uttered the response.

I seem to have costs on my mind (as well as a lot of other things, apparently) these days. I didn’t know what I wanted to address in this posting: Cost Reduction, Business Cases, Business Predictability all seemed to have been foremost in my mind among the possible group of posting topics. It seemed like the best thing to do was get started and see where it went. It went to “Blazing Saddles”. I don’t know if it is recoverable from there, but I will try.

Since this is nominally a Business Blog, and I did at least tangentially address cost reduction as one of the primary growth industries in business in my last posting, I think that I will head over into business cases. However, do not lament the transition away from cost reduction entirely, as costs do play an important role in the creation of any good business case.

It appears that creating or generating a really good business case is becoming a lost art. Coming up with an idea, specifying the investment parameters, analyzing the markets and demands, and ultimately defining the returns and value to the company are some of the building blocks of a successful business. It is a rigorous process (and it should be) because it deals with the lifeblood of the business – money.

This is not going to be some sort of a “how to” do a business case primer. It’s more about what they are and why they’re needed. Simply put, a business case is the justification package that you put together when you want the company or organization to invest in something. This is a very high level definition. The “something” to be invested in can be almost anything: research and development for new products, production automation equipment to reduce the labor component associated with manufacturing, additional sales people in an effort to expand the addressable market and grow sales, are just a few of the fun ones that come to mind.

Business cases are all about what the company should invest in. Investing is all about money, specifically when you spend it, how much of it you spend, when you get it back and how much more of it you get back. Businesses are in business to make money. Like every good investor, when money is spent or invested, a return is expected on that money or investment. If that does not seem to be the case, then the business case process has probably broken down.

I do not claim to be a business case guru. I have put several of them together and have found a few topics that I look for in every good business case. If you want to find out all that should be included in a business case, just Google “Business Case Template”. I think you will get a little more than eight million results.

In my experience, every good business case should have the following three major components:

What is it that is wanted?
What are you asking for and how much is it going to cost? Every business case is about asking for money. In the examples I cited above you would be asking for a specific amount of money for either research and development (people, lab space, lab equipment, etc.), money for manufacturing equipment for automated production, or money for salaries for incremental sales people. This amount is known as the investment.

What is it that you get for the money?
Why would the organization or business want to give you this money? What are they going to get in return? If it is for research and development, what products are they going to get and how will they positively affect the growth of the company. If it is for an automated production line, how much are production costs going to be decreased. If it is for additional sales people, how much are sales going to increase.

When do they get their money back?
No, the organization is not “giving” you money. Think of it as a loan. Every loan needs to be paid back, with interest. This interest is usually in the form of increased profits for the company, either in the form of margins from increased sales or reduced costs. If you don’t believe me on this repayment with interest thing, just ask the bank or financing company the next time you want to invest in a car or house. I think they will be quite specific regarding the interest you will be paying on the loan and the expected repayment schedule that they will require you to comply with. This money that is given back to the company is known as the return on investment.

Business Case Tip #1.
One of the guiding principles of a good business case is that the return on investment should be greater than the investment itself was.

I don’t think there are many (any?) other business case tips that can be given that have the same importance as this one. A proper business case requests a specific amount of money. It defines what the money will be used for (spent on). It specifies what will be produced (new products, cost reductions, increased sales, etc.). It also forecasts when and how much the returns will be. It is all about the numbers.

It is this last part which is especially important. When are they going to get their money back. It is during this discussion when you may hear a term such as “pay-back”. Pay-back is when they get all of their original investment back. This is the break-even point. After this, everything that is returned to the company is a benefit or profit.

Business Case Tip #2
No matter how soon or how quickly the business case hits the “pay-back” point, it will not be soon enough.

Contrary to what some may believe, money in a company is not free. A company must pay for its money, one way or the other. A company can fund a business case investment via either debt or equity financing. In debt financing it is the interest and overheads that it must pay on the loan (debt) it takes out to get the money. In equity financing it is the relative risk and return it must pay in the form of stock appreciation or dividends to the equity investor in order to attract them. This is called “the cost of capital”. It is in effect the interest or discount rate that the company must use in the business case when it looks at the future returns on its investment.

The longer it takes to reach pay back to the company, the more the amount of discount that is applied to the return. The greater the discount, the more difficult it should be to make the business case work.

Remember that there is a limited amount of investment money that is available to any company. There is only so much that the company can borrow before the financial position of the company is adversely affected by its debt position and only so much stock that can be issued before the market adversely affects the equity price and expectation for the stock.

There are also other businesses and organizations within the company that would like to invest in their opportunities as well. That will create a competition for those investment funds. So how should the company decide where to invest?

There are usually two instances where a company will invest. One of the easiest is to invest only in those business cases that provide the greatest return on the investment. That would be those opportunities that have the best business cases. You have just seen above what should be expected at a high level for a good business case.

The second place that a company usually invests is in those strategic initiatives that may not provide the best return but are required for the long term health of the company. What are these strategic initiatives you may ask? That’s a good question. I have found business cases to try to define themselves as a strategic initiative when they contain a request for funding that does not show a reasonable return on the requested investment.

That’s probably not entirely true. There are investments for things such as core technologies that other products are built from that could be defined as strategic (among the many others of this type) as well as initiatives outside of the financially definable realm such as the reduction of carbon footprints or diversity that may not contribute directly to the financial well being of the company, but should be done none the less for the greater good of the company.

Companies expect and need to make money. Otherwise they normally do not get to remain companies for very long. I think a great deal of any company’s success can probably be attributed to how strong their business case process is, and how well they adhere to it. Having people who understand what a good business case is can go a long way to attaining that success.

Good Job

I have written in the past about the need to say “Thank You”. In our roles we are all dependent to some extent on others and our teams for our success and it seems too many times we neglect to recognize that fact and thank those that have helped achieve success. I have also written about the need when thanked to say “You’re Welcome”. Too many times we have the tendency to respond with some sort of less meaningful phrase such as “sure” or “no problem” or some other similar value reducing terminology. Doing this devalues the exchange to the point where we soon begin to wonder why no one has said thank you to us anymore. At the risk of sounding like some sort of overzealous disciple of Miss Manners I am going to stay somewhat in this vein and discuss the needs and benefits of letting people know when they have done a “Good Job”.

We like to think that we all live and work in one of those here to fore highly desirable risk and return environments. I really don’t think this is truly the case. We have all come to expect a supremely high level of performance and competency in all that we do. It is when expectations of performance reach these levels that in reality there is very little return available. When you expect perfection and receive perfection you are merely satisfied, not delighted. When that situation occurs all that remains in the expectation equation is the risk. I’ll illustrate with a couple of simple examples:

I have had a car for the last couple of years and it has been absolutely problem free. All I need to do is put gas in it, and occasionally bring it in for an oil change or service as is indicated and was expected when I bought it. It has run flawlessly and I am very happy with it.

Despite this near perfect performance, I have not bothered to call the dealership, or manufacturer for that matter, to tell them how much I appreciate their effort in producing such a fine car. It is in reality what I expected.

On the other hand however, should I go out to my car at the end of the day today and unexpectedly find that it will not start, or now requires towing and service and whatever else in order to return it to its previous performance level, there is probably a very good chance that I will make both of those calls to the dealership and the manufacturer to let them know of my relatively low level of contentment with their product and question them rather vociferously about their plans to rectify the situation.

On a similar and yet much broader example, I think the majority of us now get our internet / television / phone service delivered to our homes via some sort of communication service provider. For the most part these capabilities are also delivered at a very high level as well. And for the most part we have all come to expect, and possibly even depend on this level of service.

However, should we lose our internet connection capability while one of our children is in the midst of doing their last minute research for their assignment that is due the following morning, or heaven forbid we lose the video signal during one of our favorite television shows or during the big game, I suspect that there will be several calls into that provider both voicing displeasure and asking when the service will be restored.

Like I just said. There does not seem to be any further reward available for expected flawless performance, only the risk of disappointment and unhappiness when it is not achieved.

I think the same sort of approach has evolved in the business world. We bring people on and build teams expecting them to operate and perform at very high levels of competence and efficiency. This is obviously a given. If we didn’t think that the people could operate at very high levels of competency and performance we wouldn’t have selected them in the first place.

It is only when they occasionally don’t operate at these high levels of expected performance, or fail to achieve one of several stretch objectives that managers engage and provide immediate feedback, and when they do it is normally in the form of negative feedback. It’s sort of like the employee being the cable company when the cable goes out in the middle of the big game. They hear about it.

It doesn’t matter that the employee or the team may have been performing superbly for significant stretches before the issue. It doesn’t matter if the objective was reasonable or even achievable. Because we have continued to evolve ever higher levels of performance expectations, we are in fact little by little removing the “return” portion of the risk / return equation. There is no longer a return for performing well, only a risk for having an issue.

This approach can evolve businesses into a de facto negative reinforcement management style and structure. Instead of people striving to improve or do better, they in fact begin to work at avoiding the negative feedback.

On the surface this may sound like two sides of the same coin: striving to achieve and working to avoid failure, but in reality they are not. If there is no reward of any kind, including the simplest recognition, then there is no incentive for improvement or advancement. Avoiding failure means the incentive is just to perfect the status quo. The result is that you are not really trying to make things better; your effort is going into avoiding making them any worse.

I have worked in organizations where negative feedback avoidance as opposed to positive feedback incentives was the cultural norm. I believe that there are some structures where this approach may in fact prove appropriate, particularly in those areas where the “collective” aspect of the performance is more important than the individual’s.

I remember working for an Asian based company that had this negative feedback, more collective approach to things. The organization’s management viewed their value add to the business structure as their ability to focus on those objectives that weren’t achieved and goals that were not met. It was an eye opening experience.

During my first annual review, after a reasonably successful year, I was met with the following statement (and I am paraphrasing, but also very close to the actual statement):

“It seems that you have met all your goals for this year, but all in all, we actually expected better performance from you.”

I wish I had made that up, but I didn’t.

The fact remains that while there may not be a full balance in the risk and return equation for business performance, there at least needs to be some sort or recognized return. To put it a little simpler there needs to be some sort of carrot to offset the stick approach to management. I think the carrot starts with the simple acknowledgement that someone has met our expectations. In essence letting them know when they have done a “Good Job”.

It doesn’t need to be said all the time. I don’t think that any of us has a desire to have praise lavished upon us all the time. That would devalues the effect. However on occasion acknowledging the effort, which even though was expected or even defined and required in the job description or position profile, can go very far in maintaining a level of commitment to continuing to move the business forward.

Without this sort of positive reinforcement it is all too easy for a business to fall into the trap of not trying to move things forward and doing things the best way, but only trying to avoid the negative feedback associated while maintaining a performance that meets the current level. Performance measurement is no longer associated with who performs the best; it is now focused on who makes the fewest mistakes.

The problem is that the only person who makes no mistakes in business is the one who doesn’t do anything.

I am not proposing that providing compliments will correct all business issues. What I am saying is that occasionally recognizing those people that are performing at the expected high levels of achievement with the acknowledgement of “Good Job” will likely keep them more engaged and more likely to deliver the desired good job in the future.

…and no, “Not a Bad Job” is not an acceptable alternative acknowledgement.

Is Phil Mickelson Ruining Business?

I was watching the U.S. Open golf tournament the other day. I enjoy doing that because it gives me the chance to watch people who really know how to do their job which in this case is to play golf. Believe it or not I think I actually learn a little when I watch them as well. Not much, just a little. I feel the only thing that truly separates me from them is talent. They have it and I don’t. That and age, and flexibility, and focus, and drive and probably a few other traits that I am not currently aware of.

What I noticed about this broadcast was that they seemed to focus on the players’ recovery shots. The course was set up so that if you weren’t in the fairway you were in trouble. What I saw was a lot of miraculous recovery shots that were attempted from this trouble, and only a select few that were successfully executed. However, the guy who eventually won didn’t seem to attempt the miraculous on every shot. Truthfully he was probably not in trouble as often as the others, but when he was, sometimes instead of attempting the miraculous he just chipped out. He then tried to put the ball on the green and make a putt to save par. He did that a lot. The other guys didn’t. He won by like eight strokes, which in golf terms is the same as lapping the field, or a knockout.

Let’s get this straight right up front. Phil Mickelson is an amazing golfer. He has won forty two events on the PGA tour. He has won five major championships. He has spent over seven hundred weeks in the top ten of the world’s golf rankings. I cannot hit my driver as far as he hits his six iron, maybe even his seven iron if he decides to hit it hard. He is a crowd favorite everywhere he goes because of his demeanor on the course and his willingness to interact with the fans. So why do I think that he is ruining business? I think of him as the father of the miraculous recovery golf shot. He makes a lot of them and they are all highlight reel material. When we see what we think of as an “everyman” like Phil Mickelson pull off the miraculous recovery, we think we can all do it, and not just in golf.

David Feherty on the other hand, is a former professional golfer. While he did win five times on the European golf tour, he has never won on the PGA tour and may not have spent a single week in the top ten of the world’s golf rankings. He retired in nineteen ninety four to become a golf announcer. It is widely accepted that he is far better as a professional golf announcer than he ever was as a professional golfer. Why do I bring up David Feherty in responding to my question as to why I think Phil Mickelson may be ruining business? It is simple. David Feherty provided the following quote regarding Phil Mickelson:

“Watching Phil Mickelson play golf is like watching a drunk chasing a balloon near the edge of a cliff.”

We are now getting close to the point. 

Phil Mickelson will hit some of the most incredible shots in golf that will end up getting him into some of the deepest trouble possible on a golf course. He has been known to get a little wild, or to make some foolish decisions at the most inopportune times imaginable. What is amazing about him is that he can then hit some of the most amazing recovery shots humanly possible and put himself right back in the game again. Notice that I said he “can” hit amazing recovery shots. That doesn’t mean that he always does. Sometimes it works and he is almost unbeatable. Many times it doesn’t, and then things only get worse. Golf, like business is very unforgiving of compounded mistakes.

While it is true that he has won so many times on tour, what is not so widely publicized is the number of times that he lost when he should have or could have won, due to the erratic nature of how he plays the game of golf. In 2006 Phil Mickelson lost the U.S Open on the seventy second and last hole. He came to it leading by one and needing only a par to win. It was not an especially long hole, but as with all major championships it was not easy.

Instead of being a little conservative, and probably winning or at worst tying, he went for it as he always does. He teed off and knocked his drive into the trees.

Instead of playing it safe and smart (as this year’s U.S. Open winner did on several occasions), and pitching out to the fairway where he could then rely on his well documented and much acclaimed pitching and putting skills to get his par, he went for the fabulous recovery shot. Mere mortals could not have hit the shot he was going to try and hit.

He was going to bend a shot around some trees and knock it on the green from more than two hundred yards away. It didn’t work. He hit another tree and the ball came rolling back toward him.

Now he is laying two, and he needs a four to win or a five to at least tie, and he is no better off than he was before.

He goes for it again because now he has to. This time he gets it around the trees, but misses the green and it ends up in a difficult lie in the greenside bunker. Now he needs to get it out of the bunker and in the hole in two shots just to tie.

He gets it out of the bunker, but misses the putt to tie and just like that he loses the tournament.

While Phil Mickelson is renowned for his miraculous recovery shots, there will always be the question of should he have avoided the trouble in the first place. Could he have played it smart and not hit his sometimes erratic driver, opting for a club that he could have more easily used to hit the fairway? Once in the woods could he have made a better choice that would have taken losing the tournament outright out of the equation, while still giving him the chance to win? Mistakes in golf, like in business can always happen, and when you do find yourself in trouble is it always the best course of action to go for broke on the recovery?

History has shown that most attempts at miraculous recovery shots fail, otherwise it would not be considered so miraculous when they succeeded. If they always succeeded they would just be recovery shots, not miraculous recovery shots.

Too many times it seems that businesses can find themselves in a difficult situation and instead of playing to their own strengths and capabilities, play for the miraculous recovery. Most of the time when they try the go for broke recovery in business, the business does indeed go broke. There are examples of successes using this approach. They usually end up in some business school case study where they are captured and passed down to future generations.

I think they are more like lightning strikes in a rain storm. They are relatively rare, individual events, and as the saying goes lightning doesn’t usually strike twice in the same place.

Actually in golf getting struck by lightning even once is not considered a good thing. That’s normally why we go inside when it starts to rain. Getting struck by lightning of a golf course will usually ruin your round, and probably any future rounds you had ever planned on playing.

In golf a steady performer is known as a “grinder”. A grinder is someone who works at minimizing their mistakes and maximizing their opportunities. A grinder usually doesn’t have less talent; they usually just don’t take as many risks. When a grinder makes a mistake or does find themselves in a difficult position, they weigh all the risks and rewards with an eye toward realistically minimizing the downside risk. They understand that they may not be able to win the tournament with a good decision, but that they can certainly lose it with a bad one. Making par after a mistake is not a bad score.

Tiger Woods is a possible example of the ultimate grinder. He has been the best golfer in the world for almost as long as Phil Mickelson has been in the top ten. He rarely makes mistakes to the point that it is extraordinarily uncommon that he ever beats himself. The majority of the other top ten golfers in the world are probably best described to one exten
t or another as grinders also. This means that the riskier, more swashbuckling approach to golf that Phil Mickelson so successfully uses is much more the exception than the rule for the truly successful.

Miraculous recoveries are attention grabbing by their very nature. Few of the attempts are really ever successful despite the numbers that are tried. Those that are successful however are very widely reported and seem to take on an image and a life all their own. Miraculous recovery attempts seem to have become the standard against which we want to measure all performances, be it in golf or in business.

A business that finds itself challenged might better learn from this year’s U.S Open winner. He calculated when to go for the miraculous, and when to play it smart and just chip out of trouble and play on. Phil Mickelson has finished second six times in the U.S. Open indicating he definitely has the talent and capability, but has never won. This year he was sixteen shots back. Businesses are also always competing and need to understand that while the miraculous is usually widely reported, that by its very nature cannot be expected to regularly occur.

Setting realistic goals for each shot a business is going to take is a key to a business’s ongoing success. It’s better to leave the miraculous recovery shots to the golfers.

Contracting Disease

It is somewhat interesting to me that you can both “catch” a disease, and you can “contract” a disease. So what is the difference? The principal difference is that catch suggests a transmittable infection (ex. You can catch a cold or the flu), while contract can refer to a wider variety of diseases, including those that are not contagious (ex. You don’t catch cancer or leukemia, you contract them). I had to look this up. I didn’t say that it was engrossingly interesting to me; I said it was only somewhat interesting to me. In the business world the equivalent would be that you don’t catch a bad deal with a customer or supplier, you contract it.

So many businesses do so many things right in the ongoing process of trying to satisfy customers, so it is truly a shame that when it comes down to consummating the relationship with the customer, in the form of a contract, that they fall short of the good contractual goal. It is almost as if the business entity gets so excited at the prospect of completing the deal that they forget to write a good contract. Contracts at their most basic are very simple: Both entities in a contract want to get something, and in return are prepared to give something. Buyers want to get products or services and in return expect to provide money, and sellers want to get money and in return are prepared to provide products or services.

Beyond this it gets complicated.

Buyers want to get more products and provide less money and sellers want to get more money and provide fewer products. Herein lies the rub. How do you make sure everyone delivers what they should and pays what they should? You create a good contract.

There are many benefits and detriments associated with the advent of contracts. The greatest detriment that I can think of is that contracts gave rise to a new species of life, commonly referred to as “lawyers”. To bring a little circular logic into play here, it is good to remember that it is very difficult to “catch” a lawyer (at anything). Invariably you must “contract” them, but if you wash your hands thoroughly afterwards, while you probably will not reduce any of your risks, you will definitely feel cleaner.

I know it sounds a little trite but contracts are definitely a necessity in business. There must be some way for both parties to enforce the agreement that they are pursuing. Promises are good, and I am sure that everyone involved is both reasonable and honorable, but it still needs to be put in writing. Understand that agreements and requirements of any type can span multiple years. During that period it is not uncommon for the people who were party to the initial deal and who may understand the reasons for what was done, to move on to other roles. At the very least there needs to be a historical record of the agreement in the form of a contract so that those who follow on both sides of the agreement have something to refer to when questions arise.

This brings us to “Contracting Disease”. This is a malady that affects many businesses and is very prevalent particularly around business deadlines or at the end of any measurement period. A measurement period is usually the end of a month, quarter or year. It is during these deadlines or end of the measurement periods where usually reasonably sane organizations will succumb to one of any number of pressures and sign what is known as a bad contract.

A bad contract is the result where for whatever reason one of the parties to the contract either temporarily or permanently seemed to lose their mind and the other party to the contract lets them.

Contracts are normally designed to balance each party’s risks against the specific values that they are to receive. The standard risks are normally associated with how much of a good or service is to be supplied, how long it will be supplied, how much is to be paid for it and when it is to be paid for. There are normally many other items to be considered in a contract, but these are the primary ones, and usually any others somehow relate to these.

Contracting Disease can strike buyers at almost any time but usually occurs when the buyer either puts themselves in a position where very few if any suppliers can fulfill their product specification requests, or they find themselves in a position where an external factor has occurred and they must obtain a good or service at almost any cost in order to remain functioning. The US government is a perfect example of the self inflicted product specification contract. Government contract specifications and processes are usually incredibly complex and are pursued by only a limited number of specialized businesses. This is the type of process that results in contracts for five hundred dollar hammers and twenty five hundred dollar toilet seats. This is not an example of “you get what you pay for”. This is an example of “you pay, and you pay a lot, for what you needlessly over specify”.

A good example of the buyer’s need situation can be seen in the oil embargo of the 1970’s here in the US. OPEC decided that the US was not their friend, needed to be taught a lesson and as a result they were not going to ship any more oil to the US. This resulted in a reduced supply of gasoline at the pumps for all consumers and anyone else who drove a car. Consumers needed gasoline so that they could continue to drive their gas-guzzling cars. Enterprising gas stations recognized this opportunity and started raising their prices for gasoline far beyond any rational level based on the newly limited supply. In short they took advantage of the situation and raised the price of gasoline to unheard of exorbitant levels, but back then they would at least clean your windshield when you filled up so it wasn’t quite so bad.

Gas stations raised their price for gasoline to far more than ONE DOLLAR per gallon during the OPEC oil embargo. Can you image the nerve of those places charging more than a dollar for gas?

This was seen as price gouging and federal laws were quickly enacted to stop the practice. However, at the time, gas buyers who wanted to drive their cars had no choice but to agree the gas station’s contract and to pay the exorbitant price if they wanted any gas.

Contracting Disease can strike sellers in a myriad of ways, but it usually boils down to the fact that the buyer for whatever reason wants the buyer’s money and will agree to almost anything the buyers’ want in order to get the money. As I noted, Contracting Disease in sellers appears to be primarily a seasonal related malady. It seems to strike at the end of each quarter and especially hard at the end of the year. It is no coincidence that these periods coincide with the end of the various financial reporting periods. It is at these times that some sellers’ drives for incremental revenue (and contracts) can reach a fevered pitch.

Unfortunately (or fortunately depending on which side of the contract that you are on) there are no laws to protect sellers from themselves when it comes to selling their goods or services. This has to be one of the ultimate self regulating environments; the environment where the long term costs of signing a contract outweighs the short term inflows of money. When this self regulation does not occur, Contracting Disease sets in. In many markets it appears that buyers have recognized the periodic nature of sellers’ Contracting Disease and purposely try to wait until these high risk periods to negotiate and sign contracts.

When discussing Contracting Disease it is best to remember that buyers are usually protected in one form or another when it comes to the purchase (contract) of necessities and staples required for ongoing survival. Collusive or predatory practices by vendors are illegal. However Contracting Disease that results in a contract with incremental self inflicted risks and expenses associated with either the purchase of, or the sale of goods and services has no regulatory limit.

In
stead of caveat emptor (“buyer beware”) or caveat vendor (“Seller beware”), it should more accurately be Caveat Contractor.

Answering RFPs

Most customers are pretty smart. They have to be or they don’t get to stay customers for very long. They go out of business. Ever since the first business transaction occurred where a customer gave a vendor gold (or its fiat representative, money) and in return received something they either wanted or needed, customers have been asking the eternal question:

Did I get a good deal?

The answer is invariably, maybe.

If the customer received a product or service that met their expectations and fulfilled their needs, and parted with an amount of money that still enabled them to continue operations, then they are probably not unhappy. Notice I didn’t say happy. A customer will always find room in their heart to spend less money on something. If you gave a customer their desired product for free, they would probably wonder if they should have asked for you to throw in the installation of the product for free as well.

Here in lies the rub. How does a customer get a vendor to part with their highly desirable product or service for less money? Vendors want to raise their prices. Higher prices mean better margins, better profitability, higher stock prices and eventually a larger yacht for the CEO. Keeping the CEO happy seems to be the driving force behind most business decisions these days.

The answer as to how the various customer – vendor balances are achieved lies in the market’s dynamics. If there are many people chasing or wanting the good, and relatively few suppliers, then the balance swings in the vendors favor. A good example of this phenomenon can be seen in plethora of collector car auctions that are popping up on the various television channels.

These auctions are events where we can all vicariously watch a number of rather wealthy people throw incredible amounts of money at old cars. Why are they doing that? I don’t know. I only know that when I am watching them run the price of some vintage 1960’s AC Cobra up close to seven figures, I too want that car. I don’t want to drive that car. Who would risk an accident driving a car valued at a million dollars? I would like to have that car so I could sell it for a million dollars.

Perhaps the wealthy bidders on the televised auction have already obtained their larger yachts and need another type of good to serve as the latest trophy for their success.

The point here is that there seems to be more wealthy people throwing money at old cars than there are old cars for them to throw money at. Why is that? I think it is because they are not making any more old cars, only new ones, hence there is a limited supply of old cars. But here too the economic laws of supply and demand indicate that if there are more people that want a good than there are goods (old cars) available, the price of the good will go up. This is how you get million dollar AC Cobras.

On the other side of this spectrum is the situation where there is an industry dominated by a very few customers and relatively numerous vendors contending to be one of the chosen suppliers of a good or service to them. Examples of this market structure can be seen in the automobile manufacturing or communications provider markets. These are other examples of markets that are dominated by a few very large players with many vendors contending to be suppliers to them, but these are two that we should all be familiar with.

When these customers decide that they want to buy goods or services, they also hold an auction of sorts. They hold a silent auction, with one of the prime differences being it is not the buyer who bids the highest price that wins; it is the vendor that bids the lowest price that wins. This type of scenario is called a Request For Proposal (RFP), and the really fun part of this process is that again unlike the auto auction, no one gets to know how low the others involved in the process are bidding. It’s good to be the customer in an RFP process, just as the film director Mel Brooks once said “It’s good to be King” in his movie The History of the World.

Can you imagine how much more fun it would be if car manufacturers had to go through a process like this every time you wanted to buy a car? Think about what it would be like to have car manufacturers coming to you and disclosing to you the lowest price at which they would sell you a car, without knowing what the other manufacturers are bidding. We would all probably buy more cars just for the shear pageantry and enjoyment of the process.

A customer’s RFP process is designed to do one of two things: create a process that justifies the selection of the vendor, and product that they wanted in the first place, or to reduce the vendor decision process to the lowest common denominator – price, and then choose the cheapest provider.

The RFP process enables a customer to create a specification for the good or service that they wish to obtain, and have multiple vendors submit their lowest possible price for their good or service that meets the specification. A customer can favor one vendor over other vendors in this selection process by including terms or requirements in the RFP specification that may be more advantageous to one vendor’s capabilities, or conversely have requirements that are disadvantageous to the other vendors’ capabilities.

In either event, it is the responsibility of the sales team to have previously created the relationship with the customer that will enable this sort of influence of the buying process. If you are trying to answer an RFP that does not accentuate your company’s or products advantages, your sales team has not done their job. You can usually tell this is the case by how loudly the sales team is screaming for a lower price to be included in the RFP response. You are also probably answering an RFP that does accentuate your competitions capabilities, and their sales team has done their job.

On the other end of this RFP decision process, it may be possible that the customer has in fact created their own RFP with no input from any vendors. This is a rare occurrence. If this is the case you are now in the midst of what is known as a “Price War”. This is a situation where the vendor with the lowest cost basis, or the vendor willing to take the lowest profitability margin will win the opportunity to sell their good or service to the customer.

Unless you know that you are the lowest cost supplier of the desired good or service, this is also known as a waste of time. Trying to win a price war RFP process is not usually a profitable endeavor.

The only thing worse that some unprofitable business is a lot of unprofitable business. The idea of economy of scale does not hold when it comes to unprofitable business and large RFPs.

I believe that everybody in business at one time or another has responded to an RFP. Some of us have even won them and become the selected vendor. I think that most of the times that I have been successful have been because of the influencing work that was done prior to the RFP being issued. I also think that most of the time we have all been sorry for the RFP competitions that we have won purely on price.

This probably holds true for the customers as well. If they are not willing to enable the vendor to provide their incremental or differentiate value, but only their price, then they will probably not get any incremental value in return either.

I find it even more interesting that even after all of this customer – vendor type of interaction associated with the RFP and purchase process, all the hoops that customers will create and that the vendors must leap through, and all the price discounts that will be demanded, weaseled and cajoled, the buyer will almost always refer to the selected vendor as their “Partner’.

Big Deals

I try to avoid starting off by asking a question, but sometimes I just can’t help myself. Is it just me or does it truly seem that in many instances it is possible for business egos to get in the way of business IQs as the size of the business opportunity increases? This big deal blindness is a phenomenon that I have encountered several times in the past. As the magnitude of the numbers being considered for whatever purpose (sales, costs, scope, merger, etc.) increase, there seems to have been some instances in the business past where the momentum of the deal takes over and the basic principles of business analysis and management appear to be forgotten.

This type of behavior does not seem to be confined to any one company or industry, but rather emerges unexpectedly for a while in one place and then just as quickly goes dormant again. But not until after some sort of a business millstone has been placed around the corporate neck. It then takes all of the business’s senior leadership to formulate the path back to recovery. Meanwhile the general process is that those responsible for “the deal” have already declared victory, taken their bows and then very quickly exited stage left.

I am not specifically talking about Mergers and Acquisitions here (M&A) when I talk about things such as the magnitude of the deal, but rather more along the line of basic internal business conduct. However, I think some of the lessons that have been learned by some of these humongous M&A failures of the past can equally be applied to business situations that are more related directly to the operation of the business.

Here are a few lessons for business deals that leaders ought to take into account, at least in my opinion, before they start looking at the next big opportunity, at least in my opinion:

• Unlike the Bob Dylan song (Times They are a Changing), the times are not changing. The same basic rules apply to big epic opportunities as they do to the smaller ones. Profitability still matters. Core competencies still matter. The magnitude of the deal disproportionately increases the risk of the deal if the probability of success is based on a significant change or transformation away from what has been the business’ norm is associated with the deal.

The success of the deal is usually associated with doing something that you already know how to do, to a great extent. Growth and expansion by necessity mean that you need to take on some new aspects and scope with each deal, but unless you are relying at least in large part on your known core competencies, the big deal that is supposed to be a game changer or entry into a new market is usually an even bigger risk.

• In too many instances it seems that management may have felt the need to make a big, bold, landscape shifting, game changing sort of deal. This may be as a result of a desire to get into a new market or in response to some sort of internal or external business pressure. The idea appears to be to make a dramatic market statement or splash in order to signal some sort of new direction.

Few businesses do the new, big and splashy right the first time. Unfortunately if the deal is big enough and as a result generates a situation that is bad enough, there may not be the second opportunity to do it right. Change associated with business core competencies or structure takes time. It can’t be forced as a result of a big deal. A certain amount of ego is essential for leadership. Too much ego results in deals where the mouth has written a check that the brain can’t cash.

Deal success usually comes about as the result of doing the basics well. This capability evolves from doing similar types of deals on a regular basis, understanding what your deal or market sweet spot is, and maintaining a stable business approach. If you have been successful doing smaller deals in one area, the chances of having issues with a larger magnitude deal outside of your knowledge area are significantly increased.

• Sometimes deal momentum takes over and supplants common sense. When a large opportunity or deal is first noted, it begins to appear in the various business forecasts. It doesn’t matter that it may be exploratory or of initially low probability. The longer it stays visible, the more it becomes part of the expected fabric of the business. Eventually it becomes expected and sometimes even counted on as part of the business results.

It is very seldom that any amount of caution, qualification or warning can stop this progression. It eventually evolves that big deals that have been around for a while become deals that “cannot be lost”. Once this mentality has set in it leads to a set of seemingly logical steps that culminate in an illogical deal. Costs can be shaved, schedules can be condensed and onerous terms accepted all in the name of getting the game changing big deal done.

This type of deal behavior would normally result in a difficult environment for success if the opportunity was associated with a core competency of the business. When it is associated with a new market or an unproven capability the performance and results are usually not so pretty. The budgets and the schedules are usually the first items to be impacted, with the profitability and customer’s satisfaction very close behind.

Perhaps again we are seeing another business manifestation of one of C. Northcote Parkinson’s Laws, specifically Parkinson’s Law of Triviality, from his 1957 book “Parkinson’s Law”. In it amongst other topics, he examines the amount of time and attention that businesses spend on smaller (trivial) items as opposed to the larger, more complex and more important ones. In summary:

“He dramatizes this “law of triviality” with the example of a committee’s deliberations on an atomic reactor, contrasting it to deliberations on a bicycle shed. As he put it: “The time spent on any item of the agenda will be in inverse proportion to the sum [of money] involved.” A reactor is used because it is so vastly expensive and complicated that an average person cannot understand it, so one assumes that those that work on it understand it. On the other hand, everyone can visualize a cheap, simple bicycle shed, so planning one can result in endless discussions because everyone involved wants to add a touch and show personal contribution.”

Big deals are an important aspect of any business’s growth plan. They require a significant amount of discipline as businesses seem to get more anxious to close them, the closer they believe they are to closing them. (Perhaps this can now be cited as Gobeli’s Big Deal Corollary (BDC) to Parkinson’s Law if Triviality.) This phenomenon can result in final agreements that are far from the original big deal concept and far from beneficial to the business. The risk associated with the big deal increases rapidly if it is outside of the business’s normal operating area, or is associated with senior management’s plan for the transformation of the existing business or business model into something else.

Big deals are quantum events that must be given at least the same amount of deliberation if not more than that associated with the standard business conduct, regardless of the business’s desire or dependence on their closure. If you are going to try to successfully change the business, it is also probably better to not start the change, or make it dependent on a big deal.

Initiative

I think we
have all had the opportunity to relax and talk with our coworkers around the
office. What is interesting is that invariably these impromptu discussions have
a tendency to become complaining sessions regarding the then current set of
ills befalling the company. I remember back to one of these sessions some time
ago where I was doing some of the complaining. What happened as a result of
that “discussion” still affects the way I work today.

After
complaining about a specific problem and my proposed specific solution to it,
one of the people in the group said to me:

“If you have
such a good solution, why don’t you take the initiative and do something about
it?”

I was at a
relatively early stage in my career. I thought their suggestion had merit. I
went ahead and took the risk and proposed an action. I put
together an overview of the issue, what my proposal to address the issue was,
and what the business case and benefit to the company would be. I took it up my
management chain.

I didn’t
think too much more about it until a couple of weeks later when I was asked to
come into a meeting and explain my approach to the issue and why I thought it
would work. I was actually called into a senior management staff meeting.

The toughest
question I had to answer was why I was making a suggestion about an issue that
was outside of my area of responsibility. I responded by saying that I thought
I had a workable answer to the problem. The result of the meeting was that I
was given the challenge of implementing the solution I proposed.

Not every
suggestion that I have made since has been as well received, however several of
them have been. The point is that it pays to take the initiative. Putting a
considered solution proposal together to address an issue is always in order.
We have all learned that no one has the market cornered on good ideas. As I
have moved on in management I have kept the lesson I learned in mind and still
try to practice it.

If you see a
problem and you think you have a good solution to it, go ahead and propose the
solution. Don’t just complain. Don’t say it isn’t your job or it’s not your
responsibility. Understand that it’s okay if you are told “no”, and your
proposal is not acted upon. Taking the initiative on the solving of all types
of problems seems to be the space that we all need to get back into.

The next time you find yourself discussing the problems facing your
company today, remember to take the initiative and step up and propose a
solution. Good suggestions on how to address issues are always appreciated and
they can help establish your ability to help solve some of the issues facing
business today.

When in the Rough…..

I like to
play golf, but I am not a good golfer. I like to watch golf on TV hoping that I
might learn something that might help me. Mostly what I learn is that the guys
who play golf on TV are so much better than me that I would have to be a much
better golfer just to be able to figure out what I could learn from them.

I was
watching the end of the year golf tournament from California and I actually did
pick up something that I think is useful. Usually the only announcer that even
remotely interests me is David Feherty, who is responsible for such great golf witticisms
as “…That ball landed as softly as a butterfly with sore feet.”, but I digress.
The announcer today was talking about one of the great golfers playing who “had
all the shots”, but was trying them in all the wrong places.

That is to
say the golfer had the capability to hit the ball 240 yards on the fly over the
water to the green on a par five in two shots, but probably shouldn’t try to do
that from a downhill lie, in the rough, behind a tree. Sure enough, when he
tried the increased difficulty shot, he didn’t execute it, and compounded his
problem. He went from trying to make an eagle, to struggling (and eventually
failing) to make par.

The comment
that caught my attention was that with the talent that the golfer possessed,
and being so capable of executing a standard shot so spectacularly, was not to
try and execute a spectacular and risky shot from a difficult position (in the
rough, behind a tree) but rather to execute a good shot to put the ball back
into a standard situation (the fairway) and then executing spectacularly from
there.

Even for a
relative hacker like me, this meant working on “course management”.

There will
always be difficulties encountered in golf. There is always a risk – reward associated
with how you deal with them. However, difficult situations are just that,
difficult to deal with. It is always possible to make a bad situation worse.
Sometimes it is better to take your short term medicine, put the ball back in
play where you have a chance of “executing spectacularly” from a easier, more
familiar situation and making par.

So, even with
all of the golf allegories, we can look at “course management” when it comes to
running our businesses. The idea here is that in many cases you may find yourself
or your business in a difficult position, where the best course of action may
not be to immediately “go for the green” and try to immediately recover the
situation. The correct course of action may in fact be to take you and your
business out of the difficulty and to put yourself back into a “normal” or “standard”
situation where it may be much easier, and therefore much more probable to execute
the “spectacular shot” and achieve success.

Recovery
sometimes is best made as a two step process. The first step is to get out of
your difficulties and back into a standard position. The second step is then to
use all the talent available to you to execute that step to success.

On the other
hand, when I am out on the golf course, I find it incredibly hard to remember
these types of lessons. I seem to just want to hit the ball…hard. Maybe that is why I am not such a good golfer.

Sun Tzu Was Right

In his book “The Art of War”, Sun Tzu (a 5th century B.C. Chinese general) stated “If you know yourself, and you know your competition, you will never lose a battle” – I hope you don’t mind if I have paraphrased a little.

 

Sun Tzu speaks about the importance of knowing your own capabilities, whether they are personal, corporate, technological, whatever. You must assess if you have the skill and resources to achieve the desired goal. He also speaks about the importance of knowing your competitors (opponents) capabilities, along the same lines.

 

He also talks about taking into account the terrain, climate and intangibles when preparing for war / competition. These ideas can be roughly analogous to the market, the economy and the morale/status of your team.

 

What he does not say is that if you take these things into account that you will win. What he does say is that you will not lose. What this means to me is that after these reviews, you need to pick your battles and your objectives. Analyze the risk and the return. If after review you find yourself at a significant competitive or market disadvantage, it may be best not to engage in that competitive environment.

 

Use the analysis of yourself, your competitors, and the various markets to choose those opportunities where your probabilities of success are highest. It sounds simple enough. It should be simple enough. To use a modern day analogy, it’s like blocking and tackling in football. But as we have seen in football, the basics are not always that simple based on the high level of talent and competition out there, and even then it takes a significant amount of practice to get  the basics right.