Increasing the Value of Your Business
Josh Patrick, President, The Patrick Group
Ten years ago most business owners were able to be successful by just being tactically competent at running their business. The last several years have seen a continual erosion of profits in many industries. This has been caused by increased competition, both domestic and foreign. In almost every industry there is excess capacity, the ability of companies to deliver more service than the market has need or demand for.
Adam Aardvark faced a dilemma. He was facing the third year in a row of decreasing profits. He had tightened up his operation, put systems in place to control the controllable and was spending all of his time on operational issues trying to make his company better so his profits would improve. He found that no matter how hard he worked or how much managing he provided for his people, his companies performance continued to decline. He was fast reaching the point of burn out and had decided he wanted to start thinking about selling his company.
Adams dilemma is becoming the normal. More and more business owners we speak with are getting to the point where they just want to sell their business and stop the pain. They tell us there aren’t enough hours in the day to get things done and the harder they work the more their profits decline.
I think the main reason for this is that most owners get stuck in the tactical trap. They only think about operational effectiveness and spend little or no time on strategic thought about their business and the products it provides or could provide.
Adam needs to look at two areas of his business. First, he needs to examine the role that he plays within his business. Second, he needs to look at the activities of his business and see how he can move some of his revenue producing activities out of a commodity world into a value added world.
Strategic Versus Tactical Thinking
The problem I see with most businesses is that the owners spend over 90% of their time in the tactical part of their business and 10% or less on strategic issues. The problem with this approach is that tactical issues almost always deal with the commodity side of the business where little or no money is made. Strategic thinking is concerned with value added activities a business can provide where high profits reside.
Many businesses concentrate on selling commodities to their Clients while giving away their intellectual capital. For example, your insurance agent might spend hours with you talking about to structure your insurance program properly. They don’t charge you for this information because they hope you will buy your insurance from them.
There are a few businesses that think in a more strategic manner. These businesses work very hard to not only sell you a commodity but also have learned how to charge for their intellectual capital as well.
We have a Client who sells lapel pins. They don’t manufacture the pins, but outsource the manufacturing to other companies who are willing to do the work for very low margins. Their intellectual capital is how to design and source the lapel pins they sell. As a result they have few employees and very high margins.
Understanding Appropriate Roles
Adam liked the idea of moving from a tactical to strategic focus, but had no idea how to go about making the change. He was spending all of his time on tactical issues like making sure his Clients were served effectively. He didn’t know how to get time in his life to think about strategic issues that could help make his business more valuable.
The fist thing I would suggest for Adam is that he keeps a time log for the next month. During this time he would write what he was doing at different times of the day. Next to each activity he would write P, C, GM or O next to that activity. The letters stand for player, coach, general manager or owner.
When Adam was doing front line work such as sales, he would put a P next to that time. When telling someone else how to do a particular job or supervising to make sure a job was done properly he would put a C for coach next to those activities. When he was working on activities that could make his company better like planning a new sales campaign or thinking about new value added services his company could provide he would write a GM for general manager next to that activity. When Adam was working on financial analysis or evaluating the service his company provided, he would put an O next to those activities for Owner.
The next step for Adam is to find out what percent of his time was spent on player, coach, general manager and owner activities. His goal was to spend more time as general manager and less as coach. Adam realized that he could hire people to be excellent in the tactical issues his company faced. He also realized that he needed to concentrate on strategic issues if his company was every going to emerge from its cycle of ever smaller profits.
Evaluate the Supply Chain
Many companies spend a great deal of time on managing supply chains. Often it’s possible to outsource this to companies or individuals who will do it much better and for much less cost.
Adam realized the value he had for his Clients was helping them design food and refreshment services that helped make his Clients employees more productive. He was an expert at laying out locations, merchandising and sourcing items that were hard to find that employees in companies enjoyed during their breaks. He was also finding that every year his route cost was becoming more and more difficult to manage.
Adam decided to take a different look at his business. He wondered if he could find a way to outsource the service delivery part of his business. If he could do this, he would dramatically lower his capital investment and allow someone else to take on the risk of waste, theft and vandalism while Adam’s company still maintained the sales, design and service management for these accounts. Adam realized that his value added only came from these three activities. The rest were seen as a commodity by the account.
Outsourcing the delivery activities would lower the gross sales his business produced. Adam discovered that instead of having a very thin bottom line at the end of the year, the actual dollars in profits as well as profits as a percent of sales greatly increased. In fact, his return on equity went from a few percent per year to well over 40% by making this change.
Know Where You Make Money
Financial management is one of the most important activities if not the most important activity you as an owner can participate in with your business. It’s strategic and allows you to concentrate on activities that make money for your organization.
Adam realized that his business had many different components. He decided to find a way to break out the different activities his business provided and see which ones provided profits for his company. He also realized that part of his business had significant capital investment and parts had none. He wondered if he could outsource the part with high capital investment.
Adam asked his CFO to put together some numbers that showed profitability for each activity his company provided. He found that having the delivery and service part of his business outsourced to others improved his profit to the point where he started to once again get excited about his business.
Adam’s challenge was how to control his strategic partners so they would provide high quality service as well as allowing Adam to continue controlling the intellectual property portion of the business.
He decided two things needed to happen. First, he would put together legal agreements between his company and his strategic partners that left Adam in control of the Client relationship. Second, he had them make significant investments in their part of the business. If his strategic partners walked away, they would face a large economic loss. Adam had now outsourced the part of his business he had a hard time controlling and let his strategic partner take the capital risk he used to take.
In addition, Adam started a consulting arm of his business. He went to the 200 largest companies in his market place and offered his design services for food and beverages. He found that many of these companies never had thoroughly thought through the process of what and how their employees should be served.
Getting the first Customer to hire him as a consultant took a lot of work. The second was a little easier. By the time Adam had worked for five Customers, he had a track record. At the end of his third year of providing consulting services he found that 50% of his sales cost was being covered by the consulting arm of his company.
We have a conversation with everyone one of our Clients about supply chain management, strategic focus and selling their intellectual property. We always see resistance at first. For those who have taken the plunge, many have seen their bottom lines increase by 30% to 100% by charging fees for consulting, outsourcing their supply chain or getting Clients to pay for intellectual property they used to give away.
These examples are hypothetical in nature and provided for educational purposes only. Actual results may vary depending on circumstances.