Management Science Practices: Driving Performance in 2011

 

How are companies taking advantage of the growth opportunities in this economy?

This recovery is different from the past because the recession was fundamentally different. Fundamental economic change has occurred to major economic drivers such as valuations, mid-market labor supply of mid-skill level talent, credit and lending requirements have changed due to loss of 40% of the liquidity in the market, and buyer behavior including habits and spending levels (for example: consumer spending is less and for SMBs consumer spending dictates B2B spending).

 

Even with reengineered business models that are more efficient, flexible and agile further focus on selling and servicing niche client segments, to match up with today's buying behaviors, requires effective Management Science.

 

Management Science Best Practices for 2011 and Beyond
The following is what your advisors should be telling you. The following practices highlight how-to improve with fewer resources.

 

1. Buyer's Spending Habits Have Changed: Refocusing solutions around niche client segments is imperative. Knowing the customer is the first and foremost top CEO priority. Knowing client demographics and psychographics and more importantly budget priorities and criteria includes knowing how they perceive and grade reliability and services, but also means doing pricing intelligence.
   • In today's recovery if prices are not increasing then that provider is being commoditized!
   • The mass market is being replaced by multiple micro markets and the long tail of choice.
   • Due to information and advertising overload and just sheer options thanks to the Internet; numerous buyer behavior studies show that it takes on average 8 interactions to close the average B2B buyer (transactional or consultative). Accordingly the impact on operations is that clients require finely honed maturation programs to manage the client lifecycle.
     • Existing client success is maturating the client to ensure maximum net lifetime value and greater share of wallet.
     • New client success is the combination of marketing and sales interacting with a prospective buyer eight (8x) times when they are evaluating and have budget/priority.
   • Focusing on client segments provides businesses with a unique advantage to say goodbye to the worst customers and focus on the best long-term clients.
   • Forge the right relationships to accomplish budgeted goals and corporate objectives including the creation of a portfolio of referral sources and a strong bench of dynamic, empowered, motivated key team members. Focus the team and businesses processes around client buyer segments. i.e. create clients for life. Orient and incent team members to create clients for life.
     
     
2. Personnel: Match labor supply with business demand in real-time. Whether it's using subcontractors or creating strategic alliances avoid hiring W-2s and opt for alternatives. Before hiring, long-term cost structures need to be evaluated and understood because only unique business models with "best-in-class" operating performance (for example >50% gross profit margin or less than $1 in first year acquisition costs for a dollar of revenue). Simultaneously evaluating employees before full-time hiring is key and can be done through subcontracting, partnering, alliances or through “acquisition of a team or book of business” unless they bring business and/or additional capabilities to the team (i.e. diversify your bench strength). Handing off the business to the next generation requires significant proactive, forethought and work.
   
   
3. Leverage Advisors and/or mentors: Advisors can be a huge help as they provide best practices on business strategy, bolster the business model and ensure pragmatic improvement in the business.

 

If you have a “Me-Too” business model you are in danger. Can you effectively answer the following questions:

• What have we done to significantly improve our key revenue relationships and key revenue sources YTD?
• How unique is our business model compared to our competitors in terms of margin efficiency?
• What are we doing this summer to ensure our growth forecast beyond hoping our internal employees execute effectively?

Creating wealth initiates with the creation sofa unique value-proposition and business model that is economically more efficient than the competition.

 

 

Managing Financial Performance Requires Closing the Gap between Strategy and Execution:

Throughout the economy we continue to see significant bifurcation among businesses into two groups: those who are growing and those that are shrinking.

 

Assuming that a unique value-proposition and "best-in-class" operating model are established; the next step is to ensure performance execution of the business through the simple practice of holding people accountable through near real-time reports and dashboards which is what we call: Management Science.

 

Virtually all businesses produce plans and budgets. But high performance enterprises achieve outcomes instead of “generating activities by working really hard” by ensuring results and milestones are measured, managed, and that performance is monitored in real-time. The simple result of team members holding themselves and others accountable through near real-time reports and dashboards is the difference between solid and superior organizations. Additional outcomes of Management Science include:

1. make better, faster business decisions at front-line levels (get owners out of the way, mitigate bottlenecks);
2. align strategy with execution more effectively in pragmatic terms that each team member understands;
3. collaborate more successfully to create assets, capabilities and routines;
4. develop key "what-if" scenarios to plan ahead and mitigate risks;
5. become more agile and responsive around client' buyer needs;
6. develop better insight and visibility into cost and profitability drivers; and
7. maturate and monetize assets.

 

Management Science includes not only operational and personnel real-time management dashboards, but also cost and profitability reporting, strategy management, and financial reporting. In large corporations the finance function typically owns and manages reporting. But for the vast majority of small and mid-market businesses decision making at the front-lines is required and ensures performance and profitability. Eliminating redundancy and empowering employees, sales personnel, front-line employees and supervisors is a required component of effective management in 2011 and beyond.

 

Effective management goes far beyond the financial domain and connects key non financial data (ops, personnel, etc.) and traditional financial data. The key non financial data is typically the type of data that would drive profitability, budget forecasts, or cost assignments in a cost and profitability model, and that would populate a strategy management dashboard and scorecard. Management Science also includes:

• Key Performance Indicators such as margin efficiency, profitability and loss by function/location/team, capacity utilization, etc..
• Effective budgeting, planning, and forecasting: Budget comparison to forecast, reporting variance analysis
• Risk management practices: contingency planning, scenario modeling and simulations, and profitability modeling and
  optimization.

Simply reviewing bank balances, billings and financial statements of historic financial performance is not enough. Review of this historical information will simply not get the job done as historical financials only show the financial outcome of some underlying issue.What is required is proactive review at all levels of the company and insight into the non financial operational and personnel drivers of revenues and costs. Insight into the non financial operational and personnel drivers along with the cause-and-effect relationships ensures performance and thus profitability. Every time a company closes its books it should already know and understand its performance and the current economics of its existing strategy. Make everyone a leader by setting cost and profitability targets with "min and max bandwidths" that align with the corporate strategy.

 

Besides showing team members which products or customers are unprofitable, Management Science also helps make them profitable by highlighting the actions to take to move towards improved profitability.

 

Being able to know and discuss performance at each level of the company on a daily, weekly, monthly basis makes all the difference in the performance levels achieved by the company.

 

If all the drivers of performance, including productivity levels, sales win rates, client share of wallet and client NLTV, and market growth, are updated on a regular basis, the organization is better able to sense and respond to issues.

 

In today’s service economy, executives face increasing challenges in understanding the true cost and efficiency of their business processes. Further complicating the issue is the unparalleled growth of information coupled with uncertain economic conditions. Every industry today, from Technology to Financial to Services to Healthcare, is seeking ways to reduce waste, streamline business processes, and improve productivity and quality.

Strategies for Growth in 2011:

1. Improve Profitability
   
   
2. Sell additional products and solutions.
   
   
3. Sell to different customers.
   
   
4. Acquire market share through corporate development M&A.

 

Profitability Efficiency
As a result of the economic uncertainties of the past few years many firms have been in “maintenance mode." Until sales pick up, many executives are frozen. But, what executives need to understand is that only with a change to their strategy, offerings and business processes will they be able to unfreeze themselves. Which of the following is your strategy to achieving improved profitability?

• Improve margins (pricing and/or efficiency)
• Improve productivity ("rate x Q")
• Improve your portfolio: add additional products, services, solutions, items to resell, partner

Only the most efficient and most resilient business models will create wealth. To protect your business the majority of the following measures are required:

1. Identify a Profitable Niche.
• Be #1 or #2 in each market or change. Only sell and deliver a value-proposition that the market will position you as the #1 or #2.  There is no wealth or sustainability if you are third or below in your market.
• Repetition increases marketing response rates and effectiveness. We recommend that marketing connect with your target audience at least eight times per quarter with distinct, relevant and compelling impressions.
2. Attract, Retain, and Grow Customers.
• Step one: Create Raving Fans that most need your core value-proposition.
• Step two: Choose your Options for Revenue Growth
3. Invest in Your Assets.
• Improve your product portfolio and marketing and customer assets. Build strong bonds with clients through recurring revenue model, portfolio management, customer lifecycle management, and brand equities. Create solutions and programs to ensure the business demonstrates strong ROI to customers and long retention tenure.
• Leadership > Develop your Human Capital Assets. 
• Scalability > Reengineer your processes to be 80% more efficient.
• Invest in and develop your management science so that your business has the ability to adopt and adapt.
4. Have an Expert Advisor Quarterly Update Your Business Plan, Action Plan and Budget & Forecast Model.
• Focus on only your top two (2) Priorities or Initiatives at a time. i.e. focus on uniqueness: uniqueness of the business model, business processes, and offerings.

Success in this economy will be a direct result of increased skill and effectiveness of your entire executive team. Businesses must remove people dependency to create scalability while simultaneously investing in your people to increase the probability of success. While this uncertainty poses a challenge, significant opportunities do exist for growth through innovation and investment. Nimble businesses that can respond and change to effectively reposition and compete differently and better. 

 

GoToMarket
Assuming a significant market, the opportunity to create wealth is dependent upon the most efficient means to grow.

Sizing the cost of customer acquisition (what we call "Unit of One Economics"), client retention, and client NLTV (net lifetime value) is paramount to growing more efficiently and effectively than competitors and substitutes.

Assuming an efficient economic model is in place there are a number of parallel methods which can be deployed to ensure growth and expansion such as:

• Sell "Add-on" products, services, and reseller solutions.
• Corporate Development & Acquisition of "books of business."
• Alternative Distribution through channels, alliances, global joint ventures, online, or eCommerce.

 

Outsourced Corporate Development
The time is right to acquire capabilities and "books of business" due to the following:

• Many motivated sellers. The number of baby boomers looking to retire over the next few years is enormous coupled with the number of both investors looking for exits and founders that are tired and looking for a change will result in over a trillion dollars in transactions over the next few years.
• A well performing business can add significant value to its operations and clients by providing more holistic offering.
• Many industries are undergoing significant change.
• New laws and regulations are eliminating niche providers due to rising complexities and costs of doing business.

Acquisitions can include but are not limited to add-ons, rollups, commercialization of IP, recapitalization, management buy-outs/buy-ins, and spinouts.

 

Implementing your strategic vision within the constraints of available capital and resources makes owning and managing a business a real challenge. Today’s operating requirements creates complex challenges to grow. These economic realities place more stress and new constraints on leadership to make the right decisions and adjust their financial models and business dynamics.  In this economy, it’s critical that leadership maximize the entire spectrum of opportunities, including those initiatives around M&A and Corporate Development.  By employing specific tactics, processes and best practices that mitigate both investment and execution risks, your business objectives can be achieved.

The parts of the economy that are growing include technology oriented growth sectors typically focus on areas which are demanding change and which are improved by applying “mass and density” within geographic regions: Technology, Healthcare, Energy, Data Management, Oil & Gas, Transportation, and more. Email us for a complimentary report on best practices and operating performance indicators for your industry niche or learn more here: Management Science Resources.