The Ultimate Business Case (2)

…this post relates to the previous one on the Ultimate Business Case.

Also spend some time on the strategic component, illustrate why the investment should be made and how this will provide a key advantage over competition. One strategic assessment is a sensitivity analysis: how does the final outcome behave when one of the main parameters grows or shrinks by 5/10%? Another option is to calculate the break even point: at which point does the cumulative contribution exceed the fixed costs? Eventually, seek to establish the base line against which to benchmark the incremental earnings.

Indicate the start and end point of the opportunity you want to address. It should be clear that a certain “window of opportunity” is out there and there is an end date after which that is gone. Describe what has changed vs last quarter that makes this a good business opportunity.

Finally, it will add to the robustness of the BC if it shows the project team has thought of ‘the bigger picture’. It is good to show what the company stands to lose if the BC does not take place. But…what does the company commit to if it agrees to take on this opportunity? Are there any economies of scale/scope to be realised, does the company need to make additional investments, or does it have big repercussions on manufacturing?

So, before I share with you my standard excel sheet with a business case, I would like to summarize like this:

A good BC…. 
1. Works out the assumptions
2. Describes the strategic component & description of window of opportunity
3. If substantial, thinks about the bigger company
When Modelling
1. Always contains expected product volumes for the next 5 years and their prices
2. Works out the P&L down to EBITDA
3. Works out a cash flow and payback calculation
Optionally
1. Compares the outcome with the ‘baseline’
2. Sensitivity/breakeven analysis
3. Market share analysis and evolution

And here you’ll find the Generic Business Case.

The Ultimate Business Case

In my career, I have already built many business cases, mostly on commercial decisions. Usually from scratch, sometimes just optimizing from what I inherited from others. I really feel building a good BC is an art of its own. You need deep understanding of the a balance sheet, but must not be an accountant. You need a good understanding of the business model, but you are not the sales manager. You need to have a good financial knowledge, but not be a banker… you get my point.

Before making a deep dive in how a good business case potentially looks like, I would like to make a few points. This is going to be a long post, so think I will chop it in half.

What’s a business case?

A BC summarizes the financials of a project of a future earnings model. It is decision material, meaning it does not have to contain all details, and not be too wordy or narrative. It’s the finances what it’s about. After a few hours in, step back and think about the right level of detail. Perhaps have a look at my post on business analysis. Although often produced by the same individuals, there is a difference between business analysis and modelling!

In a company, the format of a BC should be consistent and repeatable. It is a disaster for any EMEA-level manager having to work through 40 different formats for 40 different cases. It will take him -and you- 40 days. So make use of available formats, I will offer one later.

However consistent, once a BC is finalised and submitted, the owner should be aware his baby needs to be updated regularly, especially after receiving significant new information.

What is the most important slide of a BC? Right, the last one (chances are the attention level of your audience will go up when they know you are packing up – sad but true). So what do you need on your last slide? Your expected return, the expected decision or as I usually call it, the definition of success.  Be sure to represent it as a measurable output. That may be the profit or cashflow for the next periods, incremental volume, but sometimes the avoidance of loss or additional cost savings.

More key elements

Spend an obscene amount of time on spelling out the assumptions. Both the quantitative and qualitative ones. Take one, no twenty, steps back from your business and take 30 minutes to brainstorm with peers about what the assumption is. The bigger the assumption, the harder it is to spot it. One of my key projects of last year flunked because me and the entire crew I worked with assumed our distributor wanted the same as us… not!

The more senior the level of management, the more financially driven the decision will be. They literally don’t know the technical details, and won’t have time to listen to you. Come in prepared with good understanding of your P&L and Cash Flow, over and above today’s runrate of course. If it is not your thing, find someone to do it for you!

The second part of the post will follow shortly….

Three essential skills you never learn in class (Part 2)

This is a follow-up post on Three essential skills you never learn in class.

• Focus

Studying with a radio on? Believe me – it is distracting you more than you’d want. Sure it makes the working hours more fun – but you’ll end up spending more time at the desk.

Most of the greatest managers I have been working with, had a few traits in common, including this one: they were very good at determining what not to do. Get up in the morning, look in the mirror and put out a mini-goal of the day. “I am going to my job and will do…”. Keep it in mind and as soon as you get at your desk, start doing just that. All the rest can wait. In my experience, what you do the first working hour of the day, will determine what you’ll be doing the rest of that day. If the first hour is spent on chatting at the coffee machines and wrestling that email inbox, it’s simply a lost day.

Another good way to keep focus on the longer term is setting up a balanced scorecard. Every week I have a look at mine, and it helps me determine what I should do and cut out all other fluff.

• Structure

This is certainly the most abstract and unnoticed skill of good managers. There are never any medals won by ‘just bringing structure’. That is a shame. A lot of situations gone wrong, have gone wrong because of a lack of structure. A team can consist of great individuals, working on a good cause, in a great market environment. Only the one with a solid structure will make it to the finish. Structure is what puts everyone’s noses in the same direction. Otherwise, loose energy will cause entropy.

Also on an personal level, structure is often what is lacking in what we do. You can spend all the energy you have on a topic, (say learning Russian, train for a marathon or write a novel), unless you make it a long-term goal and build patterns for repetition, all that energy will be lost. Like you never did anything in the first place. What you studied is forgotten, the running stamina evaporates, the writing skills fade out.

It is my personal strong conviction these are the skills a mature professional needs to build up. As unsexy as they might be, and as attractive you can package it, it will always come down to this.

Changing Distributors in Emerging Markets

This is a follow-up post on the distributor management in Emerging Markets. From recent experience, I want to share my main takeaways with you, on what you should bear in mind when you want to terminate the current distributor and go for a new one/go direct.

• First of all, make clear that the market is YOUR market, not the distributor’s: put in time and effort to identify end customers in your market. If the distributor does not cooperate, this is a first good reason to put him under more pressure.
• Convince the new distributor to make a deal with the old one. It is a good test and usually they will happily do this for you. If you play it well, perhaps the old distri wants to be subdistributor.
• Consider taking over some key employees. You don’t want to lose the network your distributor has. Put some money apart to hire the key commercial or technical employees.
• If above does not work, consider ending the existing contract. Keep an eye on all formalities! Most distributor contracts will have a termination clause – are there any serious termination reasons where you can apply the contract? Is a simple written notification enough to stop the automatic prolongation of the contract?
• It is never as easy as you and your new partner think it will be. Even if you comply with all formalities of the contract, you can still have lawsuits and payments you did not foresee, usually based on the ‘common practice’ of the country, which exceeds the contract arrangements. Happens also in EU!
• Make a good presentation to both the old and the new distributor WHY you want to change. It is never a change for the sake of it. Both for the learning of the counter party, to frame discussions and as a preparation of a potential lawsuit for indemnification, you might want to prepare all the right reasons why the change is done. Tell everybody this is a business discussion and they need to leave the lawyers at home.
• Seek ample local legal advice. Is there a contract in place? Prepare for an indemnification to be paid. Who owns the product registration? Who does service? How to avoid parallel import? Do they have big projects in the pipeline? Do they still owe large amounts of money?
• Contact the end customers together with the new distributor, make a road trip introducing him.
• Take care of your internal PR. Prepare a worst and best case scenario. Communicate the worst case scenario internally. As this is a process that can take months, you might want to imply this in financial forecasts & budgets.
• Know the rules and legislation on distributor management and payouts in countries other than their own market. (e.g. UK bribery act applies to all companies in EU)
• With the new distributor: organize ongoing proactive performance management. Monthly or quarterly dashboards, plan visits, appoint a ‘relationship manager’ in the contract. Go through their sales prospects together, product phase-in and phase-outs, big tenders coming etc.

These were the main points I would think of, let me know if you have any additions.

Distributor Management in Emerging Markets in 10 minutes

If a company decides to make a move in a new market, it typically does that through a distributor. He will lay the path, do the ground work and shape the market, at the right price. Here are a few considerations from my personal experience (Projects in Greece, Turkey, Serbia, Russia, Slovenia).

All too often a relationship between distributor and manufacturer turns sour and an environment is created whereby both parties try to gain a quick, effortless, short-term advantage.

DO

1. Invest lots of time in the development of the relationship. Understand their needs and challenges, they will repay it in kind. Put out dates and frequencies where you will be in contact and stick to it.
2. Share your margin with them. You need to allow your distributor to make a decent margin. He needs it to develop your market. He will not want to lose you when times get tougher. And he will want to do something extra should it be needed.
3. Develop them as if you would develop your own sales rep.
4. Share success stories
5. Think win-win. The manufacturer came to this market because there is growth potential. Share that growth and incentivize it.

DON’T

1. don’t treat them as a 3d party: this is not an agent working for his own good!
2. don’t treat them as a customer: they are not. They cannot have the same demands as a real B-to-C customer.
3. don’t just talk to the business head or owner. He is literally a professional to tell you what you want to hear. Get in contact with branch/marketing/sales managers.
4. don’t overpromise and underdeliver. You’ll create a culture where that is allowed and where they will do that with you.
5. don’t discuss pricing with end customers
6. don’t pressure them on which customers and leads to go for

Think of this before the setup

• Determine if the distributorship is an intermediary step or a final setup. This will govern decisions around how much money to invest and how easy it should be made to change distributors.
• Simulate the costs you would incur when going direct. Not just the regular OPEX but also all the legal advice and setup costs. That will give the best indication on how much you want to drop your prices to the distributor vs the pricing you have to end customers. Simulate your distributor’s P&L and balance sheet.
• Run all checks possible before getting started. Work with the Chamber of Commerce or an organism from your country that specializes in that market. Buy credit reports on the company, seek where political and commercial ties lie. Does the distributor own subsidiaries? Is it a subsidiary itself?
• Keep in mind that if the distributor already exists and works for other manufacturers, taking your business on board might put a serious strain on the distributor’s resources and financial capability.
• Get to know the market. Read the Economist, follow blogs like http://blog.frontierstrategygroup.com/, contact a Chamber of Commerce or your country’s consulate.

Manage mutual expectations

It is important to determine the expectations both parties have.

Distributor’s needs would be, apart from low pricing and long payment terms of course,

1. Demonstrations of the materials sold. Also free samples.
2. Technical support if it concerns machines or bigger equipment
3. Marketing support, including material and industry knowledge
4. Leads
5. Manufacturer participating in national and regional meetings
6. Respect, also in time management
7. Flexibility
8. Professionalism
9. Exclusivity

What does the manufacturer expect from the distributor, apart from premium pricing and quick payments.

1. Independence of the distributor, that way the manufacturer will save time.
2. Professionalism
3. Hitting the targets and budgets
4. Be as close as possible to the manufacturer in terms of style, communication, orientation, etc. Replicate the thinking and operations
5. Accountability and Integrity. The manufacturer is letting go of a good portion of his profit because he does not want to deal with the crooks in the market place – he wants a mature, professional, Western-style partner

That is all for now, I will follow up soon with an article on how you change from an existing distributor to a new one. Not for the faint-hearted…

How to calculate Pareto Optimum

Hi,

As a follow up to the article on the Pareto optimum, I wanted to share an easy and accurate way to calculate it.

First, determine the parameters you want to measure against. In this case, I took the countries of a sales analysis I recently worked on.  Then you sum up the field you want to measure, in this case these are the sales.  Rank the countries according to their sales, then calculate their relative percentage, as shown in this table.

Chart the cumulative percentage together with the sales. All of a sudden, the Pareto principle becomes clear. The first 3 countries, so 21% of the total, represent 68% of the total sales. Admittedly not exactly 80-20 but you get the groove…

10 minutes on Pareto’s Optimum (and some criticism on it)

Hi,

The concept of the Pareto optimum is very well known both in business and the self-improvement literature (perhaps better known as the 80/20 rule). Personally I have been in close contact with many senior manager that made this their personal motto. I also mention it in my posts regularly, like in “A Balanced Scorecard for Yourself“, I wrote this small post just to define it and add some side remarks.

According to Wikipedia, Pareto’s Principle states that for many events, roughly 80% of the effects come from 20% of the causes. For example in Pareto’s time, 80% of the land was owned by 20% of the population. In modern management literature, you read 80% of the results come from 20% of your time. Eventually, 80% of profits in a company come from 20% of the customers.

Above all, it’s a great way to prioritize. Every individual has the tendency to allocate efforts uniformly. With that I mean, when 10 problems arrive at your desk at work, you tend to spend 10% of your time on each one. That is just wrong. The world does not work that way, it’s the other way round! Pause, step back and prioritize. Are there 2 problems that represent the majority of the stress you’re under? You’ll probably see this is the case. It also works the other way. When you slash 50% of your work hours, will you be 50% less effective? Absolutely…not! This mode of thinking is revolutionary at first and it represents a true paradigm shift when internalized.

There are however a few things to say against it, before you go about and start cutting 80% in everything you do.

First of all, despite all fancy names we gave it (Pareto’s optimum, Principle, Law, etc) it is not a real scientific fact. You cannot seriously expect everything to behave in a 80/20 way. It is an interesting approach, but sometimes it makes perfect sense to allocate your time evenly, or even adversely to this 80/20. Nevertheless, there are ways to pinpoint and calculate the Optimum, on which I will post later.

Secondly, I find it rather short-sighted. As in so many things in management literature, this is aimed at the short term gain. When coming into a new role, a manager is faced with many problems. Then it makes sense to reflect a bit before acting. But that is a strategy for the first 3 months, then he needs to develop a longer term strategic view. Nobody is really motivated by this scarcity thinking.

Finally the most deadly of consequences… applying 80/20 thinking KILLS diversity. In life, and in business, variety is truly the spice. It is also the seed of new ventures which may blossom to a whole new world of opportunity. No business has ever survived long-term by just executing more efficiently on what it did 10 years ago. Or as someone has put it so eloquently: electricity was not invented by improving the candle. Again here, please put Pareto’s Principle in a closet with a whole arsenal of other tools. And do not overuse it.