March Madness, Wooden, Lincoln and…Product Development?
A little-known fact is that “March Madness” began in Illinois over 100 years ago. It was an annual tournament of high school basketball teams, sponsored by the Illinois High School Association. It grew from a small invitational affair in 1908 to a statewide institution with over 900 schools competing by the late 1930’s. A field of teams known as the “Sweet Sixteen” routinely drew sellout crowds. In a time before today’s media coverage, before the NCAA became popular with the average fan, before professional leagues had established a foothold in the nation’s large cities, basketball fever had already reached epidemic proportions in the Land of Lincoln.
Henry V. Porter, assistant executive secretary of the Illinois High School Association, was so impressed by the phenomenon that he wrote an essay to commemorate it. Entitled “March Madness,” it first appeared in the Illinois Interscholastic, the IHSA’s magazine, in 1939.
An excerpt from the original essay reads: “Homo of the Hardwood Court is a hardy specie. There are millions of him. He exists through summer and fall, shows signs of animation through the winter and lives to the utmost during March when a hundred thousand pairs of rubber soled shoes slap the hardwood in a whirlwind of stops and pivots and dashes on the trail to the state basketball championships. He is a glutton for punishment. When the March madness is on him, midnight jaunts of a hundred miles on successive nights make him even more alert the next day.” Mr. Porter continued, “ A little March madness may complement and contribute to sanity and help keep society on an even keel.”
Today there are even more homo sapiens addicted to the ‘Hardwood Court’. This year, American Gaming Association projects that 40 million Americans will fill out more than 70 million brackets — that’s more brackets completed than ballots cast for President Obama in the 2012 election! ‘Glutton for punishment’ is probably a more accurate description of the present-day phenomenon than ‘sanity’.
As basketball grew in popularity throughout the United States and the world it became increasingly competitive only adding to the frenzy and excitement of basketball playoffs at all levels. College and professional teams emerged to draw millions of fans to watch the best and brightest athletes compete. One of the best coaches of all sports and certainly the game of basketball, was John Wooden. His UCLA team won ten NCAA championships out of twelve years with an unprecedented seven titles in a row.
Author Don Yaeger provides great insight into the methods of Coach Wooden with the following example:
“The first day of practice at UCLA was always a day full of anticipation and excitement as the new recruits awaited the arrival of Coach Wooden, known affectionately as the Wizard of Westwood. As they waited, each wondered what secrets of the game, what strategies for winning would spring forth from the famous coach on Day One.
‘Please take off your shoes and socks,’ Coach announced to the team, seating himself upon a locker room bench. ‘I’m going to show you the proper way to put them back on.’ The new players looked at one another in disbelief – had the old man lost him mind? What on earth did this have to do with basketball? Not wanting to question their leader, they all complied and waited for what would come next.
‘Now, when you pull on your sock,’ he said showing them through example, ‘I want you to make sure that there are no wrinkles or gaps,’ as he put his own socks on. ‘Make sure your heel is full seated in the heel of the sock; run your hand over the toes and make sure to smooth out any bumpy areas.’ Then he showed each player how to properly lace his shoes and tie them snugly so that there was no room for the shoe to rub or the sock to bunch up.
As Coach Wooden got up to leave the locker room for the gym, the players behind him were silent, still wondering what their coach could possibly be doing by starting out the season talking about shoes and socks. Here they were, the best schoolboy players in America, and this legend had just spent 30 minutes teaching them about shoes and socks.
Just then, Coach Wooden would turn around and, with a glint in his eye, say ‘That’s your first lesson. You see, if there are wrinkles in your socks or your shoes aren’t tied properly, you will develop blisters. With blisters, you’ll miss practice. If you miss practice, you don’t play. And if you don’t play, we cannot win. If you want to win Championships, you must take care of the smallest of details.’ Coach then walked away, his first practice complete.”
So, what does the exhilaration or agony (depending on your bracket) of March Madness and John Wooden have to do with product development? A quote from President Abraham Lincoln, a better-known product of Illinois, makes the connection: “If I had six hours to chop down a tree, I’d spend four sharpening my ax.” Both Wooden and Lincoln understood that any worthy endeavor requires preparation, practice and attention to detail.
Developing ‘product’ is a fundamental process of many businesses whether it provides software, hardware, or services. Independent of the industry and sector, developing something new or customizing an existing product is a basic element of almost every company. Like March Madness where victory is determined by a few points often in the last seconds of the game, product development processes can be a tremendous differentiator in our increasingly competitive global economy.
There are three ‘details’ in product development that may illicit the same reader response as the new recruits in Coach Wooden’s first practice: “I know how to put my socks on! And no, I didn’t bring my blanket for a mid-practice nap.” In spite of the expected reaction, I’ll continue with the first lesson.
Market Driven
Development Processes must be aligned with market needs. There probably aren’t many principles of product development that are more basic. Before the insanity jokes start flying, consider what it really means to be market driven: The market/customer determines the inputs, outputs, pace and flow of internal processes. In its simplest form, being market driven is aligning processes with unmet needs, industry tempo and market trends. The process must develop a product that solves a problem or satisfies consumer expectations and then delivers it when the customer wants it.
Every industry has a cadence. In the fashion industry, fads come and go within a calendar year and often only last a single season. In the Aerospace market, products take years to receive FAA approval and then stay in production for decades. By design, aerospace processes will struggle to keep up with fashion trends due to the heavily regulated nature of air travel. While this example is an extreme case of industrial differences, there are countless companies with internal processes that simply don’t support the market they serve. They are quite adept at citing constraints and internal conflicts that somehow justify the inability to move at the rate of customer demand.
Markets are becoming more global. Consumer expectations continually require more features, added capability and higher quality; all for less. By structuring processes to meet market trends, companies enable the industry to grow, shift and disrupt legacy business models for enhanced services and products.
Continuous Improvement
President Lincoln worked as a ‘rail splitter’ making fence posts from logs when he was a young man. His appreciation of the labor involved in cutting down a tree was earned over years of back-breaking work. Understanding the importance of a sharp tool and the time required to put a durable edge on metal is apparent in his quote. There are many strategies used in felling a tree to ensure it lands where intended. There is also tremendous time and effort to physically chop a tree down by hand. Yet, Lincoln draws our attention to the basics: more time spent honing the tool will lighten the burden of the task.
If your business is truly market driven, the only constant will be change. Because markets are always in flux, processes cannot be stagnant and maintain effectiveness. Development processes need refinement to ensure both efficiency and market focus. New entrants in your industry bring a hunger for market share requiring vigilance and innovation by the incumbents. Technological disruption can significantly alter the flow of market services demanding new skills to be applied in different ways.
Competition
Business is a competition. Rarely does a company win business uncontested. It almost sounds condescending to bring the topic up; however, have you heard the sales person say, “The customer is only working with us on this proposal!” Or perhaps someone on the leadership team said, “No one else provides this technology or service. We are the only source for this solution today!” While it may be accurate that no one has the identical process or product, consumers have options.
I have past experience in a start-up with a formidable patent portfolio whose offering was truly unique. In fact, the company never competed against the exact same technology; however, they were constantly compared to alternative approaches that were ‘good enough’ for most applications. There is always competition.
Some basketball teams dominate their conference all year. When they get to the big tournament and play toe-to-toe with the best from other regions, competition gets quicker, taller and shoots accurately from farther out. The best opportunities in the market are heatedly contested. Even if you enjoy local or regional dominance today and have no plans of expansion, the competition will come to you: consider Walmart or Amazon and their disruption of small retail businesses. This kind of ‘madness’ is happening in all markets from healthcare (telemedicine) to education (online); in both financial services (bankless transactions) and food services (‘fast casual’). The best part, or worst part, depending on your bracket, is that the business tournament runs all year and not just in March.
Let’s say you are a number one seed coming into the tournament. That is great news and you have unquestionably worked hard to get here. Did you know that in the last 30 years, there has only been one year where all four number one seeds made it to the Final Four (2008)? Even with a favorable position in your bracket (market), there is less than a 45% chance of the top seed making it to the Final Four. Comfort is statistically dangerous. New, improved products and services are the key to competitiveness.
Introspection
Now that we’ve learned how to put on our product development socks and sharpened our process design ax, there are a few question for consideration. To avoid blisters at the most inopportune time, it is essential to be brutally honest in responding to these questions.
1. How often do your customers ask for shorter development lead times? Are they asking for higher levels of integration or service than exist today? Have you reacted with, “There is no way we can do that!”? These requests are early indicators that the market wants something different or better. Is your process driven by the market or limited by internal constraints?
2. How long has it been since your last measurable product development process improvement? Days…months…years? Is ‘continuous’ an accurate description of your process improvement? Does it feel like you are working with a dull ax: expending great effort with little progress? As a percentage of total work time, what is the proportion of hours spent on process improvement?
3. Are you comfortable with your position in the market? When was the last time your team was confident of victory only to be upset by a relatively unknown 12th seed? Has your team been outmaneuvered or outpaced recently? Are you winning?
If this introspective exercise touched any nerves, the article served its purpose. Recognition and a desire to change are the first steps for any process improvement. Mastering the basics of product development is essential to “…keep society (and your business) on an even keel.” If seemingly insignificant details were key to winning multiple national basketball championships, consider the processes critical for growing your business.
Andy Finch is President of RMI, a management consulting company specializing in growth generating processes.
Do you have a customer service department?
The American Customer Service Index (ACSI) uses a national score to reflect an aggregate of customer satisfaction with companies that comprise a large cross-section of the economy. Since the baseline was measured in Q3 of 1994 with a value of 74.8 there was a steady decline to the historical low point of 70.7 reached in Q1, 1997. Fortunately, there was a fairly consistent trend of improvement in the index for over 15 years reaching a value of 76.8 during the fourth quarter of 2013. Since this highpoint, however, customer perception of quality, value, and resulting loyalty has fallen precipitously quarter-over-quarter to a value that is 1% below the 1994 benchmark. That’s right, we’ve made no progress in customer satisfaction over the past two decades. In fact we’ve taken a step back with no end in sight to the erosion of satisfaction. So, what does this mean to your business?
The ACSI serves as a macroeconomic indicator of the health of the U.S. economy. Does your company have a similar thermometer to measure the health of customer satisfaction? The index can be used to reflect economic utility and consumer demand. Is consumer demand in your company going up or is it chained to the ACSI index in a downward spiral? Very common responses to these questions represent customer service fallacies. These misunderstandings will be discussed in detail along with a different perspective on satisfaction metrics.
1. “Yes, we track customer satisfaction. The customer service department has all that data…I think.”
2. “We are doing great: Our backlog is strong! Customers must love us or they wouldn’t be ordering, right?”
3. “Relationships with customers are strong right now, complaints have dropped dramatically!”
The customer service department…
A dedicated customer service department is common in business today. Titles and reporting structures vary, but the role typically has responsibility to work with customers directly to assist with questions and concerns associated with a product or service. This happens via email, social media, live chat sessions, video conference calls, telephone, or in-person. The global economy has made customer interaction a 24/7 proposition.
It has become an endless task of responding, answering, clarifying, informing, correcting, updating, listening, supporting and going the proverbial ‘extra mile’. Sounds like a challenging department! I’ve heard people say, “You can only do customer service for 10 years before you get burned out”. Indeed, it can be hard to deliver bad news, deal with irate customers and resolve unreasonable requests. It takes a special personality to perform this job at all, let alone be good at it. Is that why is it so difficult for the US to get a “B” (80 or above) on the ACSI? A good friend of mine in the UK provided an insightful response.
He grew a business from nothing to tens of millions of British Pounds in just over 10 years. It was a competitive high technology market with global suppliers all staking claim to segments and customers. In wanting to understand his secret for growth in spite of intense rivalries, I asked him how he did it. His response is relevant: “It was always about the customer. I only hired people that aligned with my approach to customer service. If customer service wasn’t really who they were in practice, it became quickly apparent and we made a change. Over time, we created a customer service company.”
Wait a minute! I thought customer service was a department? Yes, customer service can be a department. It can also be a competitive advantage when the entire company embodies a customer priority with everything they do. But not everyone in the organization interfaces directly with customers, so how can the whole company be ‘customer service’? This is the fallacy: Everyone has customers that depend on deliverables, information, assistance and an ‘extra-mile’ effort. Customers can be co-workers, another department, hiring managers, or the next person on the assembly line. Like a symphony, a company is a system of interdependent, dynamically moving parts. If the paying customer is the conductor and everyone plays their assigned part, we enjoy inspirational music. No individual department can satisfy external customers without the needs of all internal customers being met in the process.
Warning! Internal processes must be designed and tailored to satisfy external paying customer needs. If processes are used as an excuse for not being responsive to customers, customer service is relegated to a department. To be graphic, this handcuffs the organization to a concrete block thrown from the pier into the bay.
Unfortunately, customer service isn’t a speaking engagement for the president. It really doesn’t matter what is said at the all-employee meeting or when making a promotional video. Customer service is something that happens when both you and the customer are having a bad day. It is visible when the customer (internal or external) makes a mistake and inconveniently needs you to fix it. It happens after 24 hours of travel when jet lag weighs heavy and a customer needs time-sensitive information. It is demonstrated when internal processes are proactively modified to better address market trends. Yes, customer satisfaction is determined by how you respond when there is a problem. Customer service requires complete honesty and brutal introspection. Rationalizing, justifying or dismissing feedback from customers denies the company of critical opportunities for improvement and customer loyalty.
Because customer service is not a department, the approach to doing business comes from the top. Customer service cannot be successfully delegated to a specific person to report on, improve, or manage unless it is driven from the senior leader first and consistently. The culture, personality and pace of an organization is set by the leader who should be greatly influenced by the cadence and needs of the market. If the leader can’t keep up with the market or doesn’t embody this passion for customer service in practice, the business will never be a customer service company.
Backlog looks great…
There are a number of metrics used to quantify customer satisfaction and loyalty. Order activity for some businesses do reflect near-real-time customer engagement. The E-Commerce sector, for example, earned the highest ACSI score for Q3, 2015 of 79.5. In this industry, competition is high with few barriers to entry resulting in low switching costs: Customers can often buy the same product elsewhere at the click of a mouse. Customer satisfaction is publicly displayed with a 1-5 rating score given to numerous aspects of the buying experience. For these businesses, customer satisfaction is often visibly tied to order patterns and associated trends. Probably not too difficult to understand why customer satisfaction is a priority for this sector: without it, well…let’s see how long you can hold your breath.
Many other businesses do not have this almost immediate connection between customer orders and customer satisfaction. In the aerospace market, FAA compliance is a significant obstacle for customers to change suppliers. The same could be said for medical device or pharmaceutical where FDA certification is both expensive and time consuming. In these markets, and other capital intensive industrial segments, backlog does not correlate to satisfaction. Depending on long-term contracts and product lifecycle, customers may be compelled to stay with the supplier for 2 to 10 years, sometimes longer for maintenance, repair and overhaul support. In businesses like this, using book-to-bill ratios or backlog to assess customer satisfaction can be entirely misleading because they reflect success from 5, 10 or even 20 years ago. For too many businesses, metrics that are out of phase with current customer perception can provide a false sense of security.
So if the barriers to entry are so high for some industries, why do you care about customer service? Because development cycles within the customer’s organization are not the same as product lifecycles. In the case of medical devices, companies are launching a new or refreshed product every year 3-5 years (development cycle). Each product is expected to be in production for up to 10 years with 7-10 years of service thereafter (product cycle). Although a supplier may be enjoying the annuity of the product lifecycle now, poor customer service will eliminate the supplier from the next development cycle. By the time the current product cycle finishes, the supplier is one or two development cycles behind with years before the next opportunity. Current financial data is rarely an accurate indicator of customer satisfaction.
Customer Complaints dropped…
The last myth to discuss is that customer complaints is inversely proportional to satisfaction. For any customer service-minded leader, silence is not good. When monitoring the health of a customer relationship, it is important to know if they are febrile or are experiencing early stages of hypothermia. Complaints of poor health come directly from the customer. Likewise, even the most demanding customers will experience an uncontrollable smile when they receive stellar service. From personal experience these battle-hardened clients are the most vocal in praise and generous in communication when expectations are exceeded. In the real-time world of e-commerce, customer reviews provide almost instantaneous feedback. For business-to-business transactions, if the customer has stopped talking altogether, it can be a disturbing sign they are talking to the competition.
Many businesses have multiple levels of distribution, value added resellers, independent representatives and retail outlets that make direct customer feedback more difficult. For customer service-centric companies, processes are prioritized to address this. There isn’t a business, market, sector or industry where “no news, is good news”. Where there is a will, there is a way to evaluate customer satisfaction, especially in this age of information. Methods and tools exist if customer satisfaction is the core of a business.
A different perspective…
So, if there is no such thing as a customer service department, where does a new employee or corporate officer get customer satisfaction data? Companies that live customer service connect the internal and external customer to every employee. This is driven by the senior leader, CEO or managing director, and is communicated frequently and transparently. If you asked human resources how customers are feeling today, they should be able to respond readily with an accurate assessment of the internal customers in detail and external customers in general. The same question should have similar responses from an equipment operator or the president. Go ahead, ask! Report back and share your experience.
If financial metrics don’t always reflect consumer’s current opinion of service, what barometer do companies use? Sources of customer satisfaction data vary by market and business model. For an E-commerce business the customer service barometer will necessarily be different than a business-to-government relationship. The best source for external customer data comes from those on the front lines with paying consumers. Independent of the business, get as close to decision makers as possible. For complex selling environments, this extends to the team that decision makers depend on to recommend suppliers for the next development. Second-hand information and current financial data are misleading at best.
When no news from the customer is actually horrible news, how do you measure customer loyalty? Customer loyalty is easiest to determine by listening to both positive and negative input. If there is no communication, proactively seek feedback. No news is a foreshadowing of no customers.
Andy Finch is President of RMI, a professional services company helping customers to overcome gaps in growth through market research, strategic planning, product development and due diligence.
M&A: What is the valuation?
According to the Institute for Mergers, Acquisitions and Alliances (IMAA), there were 13,424 transactions in North America in 2015 compared with 14,215 in 2014 for a decrease of 5.6%. However, the value of the average transaction went up by 15.7% from $160.4M USD to $185.6M USD. Similar numbers were experienced globally with a 16% overall increase in average value to $91.5M USD and a volume of 42,930 total transactions. Several notable increases in average acquisition value from 2014 to 2015 was the Middle East and Africa at 232.6% and Asia-Pacific with a 42.6% increase. Every transaction has a risk and potential reward. With transaction values rising for fewer opportunities, the inherent risks continue to rise.
All too often, due diligence can be relegated to a financial investigation to ensure margins, assets and liabilities are accounted for. In some cases, Lean or Six Sigma experts are enlisted to assess opportunities for improved operational performance. In yet fewer instances is adequate verification performed on the processes directly associated with growth. These include competitive landscape, market value of Intellectual Property (IP), viability of technology road map, robustness of product development processes, retention of key technical personnel and strength of customer relationships. For projects where this research is performed, relying on secondary information or macro-market reports is inadequate. This is especially true for high-technology companies that represented 19.5% of all transactions globally in 2015, the largest of any single industry. As due diligence is a risk management process, perhaps more…well…diligence is warranted.
There are infinite reasons businesses come up for sale; however, in few instances is it because the business is healthy, vibrant or competitive. In response to this statement, the example of the aging owner of a very profitable privately held company seeking a liquidity event is often quoted as a counter-argument. These opportunities do exist and represent low hanging fruit for private equity and corporations alike. But for the vast majority of cases where an organization is on the market, the lack of performance is driving divestiture of the company or business unit. Think about it, even non-core businesses that generate double-digit Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) growth year-over-year are hard for most owners to part with! Reading annual reports or listening to earnings calls, it would appear that the best leaders want to “shape the portfolio” or “refocus on the core business”. It sounds like they simply don’t prefer a business unit that plays in a different market – like a preference for mayonnaise instead of Miracle Whip. The unspoken truth is that to fix a struggling business that is non-core isn’t worth the time and energy. For those that have been through this culling process, reality is a bit different than official public statements.
In another counterpoint to the statement that most business for sale are poorly performing, some cite the start-up that will be the “next Google”. After all, the chance of a lifetime, by definition, can only come along once…and that time is now before the company goes big! If it were really going to be the “next ‘paste wildly successful company name here’ “, why are they trying to sell before it goes big? Wouldn’t it make a bit more sense to sell after it went big? Shouldn’t the founders be asking for funding instead of a purchase agreement? Maybe the founders are altruistic and simply want to make the prospective company rich…because that is just the kind of people they are. Learn more about them at #ReallySmartButExtremelyNaïveFoundersThatDon’tExist.
It is time to ask the critical question: why is the business for sale, really? Due diligence is the process of discerning if the seller’s answer to that question can be taken at face value. It is a general term for all activities requisite to establish a current value for the company based on the objectives of the acquiring party. The formula for valuation is not a one-size-fits-all recipe. Depending on the type of business, it can be very difficult to determine the starting point for purchase price negotiations, especially for technologies that are still in development. Agreeing on EBITDA is not the hard part, it is deciding the appropriate multiplier. Historical financial results are used to derive the former, but are less relevant to calculate the latter. The multiplier is based on estimated potential value post-acquisition, integration, operation under new management and launch of new products. It is the numerator in the Return on Investment (ROI) equation that must be well understood.
For private equity in the US, a 30% annual ROI in 3 to 5 years is the threshold for a feasible opportunity. This means EBITDA has to grow 200% to 300% from acquisition to liquidity. There are two variables required to calculate any type of margin in any country: Income and expenses. Due diligence always includes both elements. The most basic questions potential investors have to answer are:
1. Can costs be cut from the business making it more profitable while maintaining or improving quality?
2. Can more products or services be sold to increase revenue with equal or less fixed cost?
Businesses cannot depend on cost reduction alone to achieve private equity ROI expectations: Revenue has to increase dramatically. Therefore, the purpose of this article is to discuss best practices in forecasting future income. It is also a good reminder that most businesses are for sale because they aren’t currently performing or future viability is in question.
Three generalized functions of a business are critical to revenue generation. They are development, sales and delivery. The first role, development, understands the unmet market need and how the company can provide a unique, compelling solution to this problem. Then it develops a functional product that meets or exceeds market requirements. Typical departments and skills encompass market research, strategic planning, product management, R&D, engineering, and product development. These roles work together to ensure new technologies actually solve a problem instead of being a nifty idea looking for a problem.
The function of sales is to make consumers aware that the developed product is available and where it can be purchased. Departments of marketing communications, channel/distributor management, and direct sales are often lumped together in the same, “sales and marketing” group because they are so tightly coupled to complete this essential task.
Delivery is a broad term to describe the process of getting developed product to customers. This involves supply chain, manufacturing, customer service, sales and operations planning, logistics, and product service. Unfortunately, delivery is thought of as a cost center not a growth engine for the business. Manufacturing improvement is frequently viewed as a path to cost containment, inventory reduction and waste elimination. In a competitive global market, delivery can be a significant differentiator when supplying product or service to a consumer base with increasing demands for immediate gratification. Perhaps looking at the antithesis of delivery will assist in understanding why delivery is a contributor to the income side of the margin equation: A pattern of not shipping or shipping later than the competition can impact customer retention and future business growth.
As part of the due diligence process, all three roles of revenue generation (development, sales, delivery) must be validated. A business is only as profitable as it’s least effective and efficient function. Further complicating the acquisition process, both current and future performance must be quantified. This means the due diligence team must assess all processes associated with growth. Example questions include the following:
1. How well does the company develop products today?
2. Are best practices deployed uniformly?
3. Is there a history of performance in development and what is the roadmap for future products?
4. Does existing intellectual property have value based on trends in the market?
5. If there are areas of weakness in sales, what will it take to improve them?
6. Is delivery performance competitive relative to other providers in the target market?
7. Is the market segment becoming crowded with new entrants?
Not only are answers to these questions fundamental to negotiating a purchase price for the business, they will also shape the “100-day Plan” for the management team accountable to implement change in the company. The more relevant and detailed the pre-sale intelligence regarding growth-generating processes, people, and products, the less risk an investor assumes. Because so many acquisitions today are categorized as high technology, the front end functions require specialized skills to evaluate.
Functional expertise should be on every due diligence team to manage risk: Knowledge of the development processes required to sell to the target market including expertise in the technology roadmap, experience selling and marketing in the target market, and understanding of the competitive landscape for delivery. If the team lacks any of the three assets, additional advisors or consultants should be added to supplement the team. A company acquiring the average $185M USD high technology company cannot afford to miss pertinent details affecting the future revenue generation potential of the target company. Remember, past financial performance does not guarantee future competitiveness. Businesses are sold for a reason. New technologies don’t always satisfy unmet market needs, some are just great ideas that have little revenue potential.