Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Customers can be one of your best, lower-cost sources of the financial resources essential to building your business – yet many early-stage companies totally ignore them. Continue reading “Customers as Financiers – Part Two” »
Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Customers can be one of your best, lower-cost sources of the financial resources essential to building your business – yet many early-stage companies totally ignore them.
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Customers as Financiers – Part One
One of my suggested rules, ‘If your product or service is as good as you think it is, and they want it badly enough, they will pay for developing it’ … that your customers could supply the financing for your company’s launch and early growth, drew a number of requests for a practical example. I’m going to devote this column to responding to those requests by describing the evolution of one of my own companies.
This one started, much like the others, because I had identified a major set of problems that a significant group of potential customers had. You will notice that I did not use the term ‘market’ … I have believed from the beginning that amateurs have ‘markets’ and pros have ‘customers’. I began with potential customers and a series of face-to-face contacts with senior executives at those companies. I talked with them extensively, developed a solution to a set of challenges that they knew they had, presented that solution for review and then launched a company based on an agreed upon model.
In this case, the group of potential customers was the major US movie studios. Their challenge was the confluence of the rise of the independent film producers and the financial limits on their ability to produce and distribute films. The studios need to make and distribute as many films as possible in order to spread the risk. They do this to assure a higher probability that enough of them will be winners to pay for the ‘dogs’, the studio’s overhead and generate a nice profit. The independent producers constituted an additional source of film projects. That was the good news. But there was an Ethiopian in the fuel supply.
In the late seventies the movie business was truly bicoastal. Production was centered on the west coast and mostly at the studio lots. Financing was provided by the money center banks, principally those in New York City … where I was living at the time. The banks’ position was that the credit lines of the studios were pretty much tapped out. Even though they recognized that producing and distributing more films would increase the chances of studio profits, they were uncomfortable significantly expanding the lines.
I had a number of friends in the ‘business’ who made me aware of the restrictions on the studios. I suppose, given my reputation for not being able to put down a complex problem until I’d come up with a viable solution, they conspired to prod me into going to work. Well, their strategy succeeded.
The problem was interesting, indeed challenging, as it involved two major industries with radically different cultures and perspectives on the world. The money center banks, although they had been providing financing to the film industry for decades, were mostly ‘belts-and-suspenders’ types who kept a very close eye on risk. The film industry was populated by significantly more entrepreneurial types who were willing to roll the dice ten times in order to win big two or three times. The two different cultures had been locked in a mutually beneficial relationship which was increasingly being stressed.
My first step was to get a thorough understanding of the problem and the dynamics of both perspectives. I talked to a wide range of bankers familiar with the industry and with senior executives in the film business. The principal result was that I now could see the world through the eyes of both the bankers and the studios … I could begin to craft a solution. A collateral result of this process was a partnership with a man who, at the time of our meeting, was CFO of Columbia Pictures.
My second step (and only after determining that there was a market for the solution we might develop) was to build a team of subject matter experts to take advantage of the knowledge I had gathered … and to mount an assault on the challenge. We met over a period of several months and the group was expanded to include other skill sets. Each time we encountered a new area that needed to be covered I went on a search for the best in the field.
Finally we hit on a solution which would allow off balance sheet financing of the top twenty five percent of the risk column of each film project. Although the solution was complex, the underlying enabling conditions were quite simple. In those days the top marginal tax rate in New York City was somewhere around one hundred and three percent … in other words, above a certain level of income, and if you lived in NYC, the combined governments would actually take more than you earned. But more broadly, the combined top marginal federal and state rates approached eighty to ninety percent.
© Dr. Earl R. Smith II
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Related Articles:
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Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
I was recently working with the senior team of a mid-sized government contractor. They had built the company nicely to just over thirty-million dollars in annual revenue. The customer base was tight and well focused. They had good client intimacy and acceptable pipeline velocity. An initiative to move into a new agency seemed to be going well. From the outside, the company looked fine.
Internally, the landscape looked quite different. Management was having an increasingly difficult time controlling operations and keeping costs under control. A proposal had been muffed – submitted without adequate red-teaming – and the result was a loss that they had counted as a win. Two key team members decided to move to another company. A review of their books showed a significant financial control problem. What was all growth and sunshine on the outside was stormy and gray on the inside.
The Story Continues: During my interviews with both the senior management team and the decision-makers within their customer base, I became aware that there was a fairly toxic mix of trends developing – some of which were in full flower. I broke them down into five major areas. First, there was an increasingly dysfunctional attitude permeating the management team. Second, the value proposition of the company had become diffuse. (One of the its strengths in the early going was a finely focused value proposition) Third, professionalization of the culture was not keeping pace with the company’s growth. Fourth, effective management oversight was needed but lacking. And, fifth, there was no shared vision for the future of the company.
In Part One of this series I described the initial steps that I took. Part Two describes the culture of hubris that had evolved within the company. Now I would like to turn to the developments that had significantly blurred both the value proposition and the branding of the company.
Exactly Who Are You? Like many government contractors, this one had gone through two stages of growth. When first founded, it was presenting itself as being capable of a wide range of services – the ‘all things to all people’ approach. This phase did not last very long; mostly because of a series of relationships that one of the founders had with key decision makers in what would become their initial major client.
The value proposition and branding of the company had rapidly focused. In the early years the company benefited greatly from this focus. It was seen as the ‘go to’ company when certain problems had to be met. The reputation of the company was based on the ability of the team to deliver solutions reliably and consistently. It got very high performance marks and developed strong client relationships.
Things started to change in two ways. The first was that management had become concerned that they were ‘rooting the pot’. The CEO particularly was concerned that growth could not be sustained at historical rates based solely on the value proposition and business base they had established. The second was an addition to the senior team. In response to the CEO’s concerns, they brought on a very experienced senior vice president of business development and tasked him with expanding the company’s business base.
The concerns and management’s approach to meeting them were both very logical. Every company that establishes early success in government contracting faces them – they are linked and the standard response to the first is to do exactly what this company did. But nothing in life is a simple as that. The question that management faced – but did not completely appreciate – was ‘who are you?’
Sharp Turns, Irrational Rationality and Arrogance: The management team organized a strategic planning retreat to discuss the future of the company. They spent three days in a ‘remote location’ seeking a way forward that would allow the company to keep up its growth by remaking its value proposition and broadening its branding. The approach that they took was ‘let’s identify where we want to go and then lets chart a course that will get us there.’
If you’ve read Part Two in this series, you will already have anticipated part of the problem they faced. With hubris in full flower, there was a sense of manifest destiny that dominated the retreat. (BTW, a friend of mine is fond of observing that the only destiny that is truly manifest is the grave – but that is another story) Hubris colored the proceedings in a predictable way – “all we have to do is say it and it will become so”. Without an outside facilitator to reign in this irrational rationality, they spent most of the three days in Never-Never land.
The second problem that they faced was that the team member who would bear the major part of the resulting burden was the newest and had very little experience with the company. This was not unique to this company. Many government contractors do the same thing – they bring in business development types who, although highly competent, are not part of the culture that established the company’s early success.
Now it would be easy to vilify the senior vice president of business development, but (and, if you have read the first two parts of this series, you will not be surprised) that was not my diagnosis. It was unreasonable to expect a new team member to bear such a burden. The Board of Directors and CEO essentially took a leap of faith that things would work out and ignored the need to integrate the new team member into the culture of the company. In other words, they decided to take a causal stroll through a dense minefield. They also shifted the major challenges that the company was facing onto the back of its newest senior team member – an imprudent act of cowardice.
Quo Vadis? The ‘strategic plan’ that resulted from the retreat was an exercise in irrationality. It was doomed to fail partially for the reasons that I described above but mostly because the company and its team were simply not capable of making the journeys that successful implementation of the plan required. There were a number of reason why this was the case but the core one dealt with the inability of the company to morph its value proposition as radically and quickly as the plan called for. Two reasons underlay this inability. The first was that the company’s branding was tight and well established in the minds of their existing and past customers – they knew what the company did and when to call it in. The second was that the existing team and staff was not capable of implementing the changes – they simply did not have the necessary experience, knowledge or contacts.
The planning retreat had focused on identifying substantial and growing areas of business that the company could tap into. In other words, they chased the money. The problem with this was that they quickly lost sight of what was possible and focused on what was desirable. The resulting new value proposition was considerably more diffuse and created several islands of expertise. They intentionally planned to build silos. Their mantra was ‘they know us and that we are good at what we do – they will trust that we will be just as good in these new areas’.
Close Your Eyes and It will Go Away: The response to the new value proposition was not what the senior team expected. Their existing clients became confused and began to worry that the company was drifting away from its core competencies. Potential clients simply ignored them – the company was, after all, branded in their minds as well. Management and the board seriously underestimated the difficulties of re-branding a company in full stride.
The initial response to these developments was disbelief. That turned quickly into passive aggressiveness – particularly with the existing client base. Strains developed within the team. The senior vice president of business development began to have second thoughts. Had he joined a team of amateurs who could not deliver on what here was trying to sell? The rest of the team lost faith in him. The CEO and Board of Directors went on an Egyptian Cruise – they were in de Nile!
If you don’t remember who you are, how will you know when you get there?
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© Dr. Earl R. Smith II
Related Articles:
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Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Read Chasing the Tale – Part One
One of the best compliments that any author can receive is a request for the ‘next chapter’. I had a number of such requests after posting the first part of this series. For that I am grateful. I suppose that I am often read as an author of a serial crime novel – providing bits at a time to readers who follow the story line hoping to discover the villain before the author has decided to disclose his identity. Or maybe my writings in this vein are taken as a melodrama – with all the tension and mystery that goes with them. In any case, I am grateful for the attention and responses. Continue reading “Chasing the Tale – Part Two” »
Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
A while back I was having drinks with a friend who had, with her team, built a very nice mid-market government contractor. They had started with a client that she had developed a solid working relationship with. Like some new companies, they had left a larger one after a divide developed. The her team was made up of people who were part of the founding team for the larger company. They had become uncomfortable with the increasing pressure and regimentation. Continue reading “Meeting the Past” »
Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Coaching is a profession easy to get into and very hard to master. I am often taken aback by the lack of experience that some ‘coaches’ have. They seem to have fallen into the profession by default. One ‘coach’ told me that she became a coach because she “couldn’t think of anything else to do.” Another had a series of failures in his attempt to start businesses and thought it would be easier to “help others with theirs”. Strangely, this syndrome is akin to a challenge that some of my coaching clients face. Let me tell you a story that might help you understand. Continue reading “Fighting The Wrong Battles” »
Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
As Managing partner of The Federal Circle I work with mid-market government contractors. That means that I work with a lot of founders. For the most part, those founders have built their business to a point that it is very profitable. The are experience good cash flow – sometimes for the first time since they launched the company. The team has grown significantly, there has been substantial turnover and they have had to reinvent their role several times. Continue reading “The Founder’s Challenge – Reaching Then Exceeding Limitations” »
The Federal Circle
Managing Partner
Dr. Earl R. Smith II
Strategic Planning is critical to a company’s future. A facilitated planning retreat can significantly improve results. The Federal Circle specializes in designing and managing them for government contractors. Continue reading “Strategic Planning Retreats by The Federal Circle” »
Managing Partner
Dr. Earl R. Smith II
3988 Georgetown Ct, NW, Washington, DC 20007
(202) 337-4473
Few organizations have the depth and breadth of experience to provide a detailed and actionable situational assessment. Our teams are composed of skilled professionals who have successful careers and are actively engaged in practicing their craft. Each assessment team is custom crafted to meet the needs of the client. We combine subject-matter expertise with management experience to form teams which will identify and address the hard problems that are limiting your company’s upside. Continue reading “Situational Assessments by The Federal Circle” »
Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Old Maps, New Journeys: A friend, who is a golfer, is fond of observing that preparation is 90% of any success. He often goes on to suggest that the time on the practice tee and putting green is what wins matches. Further, he likes to ‘walk the course’ before playing it. Disparaging the ‘duffer’ – who makes it up as he goes along and tries to compensate for a lack of practice with an expectation of luck – he, instead, sees getting ready to win as a necessary step for out-performing his competition. Need I mention that he is very competitive and wins far more often than he comes in second? Continue reading “Government Contracting Tips – Strategic Planning” »
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