Monday, August 29, 2011

Everybody Outsources

It seems like every day I see at least one article trying to convince a business to outsource some process or function rather than do it in-house. Here the reality--every business outsources something. No business owns the entire supply chain. A painter doesn't make his own paint or manufacture his own paint brushes and paint clothing. Every business has inputs that it does not create itself.

So, it's never about if a company outsources, but when. So why do some outsourcing relationships work well and others fail? Here's the reason: Failure to clearly define roles, responsibilities, and cost-benefit value.

Think about it this way. Wal-Mart wouldn't exist without all of the independent inventors, brands, and product manufacturers who give them things to sell. They make the products, Wal-Mart sells them (roles). They have a contract that clearly defines the relationship (responsibilities). And both sides independently determine if the relationship is worthwhile or not (cost-benefit value).

Here's another example. Law firms go through a lot of paper. Yet I don't know of a single law firm that has invested in forests, paper mills, and distrubution channels so it can own the entire paper supply chain. Most buy their paper from an office supply store--yes, they outsource their paper.

I could go on with many more examples, but I have one that I recently addressed on Melnida Emerson's blog at Do-It-Yourself, In-Source, or Outsource Small Business Accounting is an article evaluating when it's best to outsource and when its best to in-source your accounting functions. Outsourcing bookkeeping is like any other outsourcing relationship. Roles and responsibilities need to be clearly defined and the cost-benefit value needs to exist. If you're not happy with your current outsourced solution, then it's in one or more of these three areas. It may be repairable, or it may not. If you think outsourcing might be right for you, then you need to manage these three elements of the outsourcing relationship to maximize success.

Don't go into an outsourcing relationships without clearly defining expecations, roles, and responsibilities.

Monday, August 22, 2011

Impress or Scare Your Banker

Let's pretend you're the banker and you're scheduled to meet with two different companies, back-to-back. You get to decide which one you should loan money to. The CEO of both businesses will be male to ensure your judgment is gender neutral. Here we go:

The CEO walks in wearing casual clothes, has a dark tan, and appears more like a beach bum than a business owner. He struggles to articulate why he needs a loan and has failed to come with the documents requested. His bookkeeping is handled by his daughter who also serves as PTA President and has five children, among other civic and church priorities, he explains, and she didn't have time to get everything together as requested. You recall sending the request three weeks earlier and wonder if they'll ever be able to produce the tax returns, financial statements, and corporate documents requests. The CEO spends a lot of time talking about how great his business is and how amazing the potential for his business will be, painting a picture of the next Google just one loan away from going huge. When you probe, he cannot articulate the key driving metrics of his business, like lifetime value of a customer, cost per customer acquisition, and other efficiency and financial ratios.

The CEO walks in wearing work clothes and it is apparent he's been working in a manufacturing facility. He explains how he spends one day per quarter working on the production line with his rank and file employees to stay close to them and his operations. He humbly approaches you with an organized binder, assembled by his well-trained and properly educated accountant. He speaks directly about his business, his passion for his customers, and he displays a strong knowledge of why his customers buy his products and what motivates their purchasing decisions. You can sense he's not making assumptions, but he knows his target market intimately. You open the binder to find labeled tabs for each separate document requested, and you turn to the first tab called Summary Metrics. The page is covered with charts and graphs demonstrating that this business owner knows what makes his business tick and what drives his cash flow. He even points to the bottom to something called a Fixed Charge Coverage Ratio, also referred to as the One Ratio No One Talks About--Except Your Banker. He explains that his financial consultant has taught him that bankers use this ratio to evaluate his ability to pay back the loan he is seeking.

After thorough analysis (once Company A finally produces the information you requested, although you see some warning signs that they may not be accurate), you find both businesses appear on paper to be the same level of risk. Quantifiable information says you can make the loan to either one with the same likelihood for being repaid. But your bank's lending limits will only allow you to lend to one. So which do you choose?

Every banker I know would pick Company B. They see a business owner without ego, willing to do whatever it takes to make his business successful. He knows his customers and runs his business by the numbers prepared by someone who treats the timely and accurate bookkeeping and accounting functions a top priority. So, which CEO are you?

Thursday, August 11, 2011

When is the Right Time to Sell Your Business?

One thing is certain when you start a business--you will exit it. Your exit may be voluntary or involuntarily, well-planned and executed or a fire-sale to try and avoid disaster. This implies that if you follow a proper path, you might be able to make it a very successful exit for yourself and everyone involved. It also implies that it could go miserably wrong.

Planning for your exit should be part of the discussion when you start your business. While no one can predict what will happen, considering options and scenarios is very important, especially if you have partners.

So, when is the right time to sell your business? This really depends on your overall strategy, both personally and professionally, for yourself, your family, and others potentially involved in or impacted in some way by your business. However, just like everyone would like to fetch the highest price possible when they sell their home, I'm going to assume you approach your business the same way. The best time to sell your business is when you can get the best price for it.

Selling your business at its maximum value will have something to do with timing, just like the sale of home at the peak of the housing market. Just like a home, however, you have a lot of control over maximizing the value of your business, as well. John's Warrillow's book Built to Sell is one of my favorite works discussing this and other topics related to maximizing the value of a business. I recently wrote an article on American Express OPEN Forum teaching 5 Ways to Boost the Value of Your Business.

The main point is this: if you take a passive approach to preparing to exit your business, it will probably not work out nearly as well as if you plan at the beginning and throughout your business lifecycle for your inevitable exit.

Monday, August 8, 2011

Crisis Management Lessons from my 2-year-old

I have a very cute, curious, and high-energy 2-year-old daughter (pictured below), and this is what she taught me about handling bad, negative, or even crisis-level situations.

When you're two, mom leaving for a few hours can be traumatic--a true crisis. The first few times my wife left me in charge at home and my daughter began to cry, I thought my job was to distract here. She wanted to know where mommy was, and I would try to color a picture with her, watch a cartoon, go on a walk, or anything else to get her mind away from her mother. Inevitably, she would remember mom wasn't home and start crying all over again.

Then I tried a different tactic--tackling the issue head-on. What did I have to lose?

When she started to ask where mommy was, rather than ignore the question and go into my distraction efforts, I told her exactly where mommy was. She went shopping, she's visiting her sister, she went to the church, etc. What ensued surprised me. My daughter wanted to talk more about what mommy was doing, and, after five minutes, without shedding a single tear, we would move on to something else with little mention of mommy until she came home. Crisis averted :-)

When something bad happens in your business, don't ignore it and hope it goes away. If a customer gives you a negative review, don't go into depression and wish it would go away. Face it head on. Be honest. Answer the real questions. Don't skirt around the issue, because, ultimately, those who care will realize you never answered their real questions or took their concerns and issues seriously.

Certainly addressing a crisis or other negative event requires diplomacy and communicating with the right parties, but those two cannot replace the truth. And, the great thing about tackling it head-on is that there will be no more questions. You can move on, and so can everybody else.

Wednesday, August 3, 2011

Lawsuits Don't Solve Many Problems

The moniker "litigious society" has become synonymous with the American system of justice in the 21st century. You've been wronged, and somebody has to pay. But will legal action really produce the result for which you hope?

While you are the only person who can answer this, it would be wise for you to consider 3 Reasons Your Business Shouldn't File a Lawsuit, an article I wrote for hoping to help business owners think through all of the ramifications inherent to taking an aggressive position like a lawsuit to reconcile their differences with others or to try and right any wrongs or injustices they've suffered. In most instances, legal action is best as a last resort, not a way to get things started.

In a recent visit with a well-respected CPA and business advisor, this battle-tested entrepreneur explained that he regularly counsels his clients to budget and plan for increased legal costs as they grow, primarily because it's likely sometime during the years of business operations that someone or several someones will decide to pick a fight with them, potentially causing irreparable damage to their business.

If his advice is true, and I think it is, no wonder many entrepreneurs become more and more risk averse as their companies grow and prosper.

1. Seek to resolve disputes and problems with other means before determining if a lawsuit will yield the optimal results for which you seek.

2. Prepare your own business for and protect it from those anxious to jump into a legal battle with someone they perceive as having deep pockets (or an insurance policy that could give them access to an insurance carriers deep pockets).