Next posting coming soon

I apologize that I have been off-line the last two months. I am currently acting as an interim CFO for a fast growing technology firm for the last few weeks. I am planning on providing my next write up with the next two weeks. Stay tuned!

Employee Reviews

One of the more painful, most neglected and most beneficial activities for a company - the employee review process.

As a person who has worked at multiple companies and has given and received many reviews, I could give my thoughts just based on those experiences. But I have also implemented employee review processes at two companies and have dealt with updating those processes multiple times based on input from employees.

Below are some of my do's and don'ts concerning running employee review processes.

1) Probably the most obvious - senior management has to be committed to allowing everyone in the company time to perform the necessary steps of the review process (whatever those steps may be).

2) Everyone in the company should be involved in the process. (Note: you might even consider providing shortened reviews for part-time employees, ESPECIALLY part-time employees hoping to become full-time employees.)

3) I have been in companies where reviews are done on an employee's annual anniversary and other companies where there is a designated review period time. I am a strong proponent of the second choice (designated review period time for the whole company) if you have #1 above taken care of. (Note: If the whole company is doing reviews at the same time, depending on the length of the review period, make sure that you are aware of usual departmental crush times, i.e. sales possibly at the end of the month, finance/accounting possibly at mid-month getting last months financials out, operations/customer service possibly on Mondays/start of a month when call volumes/customer requests are the heaviest.)

4) In terms of the actual review document, I believe that, as much as possible, one generic document should be used for everyone (all departments, all levels) in the company. For the documents that I created, I had high-level company-wide goals (which all employees should be contributing to):

Impact on our customers
Impact on our people
Impact on our company
Impact on one's self

It is when the reviews are being filled out that customization to a specific department/level/person occurs.

It is also best if each of the detailed categories on which to be reviewed has a combination of a numerical ranking of performance (i.e. 1-5, Substantially Exceeds Expectations - Needs substantial improvement) and a written section for supporting evidence.

5) The performance process that we had at my two companies went through the following steps:

- Employees do a self-assessment review (1 week) that is given to their manager
- Managers do reviews on each employee (2 weeks) that is given to each direct report
- A meeting occurs (within the next week) where each area of the review is discussed, more time being spent on categories where the ranking differs and then focusing on the supporting evidence (metrics if possible).
- A consensus is reached, a signed review is sent to the HR dept

In our case, the whole review process took place over a month (usually mid-November to mid-December or mid-June to mid-July, slow periods).

6) Finally, going back to my discussion on metrics, the employee's past performance (and expected future roles and responsibilites) should clearly be tied into the compensation increase that they receive. And those increases should be consistent across the company (based on the rankings). NO ONE SHOULD RECEIVE MORE OR LESS IF THEY HAVE PERFORMED AT THE SAME LEVEL IN THE PERFORMANCE REVIEW.

A review process is a great time to commend employees that are doing well and helping employees that are not working up to their potential. BUT feedback should not only happen at this point. If managers are good in providing true feedback on a consistent basis then the actual review process will not be painful.

Customer Account Management Process

One of the most important processes in a company is its customer account management process (CAM).

What does this process entail?

Of course it somewhat depends on what you are selling, i.e. services vs. products. But overall, it means the process from:

- the targeting and initial sale of a customer , to
- the providing of the service and/or product, to
- the billing and finally
- repeating that process successfully with the same customer (while also trying to sell-in other products or services

My experience with learning, developing and running CAM processes are very extensive. I was inundated with marketing/customer-focused training while at Kellogg Graduate School of Management at Northwestern, then onto developing specific CAM projects for clients and PwC itself while at PricewaterhouseCoopers Consulting and then finally implementing CAM processes while at the last two companies I ran.

As most know, it is easier (i.e. less costly) to sell more services to an established customer than it is to sell a new service to a new client. So it is in the best interests of your company to have a solid CAM process.

The process usually goes across many departments and that's where the difficulty/opportunity lies. For the company that has a clearly defined CAM process, it can be one of the most important competitive edges.

What does a good CAM process look like?

First and foremost, a good CAM process has to do with managing hand-offs within the company's departments. This needs to be seamless to the customer.

Secondly, it has to do with maintaining detailed information about the customer's interactions with your company (both the good and bad interactions), so that the whole process can be consistently improved (from the customer's standpoint).

How do you develop the process and work the hand-offs?

The first step is to clearly lay out the current (or proposed) process that is used for new (and established) customers.

For example, once the sales group successfully sells a customer for the first time (i.e. gets the sales order, obtains the signed contracted, customer joins the company's website, etc), how does the group responsible for providing the service/product discover the new client.

Is the customer handed over to a different department (i.e. Account management department) once the initial sale is done, for on-going sales/servicing or is the sales department still responsible for the next sale?

Once the service/product is provided, how is the customer billed.

How does the sales person (or the account manager) know when to return to the customer for the next order/servicing?

And as stated before, if the customer provides feedback, how is that communicated to those in the process?

In my last company, we had a clear delineation of responsibility between the groups. Once the sales person knew that the customer had signed the on-line contract (an email was automatically sent to the sales department), then the sales person was responsibility for Day One training. Once that training was completed, the customer was handed off to the account management team and assigned a specific account manager. Finance and accounting were also informed at this point to set up the billing.

The account management team then had a 90-day schedule for helping a new customer. This entailed periodic training and meetings/calls to determine the customer's reactions to the service provided.

The sales person was encouraged to sell other services to the customer after a month's time frame. All information about the customer was kept within the internally developed system, so that the sales people could see if there had been any issues and how they were resolved.

Finally, the metrics were set up so that the sales group was directly rewarded for customers who did not cancel services. Therefore they worked very closely with the account management team when handing off customers. They also made sure to only sell services that they knew the customer needed/wanted. Turnover was very low.

A good CAM process leads to a team-approach that keeps the customer happy - and buying!

Mergers & Acquisitions - Part II - Integration

Now that the deal is closing and you haven't slept in a while, believe it or not, the actual difficult part begins - the integration.

Having been responsible for integrating two purchased companies into a platform company, I can provide some clear do's and don'ts to help you prepare for this stage of the merger/acquisition activitythe .

1) MOST IMPORTANT - Have a clear, detailed workplan for all departments and the overall company. This plan should be created during the negotiation stage. It should be finalized at least a few weeks before the actual closing day. It should tie very closely with the financial model that the acquisition is based upon (more on that below).

The workplan should detail out the following areas:

By department:
- human resource issues
- communication plan within the dept
- system decisions within dept (if appropriate)
- policy and procedure changes (short-term and long-term)

Overall company:
- human resource issues
- change in hr policies, benefits
- firings/layoffs
- job responsibility changes/ reporting to changes
- communication plan
- internal communications
- external communications to customers
- external communications to vendors
- press releases, etc
- policy, process and procedure changes
- system integration(s)

2) Day 1 - meet with the company, make the official announcement, explain the reasons/benefits for the acquisition, provide details of the overall integration workplan

3) Make sure that your managers (especially sales and operations) keep their focus on the current customer base

4) Consistently communicate through the whole integration process with all your stakeholders

5) Compare your financial model that was developed for the proposed acquisition with actual financial results. Look for deviations and correct them as quickly as possible. This financial model should be detailed down to line items in the profit & loss (expected increases/decreases) and should be tied to a human resource plan of employees by department.

6) Have events (lunches, after-work social events, etc) as early as possible between people from both companies

Now some don'ts (or things to avoid if possible)

1) Don't automatically take the less expensive/less extensive benefits and provide those to the company.

Determine which company has the better benefits.

If it is the acquiring company, then determine the costs to 'upgrade' the benefits of the acquired company's employees. (This will go along way to building trust and positive attitudes to the overall change.)

If it is the acquired company, determine the impact to those employees of the acquired company if their benefits are scaled back. Make some type of monetary gesture if this path is followed.

2) Don't forget the owner(s)/senior management of the acquired company

Make sure you have a detailed understanding (and employee/consulting contracts) with the owner(s)/senior management of the acquired company. Though it might be expected that they will not be long-term employees of the new combined company, remember they have usually a large amount of goodwill with the employees and customers and knowledge of the inner workings of the acquired company. Make it worth it for those people to stick around for at least the integration. You might find that they are perfect for other positions within the new, larger organization.

3) Don't forget the systems. Make sure you know how bills are going out to all your customers. Make sure you know how all your financials are going to roll up into one group of reports. Finally, make sure you know who is paying bills across both companies.

4) Think about logos and company letterhead. How soon you should be using a standard logo vs. a DBA (doing business as).

Metrics and incentives for employees

One of the more difficult tasks, but also one of the more potentially beneficial for a company, is the development of employee incentives.

The first step is developing a baseline of the company's performance. This means that you should be tracking as many of the key attributes of success as possible. Given what your company does will obviously determine what you should track, but there are some consistent areas to track based on your income statement:

1) Sales - are your sales/revenues growing
2) Operations - cost of producing/servicing by unit
3) Operations - rework (or customer service levels)
4) Overhead as a % of sales


The second step is to then determine what are the overall goals for the company, i.e. increase revenues by 20%, improve profitability to 15%, etc.

Then determine what are the underlying metrics that would need to change to make these overall goals possible, i.e. increase customer base by 10%, decrease customer turnover by 20%, improve direct labor output by 15%, decrease employee turnover by 10%, decrease supply cost by 10%.

The third step is to then look at each department and the company goals and determine what impacts each department has on the key metrics. For the metrics that each department has a direct (and in some cases indirect) impact on, you need to see what improvements would have to be achieved against the baseline metrics to hit the overall company goals. This can be your first attempt at incentives.

The fourth step is to share these goals with the managers of each of the departments asking for their feedback. Be careful, human nature says that the initial response might likely be, "Those targets are much too hard to hit." But, on the other hand, listen to the comments coming back. You might want to ratchet down the expectations, especially on the first go-around. (NOTE: Incentives should consistently be reviewed to see if they are actually achieving what you want.)

The fifth step is to use your financial model to then figure out how much you can pay (in terms of incentives) if different levels of achievement occur.

Try not to have a 0 or 1 type incentive structure - meaning that the person/department achieves the incentive if they hit a specific number otherwise they get nothing. What this will create is a mentality that focuses only on that number; and one of two things will happen:

1) At some point, when it is determined that the number can't be achieved, the group is totally disincentivized. Performance will actually drop further.

2) The number is achieved and then work stops or drops. (A great example is monthly sales goals. You will always see a push at the end of the month to hit the number. If the number is hit early, watch those days after, the productivity usually drops drastically if there is only a 1 or 0 type incentive.)

ALWAYS HAVE MULTI-LEVELS OF INCENTIVE ACHIEVEMENT PER METRIC

Make sure that the incentive program pays for itself when the goals are achieved.

The sixth step is to make sure that the different departmental incentives do not work against each other. (NOTE: This is the biggest issue concerning incentives.)

A great example is from a manufacturing firm that I consulted for:
The sales department was incented to increase revenues (nothing else)
The buying/raw materials department was incented to buy the lowest cost materials (nothing else)
The manufacturing department was incented to produce products at the lowest cost possible (nothing else)

Do you see where this is going.... the sales group ended up selling the lowest priced products, and since the raw materials coming in weren't always high quality and since the manufacturing group was focused on always working (to drive down the product unit cost) and not focused on quality, the product quality deteriorated and this forced the sales group to price the products lower and the death spiral started. More price cutting to hit sales targets, less quality in the products, and the brand's image went down.

What this means - make sure the incentives work together in the aggregate/company-level.

The way that I solved this in my last company was to set up a three-tier incentive program (it's more work, but well worth it):

Company-level incentives (worth 40% of the total incentive program by department)
Department-level incentives (worth 40% of the total incentive program by department)
Individual-level incentives (worth 20%)

Finally incentive rewards need to occur often enough to be consistently on the minds of the employees (and the results should be communicated clearly).

Issues to discuss further in another posting:

1) How do you incentivize the overhead departments (i.e. HR, Accounting)
2) How about groups that don't work in piecemeal (i.e. Internal software development)

Mergers & Acquisitions

Mergers and acquisitions

Many people know the stats - most M&A deals in the U.S. have been shown to lose value for the buying shareholders. There are many reasons for this.

In my last company, I managed to buy two companies and integrate them into my company. There were many lessons from this experience. I will focus on the negotiation aspect first, then discuss the actual integration on companies later.

Targeting & Negotiating

1) Understand why your company is acquiring companies.
- Is it to solely to grow the revenues?
- Do you have a target that you believe will perform better on your platform/using your processes and procedures?
- Are you trying to expand your product/service into other areas?

2) Coupled with this question is the next step - is it better to buy then make
- Is organic growth not good enough
- Is there a large benefit to an acquisition that will outweigh the efforts and risks of going through the buying process, because the buying process is usually very long and fraught with downfalls (which is why most M&A deals fail for the shareholders)

3) Once you have gone through these initial questions and decided that an acquisition makes sense, then the next step is targeting.
How do you find the company/ies that you want to buy?
Depending on the size of the company you are looking to buy, there are a few channels:
1) broker/dealers
2) investment banks
3) industry associations

Broker/dealers are a tough bunch. Think of some of them as car salesmen. Sometimes you can find one that is knowledgeable and willing to help you find a great deal. But in many cases, you, as the buyer, are not whom they are concerned with. The dealer's focus will either be with the seller or will be on just getting a deal done. When that happens, be AWARE!

Investment banks are only an option if you're looking at much large companies or a major roll up of an industry.

Industry associations are a good source in some cases, but if you're viewed as an outsider, you won't get as much help. Build these relationships. Attend the events.

4) Calling targets
Obviously make sure that you have a solid script/message when you call. Get the right person. Establish trust. Get an initial meeting set up.

5) Negotiations
This is usually the longest (and most important) aspect of M&A. Depending on what you leave on the table (and how long the process takes) will ultimately decide the success or failure of the whole deal. Have lawyers that are familiar with M&A deals (I have a few suggestions if you want them), that are careful, but will help get the deal done. Try and meet with the lawyers and accountants of the targets (obviously with your potential partners there). Set the tone. Make sure that everyone knows that what is trying to be accomplished is a win-win. You want the negotiation to go as efficiently as possible and as positively as possible. When it is all said and done, you are still going to need to rely on the people whose company you just bought. You do not want unhappy or frustrated partners.

6) Get a term sheet done and get as many of the major issues completed there. Don't leave it until the actual contract.

Once you've got a contract done, meet with your team and have a review of the process. What went right, what went wrong. Make the next time even better.

One of the next issues/topics - the integration

Raising money in an early-stage company

Raising money for an early-stage company has changed drastically over the last 10 years. I was on both sides of the bubble. Overall I was able to raise $23M in equity and debt for the two companies that I was COO for.

Here are some of the learnings:

1) ALWAYS get more money than you (or your financial model says you) need

2) Point 1 means build a realistic financial model

A realistic model should tie completely to your business plan. If you update one, the other one better be updated too. Potential investors are always looking for reasons not to invest. If there are inconsistencies, they'll jump all over it.

What is a realistic financial model?
A) Have a detailed monthly revenue page with all the sales channels (You will spend a lot of time discussing this information)
B) Think of all the costs of goods/service components. What will it take to actually service all of the revenues, i.e. customer service, manufacturing, etc.
C) Finally what's your overhead going to be/extra labor needed to run the company. Do you have an internal software team? How much space are you going to need? Do you have marketing programs/team to support the sales? What other hard assets will you need? How many computers/printers/scanners, etc will you need?

3) And finally once you have your business plan and your financial model completed, you need to do the most difficult task, value your company. Depending on what stage of funding (and growth) your company is at will dictate whom you have to negotiate with (i.e. current investors, founders, new investors, employees).

One of the next topics - who to go after and how to go after them