entepreneur, Finance, Strategic Finance, technology, Uncategorized

Leveraging the power of collaboration in tech companies

Tracing back to the advent of collaboration

From the year 2000, a massive shift occurred quietly to most, but daringly to a few. A few large organizations saw the change that was occurring. In 2007, when I was consulting with a large $Bn technology bellwether from my alma mater, I remember how this disruption, so new and so unique, was being viewed as the single largest transformation in the industry way before most of the world heard of this disruption. This arrived with the perfect storm co-created by cloud system deployment capabilities and the penetration of high speed internet. With these forces aligned, it created the SaaS disruption. It took 10 years though for its proliferation to be the product of choice for all industries. It uniquely positioned itself to productise systems and frameworks and create workflow environments which were hitherto accessible only to the big companies at a fraction of the expense. It did something else which was more succinct though. Now companies were suddenly getting familiar with having open systems and integrations and allowing outsiders in – a fundamental shift in thinking which has changed everything.

How has this affected collaboration?

A precondition to any collaboration is an open mind. Where one can freely discuss synergies than be worried about theft of intellectual property by sheer discussion itself. With an open system environment, companies began to see how great technology could be accessed by everyone for a fraction of the cost, establishing that letting someone in can save money. Now organizations needed a nudge to say that collaborations can add business value. In 2009, I remember how an acquisition by another big bellwether of a small technology outfit in Europe was of strategic importance to them. Making less than 1% of their own top-line, this large technology company was ready to take the plunge of letting in a small team of engineers join them rather than do what might come to them easier – build their own team. A surprising move, but it gave them access to a downward integration possibility which could get them into market 3 years sooner and maybe worth billions in years to come.

Why would a tech company have this internal conversation though?

Collab 1

Phase 4

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CFO, entepreneur, Finance, Investment Banking, Strategic Finance, Uncategorized, Valuation

How to value a running business for a stake sale – a practical approach

SFO Valuation Study

2017 was a harbinger of times to come. Reported PE exits in India hit an all-time high crossing Rs. 80,000 crores across over 300 deals (Rs. 377,000 crores in the US). This is apart from the thousands of stake sales which occurred across the country in the VC and Angel Investment space and thousands more not covered by the media houses owing to their private nature. Interestingly the Indian Government was also a significant participant as divestment measures were at an all-time high in 2017. But how different is a valuation for a stake sale? What does one need to do differently?

What differs?

Valuing a running business for investment is slightly different from valuing a business for a stake sale. The fundamental difference being an understanding of partnership in the future as against liquidating a position today. While an investment transaction may be quite satisfied in a multiple or DCF valuation, a stake sale/ secondary transaction requires establishment of a reasonable price for a transaction. While reasonability is a factor of the high price of ownership or auction fever (Research published in the Journal of Consumer Research) and buyer-seller expectation management, practitioners deploy more than one method to ensure that reasonableness can be as less subjective as possible.

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Uncategorized

About when we remodeled a company to 10x returns

How it began

Quattro Private Limited is a 4 year old company providing hardware development services with a team of over 100 employees. Prequate was brought in to help Quattro remodel the business for proposed investments.

Quattro had just developed a great product with good interest for introduction to rural markets. They were aiming to manufacture the products with a EBIT of 27% of USD 10Mn in 5 years. They had been approached by investors who had asked them to perform a scalability assessment.

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Image credits: http://dilbert.com/strip/2015-05-09

Getting to work

Quattro started a limited engagement that allowed Prequate to develop the renewed business model within the IBM&A offering and strategize investments.

Prequate started off with looking into the product that was developed. In the course of such delivery, Prequate noticed that:

  • Product had been designed with abilities to remotely manage the software backend
  • Model was built on a product sale model that netted cash on each product sold
  • Working capital requirement bloated due to lead time payments
  • Profit needed scale which needed continuous inflow of money

While the product delivered ongoing benefit, the revenue model was one-time only.

 

The approach

Prequate deduced that the fundamental business model was a value-in-use as compared to value-on-sale. It meant that the business model needed to address:

  • Is the model rewarding usage while de-risking delivery?
  • Who gains from using the product – the buyer or someone else?
  • Are we profiting from the continuing value of the product?
  • Can contracts become onerous someday due to support?

 

⇒  A new approach to the business was necessary to highlight value.

Action Time

1

Perform a scalability assessment: Identify the key variables that provide sustaining value to the business

2

Fit an ecosystem fundamental: Develop a new business model to boost the NPV of the business and create an eco-system

3

Redesign the revenue model: Developing continuing revenue streams based on usage

4

Re-design the fund raise strategy: Create new raise plan in a tranched manner using off balance sheet funding arrangements to increase IRR and decrease dilution

 

Improvements made

Prequate redesigned the business model that:

  • was based on a dynamic franchise + sale model of the devices and had a revenue model was based on per use basis
  • strategized delivery of training manuals online over displays in different vernaculars for faster adoption
  • created avenue for performance incentives for promotion and use
  • split cash flow to
    • equity infusion: development of content, marketing
    • debt: device roll-out
    • off-balance sheet: working capital

 

Impact

  • Win 1Cumulative EBIT increased by 1000% over a 5 year horizon
  • Win 2Net jumped to 47% from existing 17%
  • Win 3 | Adoption risk brought down to 25% from 80%
  • Win 4 | Cash requirement reduced from USD 10Mn to USD 4Mn
  • Win 5Big Data opportunities opened up in 3 years

 

What happens when Finance understands your product

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.

Uncategorized

About when we saved a company ~20% of subcontracting costs

How it began

Beta Limited is a 15 year old well established manufacturing company with a top-line of approximately USD 3Mn based out of India. Prequate was brought in to help Beta manage further growth by analyzing and changing old systems and introducing future thinking.

Beta was in a mature stage and wanted to move to a people independent setup. They relied on experience and rule of thumb for determining the key controllable factors in their industry – pricing and costing mechanism.

Image credits: http://dilbert.com/strip/2010-05-05

Getting to work

Beta started a continuous engagement model that allowed Prequate to develop the management reporting frameworks within the CFO Office offering. Over the course of the next 12 months, Prequate became an integral part of the business with specific charge of the management reporting for Beta. In the course of such delivery, Prequate Team began the process of overhauling the finance function and noticed that:

  • Costing of all products were on an ad-hoc basis for specific projects only
  • Pricing mechanisms were based on rule of thumb and increments factoring the BOM costs only
  • True profitability for each LOB and product line was never evaluated as products were launched

Costing and pricing function are primary to any business, more so for a manufacturing company where sustenance becomes questionable if not adequately assessed and monitored. Each unit may become potential onerous to the company.  A new sceintific approach was necessary.

The approach

The main questions to be addressed behind any cost or pricing mechanism need to be addressed:

  • Does the system capture all costs?
  • Are there costs factored? Say, the cost of the standard delivery and collection terms and associated credit costs or customization efforts and related manpower costs?
  • Is there information flow for studying profitability on SKU basis or is it a work back?
  • Is costing information dynamic? When was the last time it was updated?

⇒  A new costing philosophy which was linked to pricing was needed.

 

Action Time

1

Detailed operations study: Understand the setup and functioning of all systems including the composition of every product and its manufacturing line

2

Review of SOWs & Job orders: Study the term, conditions and pricing system and the competitive position of the company in each SKU with dependencies between product lines

3

Process Study: Study each process in isolation and then as a whole as a part of the organization to analyze gaps in understanding and cost capture

4

Analyze wastages: Understand the products and the wastages associated at each step to set up standard measurements

5

Understand consumption: Understand the consumption patterns of different products and their respective reorder and fulfilment levels

6

Build Standards: Build out standard worksheets with manufacturing workflows tied in which will form the new norm for cost capture and reporting and get buy-ins

 

Improvements made

  • Dynamic BOMs were incorporated into the system to generate real time feedback across product lines
  • Renegotiations with sub contractors since their pricing was constant and not pegged to the size and nature of work
  • Study of individual processes and production lines led to recognition of numerous hidden costs
  • Building of a dedicated purchase team to reduce wastage and monitor levels with defined goals to reduce purchase costs
  • Developed a method for recognition and accounting of abnormal wastage which was not even identified before
  • Introduction of reporting at a manufacturing line level on efficiency and wastages was introduced

Impact

  • Win 115%-20% reduction in subcontracting in Year 1
  • Win 2 | 12% reduction in wastages due to continous monitoring
  • Win 3 | Economies of scale due to consolidate buying from ‘Purchasing Team’
  • Win 4 | Higher accountability + Better cost determination of time costs due to improved reporting and accountability
  • Win 5 | Finance thinking from all departments within the organization

What happens when Finance thinks business

Disclaimer: The nature of professional services is to provide tailored advisory based on the facts and circumstances of the case. Advice is never a one-way-fits-all. You may need to approach your advisor to effectuate a plan that suits your business.

You can contact us at connect@prequate.in if you wish to see how this can be executed for your business.

Uncategorized

A Critique on the 9 Crucial Factors for Successful Strategy Implementation using Dilbert

The success of a plan is not in the planning but in the execution. It is estimated that over 60% of strategies fail because they are not implemented. When asked about challenges, managers responded that their biggest concern is “It’s the successful implementation of a strategic plan” or “It’s getting your strategy done.”

With the number of management executives who are trained on building strategy plans and attend executive programs on various strategies, the one thing that needs to be emphasized is the ‘act of getting things done’ as outlined in the book ‘Execution:  The Discipline of Getting Things Done’  by Larry Bossidy and Ram Charan.

According to Larry Bossidy and Ram Charan, the heart of any Strategy Execution lies in 3 core processes: Strategy, People and Operations.

STRATEGY

1. STRATEGY FORMULATION

1The process of laying out the strategy is a significant factor, but not the only crucial factor. However, it defines all the other factors and how they can be achieved. As laid out in the paper, the central conclusion of research indicates the importance of procedural justice. All levels of the organization have different perceptions of strategy and interests in the formulation process. Unifying them is the task of the management function. Thus, unifying strategy must be consistent and accommodative.

 

2.ORGANIZATIONAL STRUCTURE

2Organizations are continuously thinking of adapting to times. Having a strongly thought out Strategy supported by an organizational structure is half the process in successful implementation. Further, different strategies require different organizational structures that can allow action items to flow down smoothly across levels. For example, executing a strategy to permeate leadership requires having a structure that allows more decentralisation of decision making activities. As pointed out by Olson, Slater and Hult (2005) four different combinations of structure/behaviour types of: management dominant, customer-centric innovators, customer-centric cost controllers and middle ground have to be matched with behaviours that best serve to facilitate the process of implementing a specific strategy.

PEOPLE

3.EXECUTORS

3

Organizations are made up of people. People in an organization take up responsibilities and become responsible for certain activities. According to the paper, enrolment of the top, middle and lower level management is essential for the purpose of rolling out a strategy. However, organizational structures are dynamically changing to become more flat so that they can be quicker and more responsive. While the hierarchical structures worked in the 20th century. In the 21st century organizations, people at various levels are required to take ownership of functions that work directly with the strategy as well.

Further, the most important part of the execution with relation to the executors will be the selection of the team of executors and arriving at how they need to be motivated to ensure that they work proactively for the success of the strategy.

 

4.COMMUNICATION

4While the strategy and team can be put in place in an organization, what makes the glue is establishing the right channel and mode of communication. Once the strategic plan is in motion, the organization needs to be brought into a single binding communication philosophy which ensures that right things are escalated as and when they become critical and avoiding failures due to inaction/ indecision. Further, organizations need to also be aware the importance in learning from one another to avoid future failures at the granular level. As put very beautifully by Alexander (1985), the content of such communications includes clearly explaining what new responsibilities, tasks, and duties need to be performed by the affected employees. It also includes the why behind changed job activities, and more fundamentally the reasons why the new strategic decision was made in the first place.

 

5.CONSENSUS

5Getting the buy-in from the organization and all levels is extremely important to ensure that the strategy is played out as envisioned. This can only happen when the organization feels that they are in on the decision making consensus. People care only about leadership that they have willingly provided, be it on strategies or on the leader itself. Further, a lack of consensus can lead to creation of obstacles in the implementation of a strategy.

As Floyd and Wooldridge argue, strong consensus exists when managers have both, a common understanding of, and a common commitment to their strategy.

 

6. COMMITMENT

6No amount of consensus can lead to execution unless supported by commitment.  As pointed out in the paper, strategy implementation efforts may fail if the strategy does not enjoy support and commitment by the majority of employees and middle management. This will hold true irrespective of whether or not consensus was achieved at each and every level of the planning. Commitment means that degree or extent to which each owner feels associated in order to support it without an immediate benefit accruing to him/ her. In flatter organizations, authority has no place. It’s all about accountability and ownership. Hence, commitment needs to be existent and permeating across the organization to ensure that the plan gets implemented.

OPERATIONS

7.RELATIONSHIP ACROSS FUNCTIONS AND LEVELS

7The relationship between corporate business units and inter-functional processes defines the functional competencies, allocation of resources, decision-making participation and influence, inter-functional conflict and coordination. As pointed out by Slater & Olson (2001), the relationships between different strategy levels also reflect the effect of relationships among different cross-organizational levels on strategy implementation (Slater & Olson, 2001). There is a significant trust required between functions in order to understand the long term implications of a strategy. If any lose sight of the end goals or get disheartened, the implementation may fail completely.

 

8.IMPLEMENTATION TACTICS

8The planners and executors both need to be a part of the implementation. The planners need to facilitate an environment that is conducive for the smooth implementation. Nutt (1986) identified four types of implementation tactics used by managers in making planned changes: intervention, participation, persuasion, and edict. In order for implementation to work, there must be sufficient direct and indirect motivational methods that need to be used as well as a certain sense of urgency to facilitate the change in thinking and direction of efforts.

 

9.ADMINISTRATIVE SYSTEMS

9While strategy is being implemented, the organization needs to have a strong enough review function that ensures that progress is monitored and managed. In the absence of review, there is absence of control over the manner in which the organization is carrying on implementation. Further, a strategy without accountability cannot be successful and monitoring systems are the only way to ensure accountability is taken seriously. In the absence of proper administrative systems, you cannot have cohesive and sustained implementation.

 

This document is a critique on the paper ‘Making Strategy Work: A Literature Review on the Factors Influencing Strategy Implementation’ (written in 2006 by Yang Li, Sun Guohui & Martin J. Eppler at the Business School, Central University of Finance and Economics, Beijing, China in collaboration with Institute of Corporate Communication, University of Lugano (USI), Lugano, Switzerland) which puts together a synopsis drawing out the nine most acknowledged crucial factors for a successful strategy implementation.
 
Uncategorized

Cost Centres for Small Business

Managing your business costs and revenues is a challenge. To survive, you have to sell enough products/services, and collect money and manage your costs.  The latter can be more difficult than you think, particularly when you don’t have good breakdown of costs.

Without careful monitoring of costs, any business can find that costs can spiral out of control quite rapidly. This does not mean you spend hours and hours monitoring costs in minute details, but you should be able to get an overview of all costs at any time. One way to do this is to use cost centres in your accounting system.

What is a cost centre?

A cost centre some section/portion/unit of a business for which costs can be identified and someone is accountable for these cost.  Normally, a cost centre has a budget which includes all costs traceable to the cost centre. These cost could be anything from wages to telephone to motor expenses, once they can be traced to the cost centre

In a small business there may be only one or two cost centres.  Because you will be looking at small numbers of transactions, there is no need to split things up into smaller cost centres as costs can be more readily monitored against budgeted figures. However, for larger businesses, operating as a single cost centre is probably not good enough.  It is also not going to be an easy task to monitor whether those responsible for cost control are doing their job effectively.  A breakdown of costs down into each cost centre helps control cost of each cost centre and the business as a whole.

20140627-163257-59577785Identifying cost centres

Some businesses are easy to split into individual cost centres – for example, a manufacturing company with six factories, a head office and a distribution warehouse could be split into 6 individual cost centres for each factory, a head office cost centre and a separate distribution cost centre. A business may need to go into more detail to keep a tighter control of costs – for example, each manufacturing plant might make several different products, with several different machines/processes for each product. It would be possible to treat each machine or process as a costs centre in this case.  This would allow the business to keep a good eye of how profitable each product process is. Sometimes too, a business might treat support activities like human resources, finance and logistics as cost centres too. There is no end to how detailed cost centres can be, but remember to be a cost centre, it must be possible to trace costs directly and someone must be responsible for the costs.