A Company Business Audit
A small but technically-innovative private company in the PC & Internet software business had reached a point in its short life span of five years or so, wherein quarterly revenues were coming in flat to declining. While the nation's general economic conditions had not been robust during recent years, both management and the Series A investors felt that there may exist certain obscure or hidden concerns inside the company that transcended external economic conditions. They asked the Consultant to do a rapid assessment & audit of current business activities and short-term business plans of this fledgling enterprise.
The Consultant initially met separately with management and then with key investors, and he soon provided a proposal for a two-week engagement. The proposal was accepted and approved.
The Consultant then scheduled and executed one-on-one interviews with each of the five management team members, two of whom were founders. In addition, he met separately with other key members of the company, including the chief financial person, vital sales personnel, significant field support staff, crucial technical development engineers, and top Value Added Resellers. He also met with several Board members. Finally, the Consultant participated in several management staff meetings and numerous existing customer calls.
After consolidating and verifying the collected information, the Consultant prepared a written REPORT and presented it to the Acting CEO for distribution as he saw fit. The format of REPORT included a set of observed "Concerns" followed by a set of perceived "Strengths" in two major categories: 1) Products, and 2) Sales-Marketing-Financial issues.
Thereafter, several General Observations were presented. These observations were entitled Effects of Company Size, VARs versus Direct Selling, Management Dynamics, Series B, Written Operating Tactics, Competition, Beyond VARs, and Next Year and Beyond.
Product-related Concerns were as follows:
* Very few feature enhancements have been added by the company to its flagship product in more than a year. Moreover, despite an upcoming release, known customer demands would continue to exist after the new release for supporting additional capabilities and other features offered by competition.
* The company has endured an average Cost Of Goods Sold of ~25% of net revenues just to pay royalties to third parties for licenses/rights. While these third parties are currently central to the company's business model, this 25% COGS burden is significant.
* Additionally, keeping these third party programs up-to-date with the latest releases and integrated with the company software codes, is a labor-intensive programming & testing support burden for the limited engineering manpower inside the company.
* Such third party suppliers subject the company to certain risks (small ones may disappear; medium ones may be acquired, change policies, etc.). Moreover, the company is always somewhat behind the market curve when it has to implement integrated codes when new third party releases are made.
* Competitors to the company can easily access these same third party sources.
Product-related Strengths:
* The company asserts it possesses unique intellectual property embedded in its products. The company claims it has the very best product feature coverage than any of the competition.
* The company asserts it possesses a very positive image in its market niche, by being the first mover in this space several years ago, and by providing unrivaled customer support.
* The company asserts it has a very strong record on Product Quality.
* The company products already support several important foreign language versions.
* It appears that a planned new Release does contain some important new features and capabilities that should definitely pique the interest of would-be new buyers "across the chasm and into the early majority space". The new Release may well form the basis of a fresh and credible company sales/marketing campaign. The short-term concern is whether the moderately meager customer-useful contents in the new Release are sufficient to mitigate the impact of planned increased price deltas among VARs and end-users.
* The company is maturing as a software business. In speaking with the various company personnel, emerging is a healthy awareness of what truly counts when it comes to releasing a full-fledged "software product". Like many start ups, the company began life purely as a technology-centric entity. The company's staff is now realizing that a real software product does not yet exist at "code freeze", but rather it requires all the other trimmings for the complete product to be successful in the discerning marketplace (quality assurance, user documentation, Beta testing, convenient downloading and licensing schemes, relentless marketing, dedicated support of VARs, excellent hot-line support, knowledgeable account management, et cetera), all of which add time after code freeze to the date for first customer ship.
* Realization is half the battle, but the company must proceed apace with actual steady implementation of these above practices. These are all important, but especially so if a company has not "lucked into" a "killer application" which would allow revenue growth despite many sins & omissions. It's fair to say that the company does not (yet) possess a "killer application", so the company has to earn its customers the old fashioned way.
Sales-Marketing-Financial Concerns:
* Company Net Revenue has enjoyed only a slightly positive slope of growth over the last year. Monthly revenue is running at less than half of breakeven. A/R today are high.
* Further, the Net Revenue of the current quarter is "way down" compared to historical averages. Obviously the causes of this immediate revenue dip needed to be understood, and of course the revenue dip digs a even deeper revenue hole that must be overcome. (In tough times, downward pressure develops on the sales of product applications that customers can temporarily 'live without' in a shaky economy).
* The relatively new sales force has not been devoted to selling the flagship product since the sales force came together only six months ago. Rather, the new sales team's sole focus had been initially directed toward trying to sell a new, more expensive product, an effort that has yielded relatively mediocre revenue results to date. As a consequence, the flagship product has enjoyed little incremental selling effort for over 12 months, despite the addition of the new sales force.
* Management stated that only very modest marketing efforts have been expended over the last 12 months to help sell the flagship product.
* Only a small portion of company marketing efforts was done at the team or group level. Few solution-oriented 'process success' case stories were created that communicated 'value added by the company products'.
* The company apparently had not charged for software maintenance & support (M & S) in the past. Notwithstanding the corresponding lost revenue opportunity in the past, the company now plans to begin charging for maintenance. This new policy will create a certain level of risk regarding the impact this policy change (another net price increase, in effect) might have on the company's past customers & future prospects, as well as the impact on VARs who must now accede and begin to collect M & S fees.
* License management and tracking has been an administrative burden.
* The current company accounting function is also burdensome and often unstable.
Sales-Marketing-Financial Strengths:
* The sales force now has nearly 6 months of indoctrination at the company. If applied correctly to selling the flagship product, especially related to the new release, the existing experienced sales team should create a very positive incremental impact on improving the revenue rate, all else being equal.
* The company has signed up many VARs, providing remarkable geographic coverage for a relatively small company. Despite only modest "support" of VARs in the past, the Sales Team at the company is finally turning its attention toward enhanced support and management of its VARS, aimed at improving results dramatically from selected VARs.
* The company is finally focusing on its 'star' existing VARS and is now targeting new VARS who appear to be better attuned to company objectives.
* If actually accepted by both VARs and end-customers, the planned Price Increase will create a positive uptick on revenue totals for the same level or even slight decrease of unit volume. Starting to collect Maintenance & Support fees will eventually also aid & abet revenues.
The Results:
Following the identification of the "concerns" and "strengths" above, the Consultant then presented detailed General Observations over some 12 remaining pages of the REPORT, complete with recommended actions.
These observations consisted of these categories: Effects of Company Size, VARs versus Direct Selling, Management Dynamics, Series B, Written Operating Tactics, Competition, Beyond VARs, and Next Year and Beyond.
The consulting assignment was completed on time (two weeks) and within budget.
The Board and the Management Team were both pleased with the results of the engagement and accepted enthusiastically (or reluctantly in some cases) the assessments made by the Consultant. The company and Board are now busy implementing virtually all of the Consultant's recommendations, including hiring a search firm to identify and recruit a new, permanent CEO.
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