Month: January 2021

As a technology industry executive I’m a student of market adoption.   As a technology company executive I’m intrigued any time government goes beyond supporting pure innovation and technology development and leverages their way into commercialization processes and driving market adoption.   In many ways, governments have every bit the power of Google or Microsoft to be game-changers in nearly any industry as a by-product of their access to raw technology.  Few private or public companies in the world can match the resources, depth and breadth of the US government’s R&D capabilities.  NASA’s continued success over the years highlights the sheer power of our country’s resources.  The US government’s technology transfer programs also appear to work fairly well as evidenced by the commercialization of GPS technology into numerous private market applications.  It’s when government takes the next step into driving market adoption that its success is spotty, at best.

The federal government’s most recent efforts to increase the adoption rate of healthcare information technology (HIT) via the American Recovery and Reinvestment Act (ARRA) provides a good case in point.  Recent feedback from several HIT companies suggests, contrary to its objective, ARRA has actually hampered adoption of HIT systems in the short-term and potentially compromised longer-term healthcare industry gains in favor of mid-term political gains.   In the short-term, many HIT software companies have stated that government “froze their market” when ARRA was initially announced.   In its haste to launch a program, the federal government outlined a carrot-and-stick funding approach without providing the necessary details surrounding “Meaningful Use” of HIT systems.  They also announced that only HIT systems certified by an as-then-undetermined certification authority would qualify for incentive payments.  The entirely natural and predictable result was that many medical practices and physician offices put their HIT system purchasing plans on hold until critical details were available.  Doing so made perfect sense given the potential financial and operational risk to medical practices of making a decision that may have to be reversed later.  The delayed purchasing decisions negatively impacted HIT system vendors.   Perhaps unwittingly, and certainly unnecessarily, government compromised the health and stability of the very HIT firms that would be ultimately responsible for delivering on government’s promise.

Understanding the longer-term potential ramifications of ARRA requires a closer look at the convergence of two different but interrelated factors.  First, understanding what drives normal market adoption and how ARRA changes normal behavior.  Second, looking at how ARRA may be conditioning future HIT system purchase decisions.

To the first point, few individuals have contributed as much to an understanding of how markets adopt new products or technologies as has Geoffrey Moore.   Moore’s work as outlined in “Crossing the Chasm” details the different types of buyers and stages that technologies evolve through on their way to ubiquity.  Moore’s adoption lifecycle model taught us that each successive stage or group of buyers relies on the gained experiences of the preceding buyer groups. “Innovators” thrive on being the first to own a new technology for technology’s sake even if it doesn’t fully work yet.  “Early Adopters” typically seek out new applied technologies that may give them a leadership advantage, after the Innovators have worked out the initial kinks.  The “Early Majority” seeks out proven and well-established products that deliver a calculable and demonstrable return, once the Early Adopters have proven the potential value.  The “Late Majority” tends to buy mature products that represent little risk, once the Early Majority has reached full market penetration.  Finally, the “Laggards” would prefer it if we all went back to taking notes on papyrus, and will resist buying technology at all.   The critical point that the government’s approach misses  is that compressing the buying lifecycle stages as ARRA does deprives succeeding groups of buyers of the “lessons learned” knowledge necessary for their success.  Medical practices buy HIT systems then because they have to, rather than as an enlightened business decision to solve problems or build a more effective or efficient healthcare delivery practice.  The foregone “lessons learned” of normal adoption lifecycles are a necessary element of successive buyer’s decision criteria and to ever-improving implementation processes.  The resulting absence of accumulated knowledge creates risk.  The most likely impact of the risk is a greater number of HIT implementations that fail to achieve their goals of improved health outcomes or reduced healthcare costs.

On the second aspect, ARRA reinforces the physician practice behaviors originally shaped and then perpetuated by Medicare / Medicaid funding approaches and priorities.  Medicare and Medicaid dominate the market to such an extent that healthcare practices have learned to react and respond to government funding initiatives instead of proactively developing best business practices.  ARRA represents a continuing conditioning effect that ensures that Electronic Medical Record or Health Record (EHR / EMR) systems will be adopted.  The continued conditioning suggests that further incentive approaches may be expected or required in order to drive HIT adoption beyond EHR / EMR implementations.

When you consider the implications of ARRA and the counter effects to natural market adoption and technology buying processes it becomes clear that we’ve legislated a sub-optimal solution over the long term.    Troubled HIT system implementations will curb the appetite for the follow-on layer of HIT systems.  Limited tangible industry-wide health outcome successes will curtail the taxpayer’s and lawmaker’s desire to create a second ARRA-like program.  It certainly doesn’t appear that real business issues such as these, and others, were duly considered as the ARRA bill was being developed.  That may be asking too much of a politicized process.  The end result will likely be that progress will be claimed by the proponents of the legislated bill and ARRA will be credited with driving HIT system adoption.  The industry will likely reach a very high level of penetration, but unless something changes, the hoped-for economic gains and improved health outcomes will be far less visible and touted than are the political gains.   A much better approach, although far less politically viable, would have been for government to focus its efforts and resources on development of core technologies that could support healthcare, allow for technology transfer to the market and then support normal market adoption.

Illustration courtesy of Geoffrey Moore, Crossing the Chasm, Collins Business Essentials (2002)

The simplest concepts can be the most powerful, but only when they’re used.  I was reminded of this as I kicked-off a three day training session for a group of B2B software sales managers.  The question I posed to the group that brought me to that realization was simply:  What’s the quick formula for calculating Return on Investment?  I raised a crisp $50 bill in the air above my head  as I asked the question.  I promised to give the bill to the first person that could provide the answer.  It should have been an easy question given the audience, with a positive reward, designed to engage the team as we started the first morning’s session.   It was also a key question to kick off any sales training session as the concept at the heart of every business endeavor….what value is being created and how is that value being captured in the go-to-market approach?  Fifteen blank faces stared back at me.  I added another $50 bill to the first and asked the question again.  Fifteen faces stared back, this time a bit more nervously. 

I have to admit I didn’t fully expect an answer.  I also have to admit I borrowed the approach from the first-ever sales training session I attended.  In that case, it was my first day as a new sales rep and I was sitting in a conference room packed with nearly a hundred IBM sales reps.  IBM’s famed Terry Booten was the instructor and he’d been assigned the responsibility for teaching that group the basics of financial selling.  Terry had been a very successful sales executive in his career in IBM while selling into one of the IBM’s toughest segments and geographies: advanced hardware and software systems to coal mining operations in Kentucky.   That was a tough territory.  He was very successful and was somewhat of a legend in IBM’s sales organization.  As Terry opened his first day’s training session he held up a similar bill and a copy of his recently published book “Cracking New Accounts”.  He promised the bill and a personally autographed copy of his book to anyone that could provide the ROI formula.   I couldn’t believe it.  I had just finished my undergrad program in finance and I thought it seemed a simple enough question, but no one in the room was responding.  I looked around the room at a hundred of the industry’s most highly-regarded sales professionals in the IBM-standard white, pressed shirts.  No one responded.   Terry added a second bill to the first, held up the matching bills and the book, and asked the question again.  First day on the job or not, I wasn’t about to let the opportunity go by.  My hand went up from the back of the room.  Terry saw it and seemed a bit surprised that his pocket change and book might be at risk.  He grinned from the front of the room and called on me, most likely not expecting the right answer.  I gave him the answer, ran to the front of the room to pick up the cash and the book, and went home that night feeling lucky, $100 better off and somewhat wiser.

What I’ve learned since then, despite all the advancements in sales training, systems and processes, is that you can repeat that same scenario in any B2B sales meeting and get nearly identical results.  You’ll most likely take your money with you when you leave the meeting.  I don’t know about you, but I find that fact dismaying.  Dismaying since the heart of business is allocating and investing in resources to build value that ultimately generates positive returns on the investment.  That’s certainly the fundamental equation that companies think about when they develop solutions to market problems.  It’s also what B2B prospects are trying to figure out when they evaluate vendor’s products or services to address their business issues.  I’ve always thought everyone in business would benefit from understanding the ROI and value equation, especially professional sales people.  But few do, although ROI should be at the core of nearly every discussion they have.  Virtually all B2B software companies can demonstrate an ROI for their solutions that can be measured in the thousands of percents, only to find themselves negotiating sizeable discounts.   It seems that it would be difficult to sell on value if you don’t know how to describe it, measure it or calculate it. 

As dismaying as it seems, it’s quite encouraging since there’s obviously not a lot of competition for those that can talk and think in terms of value and ROI.  How does your direct sales team stack up?  It might be interesting or enlightening to take a couple crisp $50 bills with you to your next sales team meeting and try the exercise.   I’d love to hear from you if you have anything close to half of your sales reps that can answer the ROI question on the spot.  If you do, I’d love to share your story about how you developed a top notch sales organization.  Otherwise, stayed tuned.  The next post here will describe how you can get there…

Software company success is sensitive to sales execution.  Having a great product that effectively meets its market’s needs certainly helps.  In fact, it’s a pre-requisite, but there are innumerable examples of lesser products beating stronger competitor’s offerings to win ownership of their respective markets.  Don’t get me wrong, I’m a staunch advocate of product leadership and the power of strategic product management.  In fact, one of my favorite business philosophies from Peter Drucker is that effective product management should make selling superfluous.  Drucker wasn’t suggesting at all that selling is unnecessary; rather that effective product management is a success enabler.  It sets the stage.  Products or solutions create value; sales and marketing execution done right captures value.

It’s at this very point that the discussion often goes awry.  Most VP’s of sales would passionately defend their organization’s ability to capture value.  And they do, to an extent.  They’d point to such things as market share gains, sales growth, reduced customer acquisition cost, improved cost of sales, shortened sales process duration, etc. as evidence.  Some may even point to an increased share of target client’s budgets, reductions in discounts or increases in average contract value.  Those are all good measures that capture aspects of sales efficiency and effectiveness, but they miss the critical business question:  How much of the potential value that was created did they capture?  The answer to that question closes the loop between the halves of the business model: Creating value and capturing value.

The path to getting there is two-fold.  The key to the first part is highlighted in a research study jointly conducted by Software Magazine and Spencer Stuart several years ago.  The two organizations set out to understand why some software companies thrived and others didn’t.  The team interviewed CEO’s, GM’s and EVP’s of sales and marketing from 30 software companies that had surpassed $250 million revenue.   The companies included in the study cut across industries and software applications and the research team studied their respective industries and the makeup of each of the companies in great detail.  As any VC, Private Equity firm, banker or entrepreneur will tell you, the odds are pretty long against any company successfully navigating the journey from start-up to over $250 million revenue.  Clearly, there’s something these companies figured out on their way to success.  The research team’s results were published in the August 2002 edition of Software Magazine and in a Spencer Stuart Blue Paper and I’ve taken the liberty of summarizing their key points here:

1)   The quality of the direct sales team is a differentiator.  Multiple sales channels are beneficial, but the quality of the direct sales team matters most.

2)   First-line sales management is the key to quality of the team, disciplined execution, and success.

The essence of the study was that these companies succeeded as a result of the combination of a good product and a great sales team.  Moreover, and this is the important part, the researchers found that first-line sales management is a Force Multiplier.  [A Force Multiplier is an element that when added creates a disproportionate advantage that multiplies the capabilities of a team and enhances the probability of a successful mission.]  There are notable examples of the success of this concept including GE’s focus on developing management and leadership capabilities, or the military’s focus on the quality of Drill Sergeants as the focal point for building basic skills and teamwork.  GE has a well-deserved reputation for the depth of their leadership talent and its ability to drive superior results in tough industries.  Military personnel are highly sought after for their ability to execute and lead teams. By comparison, many sales organizations focus their development efforts almost exclusively at the field sales rep level versus the sales management level.  Education and development across the organization is a good thing.  However, the research clearly demonstrates the multiplier effect of increased training and development of the sales management team.

The second, somewhat easier part involves “institutionalizing” the discussion regarding value.  This takes us back to last week’s discussion regarding the one measure that every technology sales rep should know:  Return on Investment.  The value that a client expects to gain and ultimately receives can be measured and tracked, but only if it’s discussed and agreed upon.   The details and nature of client value, whether its strategic, tactical, financial, political, etc., should be captured as part of the engagement process, and documented in internal systems.  Ultimately ROI information should make its way back to the delivery and development organizations.  Every CRM system is capable of tracking and reporting this information.  Few do.  In most cases, it’s likely because value is not typically part of the sales management discussion with the direct or indirect field force.  The management adage of “What gets inspected is respected” holds true.  It’s incumbent on sales management to make the value discussion part of the sales culture.  The best first-line sales managers do.  It’s also critical, and highly advantageous, that executive leadership support their efforts by making the value discussion part of the organizational fabric.  At that point, rewards can be tied to the organization’s ability to create value, and to the degree of value that’s captured.  Imagine the power and competitive advantage that such a value-driven, market-focused organization would possess.

Benchmarking is a trait that’s commonly found in the most successful emerging growth companies.  I note it as a “trait” and not simply a “practice” because the benchmarking approach is inherent in these companies’ DNA.  These agile companies are continually scanning within, and across, industries as they test their operating assumptions, perceived limitations and potential opportunities.   The underlying benchmarking process is a critical element of their focus of working “on the business” as much as working “in the business”.  You’ll find that these companies are typically incorporating benchmarking results into their planning processes, and within their execution metrics.  As a result, they easily outperform less nimble larger corporate competitors, and other inwardly focused challengers.

One of the best benchmarks for gauging how well a business is operating is to look at companies run by Private Equity Groups (PEG’s).   PEG’s are certainly known for their ability to earn higher-than-average returns given their understanding and application of financial leverage.  What’s equally important, and not as well known, is that PEG’s have derived much greater benefit from improved operating performance than they ever have from financial leverage.   A McKinsey study referenced in a November 2007 Harvard Business Review article (“If Private Equity Sized up Your Business”) reported that improved operating performance, not financial leverage or overall market gains, was the primary determinant of Private Equity Group’s higher-than-average returns.  More recently, even blue chip companies such as GE and Dell have demonstrated that financial machinations aren’t sufficient to support sustained growth and results.  Operating performance improvement is required. 

So what do Private Equity-owned companies do differently than the rest?  It might surprise you to find out what their secrets are, and aren’t.  The good news is that what they do is not rocket science.  The approaches and the tools they use are published, well-known and readily available to every company.  They difference is that PEG’s have developed an elevated competency, and moved further up the experience curve, by rigorously benchmarking their own companies.  How they apply their expertise helping companies achieve maximum value can be broken down into seven interrelated areas:

1)   Understanding how companies create and capture value.  Ask an executive at a privately held firm how they create and capture value, or to describe their business model and more often than not you’ll get a blank stare.  PE firms quickly understand how to gauge the pervasiveness of a targeted market problem; who benefits from the solution; how to measure the value; and how much of the created value is captured in the go-to-market approach.  In other words, how well a company’s business model works.

2)   Investing in leadership and management.  Contrary to popular opinion, PEG’s have no interest in running any of their portfolio companies.  The harder truth is that few emerging private companies invest in leadership development.  Most emerging companies lack even a rudimentary succession plan.   To cross that bridge, numerous PE firms invest real dollars in continuing development of their operating executives, or at the very least bring their operating executives together on a regular basis to share gained wisdom and insights.  It would also be difficult to find a board member of a privately or publically-owned company that puts as much time and effort into understanding a company as does a partner at a Private Equity firm. 

3)   Creating alignment that drives execution of the operating plan.  The best firms understand very well the role that vision, business model, culture, metrics and aligned compensation have on the execution of the operating plan.  PE partners continually seek validation that there are adequate resources supporting the operating plan; that human capital is succeeding and developing; that the operating plan is being executed; and that the business model is creating and capturing sufficient value.  In many ways, PE firms are more adept at organizational and human capital development than many Talent Development organizations within Fortune 500 companies.  

4)   Building appropriate capital structure.  Understanding when and how to add debt or sell an appropriate equity stake is a body of expertise unto itself.  Many emerging stage companies unwittingly compromise their flexibility or viability, hamstring future growth or limit exit options by creating unnecessarily complex capital structures.  The Software Equity Group (www.softwareequity.com), a San Diego-based software-only M & A advisory firm regularly notes that a software company’s equity structure is one of the top three most important determinants of the company’s valuation.  Getting the capital structure right is critical to keeping the business growing and preserving shareholder value.

5)   Understanding the issues of scalability.  The challenges of rapid growth have broken more emerging stage companies than almost any other factor (For more on this topic see Doug Tatum’s  “No Man’s Land – What to do when your Company is TOO BIG to be small; and TOO SMALL to be big”) .  The nature of PE firms is that they generally focus on selective industries.  They have experience working with several companies at different life cycle stages within an industry sector.  As a result, they have and can share first-hand experience navigating the challenges that high growth can bring.

6)   Thinking critically and making the tough decisions.  Gaining arms-length or third-party objectivity can be one of the hardest things a founder or entrepreneur can ask of themselves.  Such is the nature of pride of business ownership or business plan authorship.  The best PE firms tend to ask the most incisive questions and demonstrate a unique balance of patience, expectation and decisiveness.  They’re proponents of testing new approaches and will give an idea or concept ample runway, but will push for objective benchmarks that demonstrate success or failure in a stage-gate approach.   More so than a typical board member would.

7)   Making focused strategic investments.  Cash is a scarce resource in emerging growth companies and comes with significant opportunity cost that’s rarely discussed.  Private Equity firms focus on growth and recognize that usually requires cash.  Once a PEG’s initial investment is made their focus quickly shifts to maximizing shareholder value through profitable growth.   As noted earlier, they understand and willingly make strategic investments that drive market share or enhance and improve operating performance.  What’s important and valuable is understanding where PEG run companies are investing their resources.

If you’re not benchmarking, you may be missing critical insights into the evolution of your market.  At the same time, economic downturns like we’ve seen over the last two years can give emerging growth companies a breather to validate operating assumptions and the business model.  Down cycles provide companies time to make the adjustments necessary to cost effectively gain scale as the economy rebounds.  On the other hand, if you are benchmarking but not yet against companies run by PEG’s then let me know.  I would be more than happy to help you identify and connect with companies to benchmark with.

Two years ago we were on the eve of the deepest global economic plunge of the last 80 years.  Financial capital, in the form of cold hard cash, quickly supplanted human capital as one of the most precious of all corporate resources.  The new challenge wasn’t about thriving in a competitive market; it was about surviving a global market meltdown.  No matter how much cash you had on the balance sheet, it didn’t feel like enough.  And if you didn’t have enough cash you wouldn’t survive.   To protect cash, most organizations shed human capital and in the US alone, somewhere between eight and ten million jobs were eliminated.  Some number more were reduced.  The employees remaining feared their job may be next, or felt the direct impact via a relative or friend’s loss.  Understandably, employees took fewer risks and gave less of themselves to the organizations that demonstrated little apparent loyalty.  If cash was the fuel and human capital the engine, then most companies ran leaner, and with reduced horsepower.

The economy is recovering, but the lingering impact of hobbled human capital is staggering.  The Conference Board, an institution that’s operated at the intersection of economic, market and management knowledge for 90 years, reports that 22% of employed workers expect to leave their current job within the year.   If you factor in the 1 in 10 workers that are currently unemployed then up to one third of the workforce will transfer their accumulated expertise, knowledge and capabilities to another company.   The Conference Board also reports that 55% of all employees are dissatisfied with their current job.  A recent Gallup poll corroborates the scale of the dissatisfaction with their report that over 70% of employees are “not engaged” or even worse, “actively disengaged”.  The cumulative economic impact has been estimated at $350 billion of lost or potential productivity.   For the sake of comparison, that’s an amount roughly equal to one-half the $700-$800 billion Federal government’s stimulus package.  However, unlike the government’s stimulus package, every company has an equal opportunity to gain an equal or greater share of the potential benefit.  Which begs the question:  How much time, effort or focus would you ask your executive team to commit to gaining your share of a $350 billion benefit?  How aggressively would you compete for a share of a $350 billion opportunity?

Bestselling author and President of The Table Group Patrick Lencioni (The Five Dysfunctions of a Team and The Four Obsessions of an Extraordinary Executive) outlined the path to your company’s share of the potential benefit in Three Signs of a Miserable Job.  In it Lencioni identifies three root causes of employee dissatisfaction, and shares his perspectives on how simple it can be to re-engage latent human capital horsepower:

1)   Anonymity – The apparent lack of interest in, or caring about a team member and their personal and professional lives, at more than a cursory level. 

2)   Irrelevance – An individual’s inability to see how their efforts contribute to the company’s goals or to a higher mission or purpose.

3)   Immeasurement – The inability of an individual to see, feel or determine that they’re making progress or even doing good work.

The solution, or what Lencioni refers to as the “Cure”, rests directly in the hands of direct managers and leaders, and more generally in a company’s culture.   As easy as it sounds, there is hard work to be done in knowing your people, helping them see that they’re doing good work and that their efforts are aligned to the vision and mission, and then building a culture that institutionalizes the process.  Leading and managing is an impossible task if the vision and mission isn’t clear, if there are conflicting messages or success measures, or if you don’t know your team members at a deep level.  To be fair, not all employees are seeking meaning from their work.  But as a leader or manager you owe it to the best and brightest in your company to ensure they don’t question their worth, contributions or alignment to the goals.  In other words, un-hobble the horses.   Otherwise, the impressive horsepower they represent may end up powering your competitor’s engine.