Category Archives: Revenue Risk Management

Look Ma! No ROI!

Tuesday, 26 November 2013 16:45
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Do your sales teams regularly get pulled into ROI * bake-offs, only to get bested  by your competitor’s numerical artifice? Wobble . . . wobble . . . thud! The “High ROI” pedestal shakes easily, exposing the evanescence of big revenue opportunities.

“Sorry – we had to make a decision, and the ROI numbers speak for themselves,” prospects say. But can numbers really speak for themselves?  58%. 18%. 15%. 9%. Marketers know that with ROI, large numbers speak much louder than small ones.  But are any close to reality? Beats me! For decision makers, comparing numbers side-by-side is always a simpler exercise than comparing the reasoning, logic, and assumptions behind their calculation. No one wants to be gullible, but who has the time to get into numerical weeds? One reason that “show ’em the ROI!” has become such a popular marketing mantra.

ROI differentiation is ephemeral, but ROI-enamored marketers don’t recognize the tactical risks.  Onward! Into the abyss! And off they go, plowing hours into elaborate spreadsheets, and pushing them out to the sales team and prospects. “Next time, we’ll add some new variables and be less conservative with our estimates.”

Running ROI numbers. It’s a tough gig, with uncaring math. And you know how people play the game. Everyone cheats.  Instead, compete using harder-to-topple attributes for making the business case. Ones that are rabidly value-focused:

1. Strategy, enabled. Discover your prospect’s near and long-term strategic plans. Rapid revenue growth through global expansion? Delivering outstanding customer experience and happiness to customers?  Then ask him or her which capabilities are indispensible for achieving those strategic results. Prove you’re the vendor that can best provide those capabilities, and you’ll own the pole position—at least until their strategy changes.

2. Low risk—or maybe lowest risk! “Nobody ever got fired for buying IBM equipment.” The IBM schtick has as much freshness as an old doormat. But the idea behind it rings as true today as when someone—presumably from IBM—first coined the message. Every day, prospective customers bypass glitzy features, bleeding-edge technology, and “fantastic ROI” in hope of making a safe decision. “Low risk” doesn’t pack the same punch in every buying situation, but it’s a potent card to have in your hand.

3. Options value. Companies face great uncertainties—including markets, regulation, competition, political, technological, and human capital. Uncertain conditions favor solutions that offer flexibility and agility.  For example, IT vendors that provide products that are multi-purpose, interoperable, and scalable possess a distinct competitive advantage over those that are more rigid or require high switching costs. “. . . options create value by providing [project managers] the chance to alter or terminate a project before each new stage of funding, based on updated information about costs and benefits.” (Fichman, Keil, Tiwana Beyond Valuation: ‘Options Thinking’ in IT Project Management, California Management Review, April, 2004)

Strategic enablement. Low risk. Options value. Things that are difficult to measure can hold the greatest value for customers. Shouting High ROI is a distraction – causing business developers to miss opportunities to reveal stronger reasons for customers to buy.

No company should be able to win a sale by simply pumping fluffy numbers into a spreadsheet. Avoid numbers-game bakeoffs by moving your proposals to a higher plane. Confront your competitors with a more intimidating bar, one that’s significantly more difficult to overcome.   Without ROI dependency, you’ll discover that your business cases stand up on their own, and are much harder to topple.

* ROI = Average annual operating cash flow divided by net investment. The equation does not include variables for risk, time, or cost of capital.

How Much Would You Like to Pay for That 777X?

Monday, 25 November 2013 23:06
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Suppose you had a modest hoard of cash and needed to fly somewhere—say, one-way from Moscow to La Paz. But you’re finicky. You get annoyed with seatmate small talk, like “. . . and what brought you to Russia?” You’d rather fly solo.

If you’ve got time, and don’t mind being holed up in Russia for a while, you might call a Boeing sales rep to order your own brand new twin-engine 777X jet to spirit you over to the Bolivian capital.

That idea assumes that Boeing knows what to charge you. In fact, they don’t. “A final price tag has remained elusive,” according to a Wall Street Journal article, Boeing’s New Plane Is Hard to Price, July 30, 2013.

“The hard part . . . is the pricing part,” said John Plueger, president of Air Lease Corporation, a potential customer for the 777X, adding that Boeing “still has a lot of review to go yet” on its selling terms. Some in the industry think the 777X list price might approach $400 million, about $48 million more than Boeing’s current priciest model, the 747-8, which carries more passengers. But that plane also sports an additional pair of engines, and drinks JP-5 like a college student at a keg party.

Because fuel costs are the largest expense for an airline, the 777X has an enviable selling proposition: it consumes 20% less fuel than its popular predecessor, the 777. According to Scott Fancher, Boeing vice president of airplane development, translating fuel efficiency gains into financial terms is necessary to find “an equitable way to reflect that value in the price of the airplane.” And that creates a conundrum, because, he says, “there are varying opinions of where fuel prices are going to go.”

The first 777X deliveries are expected around 2020, and the service life of the aircraft is 20 years. Everyone get out a calculator! We’re going to do an ROI on this. Let’s start with the average price of jet fuel between 2020 and 2040.  Then, predict the 777X’s maintenance costs, Boeing’s labor expenses, and the monetary value of reduced noise and emissions into the next three decades. Got your number? My estimate contains the word if 4,822 times.

While I didn’t interview Mr. Fancher for this blog, l suspect what keeps him up at night are visages of extended complex project plans, like Barcelona’s Sagrada Familia, which began construction in 1882 and still employs hundreds of stone masons and other workers engaged in its ongoing completion. Back when the foundation was being poured, I wonder which values the managers entered in their planning ledger under the column heading, 2015 – hourly direct labor?

For managing its sales risks, Boeing has pricing options, including some it can copy from archrival Airbus. “In pricing its A320neo, [Airbus] shared the value of the single-aisle jet’s 15% fuel savings with airlines, effectively adding half the value of the savings as a premium to the price. That equates to $8.7 million more than the current generation A320, which lists for $91.5 million,” according to The Wall Street Journal article.

If tight petroleum supplies elevate fuel prices, taking that bet means Boeing’s profits could soar, and its execs could break out the bubbly in their Chicago headquarters. But it could also spell a global recession, which could doom future aircraft sales. At least sales of antacid tablets are recession-proof.

Boeing’s pricing challenge isn’t unique. In IT and elsewhere, executives encounter the same issue: how to reflect customer value received in their prices when that value isn’t known, and can’t be reliably predicted? Let’s face it, business cases and ROI analyses are SWAG’s, at best.

Meanwhile, with Boeing’s first brand-spanking new 777X’s scheduled to roll down the company’s Everett, Washington, runway in just six years, Boeing’s sales force already has order entry screens aglow for the 777X.  As of now, the unit price field isn’t available, even for “management override.” So, what’s the price of a 777X?  For a technology as sexy as a state-of-the-art commercial jetliner, it seems cheesy to respond with “How much are you willing to pay?”

For the restaurant chain Panera Bread, though, that question isn’t facetious. The company announced a pay-what-you-can pricing model in economically depressed markets like Detroit and St. Louis. Panera provides a “suggested donation” to guide consumers. “Three years into the experiment, the company now is testing one pay-what-you-can item—turkey chili in a bread bowl—at for-profit St. Louis stores, in hopes the idea will expand to its 1,700 outlets,” Annie Gasparro wrote in The Wall Street Journal, June 5, 2013.

As Panera and Airbus illustrate, such pricing innovations don’t reduce risks. They redistribute them, much in the way a kindergartener smears finger paint on a poster board. “It’s beautiful, Dear! What is it?” The same question any executive should ask before jumping into a pay-what-you-can or pay-for-performance program.

Of course, pricing modern jetliners differs greatly from pricing a turkey chili bread bowl, but if you’re tied up in a situation with an indeterminate future for an indeterminate amount of time—like trying to find a way to get from Moscow to, well, somewhere else—having flexibility might come in quite handy.

Revenue Risk: Why Managing It Beats Crushing It

Monday, 25 November 2013 17:47
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In 2011, the New England Patriots offered Aaron Hernandez, a promising young tight end who played just two seasons, a contract extension worth $40 million.

Hernandez was arrested on a murder charge two years later, in June, 2013. His employer released him the same day. The Patriots, “a team long considered a model of fiscal prudence and solid character, were the unlikely conduit for one of the most ill-advised contract offers in NFL history,” The Wall Street Journal reported (How the Patriots Lost Their Way, July 12, 2013).

“Interviews with NFL executives, agents and former players suggest the Hernandez contract was the result of a decision the Patriots made to embrace more risk . . . they also suggest the NFL’s current economic climate played a role in encouraging that decision, and that all teams may be more inclined to make serious commitments to a riskier pool of players.”

Whether you’re selling sports entertainment, IT services, or industrial pumps, risks swirl around like poltergeists. In business development, we give a tacit nod to their presence when we talk about funnels, pipelines, and forecasts. But as we know from the Patriots, executives who ignore risks or downplay their significance often pay a large penalty. The dangers are especially acute when marketers assign attributes like surefire and guaranteed to business development strategies and tactics. If only such claims were true.

Mostly, risks are misunderstood. If you set aside the negative connotations for a moment, risk simply means uncertainty toward reaching a goal. Not every prospect will buy from us – a hard fact we must deal with, or find another job. Dictator, maybe. Or warlord. Though lately, even these occupations face a risk or two.

The right question isn’t “how do we avoid risks?” but “how should we manage them?” And that requires identifying them, then assessing their likelihood and impact. Regarding Hernandez, had the Patriots performed even a perfunctory analysis, his coaches would have discovered before he first signed that a scouting report gave him a one out of a possible ten in “social maturity,” and it stated that “he enjoys living on the edge of acceptable behavior.” I can hear the discussion in the Patriots front office now. “Downside? There isn’t one!”

Schadenfreude, for those of us who aren’t Patriots fans. But I can’t get smug. After all, I live in Washington DC, home to a football team whose name is so reviled, I won’t even use it. And their record . . . well, let’s just move on.

Risks can smack anyone in the head, even when you’re aware of them. For business developers, here are some different strategies for coping with risk:

  • Add risk. New market development, new product launches, expansion of market boundaries. All of these diminish some risk, but introduce plenty of new risk at the same time. As Bob Thompson wrote on CustomerThink, “Unfortunately, many companies look at risk as something to be avoided. Which means they limit future opportunities as well.”
  • Accept risk. Not every prospective customer will buy. It’s surprising how few companies adequately plan for this ubiquitous risk. But it’s table stakes for any company that intends to compete in a market.
  • Reduce risk. Shorten sales cycles! Increase lead flow! Improve selling skills! Make the right sales hiring decisions! Monitor, measure and reward! There are many ways to reduce selling risks—or at least to create the perception they are being reduced.
  • Eliminate risk. Some business risks, such as ethical impropriety or felonious behavior, can be so catastrophic that they must be eliminated.
  • Transfer risk. Outsourced IT development. Outsourced sales. Consignment retailing. Third-party receivables collection. Many companies have been created for the purpose of absorbing risks others don’t want or can’t handle.
  • Share risk. The idea that sustains product co-development between supply chain partners, and channel sales strategies.

Which risk management strategies are best for your sales organization? Likely, a combination of these. The ones you use depend in part on your company’s capacity to carry risk, or RBC (Risk Bearing Capacity)—a strategic differentiator that can’t be seen, felt, or touched. The reason that some companies can develop technologies to launch commercial rockets, engineer driverless cars, and compete for long-term government contracts, when others can’t.

While RBC is calculated in different ways, the common basis for the calculation is “how much risk the organization can bear before [it becomes] insolvent,” according to Carol Fox, the director of the strategic and enterprise risk practice at the Risk Management Society. Most companies don’t want to test that limit, preferring to keep it theoretical.

Whether the NFL can control the increasingly risky environment in which their teams operate has been the subject of much debate. But the Aaron Hernandez saga painfully demonstrates what happens when risks aren’t well understood and aren’t properly managed.

Why Discounting Rocks!

Monday, 25 November 2013 17:43
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“Tom finally brought in the MegaCorp deal. He’s set for the quarter!” “—Yeah, but . . . he . . . (mumble)—discounted.”

To many business developers, discounting creates ugly stains on otherwise bright outcomes. Is Tom a talentless clod who couldn’t sell his way out of a paper bag—or did he make a deft, well-timed pricing maneuver? You make the call.

Mention discount in a sales meeting, and people might look at you like you just traipsed into the room toting a sack of anthrax. Never Discount Your Prices. Salespeople Who Give Discounts are Not Salespeople. Discover Why You Must Never, Ever Discount. Wow. How do you really feel?

Managers moan that salespeople overuse discounting. They believe the tactic is emblematic of weakness. That it’s a knee-jerk reaction for those who lack selling skills. Agreed. Salespeople become discount junkies because it often works for capturing orders. A profit-eroding sugar high. A vicious cycle, that frequently ends with “we had to let that salesperson go. It’s just not how we want to do business.”

Emotions aside, discounting is just a thing—one of many levers that businesses can adjust in response to pressure from evolving risks and opportunities. But other levers, like process innovation and cost-cutting, can also create havoc when used indiscriminately. Oddly, they don’t suffer from the same taint as discounting. I searched online, and could not find one article titled Why You Must Never, Ever Cut Costs.

Discounts—and their cousins, price adjustments and rebates—are essential strategic and tactical weapons. Discounts help vendors

1. exert time pressure. Limited-time offers. Expiration dates. When there’s an incongruity between buyer and seller motivation, discounting can help close the gap.

2. get pending orders off the street. Vendors have huge risks when almost-orders hang, and hang, and hang, and hang. Stuff happens. Show me an executive with a non-negotiable, blanket prohibition on situational price adjustments, and I’ll show you an idiot.

3. rapidly adjust to changing market dynamics. Sometimes, you just can’t stick with legacy pricing. Look at the decline of once-great companies—Sony, Blockbuster, Sun Microsystems, Sears, Motorola—and you’ll find ossified price models in the rubble pile.

4. gain key customers in new markets. Ever heard “We’d like to buy, but we’re concerned we’ll be the first in our industry to use your product.”? Discounting can compensate customers for increased risk.

5. create perceptions of high value. One software company I worked for always presented pricing for small-to-medium businesses as discounted from the large-system list price. While the discounts varied, prospects anchored on the list price which the company charged its largest clients for the same product.

6. quickly pass savings to customers. In a recent Wall Street Journal article, Chevy Cuts Volt Sticker Price, Don Johnson, GM’s US Vice President for Chevrolet sales and service said, “we have made great strides in reducing costs as we gain experience with electric vehicles and their components. We want to pass those cost savings back to consumers.”

And most important of all,

7. keep competitors off balance. Nate Silver points out in his book, The Signal and the Noise, that when competitors aren’t sure how you will play your hand, you have a powerful advantage. He used poker as an example, but the same holds for sales. Denying yourself the discount option means your competition has one less thing to worry about. “Cut their price? Nah—won’t happen.”

Pricing discounts represent a cost of risk—a response to the overarching risk that a prospect might not buy from you. Of course, like any cost, executives must consider how to manage it. Want to reduce discounting? That worthy goal requires making trade-offs. You’ll likely need to define market targets with greater clarity and precision, increase pipeline multipliers, hire better educated, more talented salespeople, improve coaching and training, pay higher salaries and commissions, and provide staff with better business intelligence. Nothing’s free. But done right, you’ll experience an improvement in profitability.

When timed properly and used with the right intent, discounting rocks. Sure, nobody should get hooked on it. But stomp it out? Ban it? Remove it from your arsenal and throw it in the crusher? Not on a bet!

Build a Corporate Wall, and People Won’t Beat a Path to Your Door

Monday, 25 November 2013 17:37
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The late Charles Schultz, creator of Peanuts, warned us many years ago about an emerging technological danger. With characteristic brevity, he drew Charlie Brown’s sister Sally plopped into a beanbag chair opposite a nearby TV, as she shouts to her brother, “You should watch this. They’re showing pictures of huge snowflakes falling gently on this beautiful snow covered meadow . . .”

“You can see the same thing right now if you go outside. . .” he replies, blandly.

In the last panel, Sally shrieks incredulously, “OUTSIDE?!”

Imagine Sally today as VP of Marketing for a Fortune 500 company, and consider how her worldview might play out. With her company experiencing falling market share, high customer churn, and low marketing and sales productivity, a consultant from McKinsey recommends that she leave the confines of her corner office on the 10th floor to gain a different perspective.

She ambles far away so she can see her company the way her customers do. Turning in the direction of her office, she makes an astonishing discovery: there’s a huge wall surrounding headquarters. “OMG!” she gasps. “We’re not customer-centric!” As she peers in disbelief through a pair of binoculars, she has another revelation—the wall is growing out of control, threatening to suffocate her turnaround strategy. Panic ensues when she sees familiar objects embedded into the wall. “Oh, for the love of . . .” She drops the binoculars and whips an iPad from her briefcase, hurriedly documenting every identifiable item in the partition between her and her customers.

1. Terabytes of customer data, mislabeled as insight. Swirling digital exhaust, untapped by useful, meaningful questions from management.

2. Spreadsheet cells filled with aggregated numbers—providing airbrushed representations of customers. “Buyer personas? Who needs them? We manage by spreadsheet.”

3. Fuzzwords. Referring to people as market targets. Or using phrases like “Our typical customer wants . . . an ideal prospect has . . . . the average user for our system likes . . .” in internal meetings and emails.

4. Needlessly complex legalese on websites and customer documents.

5. Lead generation workflows, engineered without context, and lacking empathy for how people buy.

6. Tone deafness. “But we offer chat and email for inbound communication. That seems to work fine for us.”

7. Relentless profit pursuit. “Cut costs!” “Raise revenue!” –and no customer value in sight.

8. Self-satisfaction. Gratuitous internal product accolades. Lists of long-faded corporate accomplishments, bloated biographies of top executives complete with fancy job titles and academic credentials-but little else.

9. Channel insulation. “VAR’s, VAD’s, and ISV’s. They’re the primary points of contact for our customers.”

10. Product infatuation. “I can’t imagine anyone not wanting what we sell!”

11. Layers of organizational fat. Territories reporting to districts reporting to regions reporting to divisions.

“Build a corporate wall, and people won’t find a pathway to your door,” to borrow from a more familiar adage. The biggest danger of all is not recognizing when the wall is under construction, and that you’re the one building it.

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