Tag Archives: risk_management

Should Inmates Run the Biz-Dev Asylum? The Case for Stronger Sales Governance

“I don’t care how you make your number, as long as you make it,” my district sales manager told me many years ago. Nobody accomplished a Big Hairy Audacious Goal while stressing over boundaries. I know how the West was won.

But my manager should have cared. Achieving a revenue target entangles many different behaviors. Some are laudable, like agility, tenacity, assertiveness, customer focus, and good personal hygiene. But others can be manipulative, unethical, or illegal. When conditions are ripe, bad behaviors spawn and fester. Occasionally, they are exposed, like a colony of voracious termites found under a fallen tree trunk that just rolled from its dark, earthy foundation. In June, 2016, Volkswagen agreed to pay $14.7 billion to settle claims resulting from its sales deceit. A mondo penalty for not caring how a number is made.

Volkswagen’s dishonesty was propagated through modern software technology, using flowcharts, decision boxes, algorithms, code, and computer chips. But other techniques for juicing the top line have existed since the invention of accounting records. As Karen Berman and Joe Knight wrote in their book, Financial Intelligence, “Revenue recognition is a common arena for financial fraud . . . the most common source of accounting fraud has been and probably always will be in that top line: Sales.” Channel stuffing and bill-and-hold. These crafty techniques have vaulted thousands of sales reps and managers into bonus-land. You won’t learn about them on Etsy.

I can’t fault my boss for being laissez faire. His attitude reflected that of his boss, his boss’s boss, and every boss all the way to the C-Suite, where information technology converts biz-dev complexity into integers. A process that cleanly extracts ethical messiness and other biz-dev slop, leaving executives room to “focus on the numbers.” Message to sales force: as long as revenue meets expectation, what happens in Sales can stay in Sales. “If I told you all that went down It would burn off both your ears.” No thanks. I’ll stick to analyzing my spreadsheets.

Corporate boards, beware. “The responsibility of the board to prevent scandals is more important than the responsibility to clean up the mess once it has emerged. Here most boards are still at the starting gate,” wrote Kirk O. Hanson in a 2014 article, Five Ethical Responsibilities of Corporate Boards.

It’s a global problem. In June, 2016, IndianExpress reported that “poor customer service practices of [Indian] banks have come under fire from the Reserve Bank of India (RBI). Despite the banking regulator putting in place Codes of Conduct and Charter of Customer Rights, the RBI has found that banks observed the code ‘more in breach than in practice,’ raising the possibility of a regulatory intervention.”

“We have taken cognizance of the fact that there has been mis-selling in third party products. We are going to take it very seriously. The banks should review how it is being done and be very careful that 75-year-old people should not be sold wrong products simply because salesmen require bonuses or compensation. It is something that we will undertake careful review of and if necessary take action wherever warranted,” said RBI Governor Raghuram Rajan in June, 2016. He could not have expressed this ugly reality in a more genteel way.

His statement points to an even darker story. Too often, companies don’t bother to govern the internal machinery that drives their revenue, leaving it up to the inmates to run the asylum. “You made goal this quarter. Keep doing what you’re doing.” Sales and selling has traditionally been a black box to the rest of a corporation, and many senior executives prefer to remain unknowing about what happens within the guts of its raucous machinery, and what goes on outside, where prospects are “engaged” deals are “closed.”

Ethical principles frequently clash with demands for quota attainment, and in the absence of governance, it’s not always clear or predictable which actions and outcomes will prevail. One thing is certain: when others don’t examine the black box’s innards, the likelihood of harming employees, customers, suppliers and shareholders increases substantially. As Mr. Rajan knows, bad sales ethics break customer trust, poison a company’s brand, undermine shareholder value, and corrode economies. Sounds like a governance problem to me.

What is governance? Corporate governance provides “the structure for determining organizational objectives and monitoring performance to ensure that objectives are attained,” according to the Organization for Economic Cooperation and Development’s 1999 publication, OECD Principles for Corporate Governance. “The OECD emphasized that ‘there is no single model of good corporate governance,’ but it noted that in many countries corporate governance is vested in a supervisory board that is responsible for protecting the rights of shareholders and other stakeholders (employees, customers, creditors, and so on). The board, in turn, works with a senior management team to implement governance principles that ensure the effectiveness of organizational processes,” wrote Peter Weill and Jeanne Ross in their book, IT Governance. Their ideas apply equally to governing sales.

A 2008 CapGemini Survey shared that “all sales executives stated that Sales Governance will become more important in the future. In addition, 86% of the Sales Executives anticipate their group management to put more focus on questions related to Sales Governance the coming three years.” The study covered 42 companies in Norway, Sweden, and Finland, and defines sales governance as “the method used by management to drive the sales organization towards effectiveness and high performance and to promote a desired sales behavior.” The study’s authors represent sales performance in context – specifically, in relation to influence from competitors, customers, organizational culture, corporate strategy. So far, so good.

The study explains that “Sales Management is the core element of the Sales Governance Framework. It entails both a strategic and an operational level. At the strategic level of Sales Management, the sales strategy is aligned with the corporate strategy and short¬-term and long¬-term business objectives are defined. At the operational level, the activity plan is implemented and managed as required. Cross-functional co¬operation is a pre-requisite for achieving internal strategy alignment and operational efficiency. . . Sales Governance enables best practice identification and implementation, and ensures an adequate sales behavior.”

Given CapGemini’s inclusion of a method used by management in its definition of governance, there’s little surprise that “Sales Executives saw driving sales productivity and reducing non¬-value adding time” among the major benefits achieved from undertaking the program. Unfortunately, promoting adequate sales behavior (whatever that means) and driving sales productivity do nothing to protect companies and their customers from unethical and illegal activity, or its consequences. In fact, they might exacerbate the problems. When juxtaposed to the OECD’s governance standard of protecting the rights of shareholders, employees, customers, and creditors, I call CapGemini Governance-lite.

Although CapGemini addresses one important component of corporate risk, sales readiness, its governance model falls pathetically short for deeper risks. Using this model, the unethical practices in 2015 of GM, VW, Takata, Peanut Corporation of America, Wells Fargo, Medtronic, and many others would not have been thwarted. Sales organizations can be highly productive and efficient while institutionalizing seamy practices. “The dashboards look peachy! Keep doing what you’re doing . . .”

The case for board-level involvement in sales governance. Today, selling abuses make international headlines, and the case for board involvement in sales governance could not be stronger. “Boards must think about risk and strategy,” said Erica Salmon Byrne, Executive Vice President, Governance and Compliance of the Ethisphere Institute, in a webinar titled, Enabling Ethical Leadership: Equipping Your Board to Govern Companies with Integrity.

Ethisphere, which conducts an honoree program for the World’s Most Ethical Companies (WMECs), reported that 90% of its 2016 corporate honorees offer employees its board or a board committee as a conduit for reporting misconduct or raising concerns. “Boards are increasingly interested in measuring and cultivating an ethical corporate culture; 86% of WMECs update the Board on such efforts . . . Not only do WMECs more frequently evaluate their [Ethics and Compliance] programs (61% of honorees conduct annual reviews vs. 27% of non-honorees who annually review), but honorees tend to evaluate their program very broadly,” Ethisphere said in its 2015 report.

The duty of board-level sales governance. The line between board oversight for sales governance and management’s responsibilities can be thin and fuzzy. Board-level sales governance addresses strategic risks extending beyond salesforce productivity and efficiency. Primarily,

1. To ensure sales goals are balanced, and support corporate strategy

2. To ensure business development policies and practices are consistently legal, ethical and fair

3. To protect the customer’s best interests

4. To ensure effective mechanisms exist for identifying and reporting activities or events that threaten the above

Hanson’s Five Ethical Responsibilities of Corporate Boards provides useful guidelines for what boards must know or examine. He wrote:

1. Knowing the health of the company’s ethical culture. Most boards or their audit committees hear pro forma reports on ethics violations and lists of calls to their hotlines. Few know anything about the culture in which these violations arise. Do these behaviors reflect widespread acceptance of improper behavior — or a few bad apples?

2. Evaluating the ethics of the business strategy. Business models and strategies are being junked and reformulated everywhere in our modern economy. New sources of revenue are being sought; radical transformations of manufacturing and delivery systems are being implemented. Sadly, some boards are swept along by management proposals to change the nature of the business without asking critical ethics questions about the strategies.

Most boards have learned to ask whether the company is ready to monitor a China-based supply chain to insure worker safety. But few boards have discussed the ethics of tax inversions, big data mining strategies, or staffing strategies which make family life difficult.

3. Monitoring the real ethics risks in the organization. Every organization manages financial risks, and boards pay close attention to the level of that risk. Few senior managements and even fewer boards evaluate the ethical risk of entering new markets, extending the supply chain to new regions, or putting extreme performance pressure on a sales force that is prone to shortcuts . . . Boards are charged with oversight over the adequacy of this ethics risk assessment.

4. Monitoring the ethical behavior of the leadership team. No decisions are more complex than hiring and firing top executives. It is tough enough to find a prospect who has the skills needed to execute the company’s strategy for the next five years.

5. Verifying that the elements of the ethics and compliance system are strong. The Federal Sentencing Guidelines list seven to 10 elements of an ‘adequate’ ethics and compliance management system.

For sales governance, Boards should have access to, and regularly review the following:

• Sales Code of Conduct
• Corporate compliance and ethics policies
• Ethics training program or curriculum
• Misconduct reporting system
• The investigation process

In addition, boards should ensure that employees who report misconduct understand their legal rights, and have appropriate protection. Few people will want to report misconduct when companies exert draconian penalties on those who have voiced concerns.

“Make your number any way you can!” Right now, millions of sales reps operate under this heavy, boundary-free instruction. How will they behave? Which strategies and tactics will they use on their prospects and customers? What outcomes will occur? Corporate boards should care, and get involved.

The Lucrative Black Market for Customer Trust

“Free travel.”

A combination of words that grabs my attention, and stirs my soul. When? . . . How? . . . I’m thinking Machu Pichu! The Galapagos! High adventure, or a cheap way to satisfy an obligatory visit to a friend or relative. Sign me up!

A Fly Delta Facebook Event promises two free tickets on Delta by joining a fan page. All you have to do is invite 300 people, add a comment on the fan page, and click a box labeled “confirm tickets.” Alas, at 173 Friends, my community of Facebook acquaintances is so paltry, it will be difficult to capture this coveted prize. Not without me having to get a whole lot friendlier. Fat chance! Besides, the final statement in the offer makes me skittish: “After successful participation of an offer, your download will begin automatically.”

If that enigmatic sentence doesn’t pique your fraud antennae, maybe the name of the fan page will: Delta Air. All part of a choreographed online scam, according to the website Hoax-slayer.

In March, 2015, a similar Facebook scam took off, this one riding on the Qantas Airlines brand:

Today we at Qantas Australia are proud that we have seated over 3 Million passengers since January 1, 2015! So to celebrate this record setting accomplishment we will be giving out FREE first class flights for the rest of this year! That’s an entire year of FREE flights! To win, simply complete the step’s below. [sic]

A persuasive ploy that my finicky high school English teacher, Mrs. Gimmelblatz, would have immediately dismissed. “A grammatical catastrophe!” as she often exclaimed. But in less than 24 hours, this shoddy ruse hijacked over 130,000 Facebook Likes, and more than 153,000 shares – a runaway success by any marketing measure. If only it weren’t fraudulent. The imposter pages were shut down, but not before damage was done.

Expect to see more imposters. “The intention of these scammer like-farmers is to increase the value of the bogus Facebook pages they create so that they can be sold on the black market to other scammers and/or used to market dubious products and services, and distribute further scams. The more likes a page has, the more resale and marketing value it commands,” said Hoax-slayer.com. Fraudsters know that customer trust is highly fungible, and the black market is thriving.

Many scammers assume that consumers don’t pay close attention to the intricate branding and product details that designers, marketers and trademark attorneys obsess over. Delta Air Lines uses Delta as its official name, not Delta Air. Qantas doesn’t embellish its brand name with the company’s country of origin. A kangaroo, the proud centerpiece of its red logo, provides graphic confirmation. “One of the ways firms signal their integrity is branding; it makes little sense to invest vast sums in building a distinct reputation only to allow that reputation to be besmirched by fraud,” William K. Black wrote in an article, How Trust is Abused in Free Markets: Enron’s Crooked ‘E’.

Today, fraud can be astonishingly easy to pull off. Why commit messier crimes when you can just cut and paste a logo, or, if you’re working from inside, just use the one printed on your business card? And nailing the impostors is like a legal version of whack-a-mole. One manufacturer, Saddleback Bags, went the other way on fraud protection, taking a novel if-you-can’t-beat-them-join-them approach. The company’s YouTube video has the ostensible purpose of teaching people how to produce a knock-off of one of its leather bags.

Fraud techniques are often learned from others, and they are easily shared. An insight that Edwin H. Sutherland gave the world in 1939, when he coined the term “white collar crime.” He deserves credit for bravery. At the time, the notion that wealthy aristocrats could be criminally corrupt was as heretic as Galileo’s heliocentricism. And today, there’s no better channel for incubating and spreading white-collar fraud than social media. Whether committed externally or internally, fraud has five characteristics:

1. It works by mimicking an existing signal (e.g. brand name, product design, marketing message, or other communication)
2. It exploits trust
3. It relies on an imbalance of information that favors the party committing the fraud
4. It provides the perpetrator a direct or indirect financial benefit
5. It erodes the value of corporate brand assets, and present and future revenue streams

So while companies vigorously play whack-a-mole to thwart outside brand imposters, many are less aggressive about protecting against internal fraud. “Insiders cause the vast majority of theft losses,” according to Black. And, in a recent review of regulatory filings The Wall Street Journal conducted, “more than 300 companies, with a combined market value of more than $450 billion [maintain] internal-control guidelines that were written more than two decades ago.” In fact, The Wall Street Journal reported that “more than 180 companies disclosed ‘material weaknesses’ in their internal controls in 2013 – the latest year for which data were available – an 11% increase from the prior year, according to data tracker Audit Analytics.” (For further information on this topic, please see the updated 2013 COSO framework for fraud risk assessments.)

Absent adequate corporate governance, inside fraud makes travel fakery and similar scams seem like chump change. In March, 2015, over 200,000 protesters took to the streets of Sao Paolo, Brazil to protest billions of dollars that the national energy company, BNP Paribas, stole from consumers, and funneled to corrupt government officials. That’s about the same number of people involved in the historic August 28, 1963 civil rights march on Washington.

Fraud doesn’t spontaneously ignite. Companies must first understand the combination of circumstances that creates fraud before they can effectively fight it. The Fraud Triangle, described by Donald Cressey in a paper titled, Other People’s Money: A Study in the Social Psychology of Embezzlement provides three contributing forces:

1. Financial pressure, or other motivation to steal
2. Opportunity to engage in deceit
3. Rationalization for why it’s acceptable

While companies often can’t control or reduce motivation to commit fraud, they can reduce their risks by decreasing opportunities for abuse, and by monitoring its symptoms:

1. Accounting anomalies – including irregular or missing invoices, an unusually high number of voided transactions, GL journal entries without any supporting documentation, account details that don’t reconcile to the General Ledger, back-dated or post-dated transactions, unexplained variances between tax returns and the General Ledger, excessive number of late payment penalties from vendors

2. Weak internal controls – including missing documentation, no separation between accounting and audit functions, evidence of frequent overrides of transaction procedures, lack of authorization for transactions, lack of integration between accounting and information systems, lack of accounting oversight on departmental transactions, lack of internal conformity on records retention, inadequate protection for valuable assets such as intellectual property and product designs

3. Analytical anomalies – including ratios that are suddenly inconsistent with historical patterns, (e.g. increases in inventory accompanied by a decrease in Payables and/or carrying costs, increases in receivables accompanied by a decrease in bad debt expense), ratios that don’t make sense, excessive Accounts Payable late charges, excessive credit card charges

4. Lifestyle and behavior – an employee who has unusually expensive jewelry, clothing or cars, an employee who rarely uses direct eye contact. In a 2003 scandal at the Washington, DC Teacher’s Union, prosecutors said that union funds were used for “to buy tickets to sporting and entertainment events, plus luxury items including clothing, electronics and art.”

Many executives in smaller companies believe they are immune the risks of stolen trust. “We’re not a very compelling a target,” some tell me. But then I remind them that everyday email fraud flourishes through the same techniques. Who hasn’t received at least one email with a friend or colleague’s name as the “sender,” that contains a short, cryptic message like “You gotta see this!!!” followed by a squirrely-looking weblink? Trust in someone’s good name, exploited through social media. It’s been going on ever since the ‘90’s.

“A generation or two ago, strategic risks were largely confined to anticipating competitors’ next moves and focusing on solutions that could beat them at the same game. Financial risks were hinged on the strength of the US economy and banks’ credit capacity. There were no cyber-threats, no data breaches, fewer regulatory impediments and very short supply chains,” wrote Russ Banham in an article, Emerging Risk: Managing Threats in an Evolving Business World.

All true. And it was a lot less common – and less rewarding – to steal an asset like customer trust, and sell it on the black market.

Revenue Uncertainty – Part I: Known Unknowns, Unknown Unknowns, and Everything in between

“. . . There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”—Donald Rumsfeld

Rummy sure has a way with words, concealing some powerful insight within bureaucratic gobbledygook. For most of us, uncertainty appears to be one large, amorphous mass, and Rummy has tackled that problem with a distillation, albeit one that’s a tad verbose. We should applaud him for even taking this on.

Let’s put Rummy’s idea to work. Suppose your company has decided to sell an established product into a new market. You have knowledge about the past and assumptions about the future. You understand that there are many possible outcomes, some of which are likelier than others. You know that one outcome will prevail, and even though you are fixated on your goal, you don’t know exactly how things will turn out. Question: how do you ensure the outcome you get is the outcome you envisioned? (Hint: the answer is probably not stay the course. The people who coined the term agile will get upset.)

This describes a classic uncertainty problem, and one that is especially common in revenue creation. How do vendors sort through the universe of data, artifacts, anecdotes, and information to develop sufficient knowledge to place bets intelligently? Rummy’s taxonomy can help.

Three distinguishing characteristics of an intelligent bet are 1) the odds of winning are understood, 2) the bettor can sustain a failed outcome, and 3) the best possible result should be one worth having. As I’ve learned, smart people can make dumb bets, and the converse is also true – it doesn’t require extraordinary brainpower to make wagers that are remarkably astute. Something to consider before forking over a hefty chunk of venture capital to a high-IQ adult. Want an extreme frinstance? Click here to see eight defunct dot.com’s that purchased expensive ads during SuperBowl XXXIV. “Oops. The money was nice while it lasted.” Dealing successfully with uncertainty involves having at least a shred of common sense.

Imagine that Rummy has a seat at the table as part of your strategic team. Here’s how he might whiteboard your planned market entrance:

The Known-Known’s. Pretty straightforward, but known-known’s are a small fraction of needed information: names of target organizations and their executives. Regulatory restrictions and pending legislation. Major competitors. Revenue and other financial information for each prospect. Specific Key Performance Indicators. Industry trends.

The Known-Unknown’s. Typical stuff that marketers and salespeople ask about: Size of the market. Trends. Forces. Competitive strengths and weaknesses. Average length of the selling cycle. Pain points. Influencers, movers, and shakers. Level of buyer knowledge and understanding. Decision criteria. Buying processes. Internal politics. Competing projects. Motivation. Money and budgets. Biases. Perceived opportunities. Perceived risks. The list stretches from here to forever.

The Unknown-unknown’s. Everything else. Things that nobody ever thought to ask about or discover. Events that happened before, but went under the radar. Events that never happened before, but might happen. Customer backlash over who-knows-what that might have a measurable impact on revenue. Mistakes that will be made that no one even knew could be made. The metaphorical blindside tackle. What author Nassim Nicholas Taleb calls Black Swans.

Rummy’s taxonomy guides a useful, and much needed conversation about revenue uncertainty. In the last twenty years, we’ve made great strides in adding to the corpus of known-known’s, and we’ve come a long, long way in learning how to discover the known-unknown’s. But we’re still left dangling, because we know that categorization only takes us so far. We still must answer, “now what?” And for that, we need mathematical rigor. Eighty years before Rummy, economist Frank Knight, author of Risk, Uncertainty, and Profit, examined uncertainty under that lens, outlining three types: a priori probability, statistical probability, and estimates. I’ll stick to the high level, so hang in there with me.

a Priori probability. You have a box with 12 blocks, and you know up front that six are green and six are red. Assuming you cannot see into the box, what is the probability of drawing a red block? The probability distribution has been determined by definition. This is an iconic example in which an individual can place a bet based on straightforward calculation.

Statistical probability. Imagine the same box, but now you don’t know how many blocks are in it, or how many different colors there are. This uncertainty problem is more complicated, and therefore more difficult to cope with. The probability distribution of the result is can be described by statistical analysis of empirically-collected data. Therefore, the way to manage the uncertainty in this scenario is to keep drawing and keep recording the result until you have sufficient information about the outcomes on which to base a future projection.

Estimates. Again, imagine the same box, but this time, you have no knowledge whatsoever about its contents. It could be holding anything. Any data that you might choose to collect don’t lend themselves to any statistical analysis.

Knight was keenly aware of the dangers of conflating “the problem of intuitive estimation” with “the logic of probability,” whether a priori or statistical.

Here’s what he wrote: The liability of opinion or estimate to error must be radically distinguished from probability or chance of either type, for there is no possibility of forming in any way groups of instances of sufficient homogeneity to make possible a quantitative determination of true probability. Business decisions, for example, deal with situations which are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance. The conception of an objectively measurable probability or chance is simply inapplicable . . .

Knight must be turning over in his grave today. I’d love to see his reaction watching sales executives discuss revenue forecasts, or listening to data wonks crow about the ‘predictive validity’ in their models for B2B decision-making. And I don’t see Knight endorsing any company’s policy for assigning increased purchase probability based on where a deal sits on a hypothetical sales process continuum. Yet, many companies abdicate probability to the “forecasting logic” embedded within their CRM applications, while their senior executives scratch their heads wondering why Sales can’t furnish a more accurate number. “If only our sales reps would populate the information we’re asking them for!” Hmmmm. Which unknown-unknown’s might you be referring to?

I’m not advocating that forecasts have no value, or that companies should discontinue preparing them. Only that we’re squandering opportunities to gain insight about what makes revenue uncertain, and we’re failing to use the insights that we do gain to reduce the volatility in revenue results.

We all want less uncertainty. I get that. But we expect people responsible for revenue generation to be prescient beyond their capacity – heck, beyond anyone’s capacity – and then kicking them in the rear when they are wrong. Happily, there’s a way out of this frustrating cycle. In Part II, Putting Uncertainty to Work at Your Company, I’ll cover how to create a repeatable process for identifying and assessing revenue uncertainties, and in Part III, How to Model Revenue Risk, I’ll show how probability distributions can be applied to specific uncertainties, and how to interpret and use the results.

Revenue Uncertainty Part II: Putting Uncertainty to Work at Your Company

Last year I snapped a photo of a curious bumper sticker, and posted it on Facebook. It read, If you’re prepared for flying irradiated zombies that can swim, then you’re prepared for anything. I figured the car’s owner to be either a risk manager or an insurance agent. Who else would be moved to share this wisdom?

When dealing with uncertainty and risk, we humans follow a pattern. We collect an array of facts about things that matter. We relate these facts to other facts. Then, we assess that mass of information to glean understanding for how future outcomes might unfold. Ultimately, we must untangle this messy conglomeration of fact and feeling to answer a vague question: now what?

“Any decision relating to risk involves two distinct and yet inseparable elements: the objective facts and a subjective view about the desirability of what is to be gained, or lost, by the decision,” wrote Peter Bernstein in his book, Against the Gods. Here’s where things get interesting, because at this point, the pattern begins to fray. The actions that we plan are based on our dynamic, individual mix of optimism, confidence, and loss aversion. A constant mental tug-of-war that has shaped our personalities since we were tiny infants. These emotions combine within us as uniquely as water crystals in snowflakes.

Maybe, just maybe, that irradiated zombie visage pushes a bright-red risk button for someone – especially someone who has learned about drone technology, and recognizes its potential sinister uses. But one person’s sincere concern over possible zombie infestation can be another person’s dismissal of an irrational fear. In business development, I still marvel that people unabashedly proselytize rules pertaining to buyer behaviors.

Compared to human fickleness in risk assessments, software algorithms are coldly indifferent. Give a computer clean data along with a set of logical rules for analyzing it, and you’ll get consistent interpretations. Don’t like the results? Refine the algorithm! Alas, for now, we humans are stuck with pesky biases that interfere with the uniformity we often crave.

This yin-yang of risk seeking and risk aversion between and within individuals creates immense organizational challenges because people – not algorithms – still make most of the high-level, strategic decisions in an enterprise. And executives suffer a love-hate relationship with uncertainty by sometimes confronting it, sometimes sweeping it under the rug, and sometimes, doing both. So here’s the problem: how do you bubble up the most relevant, consequential uncertainties, and put them into a collaborative space for people to consider, analyze, and use for strategic planning and decision making?

Not surprisingly, there’s a process for that! Here’s how to put uncertainty to work for your company:

1. Start with a deterministic statement. In most organizations, they’re easy to find. For example, “In the next five years, we will increase our annual revenue by seven times our current level,” or “our target operating margin for next fiscal year will be 20%.”

2. Identify areas of concern that might inhibit achievement of that goal or target. This requires people – preferably, many people – to raise a hand and say, “well, what about, what about, what about, and what about . . ?” Write those what about’s on the white board, and you’ll develop a picture of specific uncertainties that exist in what was an opaque swirl of unknowns. Some thought starters: “Customer demand,” “parts availability,” “meeting hiring targets,” “economic conditions,” “currency valuations,” “pending regulations” “competitive product introductions.”

3. Prioritize those areas of concern by ranking them from most likely to apply pressure on revenue results, to least likely.

4. For each high-priority area of concern, take a view on a related process, and, over a specific planning time frame, forecast the minimum, most likely, and maximum values that could occur. Example 1: “in the next 12 months, revenue from service agreements will not be less than $10 million. The best result we could achieve will be $30 million, but we’ll probably be somewhere around $22 million.” Example 2: “next year, our worst case for customer churn will be 18,000, our best case will be 7,000, but we should anticipate churning about 14,000.”

Note: the most likely value is not necessarily the average between minimum and maximum – and most often, it isn’t. For example, the most likely revenue produced by a new sales rep will skew toward the minimum value, and the opposite is typical for a more experienced rep.

5. For every minimum value, explain why it’s not possible to achieve a result that is lower, and for every maximum value, explain why it’s not possible to achieve a result that’s higher. For example, there might be a ceiling on units sold because factory production might be unable to exceed a specific capacity, and outsourcing manufacturing isn’t feasible. Or, for planning quota achievement by sales rep, the minimum value could be derived if every territory generates run-rate revenue of $X million.

As daunting as uncertainties might be, they serve a vital function to open conversations, and to enable people to develop an understanding of probabilities for business outcomes. By now, you have recognized that for every target or goal, there are identifiable circumstances that are consequential for achieving them. The variables have many possible values, and they can combine in thousands – or millions – of different ways. If unemployment increases by 6%, AND average sales price is $145.00, AND salesperson productivity remains static, AND the development team delays the new software release by six months . . . will the company meet its financial goal? You get the picture. When forecasting an outcome of interest – revenue, net profit, new customer acquisition, average revenue per transaction – the sheer magnitude of number crunching requires software for simulating the results.

Through analytic tools, insight for very complex uncertainty problems can be revealed. Managers can ask which outcomes are most likely given a particular condition, or set of conditions. How might price increases affect demand? Which projects will likely achieve the biggest increases in revenue? Probability modeling makes the answers accessible.

Next month’s column, How to Model Revenue Risk, adds five steps to the five provided in this article, and using an example, I will illustrate how to solve common problems in revenue uncertainty through Monte Carlo simulation.

Put uncertainty to work for your company. What begins as a whirlwind of uncertainty can be used to gain clarity on how to achieve your most important, mission-critical goals. An infestation of flying irradiated zombies won’t be on everyone’s list of worries, but without first having a conversation about what is, we can never know for sure.

To read the first article in this series, please click here: Revenue Uncertainty – Part I: Known Unknowns, Unknown Unknowns, and Everything in Between.

CFO-Turned-Writer Patrick Kelly Talks Openly about Technology Start-ups, Sales, and His First Novel, Hill Country Greed

What do you get when you combine a tech startup, a management team ravenously fixated on a goal, an IPO, and a mysterious murder? Well, I won’t spoil things by giving up the answer. You’ll have to read Hill Country Greed, the debut novel by CFO-turned-writer Patrick Kelly. I will offer only one hint: the outcome is not what you think.

Kelly has deep experience in the technology and airline industries. He has served as interim CEO of a $750 million airline, director on two public company boards, and CFO five times for public and private companies. He imaginatively weaves his experiences into the novel, which takes place in Austin, Texas during the high-tech boom between 1999 and 2000.

I caught up with Patrick Kelly this week, and asked him about the characters and situations that inspired his novel, and how CFO’s view marketing and sales:

AR: At the beginning of Hill Country Greed, CFO Joe Robbins, and the head of Marketing, Gwen Raleigh, initially have a rocky working relationship. A vignette involves a rancorous staff meeting in which the two argue about whether the company is wasting its marketing investment, and it’s clear that Gwen isn’t accustomed to having her feet held to the fire. What are the biggest sources of conflict between CFO’s and Sales and Marketing?

Patrick Kelly: Joe is from a button-down old-line company where every dollar is scrutinized. Gwen grew up in a start-up environment where speed is valued more highly than solid controls. Eventually, Joe and Gwen settle their differences and establish a solid working relationship. This should always be the case with the CFO and the Sales and Marketing organization. A good CFO realizes that strong sales are essential to growth and that you have to spend money to make money. At the same time, the head of Sales and Marketing must understand that the sales group is accountable for generating an acceptable return for each dollar of spending. By recognizing each other’s contributions, the CFO and head of Sales and Marketing can establish a winning relationship.

AR: How do you make sure project risk—whether IT, business development, or anything else—matches what the company can absorb financially? In other words, how do CFO’s address the problem of business risks spiraling out of control?

Patrick Kelly: Every business has risk, and to create a truly disruptive business with high growth potential it is essential to assume risk. The biggest mistake I see small companies make is to bet too big on unproven concepts. The innovators of a company sometimes fall in love with their own inventions and become blinded to downside risk. They may be tempted to “bet big” on a new product or service before it has been proven in the marketplace. If the initial test fails this can lead to cash flow problems and an early demise for the business. A strong CFO can help the team decide to manage cash conservatively during the market test phase so that when the product IS finally ready, there are sufficient resources to finance growth.

AR: In your book, head of sales Jack O’Shea tells Joe Robbins, “a good CFO knows that all salespeople are coin operated.” But isn’t everyone, to some degree? And, aren’t millenials and younger salespeople motivated by more than just high income?

Patrick Kelly: I suppose everyone is coin operated to some degree, but it is the sales team, with their fine-tuned sensitivity to what the customer needs, that the company depends on to bring in the revenue. The combination of a good product, a well-designed commission plan, and a strong sales force will result in solid growth for the company. I can’t speak for millenials, but I certainly hope younger salespeople are still motivated by the promise of making money.

AR: I don’t want to give away the plot, but I’ll mention that insider fraud is part of the story. How prevalent do you think fraud is at tech companies, what are the warning signs, and what precautions should executives take to avoid fraud?

Patrick Kelly: Fraud occurs at every company, including tech companies, and most of it goes unnoticed. The most important step executives can take to avoid fraud is to set the right “tone at the top.” The CEO and the rest of the senior team will prevent most fraud from ever occurring by clearly communicating that fraud of any kind is unacceptable and by setting a strong example with their own actions. In addition, the CFO, with strong support from the CEO, must design and implement an effective set of controls to make the commission of fraud more difficult.

AR: Many generalizations have been made about what CFOs think—much of it written by people who aren’t CFOs. Is it possible to generalize? Is there such a thing as a “CFO mindset”?

Patrick Kelly: Yes. In my view adopting a “CFO mindset” means looking at the business in terms of the key drivers of success. For example, some software companies make little or no profit from selling the initial product but generate tons of profit from the maintenance and support services that follow the initial sale. The astute executive team will understand those drivers and ensure that the quality of the maintenance and support services is so high that customers never leave.

AR: Are CFO’s really driven by math and “hard numbers” when vetting business development projects? Or, is it really something else?

Patrick Kelly: CFO’s should carefully evaluate the numbers when vetting business development projects. If they don’t, chances are no one will. However, that doesn’t mean there shouldn’t be dreamers in the company. The R&D team must take into account where the market is headed and create new products that are ahead of those trends. That takes vision and dreams. But by the time the dreams have been fine-tuned into development plans there should be market analysis that supports the investment of capital required to make the dreams a reality.

AR: When prospective vendors pitch to CFO’s, what makes a positive impression—and what doesn’t? Are there any top “deal killers” people should know about?

Patrick Kelly: A lot of vendors pitch me with a product or service that sounds like the “idea of the day.” I immediately reject those pitches. I also dislike miracle cures. Never start a pitch with a line that sounds like, “Wouldn’t you like to double your profit in the next three months?” To impress me, a sale representative must understand my problems. Bring me a product or service that solves a real problem in a unique way, or lowers the cost of the business in a meaningful way, and I’ll take the meeting.

AR: Hill Country Greed takes place in Austin. What do you think of the city as a future tech hub or startup incubator? Will it overtake Silicon Valley?

Patrick Kelly: With its rolling hills, evergreens, and lakes, Austin is a great place to set a murder mystery and a great place for a high-tech company to base its operations. Technology companies have been in Austin for decades, even before Michael Dell began his start-up in the mid-eighties. With affordable housing, zero state income tax, and an abundance of recreational activities, Austin is a magnet for young professionals. In terms of size, we may never overtake Silicon Valley, but then again, Silicon Valley will never boast that it is the Live Music Capital of the World.

As author Tim O’Brien wrote, “A lie, sometimes, can be truer than the truth, which is why fiction gets written.” Whether you’re seeking a fabulous mystery, or an excellent “case study” about technology startups, you’ll find something to like in Hill Country Greed. Try out the first five chapters, free!

 

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