Strategy

Last month I had a very lucrative, but sad day.

I spent nearly four decades in the same private employee-held service sector company, the final eleven years as its CEO. Over my career, I witnessed it achieve world-class status in its focused sector of global water infrastructure. Three years ago, I left the management for an independent consulting practice but, as did other senior retirees with large holdings, retained a stock position in a multi-year sell-down allowing the company continued use of my investment capital.

Since I left the management team, the firm repeatedly told its employees of its exciting future as evidenced by its ever-growing record backlog, strategically enhancing acquisitions and improving internal efficiency. They credited much of the success to the dedication and care of employees who were also the sole owners.

But last fall, the Board quietly self-initiated a structured sales process with about a dozen self-chosen firms and sold this spring to a public company—to the surprise of its shareholders, employees and the industry. When the deal closed I benefited through my residual stock’s escalation, but it was a depressing day for me. Another mid-sized, privately held, services company was gone…this time; it was the firm to which I had dedicated my career.

As a result of the acquisition, many of the latent ambitions of both individuals and the company’s leadership, that was not possible before the sale, may now be achieved with the new configuration. The buyer is an established public company in the infrastructure space with proven leadership and better accessibility to growth capital. All this may be true, but sadly, the merger results in the rapid evaporation of my former company’s enterprise legacy and independence. And that change is irreversible. There is […]

Don’t Cling To History
Today I seem to be doing more strategy consulting and advisory work for engineering and construction firms, after a three-year hiatus to avoid conflict of interest after leaving corporate management. I am usually called in when things aren’t going great—either revenue is flat or declining and overhead is rising. That formula leads to declining profit and sustainability.

Engineering firms are the easiest enterprises to determine what is wrong and the hardest to get to do anything about it. They are stubborn and set in their ways. They are a people business, so business change means getting a mindset change in a diverse and distributed leadership base. At the exposed level of the iceberg, the problem will appear to be poor personnel utilization and low backlog. But that only indicates a more critical, below the surface problem of not having a competitive product and/or the marketing ability to sell it. The firm is just not winning enough work to allow it to hire new people and stay fresh, so they get older. The older the firm, the more energy goes down and expectations decline. The older managers complain that the new generation is not as talented as they are. It can be self-fulfilling prophesy and a resultant downward spiral.

Many of these firms have a long heritage of success that proves to the management that they must have had the ‘right’ model. Awards, plaques and project photos line the walls that beautifully describe the past leadership, the company’s stages of growth and landmark projects. Many older firms also have their age embedded into their business cards and letterheads.

I think all this is fine…if the company is doing well. ‘If it is not broken, don’t fix it.’ […]

At Harvard Business School, I learned several simple broad strategy theories, which have always stuck with me and set my “strategic sails.’” One of these theories was: “the profit margin rapidly increases with identical repetitious products, while the risk of failure dramatically decreases.”

I met with a venture capitalist, who described his acquisition strategy as buying a set of “razor blade” businesses. “Razor blade” strategy specifically refers to the business concept that, if a company like Gillette sells a new Fusion razor with a proprietary design for the blade head, they are actually selling a multi-year annuity of razor blade replacements. These proprietary razor blade heads are mass-produced for several pennies and yet sold for close to $1 per blade, yielding an enormous profit that lasts as long as the person uses the razor. In fact, so much profit is generated in the annuity that it pays to spend enormous amounts on advertising in order to get people to switch to the newest razor. The razor itself can even be thought of as a lost leader.

Of course, this concept is well documented in pharmaceuticals, CDs, water purity cartridges, apparel, automotive parts, software products, iPod and tablet apps, etc. The real profit is not made in the original capital cost of the first item, but rather the repeat sale of a proven solution. Additionally, the greater the volume, the higher the margin goes up. Therefore, the profit can be exponential for repeatables.  Repeatable product companies carry the highest profit margins in all industry sectors.

Many service company firms think very differently. They believe in customization and near “perfect fitted” solutions. They traditionally make profit from the margin in the labor rate and are not motivated to standard products. […]

While I typically focus my articles toward high-ranking profit and loss leaders such as CEOs and line managers, I’d like to take the opportunity to discuss Level 1 leaders for staff departments, including: accounting, human resources, IT support, corporate communications, and legal. Oftentimes, top executives struggle with determining these individuals’ roles and evaluating their contribution, as Level 1 staff members are often seen as costly necessities to the rank and file employees, and have little impact on the company. They can be seen as bureaucrats or policy gatekeepers living off the revenue execution talent of others, and are often known to make business difficult.

Level 1 staff executives are paid sizable salaries and often benefit from large bonuses immune from enterprise performance. They can be seen to have little direct effect on profit, and are not held accountable except by subjective opinion relative to “likeability,” or their relationship with the CEO. Because they lack direct ownership for numerical KPIs, mediocre functional staff chiefs can skate for years without much quantitative accountability. Many are perceived to contribute only as process advisors when a crisis occurs for the line officers and client servers.

In numerous companies, employees have a right in evaluating the functional staff leadership as ‘maintenance personnel,’ in that they do not have the long-term competitive impact to justify their costs. This leadership can have considerable authority, but little quantitative accountability. If their only role is proven to be only functional transactions, the positions would be cheaper being outsourced or even automated.

Despite this, Level 1 functional staff can be the most valuable business leaders in the organization, if they are talented and their position is clearly defined and regulated.

I believe the most successful chief functional leaders […]

You don’t win big without sacrificing your best talent for the interest of the client.
Throughout my career, people have told me, “When your company mobilizes leadership from the top of your organizational hierarchy to win a job, it seems to have an incredible batting average.” Over the years, I’ve given a lot of thought to this comment, considering it’s been conveyed both inside and outside my company. Perhaps the reason I have given it so much thought is because it consistently rings true. Throughout my career, we have watched ourselves and competitors win and lose mega-jobs and have learned from the experiences.

We have found that when a company really wants to focus on winning a large project, it is forced to make difficult leadership decisions. It requires a company culture that believes the client’s largest project is equally as important as the enterprise management. The most common prerequisite of winning a mega-job is re-assigning senior talent (often Level 1 or group/division presidents) to lead a project for up to several years.

Of course, when a company does this, the enterprise leadership is disrupted with the need to replace that executive while they are gone; however, very few firms have the courage and culture to do this. Companies rationalize that the leader is irreplaceable (which, in my opinion, is not true) and that removing them from their position would be too disruptive to the organization. Rarely does an executive volunteer, leaving it up to the company to make the decision. But in my experience, when a company truly wants to win a large project, it will find a way to provide the client with one of their most senior executives for the entire duration of the […]

The secrets to the best solutions are found where the greatest challenges of the world exist.

When our U.S. based company first contemplated global expansion strategy in the early 1990s, there stemmed an appropriate internal challenge from the senior management team as to why. The U.S. market was very large and profitable. At the time, we held a >5% overall market share of our water sector and the market was growing. Globalization seemed, to some, a difficult diversion to a proven domestic approach. The management challenges of differing currencies, cultures, contract styles and languages, in addition to the issue of management time required, seemed like a tall order. There was no indication that a non-U.S. market had any advantages in profitability, but certainly would add disproportionately to corporate overhead. We were inexperienced in transcontinental travel—we knew it and were not kidding ourselves—and we were unsure of the time dedication it would require of a few of us. So why?

The major reason for globalization was rooted in the conviction that the best technologies in the world are found at the location of most severe challenge. These challenges were often not located in the U.S. If we were a technology company, how could we detect and learn the best technologies without an international presence? For instance, the best dredging and pumping technology in the world resided in the Netherlands. The best desalinization technology existed in Arab countries and other places of severe drought. The best dam and reservoir technology was found in emerging countries harnessing large rivers for energy.

At that time, computer science was elementary and email was just evolving. Software compatibility was problematic and equipment costs were very high. There was no satellite or high-speed cable lines […]