Reshaping Your Business for Survival

Posted: 11/2002

Reshaping Your Business for Survival

By Casey Freymuth

WE'VE ALL SEEN THE ARTICLES ON SURVIVING an economic downturn. The first wave appeared in early 2001. Bullish experts told us not to sweat it -- that the sky was not falling, and telecom and tech companies shouldn't forego long-term growth strategies for a short-term hiccup. Most of those people aren't employed anymore; Chicken Little got the last laugh. The second wave, which appeared late last year and early this year, included experts who looked at the piling carcasses and said the downturn is real and it was time to get "back to basics," i.e. cutting everything that doesn't make money and focusing on "core" assets. Turnaround experts piled into telecom (and tech) companies -- only to watch many of them collapse anyway.

There are plenty of survivors at this point to be sure, but many firms -- too many -- are struggling to stay afloat. Eventually, many more firms are going to reach a point where they are forced to decide whether they will stay in the game. Just to be clear as to who needs to be paying attention here, I submit that if you aren't sure about your firm's ability to survive, it probably won't -- at least not in its current form. If you can't make it on current cash flow, you cannot count on rebounds in spending or investment around the corner; they're nowhere in sight.

First Things First

Let me state clearly that this article aims to provide firms that need to take extraordinary steps to ensure survival with strategic options and perspectives outside of (or in addition to) typical turnaround strategies. While some of the principles herein apply to general strategy, it is not about positioning for record growth, achieving maximum franchise value or positioning for exit. It's about survival, period.

If your firm is one of those teetering on the edge, your first step to becoming a survivor is recognizing that a lofty exit can no longer be a chief goal. However, before you curse me and throw this magazine in the fire, it is my belief that the results from this change of focus will serve you better in long-term valuation, anyway. Here's why: Achieving a meaningful exit is impractical right now. My firm produces the chief valuation report on the space and nearly all of our inquiries this year have been from companies looking for data on bidding for the assets of bankrupt firms. Firms with the resources to pursue growth by acquisition are feasting on the sick and dead.

Value that has migrated from an emerging, high-value area has never returned to its original levels. Occasionally, firms may achieve values that appear to compete with historic achievements on the surface, but they will be driven by different metrics beneath. In other words, if news breaks that a firm achieved a multiple of 18 times monthly revenue, there will be extraordinary underlying drivers (e.g. buyer catching the front end of a new distribution channel driving significant growth in cash flows). It will not represent the norm.

The telecom space in particular not only has become a poster child for devaluation, it has become a poster child for fraud. Profitability no longer is optional. If you aren't on track to make money, you're not on track for any kind of desirable exit.

Even when the space was graced by the inflated values associated with migration-driven bubbles, there were anomalies that will not be repeated. For example, when WorldCom was amassing revenue by acquisition, values were driven through the ceiling. Now that the cat's out of the bag, and everyone who tried unsuccessfully to emulate the firm's results has realized WorldCom wasn't achieving its reported results, we'll see a much more cautious approach to rollups in the future.

On the upside, these realities provide telecom executives in troubled firms with flexibility they didn't have in the past. In other words, you can go further than "looking outside the box." You can reshape it, even if it means gouging the hell out of the top line in the process. Better to be in a rubber raft than that can squeeze through a narrow channel to the land of survivors than a luxury liner that can't make the trip.

Finally, there is no "right" shape for everyone, and there is no one-size-fits-all solution.

Accordingly, my goal is to get you thinking about steps you can take. The point is to get your mind down the path of options; where you place your feet is inescapably unique to your own company.

Rethinking Your Assets

Before you can reshape your firm you have to inventory your materials. This is trickier than it sounds. In the business world we are plagued with buzz phrases and terms that have become watered down, like "core competency." Every day we hear or read about a firm's core competency, and almost always it is a description of the business that firm is in. This overlooks the most important aspect of "core competency," at least as it was originally envisioned, in that a core competency should be difficult to replicate or substitute.

Looking at where your team excels, as opposed to what it does, can lead you to an entirely different view of your company. For example, a telecom firm in the Southwest that delivers services to corporations and residences, including Spanish-speaking people, may discover its core competency is marketing to Hispanics. A marketing firm with proficiency selling to Hispanics that has wrapped communications services around that competency is significantly different from a firm that offers telecommunications services and happens to sell them to Hispanics. In this light, an array of marketing possibilities opens up, including those outside of a telecom firm's typical offerings or activities.

Similarly, resource-based valuation looks at competencies but also factors a firm's entire asset base into its arsenal for competitive -- and growth -- advantage. Sticking with our hypothetical Southwestern firm, let's assume, then, it owns a proprietary billing system as part of its asset base. We now have a firm that is proficient in selling to a high-growth niche and is delivering bills, over which the firm has complete control, to thousands of members of this segment each month. This further expands the firm's marketing possibilities -- particularly in company-branded offerings.

This is just one hypothetical example. Others strategic assets could be partner-driven distribution channels that are difficult or time consuming to establish, affinity relationships, or an elite customer base -- the list is enormous. Real world examples of these concepts -- in reverse, meaning outsiders entering telecom -- include insurance firms that have leveraged their distribution channels to carve out telecom (and other) businesses, cable companies have leveraged their networks, billing and support infrastructure to provide telephone and Internet services and pipeline companies (e.g. Williams) that have leveraged their networks and infrastructure to enter the carrier space.

These are particularly relevant examples because they demonstrate the application of assets to create new growth and profit avenues. As it turns out, the glut and economic downturn caught Williams in its encore round, but the endeavor in-and-of itself was so powerful and successful that this pipeline firm came back for seconds.

I am not necessarily advocating that the answer for every firm is diversification -- especially cross-industry. The same principles can be applied to value-added offerings.

However, if your immediate response is that you can't (or shouldn't) leverage your assets for noncore activities, let me challenge you by asking why not -- especially if there are activities that can generate better financial returns and your current situation does not allow for survivability. In our hypothetical example, the Southwestern firm has the infrastructure to sell and bill other products and services under its own brand or telemarket for other firms. Furthermore, it may achieve a higher margin than other firms because of its wholesale or network costs, or be able to charge a more competitive rate than others by passing those differences through.

Potential Problem Areas

Protecting Your Lifelines

Sales and Pipeline Analyses Running analyses of potential causes of unprofitability across areas of focus (target markets) and execution (penetration) as in the chart below can identify unprofitable customer segments, salespersons, distributions partnerships, etc. Note that churn/attrition and bad debt can destroy the profitability in all categories, suggesting that these two analyses alone can provide broad insight into problem areas. This is a generic illustration. Final analyses should be run based on a firm's unique characteristics. In addition, similar analyses can be applied to a wide range of factors (e.g., geographic customer dispersion, network facilities and usage, etc.) depending upon an individual firm's characteristics.

I've had both types of clients -- those with excessive attrition that ultimately do nothing substantive to stop it and those with minimal attrition that ratchet it down even tighter. The simple reality here is that the impact across a firm from even a modest increase in retention can be staggering. Some executives get it and some don't.

If you're focused on survival, you cannot afford to be one who doesn't get it. No matter how you slice it, it's more economical to plug the leaks than to increase the flow into the bucket. Exactly how to go about this is a whole series of articles by itself, but there are several key elements you need to know in order to focus on this area and they are included in the sidebar, "Bare Bones Data You Need to Increase Retention," on page 16.

Retention notwithstanding, you need to have functional pipelines but these also must not be at the expense of profitability. "Sales and Pipeline Analyses" on page 16 identifies common areas and problems that cause bleeding. When survival is at stake, the bottom line has to outweigh the top. One of the most common "if I had it to do over again" sentiments from executives at failed firms is that they would have cut unprofitable revenue streams, products and partnerships sooner than they did. This data, combined with an assessment of your assets and abilities, provides for a detailed range of strategic options. We have extended our Southwest Telecom example one step further to illustrate the meshing of these components to provide management with strategic options (see table at right).

Rethinking your company from the ground up not only opens up new avenues for profitable revenue streams and divestiture, it opens up new avenues for achieving those goals. If you find that certain types of customers are profitable and others aren't and you are unlikely to sell the base, you can try to orchestrate a customer swap with a firm that is better suited to manage them. On the other hand, you could rein in your service area by swapping customers based on geographic distribution in order to achieve tighter clusters/service areas. Another possibility is trading customers for network minutes with a wholesaler. If a customer base can be sold for one-and-a-half times revenue in cash, you might be able double the take in wholesale services from a provider hungry to fill its network.

It's important not to get caught up in game of turning your liabilities into someone else's assets, however. If you've determined that a portion of your business is unprofitable, simply eliminating it is advantageous from a survivability perspective.

Smart Cutting

Some of the activities we've covered -- especially those pertaining to leveraging assets and abilities for new sources of profit -- fall outside of "traditional" turnaround or crisis- management strategies. Nevertheless, this does not mean that traditional measures should be ignored. All of the traditional measures -- including downsizing -- apply when a company is in distress and, in many cases, represent the first line of defense. On the subject of staff cutting, however, I will offer one perspective that runs against the grain.

Firms in today's market have an advantage rarely enjoyed by many firms facing difficulty in days past -- they still have good people. When times are good and a firm gets into trouble, the best and brightest usually jump ship. They either go to other firms or start their own. In the current market, where all companies are struggling and capital for startups is nonexistent, good people are remaining within the organizations. This means that it may useful to resist the urge to prioritize cuts based on salary. The elimination of experienced personnel can lead to knowledge and operational gaps.

Simply put, a senior person can pick up the key pieces of a junior person's duties, but the reciprocal is seldom true. If you were fighting for your life you'd want the best team possible around you; it should be no different for your business.

Smart cutting also means taking into consideration the people who interact with your customers and how cuts are handled overall. Studies prove customers want to do business with companies that take care of their people. Internal morale issues aside, it can directly impact your ability to retain key clients. If cuts are necessary, handle them intelligently and gracefully.

Casey Freymuth is president of Group IV Inc. He can be reached at cfreymuth@groupivinc.com.

Options for Southwest Telecom Had they been real, the executives at the hypothetical Southwest telecom firm used as an example in this article could have identified three courses of action from their inventory of assets and competencies as follows in the table below. This is a simplified analysis for illustrative purposes. As with all the concepts discussed in this article, the principles can be applied to any firm's unique characteristics and circumstances.
A Option A: Intensifying Activities in Profitable Areas	B Option B: Telemarketing for Other Firms	C Option C: Company-Branded Diversification
Description	Using analyses techniques from "Sales and Pipeline Analyses," management reinforces marketing efforts in profitable areas.	Leverages competency in marketing to Hispanic segment to generate new source of profit.	Leverages competency in marketing to Hispanic segment and all key assets of the firm, including service and support infrastructure, billing systems, etc. to provide new products or services to existing and new customers.
Advantages	Rapid deployment. No new equipment, systems, process or personnel required internally.	Relatively rapid deployment. Utilizes some strategic assets, such as telemarketing centers, lists, network, etc. Some level of diversification with limited failure costs.	Represents full leveraging of assets to carve out new revenue streams. Potential for significant insulation from single-market shakeouts.
Disadvantages	Lack of diversification if telecom sector continues to weaken.	Requires some staff training and systems development. Diversion from core business activities. Some failure costs.	Although existing infrastructure is leveraged, companywide training, processes development, etc. is required. Hence there would typically be a delayed impact. Diversion from core business activities. Significant failure costs -- especially for smaller firms.
The Skinny	This would be generally considered a "safe" option, provided modeling showed that such activities, coupled with other measures, could lead to rapid profitability. This would be the most likely to earn the endorsement of traditional consultants and businesspeople.	This represents a "middle of the road" option that might be employed as a first step or "testing the waters" approach at diversification. Because it can be executed relatively quickly, it could provide rapid contribution to the bottom line.	A more classic move for large firms (wherein the diversification represents a small portion of overall company activities). This type of move might be appropriate in a survival-mode setting for entrepreneurial style companies or firms that do not have the ability to expand profitable products, segments or pipelines.

Source: Author

Bare Bones Data You Need To Increase Retention

Successful retention programs typically involve a variety of measurements that help management ratchet down churn rates. However, if operating in fire mode, there are some "bare bones" data that can help management take immediate steps to curb attrition.

This information provides management with the key intelligence necessary to combat attrition at the source. When cross-referenced with the analyses outlined in, "Sales and Pipeline Analyses," it also provides insight into possibilities relative to salvaging segments or channels that are on the bubble relative to churn/attrition-driven breakeven analyses.

Which customers you want to keep. Don't bother with unprofitable segments. If you're fighting for survival, you'll probably need to dump them anyway.

When your customers leave. The point in the service cycle at which they leave is crucial in pinpointing areas of focus. If they're dropping off after the first bill, for example, issues could exist at the sales level with respect to setting customer expectations.

Why your customers chose your firm to start with. This is key to identifying churn-causing problems at the point of sale, such as setting expectations too high.

Why your customers leave. As with the previous element, this can identify discrepancies between expectations and delivery, and it can identify service problems as well as external pressures.

Which competitors they are choosing. Knowing to whom you are losing your customers is essential in fighting to retain them. This tells you which plans and brands to combat.

Why they are choosing those competitors. This is particularly useful in identifying and responding to competitors' promotions and sales tactics.