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| About Paul Kedrosky |
| Dr. Kedrosky is currently the Executive Director of the William J. von Liebig Center in San Diego, California. Using an innovative seed capital program, the Center catalyzes the commercialization of technologies from the internationally-ranked University of California, San Diego. Dr. Kedrosky is also a venture investor with Ventures West, Canada's largest institutional venture capital firm, where he is most active in consumer technologies and software. He is currently on the board of Marqui Corporation, a marketing automation software company. |
Recent Article:
Building the Perfect Board Package
- For more on Paul Kedrosky visit paul.kedrosky.com
Some companies do a great job of putting together package for board meetings -- it's empirical, concise, and focused on measures that matter and that can be influenced -- while other companies leave their boards more confused after the meeting than before.
With the preceding in mind, here is some guidance on the subject from a sales-guru colleague to a company's management on whose board he sits. It's lengthy, but great stuff:
In my opinion, our board package (which in a perfect world is just an output of the current mgmt processes embedded in the company already) has too much information and too little information. Let me explain by highlighting metrics you may already us in the company but might not have in our board discussions.
Key Stuff in no particular order: Forecast --- Two views: One Math, one Sales Mgmt
Mature sw companies do not rely solely on the input from the sales channel, vetted by the CEO. While this is an important input it often does not have context around it, i.e., how has the field done in forecasting over the last year from a forecast accuracy perspective. That matched with the forecast gives this data more credibility.
The next more important step in forecasting is a math-based number generated by the CFO which is a counterbalance to the sales channel. The CFO goes into the pipeline historically and looks at realization rates. He/she can then look at the pipeline at any time and based on the current composition (i.e., where it is in the sales cycle, etc) he/she can run historically accurate realization rates against it to give a math-based outcome.
The first issue most have with this model is that lumpy sales can affect it - I really don't care. Lumpy is not a fact of life in enterprise sw companies - lumpy companies should never go public. Large opptys that are big swing items for the quarter should be pulled out or normalized to ensure we do not need a big deal (i.e., close to our historical high) to make a quarter.
My view, when there is a large swinger, would be to forecast based on historical realization and hope for the upside. Surprises are on the upside not the downside: upside surprises everyone can live with; downside surprises get everyone sued.
Pipeline Size/Composition/Average Sale Cycle Time Etc
We never talk about this metric at XXXXXXX and it is a very important metric at most ent sw companies. Once again lumpy-ness will play but data overtime with context (ie last 4 quarters run rate etc) is valuable.
We get anecdotal stuff from XXXX that suggests things are getting better - facts would be better here. This is step one in pipeline mgmt - more mature mgmt uses this data to give us foreword visibility, i.e., if we know that it takes 6 months on average for a deal at Stage 3 of the pipeline on average to come to conclusion, and we know the average deal size for the type of product and we know our win rate, we can call out whether our current pipeline is big enough to make next quarter or even further downstream. Most sales guys like to say I know I need 3X my number in the pipeline. There is a far better metric to use here: history tells you exactly what you need based on historical realization rates. We have a CRM product deployed at XXXXXXX that has all this data in it.
Average Sales Price
This is a key metric - once again with context and split down to a product view. This would give us fact-based evidence on whether there is pricing pressure in the mkt we need to adjust to.
Sector/Region/Product/IBU breakdown
A common problem in bringing out new products is that rev all gets lumped together and product specific investments and accountability can be lost. Your new development model is a great step in the right direction on this topic but if we have a discreet sales force for a new product we should see actual vs plan at every board meeting. You do a great job with Europe on this today.
Rep Productivity
A key metric especially when we are investing heavily in sales vs mkting dollars, as per the wish of XXX. This may or may not be the right strategy - the only way to truly dissect it and make that decision is whether the productivity of his investment is high enough to justify the spend. My gut tells me we have between 3 and 5 too many reps in New Business for the pull of the mkt. However I do not like to trust my gut on this issue. The model I showed on the blackboard is a very common industry metric on reasonable ROI on sales investments.
To restate my model:
A rep gives you no productivity in the quarter after they are hired; they give you 1/2 productivity in Q2 and Q3; and they are fully productive in Q4. This allows you to lay out quota. To give the business some hedge and some "overlay" expect that you will get 70% productivity of this group. Therefore XXXX should be able to give the board and XXX exactly what is expected out of the investment that he/we made. For example if his ten reps have all been on board for >6 months and the annual quota is 1M Usd, then we should have 2.5M/quarter in quota laid off and we should expect 2.5M X .70 = 1.750M. I think XXX's quotas are higher than this but you can do the math. This takes out all the bs of the process - fact based is the investment paying off. I would do the same thing for Europe for every sales head we have out there - the answer on this one will be ugly, but facts are facts.
I think the company and the board should look at rep performance every quarter both for sales and forecast accuracy. The reason forecast accuracy is a key metric is that it is an important tool in managing rep accountability. XXXXXX for all his good skills, is a crap forecaster and this needs to be in his face constantly.
Win/Loss %
Critical data that can also be used to extrapolate mkt share or even mkt size and will help in assessing whether the funnel is large enough on a go forward basis.
Product Development
There has been debate since the cows come home on how to drive metrics around product development. I have heard them all and they bore the heck out of me. For me two key metrics are important
1. % Development resources working on Maintenance, current product enhancements and new products.
Most ent sw companies spend too much on main and not enough on new. I was very enthused to hear that our product strategy will require limited core development however that does not diminish the requirement for this metric. A world class sw company has approx the same amount of dev resources focused on product categories as the planned rev but product cat.
2. On track or off for next release
Pick a release content, pick a date and measure it. Are we red/yellow or green? I like r/y/g for almost all metrics as it allows the mgmt to quickly get to where the action is.
Marketing Metrics
Another long debate on how to truly measure mkting impact on the business. To me this is an easy answer: leads leads and more leads. If you do the math on the pipeline historical outcomes, you can get a math-based metrics on how many leads need to come into a company from mkting. XXXXXX has data on lead source including cold call. If it historically has taken 100 leads from the net/trade shows etc to generate x revenue and x revenue goes to x+y revenue then you now know how many leads mkting needs to generate. That should be measured and pitched every quarter and bonused for the mkting exec. Visibility is nice - working with the analysts is nice but at the end of the day, XXXXXXX like every other gig in town, only lives for leads and right now there are not enough of them.
Scorecard
Now is the time for the financial metrics in the scorecard but to give an overall perspective the above metrics need to come first to give context.
Beyond the P and L, which is self explanatory, I am most interested in DSO vs target. You have a DSO number in the metrics but what is your target and if you are red how are you remedying this to get in line. World class DSO is now 60 days or less. If our terms are precluding us from getting there I would take a hard look at changing out terms.
Obviously cash flow is number one here with a bullet. We need to see best and worst case analysis.
Lastly, and I think just as important is the business model metrics, is where were are , where our plan takes us and where we want to get to.
I showed metrics on the white board from what I will call a perfect ent sw company, i.e., 3x multiple although today there is much debate that rental far outstrips this type of model
Revenue 55/45
License to Service Gross Mar 75%
Lic 94%
Ser 55%
Op Costs 60%
Sales 29%
Mkting 8%
R&D 9%
G&A 8%
O Margin 15%
S&M Costs as a percent of Rev 68%
How are we today , how does it shift in this years plan, and how does it come to fruition in next years plan. My view is that unless you put the goalposts in place, you never know where the end zone is.
Service centric sw companies can be ebita + if they are run extremely well by metrics (as above) and kill all spend that does not meet at least corp productivity numbers.
I am sure you look at and manage many of these metrics but they are not visible to me as a board member and in my opinion should be discussed at a bi-weekly mgmt meeting with the CEOs direct reports.
A 3 or 4 page key metrics pitch is all I need each quarter along with XXXX's executive overview, the financial detail as backup and the one or two pitches from folks that work for XXXX that see us each quarter. I suggest until we get XXXXX productive, he comes. I would also suggest Europe pitch via videotel next quarter because as I have told the board until you are sick of hearing m, the investment is not paying off today and it is not planned on paying off soon.
I am sure in my haste I have missed some stuff. All feel free to add as you see fit.
Building the Perfect Board Package - To learn more about this author, visit Paul Kedrosky's Website.
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Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
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Linda RichardsonLinda Richardson is the Founder and Executive Chairwoman of Richardson, a global sales training and performance improvement company. As a recognized leader in the industry, she has won the coveted Stevie Award for Lifetime Achievement in Sales Excellence and she was identified by Training Industry, Inc. as one of the “Top 20 Most Influential Training Professionals.” Ms. Richardson is credited with the movement to Consultative Selling and is the author of ten books on selling and sales management, including Sales Coaching — Making the Great Leap from Sales Manager to Sales Coach, and Stop Telling, Start Selling. She teaches sales and management at the Wharton Graduate School of the University of Pennsylvania and the Wharton Executive Development Center. Linda is a frequent speaker at industry and client conferences, has been published extensively in industry and training journals, and has been featured in numerous publications, including The Wall Street Journal, Forbes, Nation’s Business, Selling Power, Success, and The Conference Board Magazine. Learn more about Richardson's sales training and performance improvement solutions at http://www.richardson.com web - Visit Linda Richardson's Website |
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