What Getting Real in Today's Environment Really Means	<< Back
By Phillip Lay, Managing Partner, The Chasm Group Today most people recognize that the tech industry is experiencing the toughest times in more than a generation, with little signs thus far of when things will lighten up. By now, after more than two years (yes, it's been that long!) since the internet bubble was first punctured in April of 2000, I would have expected most company CEOs and management teams to have got real about the predicament they were in. Unfortunately, in my daily contacts with executive teams and Boards of software companies, I still see that hope-based (or their sibling despair-based) management attitudes still predominate over a more grounded mindset that I will refer to as reality-based management. From where I stand, the lack of a realistic approach, more than any other single 'internal' factor, is serving to delay a return to more viable or even prosperous times for the market as a whole. Even worse, I would argue that adopting a variation on the hunker-down-and-hope approach - as many companies seem to be doing - is likely to lead to failure of the business. To use psychologists' jargon, if untreated, the refusal to face squarely up to the need for tough, perhaps, radical decisions, is almost certain to be pathological - i.e., it will cause the organism's demise. In previous articles I have referred to the importance of contrarian thinking, a quality that is especially vital when times are bad and all about you are losing their heads. What I mean by this is that it is during tough times that companies can separate themselves from the herd by having the courage to row upstream against the prevailing currents of defensive management and conventional thinking. Thus, instead of hiding in a bunker to weather the storm, it is critical that management teams drum up the energy and initiative to address the tough decisions that will give their companies a fair chance to survive the current storm to fight new battles [OK, that's enough with the mixed metaphors!]. Here is my challenge to all those management teams who are reminded on a daily basis of the deflating fact that the companies they have spent five years or so building have an enterprise value equivalent to zero or less. Before I continue, allow me clarify what I believe is meant by 'enterprise value', a metric introduced by securities analysts to compare the real market value of tech companies. As we all know, many such businesses continue to be unprofitable well after their IPOs, despite having cash in the bank from such liquidity events as secondary offerings (the private-company equivalent being those companies flush with cash from recent D, E or F rounds, and still operating unprofitably). 'Enterprise value' is a measure that, among other things, subtracts a company's cash resources from its market cap (or market valuation, for private companies); today, despite having cash in the bank, many notable public software companies have a close-to-zero or negative enterprise value as a result of this calculation. You can debate whether or not cash should be part of the enterprise valuation, but Wall Street prefers to count this conservatively, especially in companies with money-losing operations, on the skeptical basis that if the company is still losing money after all this time, what's to say that the cash won't be frittered away before investors can get their hands on it? Thus, taking into account the various indicators that the market is using to send companies a message (such as, if in the currently depressed stock market your company is being attributed a zero or so enterprise value; or if your product category today does not look so 'investable' or promising as it once did; or even, assuming there is no assured upturn on the horizon for software companies as a class), it is reasonable to ask what company management teams are doing to give their companies a chance to avoid the failure syndrome that is consuming many of their fellows? Unfortunately, my perception is that most teams are still operating out of an excessively tactical frame mindset, thus effectively not giving themselves a real chance to survive today's perfect storm. So, what are the key signs that hope-based attitudes are continuing to predominate over reality-based approaches? Below I have listed five factors, with a specific emphasis on sales-related inhibitors, and have compared approaches that are likely to result in a downward spiral (the first set), versus those in which management is taking the right kind of action to maintain or restore vitality in the business (the second set): Five signs that the Board and e-team may be presiding over a pathological spiral: 1. Business model: Companies conceived and launched on one fundamental business model during the boom (e.g., software licensing, custom-project services, transaction services, or subscription services) that opt to make only gradual adaptations to the existing organization instead of actually redesigning their structure and processes in order to operate the new model effectively (*); 2. Sales pipelines in which a majority of the significant deals forecast not only do not close in a given quarter, but show no forward progress from month to month (in many cases, companies do not distinguish effectively between pipeline, forecast and committed items; the blurring of these classifications can lead directly to last-minute disappointments in quarterly sales and earnings results below the already-lowered guidance and consensus estimates that are typical in today's market); 3. Field sales forces populated - and managed - predominantly by 'hunters' brought up in the boom of the naughty nineties to expect to be handed hot leads and close them in short sell cycles, and who cannot adapt to the challenge in today's market of creating demand using more consultative selling skills; 4. Organizations in which 'sales' is treated as a functional activity, rather than a company-wide activity. These are the same organizations in which executives and directors spend less than 20% of their time in 'proactive' customer contacts (i.e, excluding 'damage control' or 'deal-closing' activities). When sales don't materialize, the finger-pointing starts, but no one is authorized or informed enough to understand or address the cause of the lost sale; 5. Human resource management: Companies that continue to execute successive RIFs, each one being touted as the last, without any significant alteration to company strategy or business design. Morale is gradually eroded, as employees, management and board members lose sight of the cause that originally attracted them to the company, and the best people leave (or go on indefinite sabbaticals). (*) As an example of the gravity of this problem, since the 1996-1999 period - when widespread experimentation into new tech business models was funded by VCs and others in the wake of the Netscape phenomenon - the software-licensing model has re-exerted itself, especially in the enterprise-focused software world. Thus, many former ASPs, B2B exchanges, B2C software companies, and even some professional services companies, have redefined themselves as software companies. Unfortunately, in many cases, certain critical functional disciplines for enterprise software companies of product management, solutions marketing (via industry and/or field marketing groups), consultative selling, post-sales field support, and account management - often neglected during the boom - have still not been either suitably designed into, nor installed in, the reworked organizations. Such gaps are proving themselves in some situations to be life-threatening, as enterprise customers turn away from young companies that do not learn quickly enough how to deal with their stringent requirements in these areas. Five signs that the Board and e-team are giving their companies a chance to survive: 1. Business model: When, for example, reverting from a transaction services model (e.g., an ASP) to a licensing model (e.g., a classic enterprise software model), the executive team performs a complete overhaul of its vision, market strategy, sales process, operational resources, and organizational structure. This implies having the guts to re-allocate people, release others, and hire, outsource or partner for new skills and resources, as necessary - especially at the top. 2. Sales pipeline: All deals that have not made progress in the selling process from one quarter to the next are eliminated from the sales pipeline and forecast, and potential deals are only (re)admitted when closure is actually forecastable within the current quarter, based on clear steps in a documented sales process; 3. Field sales force: Salespeople and managers are required to develop/manage their business using consultative selling and relationship management techniques, as required by enterprise customers; 4. Organization structure: Sales is organized and authorized to manage the selling process on behalf of the company, but they are required to engage the entire organization in the process. When sales don't materialize as forecast, the organization has sufficient information to identify the cause of the problem and take corrective action for the next deal; 5. Human resource management: The company reviews and, if necessary, redesigns its business model and organization, including a plan to install new functional disciplines and eliminate others, as needed. Adopting a bootstrap or customer-funded approach (in light of today's acute scarcity of cash), if the resource review indicates that a RIF is needed, it is implemented in line with the most conservative sales forecast designed to produce an operating breakeven or better. New resources are only brought on board when there is solid business to back it up. Clearly, management cannot be held responsible for the external market factors that are making it so difficult for tech companies to successfully manage their growth and profitability in the current environment; nonetheless, everyone with a measure of common sense recognizes that management must take full advantage of slower-moving markets to reorganize for better times. Philip Lay is a Managing Partner of the Chasm Group, a strategy consulting firm based in San Mateo, California. He focuses on helping high-tech companies (mainly in enterprise software and systems) to optimize their market strategy, drive effective sales execution and organizational alignment. Prior to joining the Chasm Group in 1995, Lay was founder/CEO of a leading PC/network security software company, country manager of an ERP software firm, and salesman for IBM UK.
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