Obtaining Breakthrough Performance by Not Blindly Projecting Numbers by shridharlolla

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									  Obtaining Breakthrough Performance by Not Blindly
                 Projecting Numbers
              Most Business Improvements Need No more than Good Thinking

                                                  Dr. Shridhar Lolla
                                                 CVMark Consulting
                                                 lolla@cvmark.com

Early Draft , Needs Editing
Mar 2011,
Bangalore, INDIA

(This caselet belongs to ‘respecting the business’ series of CVMark. It is based on real
life experience at EnggCons- an Engineering Solution Company; and several other
companies )

Key words: organizational thinking, simplicity, breakthrough performance, performance Improvement,
Core capabilities, Thinking Capabilities, Order Size, Sales, Order handling, focused execution,
entrepreneur, entrepreneurship, business rules, business fundamentals, built to last, capacity building,
entrepreneurial behavior, first generation entrepreneur, value system, culture, focusing behavior

Definition: Prime Rule (n)= Non negotiable rules

Prime Rule #030:

Most often, Breakthrough Performance does not require huge resource and taking real
risks.

This is a sequel to following caselets:

0. The Saga of Startups
1. When sales Staff quit, Clients switch over
2. Sales is the prime responsibility of entrepreneurs
3. Not Succumbing to Pricing Pressure
4. Entrepreneur Agrees to do Sales
5.Temptation of taking large orders
6.Pitching Business Idea within 3 minutes
7. Startup Carnival
8. Taking Funds NOW or LATER
9. Not Succumbing to the temptation of every opportunity
10. When People Management is not a Prime Responsibility, Business Downfall is
Inevitable




Copyright © 2010, CVMark Consulting, All rights reserved.                                                  1
________________________________________________________________________
It is normal for organizations to project their growth, based on their past performance.
However, this projection is often done blind-foldedly, without realizing the real extent of
performance the organization can influence. The inevitable result, therefore, is that
organizations fall pray to unexpected poor performance, very often.

It makes sense for an organization to know its capability and; therefore, be better at
predicting performance that is in its control. When an organization gets into the habit of
calibrating its capability, it knows the effect of the effort it makes; and thereby, will be in
a good position to not only predict but also achieve its performance.

Thinking is the key capability of the organization, but is often undermined in terms of its
impact on organizational performance. While all other capabilities essentially require
significant resources and risks, by building a capability to think better, an organization
can achieve breakthrough performance without taking real risk and without exhausting its
resources.

This caselet, is a part of Respecting the Business series of CVMark. It shows how an
organization engaged in better thinking can obtain breakthrough performance.


The workshop of EnggCons was buzzing with machining and assembly activities. Over
the master walls in each bay, A0 size CAD drawings were carefully pasted, revealing the
intricate designs of engineering projects and systems. Juxtaposing below them were the
project schedules with yellow color highlights indicating status of the project on the
critical chain. It was a big relief compared to last 4 months when the shop was running
more than half empty.

It was the last month of the financial year and hence, was the time to review things and
take actions on the slippages. Ashogan joined me at Bay-6, when I was trying to
understand the process of reproducing profile of a turbine blade. Soon, we walked into
his office.

He told, “Sir, we are behind by 30% compared to last year’s revenues and by over 60%
compared to the projected revenue for the year.

When I asked about the reasons, Ashogan told that there is a general slow down in the
market.

I walked up to the white board, took the markers and drew the industry trend. Looking
back at him, I said, “The slow down in the Industry was 2 years back and the market has
bounced back since then.”

I then drew performance of EnggCons on the board and said, “Look at the performance
of EnggCons, Actually, the year when the market performed the worst, you grew the
most. But this year, despite market bouncing back, you went down.”

Copyright © 2010, CVMark Consulting, All rights reserved.                                     2
In a new finding realization, he said, “Oh!, so our assumption of market slow down is not
correct.”




Figure 1 There is no co-relation between the dip in industry performance and the dip in EnggCons
Performance

He found himself in a fix, not knowing what exactly hit his performance. Further, his
clients and suppliers both prospered this year. He knew that a lag of one or two quarters
can occur with respect to the domestic industry or market but not a lag of 2 years. The
laps must be a serious one.

I returned to my Chair. When he kept mum, I took him down basics of performance
improvement.

First, I wanted to have management’s role understood and therefore, said, “Managers role
is to ever improve performance of the organization. The degree of improvement is
another issue, but managers must show improvement in performance of the business year
on year. In order to do justice with their role, managers must find, what prevents them
from improving; and they must be in control of such a constraint. This also means that
managers must know what input they should influence so that they get the desired
output.”

I looked into his eyes and said, “Ashogan, performing better when everybody else is
doing so in the industry and falling down when others are not, is not Business As
Usual(BAU). You do not hire a manager just to row a boat down stream; but for his
capability to row the boat (the company) upstream with equal successes.”

Referring to his past performance, I told him, “It looks as if the past good performance of
EnggCons was due to buoyant market conditions and not due to any effort made by the
management.”

Copyright © 2010, CVMark Consulting, All rights reserved.                                          3
I saw his face turning red, but continued, “Since your team does not know exactly what
factors contributed to their high performance during last two years; they actually do not
know how to influence the outcome and hence, situation went out of control this year.”

I clarified, “The role of the managers is to steadily steer the organization to higher levels,
despite the roller coaster behavior of the market. It must make progress, when the market
is good; and then, continue to make progress, even when the market is down (since
competitive edge of all other players would blunt out in adverse conditions, it must
actually make comparatively much more progress).”

Ashogan understood that he needed to make serious attempts to understand the factors
that influence performance of EnggCons and establish a system to leverage these factors,
otherwise his organization is doomed.

It is not that EnggCons managers are not at all in the control of things. Indeed they made
significant improvements in their business model that allowed them to grow at a CAGR
of 40% during last 4 years, without adding additional resources.

Ashogan summarized, “The issue we are facing is that first we do not have a sense of
calibration of output to input. Hence we do not know how much improvement is
expected, when we do some thing. In a way we have never validated our assumptions.”

He controlled his breath and said, “Also, the opportunity to exploit by what ever
innovation we did so far to improve our performance, is probably exhausted; and we now
need to search out new parameters to improve our performance. Further, we are, perhaps,
not aware of changes in market conditions and that have adversely affected our business.”

He asked, “But how do we calibrate our capability, when we look at revenue as an
output?”

So we returned to another basic issue. I told him, “At any moment, the organization must
fairly calibrate its capability, and entrepreneurs intuitively know their capabilities. It
does not need to be very accurate. Let me explain.”


Then I said, “Look into the performance over past years or quarters or months, which
ever is more reliable. Then, look at the revenue made during each bucket of the duration.
It is a normal practice to compare and project the Revenues during different buckets of
duration.”

I took out my felt pen from the chest pocket, drew a graph on the broad sketch book, and
said, “For example, look at the total revenue Graph. It is usual to compare the revenue
year on year basis and say that the revenue grew by some percentages, (e.g. EnggCons
grew by over 40% YOY and by almost 80% last year in terms of its revenues). And then
use such observations to set future targets.”


Copyright © 2010, CVMark Consulting, All rights reserved.                                    4
Figure 2. It is normal to predict performance targets based on historical total revenue growth

He prompted, “But the truth is far away from this as the revenue of this year shows.”

I responded, “Yeah ! Let’s decipher the truth.”

I drew three curves quickly and told, “The truth is that ONLY part (X) of the total
revenue is obtained because of the inherent and base capability of the organization. The
rest (Y) of the revenue is achieved because of the various unexpectedly favorable
situations ( on which the organization does not have any influence). Hence X could be
because the organization took a new strategy decision, started new campaign, deployed a
new tactics etc. And Y could be because the general economy went up, the competitors
closed down shop, customer decided to hoard etc. Now in reality, the component Y could
turn NEGATIVE (unfavorable) instead of being positive, due to new regulations, new
competitor, general economic condition, etc.




Figure 3 When an organization is in control of its capabilities, even adverse market conditions does not
prevent it from growing




Copyright © 2010, CVMark Consulting, All rights reserved.                                                  5
The trend X is based on your capability and it rightly depicts your performance. If you
recognize and identify your capability and it is very well in your control, then, the
outcome i.e. revenue X, is predictably on growth with stability. The line Y, that is based
on external factors, would fluctuate widely, some time up and sometime down. Hence,
the total outcome or revenue can be fairly under your control, if and only if the
proportion and rate of growth of controllable revenue (X) is far more than that of
uncontrollable revenues (Y).

But, if you are not in control of X and not able to influence the outcome there, and you
are in a domain where Y fluctuates significantly compared to X, then the fortune of the
company fluctuates violently. And it runs into the risk of extremely poor performance, as
it happened in the case of EnggCons.




Figure 4 When an organization is not in control of its capabilities, its fortune fluctuates with external
conditions and its future is threatened.



In summary, first, it does not make sense for managers to make projections based on total
revenue without calibrating their capability to revenues. It is the prime responsibility of
entrepreneurs to focus on what is under their control and influence the outcome by a level
such that effect of the uncontrollable factors does not threaten but only reinforce the
growth. And it is the job of managers to continuously increase share of revenue from
controllable part of the business.

Then I asked him, “Do you know, under a reasonably steady market condition, how much
minimum revenue you can make? Or for that matter, under worst possible conditions?”

He thought but replied confidently, “Yes, Of course.”

I said, “Then you know what is your current capability. Now try to increase this
controllable part of your revenue and keep a fair protective capacity to take advantage of
outside opportunities. But your projections should always be based on your predictable
capabilities.”{There is an advanced approach that deals with situations that are negative and yet the organization is
able to leverage those situations positively; we are currently not talking about such a capability in this article.}

Copyright © 2010, CVMark Consulting, All rights reserved.                                                              6
Understanding the Problem

It was now time to get into problem solving mode.

I asked Ashogan, “You said that we made less revenues this year, so were there less
enquiries?”

His partner Srini, who joined us in the discussion said, “Enquiries were good, much
better than the previous year. We received more than double number of enquiries
compared to the year before.”

I knew this would be the effect of high visibility of the company Ads across digital
media. The advertisement campaign launched last year had worked.

(And they had delivered all orders in time in the current year, thanks to the productivity
improvement and the spare capacity they revealed during past 3 years. I also checked the
delivery dates quoted in the enquiries and they were reasonable.)

Which meant that the conversion of prospects into clients went down dramatically. So,
we see a problem, where the lead generation went up by about 100%, but the conversion
ratio dropped by over 50%. I asked him to look into the list of enquiries and fish out why
conversion rate was lower.

As Ashogan spelt out a list of reasons: pricing, delay in client’s management decision,
priority changes, new clients, emergence of competitors etc; the Pareto Chart revealed
that price and delay in client’s management decisions, were the key reasons for low
conversion ratio. But this did not clarify why this year was exceptionally poor, since there
was no major change in pricing policy and the clients businesses were not doing badly.

When he further looked deeper, we found that EnggCons also had clients, who accepted
proposals with high pricing. Ashogan also told that most of the people do not tell the
reason, why they are delaying or not converting.

This gave us a feeling that the quality of additional enquiry generated this year may be
poor, especially since the revenue from repeat customer business actually did not reduce.
At one moment during discussion, Ashogan doubted about the seriousness of the clients
and said much of the enquiries were, perhaps, non-serious.


Reasoning Out Issues

If the Ad campaign has attracted several enquiries and the clients are not serious,
EnggCons needs to find a way to sense seriousness of a client’s enquiry and filter out
such enquiry without spending much time there. Hence, the leads need to be better
qualified. This is an important aspect, since the proposal making takes significant time of
Ashogan himself.

Copyright © 2010, CVMark Consulting, All rights reserved.                                    7
We ran through the enquiries by organization and the reason they wanted the solution for,
and we inferred that a majority of enquiries were, indeed, serious enquiries.

Ashogan did not raise the doubt on ‘seriousness’ of the prospects for the first time. This
issue was discussed several times earlier too. In order to ensure that serious clients are
only followed up, EnggCons had introduced rigorous input adequacy process that
demands clients to share confidential information. And since most of the clients shared
confidential information that they would not so easily part with, it automatically ensured
seriousness of the clients.

It could also be that there is some undesirable aspect in the proposal submitted by
EnggCons. This thought process gave a feeling that when the enquiries went up by
almost 100%, if there was any adverse effect on the quality of proposal. We quickly
checked a number of proposals and found them well drafted and adequate. That ruled out
the quality aspect of proposal too.

That we looked into the symptomatic problems, it was important to understand how the
company works and then link the symptoms to actionable causes.


The working of the Business

EnggCons is in the business of providing customized solution to engineering companies,
and hence, its work varies from customer to customer and each proposal is different.
Scoping of the work is a key exercise, where EnggCons uses an input adequacy template
(requirement specification) to capture client’s needs. However, as in any solution
business, the scope has a wide range that depends on how detailed one wants it to be.
Typically, for EnggCons clients, the scope can vary as much as 1:10, and the pricing of
their proposal vary from Rs 200k to Rs 3000k. EnggCons normally quotes on the top
60-75% of the customization scope.

So, while last year, its Ad campaign pulled in a lot of customers, not much of them
reverted because for their first experience for this type of need i.e innovative engineering
solution. They, probably, felt that the price was high.

However, Ashogan also told me, “Some of the clients actually had all negotiations done
and secured discounts. But they have kept their decision pending.”

So in net, what Ashogan said is that even when price is reduced clients did not place
orders.




Copyright © 2010, CVMark Consulting, All rights reserved.                                      8
Nailing Down the Culprit

When we looked into the size of enquiries, we realized that average size of these
enquiries was bigger than that in the last few years. And then most likely, the time taken
for management decision is longer, which Ashogan had already suspected.

I then explained Ashogan, “The average size of enquiry is increasing (and also you are
not rejecting small size enquiry), which is from last years average of Rs 800k to this
years enquiry size of Rs 1900k. Larger the order size, higher is the authority needed to
take decision in hierarchical organization of the clients and; more involved and longer is
the negotiation. “

I continued, “Normally client purchases can be categorized as discretionary, operational
and capital purchases. When the order size was small a couple of years back, and since
EnggCons solution is innovation based, it was very easy for the CXOs to use their
discretion to take decision and move the order faster. The offerings of EnggCons are
anyway not of operational nature. Now since the size of the order has increased, much of
EnggCons offerings neither fall into Discretionary purchases not operational purchases,
but into capital purchases of its clients. Hence now most of the proposals that EnggCons
submits has to go through CAPEX approval process even if it has been initiated by the
CXOs.

Then I said, “It now explains the delay in decision making. Hence we have a situation
where the order size has increased but the client segment (now based on ‘decision
making’) has also switched. The impact of the delay in ‘decision making’ is more than
that of the increase in number of enquiries. Further, longer is the time for decision
making, the probability of acceptance is poorer.”

So, how does Ashogan tackle the situation of growing order size on one hand and delay
in decision making on the other hand.


Problem Definition

The clue that we got from understanding the working of EnggCons is that its recent
proposals have become CAPEX based purchases for its clients. This also has to be seen
along with another underlying fact of EnggCons, which is that for a given enquiry, the
scope is too wide and it must do something with this boundary condition. A connection
must be established between these two aspects, i.e. CAPEX purchases and too wide scope
of proposal.

The problem therefore is how to shorten clients decision making cycle.

Now Ashogan needs a solution that can hasten the decision making process of the clients
even if it is a CAPEX purchase for them. There has to be one simple solution that will
contribute significantly to the conversion ratio.


Copyright © 2010, CVMark Consulting, All rights reserved.                                    9
Direction to Solution

Since CAPEX expenses are pre allocated in the clients budget, the Budget of the client is
known a priori. This is one fulcrum that brings stability to the selling and purchasing
process. If at the input adequacy stage, EnggCons knows budget of the client, it is very
easy for them to narrow down to the exact scope for each enquiry, however wide be the
feasible band of the scope. By making a proposal that fits to the budget of the client,
chances are that there will be less negotiation and less delay in decision making. And
when there is a price that comes closer to budget and less delay occurs in decision
making, faster the the proposal gets converted into a purchase order.




Figure 5. The Underlying Factors for the Poor Lead Conversion Ration



There is one more outcome. When the budget will be asked at the input adequacy level, it
will be possible for the company to weed out non serious enquiries, that otherwise would
take significant time of Ashogan and his team in preparing proposals. Thus both
productivity and yield of lead conversion improve simultaneously.


Implementing Solution

So, Ashogan agreed to make a small and simple change in the way he attends enquiry. He
wrote down a new policy for his organization: No enquiry to be processed unless the
client tells his Budget.

This was a pretty raw and tough policy. He knew that some of the large clients have
flexibility in budget and he was contemplating a way to identify and deal with them. Of
course, he knew that one rule does not fit all. But he knew that in most of the cases the
above rule will work out and he must make effort to align his enquiries to this rule.




Copyright © 2010, CVMark Consulting, All rights reserved.                                   10
He realized that the rule, though, seemed simple, it was not easy to implement; and he
needed to guard against any undesirable effect on the clients.

Guess what happened, once Ashogan implemented the new tactics ?

In less than 3 months, his conversion ratio more than doubled.

The problem was clearly identified and the solution was Simple. The solution was simple
but not very easy, since Ashogan had to find a way to identify the Budget of clients
without sounding too ‘transaction’ oriented. He mis-stepped and enraged a couple of
prospects, when he insisted on knowing the budget in order to make better proposal to
them. But soon he learnt the ‘art’ of seeking this additional but critical information. And
then, preparing a more targeted proposal became a Business As Usual practice at
EnggCons.

For Ashogan, it was a great validation of the power of identifying core problem in
obtaining breakthrough performance, without taking real risk and without exhausting
resources.




Copyright © 2010, CVMark Consulting, All rights reserved.                                11
Disclaimer:
CVMark Consulting is an independent business-innovation research agency based in Bangalore, INDIA.
It handholds entrepreneurs and promoters in road testing their business ideas and in delivering
breakthrough performance.

CVMark Consulting intends to serve business community through advisory, consulting and coaching
engagements. As a part of its engagements, it regularly brings out insights, perspectives, research reports,
newsletters, issue-oriented reports and other products.

This caselet captures description and direction of solution to generic problem faced by business owners. It
is intended to share experience of CVMark with a wider business community. This document in part or full
can be reproduced subject to a reference to CVMark Consulting and to this document.

Factual material contained herein is obtained from sources believed to be reliable, but the publisher is not
responsible for any errors or omissions contained herein. Opinions are those of CVMark and are based on
research conducted for this report. CVMark holds no responsibility for decisions made on the basis of
content of this report.



CVMark Consulting
Bangalore, INDIA



Clet:11-24




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