Making sense of managing and investing in an R&D environment

Managing in an early stage R&D company is different than managing in an operating company... it takes a thorough understanding of the differences to carry the business through to a successful outcome.Mainly the issue stems from where the working capital (WC) comes. Raising WC is a critical responsibility of the founder and subsequent leaders while still in R&D mode. This can be a drain on the founder and on executive leadership. As a result WC is both a critical measurement and something that is harder to grasp during times of soft capital markets.

It is interesting to acknowledge that in an operating business the measurement tools are mainly based in the Income Statement and Cash Flow Analysis. When planning, in operating mode, most of the target measurements are around dollars... revenue, margin, profit, and a series of ratios like GM, DSO, ROCE and so on. All of the departments are managed to keep the business moving forward, and additional focus can be paid to specific problems, new products and new markets.

On the other hand, in an R&D stage company, the main focus should be on getting the product ready for market; development of the patent portfolio; and so on. But absent a critical tool... cash... none of the R&D company's other goals can be achieved. The realization that absent cash from external working capital funding, even the best operating manager will fail.

The problem with this situation is that most founders do not have access to large supplies of capital, so they are forced to raise funds. At first this may be relatively easy... relatives and friends are the usual source. Then government agencies help along the way. The founders then start needing to leverage accounts payable for more time and the funding spiral ensues. The company burns funds at rates that require management focus. It is critical to have employees that can multitask with little supervision and recognize when they have to report problems. This means that critical employees are very aware of the cash position of the company... in fact, all the employees end up knowing.

The cash burn becomes critical when measured against the working capital... this becomes known as the runway... the number of days or months that the company has before it can't operate anymore. The founder needs to understand that much of her/his time must be focused on forecasting the runway, and lengthening it. S/he also needs to ensure that the employees hired along the way are ones that have demonstrated an ability to withstand the knowledge of the runway and burn rates.

Because the business requires such a focus on working capital, it is incumbent on the investor to also understand that founders may not know their cash needs all that well. When founders start, they are in hand-to-mouth mode... get money, spend it... have money spend it... spend money, go find it! We can call this type of fundraising "incremental".

All this fund-raising activity draws focus from the real target that needs tending... getting the product ready for market. As a result, pleasing the investor becomes more important, just so that more money can be found. This then starts another spiral that is oriented to unfinished products. Always moving forward with the best story, and doing the things that sound best. Incremental funding by investors may result in several undesirable outcomes... poor product and/or company failure.

Experienced operating company managers can be sourced to help out the founder. New management may lead to improvements in identifying needed product revisions and customer development requirements. It is at this transition that  the focus of the founder and the potential investor must change. From incremental funding, to significant investments that will lengthen the runway to the point that the founder and managers can focus on finishing products and customer development. It is also important for the founder and investors to ensure that the experienced operational managers that are hired are well accustomed and/or knowledgeable of the challenges of the R&D business.

In order to rationalize this investment, the investor needs to understand that the measurements of the company can not all be financial, even with the requirement of a larger capital outlay. As in the earlier stages, it  must be dated milestones of product or customer developments that are measured. These milestones should obviously be ones that are designed to increase the value of the company for the investors. Longer term R&D investing is not a leap of faith if appropriate market knowledge is in place.

While all of this is going on, it is critical to have strong financial managers in place to maintain good planning and execution. The financial managers must remain neutral to the issues and can not be anything but solid in financial planning analysis and milestone measurement functions. Good founders will understand these issues and utilize the expertise of all of their employees... rather than encumber them with their own interests. Good investors will try to better understand the basis of success... and what milestones will assure accomplishment of  its long term financial goals.

What if there were Consequences...

Posted to LinkedIn 1.31.12

I started selling medical devices 37 years ago... when the industry was really starting to fire on all cylinders in North America. I have operated sales and service teams of up to 300 people with great success over those years... always striving for excellence in sales and exacting standards of moral and ethical values. That is the way it has always been in the medical device industry, our teams were no different from those of most of the companies. Sales and sales management was rewarding, career path oriented, and the customer development and loyalty that resulted, benefited the companies, greatly.

Lately however I am seeing some very, very disturbing trends in the medical device industry, relative to the way sales people are being treated by sales management and by corporate executives and directors. I am getting calls from excellent sales people who have been terminated with no warning, for no apparent reason. The managers implementing the decision to fire the sales people, and the supporting HR functions seem to be daring the sales person to complain... daring them to challenge the decision.

The sales people seem not to have any alternatives. Accept the severance (which typically seems to be narrowly attached to local regulations), shut up, and move on. Get your resume in order; ensure your references are in line; strategize your network; touch base with LinkedIn, contingency search firms and so on. It is almost like a strategy on the part of many companies to milk good reps, and when it is advantageous to fire them so that they can eke out a slightly better margin by hiring a lower paid sales person... just do it! There are no consequences, why not, Just Do It?

What if there were consequences?

What if we start a registry of companies that seem to be blatantly abusing their sales people. Terminations without cause; Terminations with no progressive process; Terminations that seem intended only to allow a manager to hire a buddy into a position; Terminations intended to cut costs, never mind the fact that the sales person developed the territory, but hasn’t fully benefitted through the compensation program... yet.

What if we start to black ball some of these companies so that it becomes industry knowledge that one shouldn’t bother taking offers from the company, because the end result will be frustration... and worse? I would like to hear from LinkedIn registrants... not yet about experiences, just about the strategy of black balling companies who continue to abuse their sales people. Pass this on to colleagues and have them weigh in, too.

We don’t have a union, grievance committees and so on. It is beginning to look like we have lost our champion sales managers who will protect their own jobs by listening to the accountants, lawyers and presidents who are trying to milk the companies. But we do have tools... networks... to give the companies reason to reconsider... Should we be using these tools? I for one would be willing to start such a network, were it deemed necessary... 

The Heart, Brain and Body of a Business

Arguably, a company is a living organism. I have struggled over the years to imagine just what form that organism should take. This analogy is to the human form... leaving aside the 'soul' for the future.

There have been champions of many management systems that ultimately could not support human life. Let's for the moment put these systems aside. We can leave systems of management for another post.

Now for the company as a human form... taking the heart as the life sustaining organ that it is. I believe that the heart of a company is in fact the customer! The health of the customer, and the way s/he is cared for by the company, dictates the quality of life for the rest of the business. Without the heart and the care taken to optimize it, customers don't place regular orders; they chose alternate service sources; they seek new equipment suppliers.

The heart is the pump of the company... but what does it pump? Many people measure the company's blood pressure and heart rate by looking at the revenue and profits... or the balance sheet with assets, debt and ownership. I really think that cash flow is the critical element (not that the others are unimportant) and therefore, it is like the blood flow of the organism. Measuring cash flow, and the impact on it by the decisions of a company is critical to good health... as in the human, rate and pressures tell a lot about the condition of the company.

I think of the Executive Management of the company as the brain of the company. In the human, the brain has several parts that control the way the body and its organs function. The company is similar, in that it has the left/right tendencies like marketing, finance, sales, accounting, human resources, legal, and engineering... they all have their spot in the skull (corporate offices). The right side is the creative and soft side, while the left seems to stick to the numbers. As the executive components strategically direct the company... the organs (departments) allow the business to operate efficiently.

The legs of the business seem to be the the engineering/manufacturing departments... research, development, and sustaining engineering... along with manufacturing gain strength from hard work. They can support the business as long as they are kept in good condition. As the heart of the company, the customers, allow orders to flow, the manufacturing departments become more efficient.

The arms of the corporate organism are the sales and service organizations... hunters and gatherers, depending on the market dynamic are capable of making all the difference to the company... as they have through their evolution in the human body. While examples of evolutionary development are the apposed thumb for holding things, there are also developments like prosthesis for when damage has been done to an appendage... or organ transplant in other cases. One could speculate as to what a lobotomy would constitute in this analogy.

The organism's senses (sight, hearing, smell, touch and taste) are the marketing teams... market analysis allows the company to develop it's strengths into a cohesive, strong body. It can, with good senses, give direction and support to all aspects of the corporation. The brain that has good senses (and sense) is far more capable of understanding what the heart is needing for not only sustenance, but for vigorous growth.

The spine and nervous systems are made up of the various processes that are implemented to make the parts work together. Process management and the quality components that are built in are like the ISO of the body form. It is critical that the nervous system be capable of sensing all aspects of it's life. If there is damage to the process system it can cause catastrophic impact on any or even all life support.

When one uses the human form as the example, we can see many things that can cause the weakening or death of the corporation. Excesses are often the culprit. A lack of exercise; disease in one department; balance... all need to be carefully monitored by the brain. But it is still the heart that needs to be taken care of... and each organ or part of the body needs to be in good shape to accomplish this main goal.

Conditioning of a company is easier to me, when I equate it to a human body. We seem to think of a company as an inert blob... as a result we don't take care of it. We don't give it caring support. We don't worry about it's health, as long as it is paying our bills. What of the corporation that smokes, is obese, drinks excessively, and is on life support...

Don't Forget the Market in Marketing Products...

Misunderstanding the continuing market potential of mature products can be the cause of excessive or wasted investment in product cycle development. I have noticed companies relying on what has worked in the past, failing to look at forward potential. The causes are many, but I see these as critical faults:

• companies often fail to do the necessary customer education and merchandising work to extend the life cycle of a product or technology.
• business units miss the transition to new technologies that could fit their underlying market advantages... installed base, sales and service expertise, early adopter relationships and so on.
• corporations don't fund regular market, technology, regulatory, patent, and competitive studies in order assure strategic stability of legacy products for their divisions

Frankly, I think that some companies allow their heritage of strong engineering or accounting departments to overcome the need for market intelligence. Marketing function(s) (remembering please, that marketing is not a one dimensional function) are an insurance policy for the board of directors and executive management to utilize to ensure the future is protected. Market studies; bench-marking technologies and performance data; utilizing focus groups to see the future as well as product issues; thorough analysis of competition at conventions by tech and market experts are all examples of keeping an eye on where the market is/is going.

It can be a costly error for corporate leaders to rely on the mechanics of business (accounting and engineering) to drive the future. The automobile and steel companies are not the only examples of this myopia. On the other hand, some automobile and steel companies have also used uncanny market savvy to maximize their potential by looking to green product horizontal development for their recent successes.

My point is, don't forget the market in marketing.

Middle Management... the Hour Glass Affect

Many executives complain about the difficulty in getting their corporate messages through to customers. It is likely that they would find their customers saying the same thing about getting their needs through to the executives of the company. There have been many attempts, techniques, structures and so on... but the communication of needs and solutions remains the beguiling issue of business. This feedback loop can be the source of success... or failure.

I like to think that this conundrum as the key marketing issue in our business cultures... be the company in America, Europe, South America or Asia. It seems to me that the solution lies between the company and the customer... in fact, I prospect the solution is in the ranks of middle management. I suspect that middle management is a big two-way filter... absorbing information coming from the company and the customer, interpreting it, and then passing it on... rarely in its original form.

In this case, middle management is defined as any position in the chain between the customer and the executive. However, the focus is on the manager who directly manages employees that interface with customers. I would like to use an analogy to the human body... the Middle Manager being the heart; communications being the blood; and employees that work with customers are the nerves (eg: service technicians, sales people, direct marketers, product developers) . So, if you want to check the pulse of a company, check the middle managers. Make certain they are communicating efficiently.

When I am working in the field with Middle Managers (as an executive, used to spend a large amount of time observing them interfacing with employees that interface with customers) I try to stay in the background in order to observe the way they listen and coach their employees. Typically, executives want to get involved in the discussions... even lead them. Normally however, we don't have adequate time in the field, and if one wants to know what is happening, an executive needs to spend time observing.

When Middle Managers ask me what their job is, I normally answer in two ways... first their job description functions... direct, control, measure, respond, develop and so on. But then I focus them on the critical aspect of communications. Getting the message to the customer through field operations, and from the customer to the executive through the same operations. Since executives need both sides of the communications in some form, it remains the Middle Manager's most critical function to ensure that the messages in both directions arrive in their purist form.

I tried many analogies over the years to explain this strategy. In the end, I arrived at the mighty HOUR GLASS. Below is a partial example of what I am talking about... I need some graphics help to put all of the necessary headings and notes on the drawing...

Mission, Strategy, Executive

....

Customer, Sales and Service

The hour glass affect has the middle manager in the narrow area. The sand in the hour glass is information... going to and from the corporation and the customers. In many companies, the sand (information) is not flowing, or at best, flows slowly. This lack of flow is a problem in many departments that deal with customers... if it is not systemic, it could be a problem with the manager's performance... either way, it needs to be addressed.

Some companies are organized in a manner that does not encourage strong two-way communications. When this is recognized, it is usually a simple adjustment to structure, training or motivation.

The more serious problem is that many Middle Managers, no matter what part of the company they are in, don't have a primary function as a communicator... that's not what they are paid to do! But if information is what needs to flow, clearly they are in the position to achieve success. They need only open the narrowing of the Hour Glass ... this will let the flow occur more quickly, and unfiltered. They need stand in the narrow part of the glass and (figuratively speaking) put their arms out and consciously push... to widen the window.

There are strategies for Middle Managers to use to get better at this critical function... communications. First, they need to understand all of the functions for which they are responsible. They need to prioritize the functions with agreement of their supervisor. This way, when communication need to be improved, they will know which other functions are lower on the list, and need to be delegated or dropped.

Second, they need to organize their listening tools... the ones at hand for corporate communications... and those for customer communications. Adequate time and concentration needs to be planned for both. Phone, email, snail mail, video-link, and face-to-face are examples of how we consciously communicate. Each Middle Manager will have strengths and situations where one or the other will be best for their situations. There are also educational opportunities to improve these skills.

Next, they also need to ensure that they are hearing what is being messaged. They need a mechanism for storing and then passing on, unbiased, unfiltered, data based information. Listening skills are trainable, as is the ability to organize information for effective communication.

It is critical that the supervisors of middle managers also ensure that they have set appropriate communication goals. They too, need to observe the performance of the subordinates, and evaluate the performance through 'in-the-field' observation of managers working with their subordinates. When the flow of information is stifled, it is critical to manage the situation appropriately... based on targeting, job prioritizing and so on.

By emphasizing effective communications in both directions, it is possible to achieve dramatic improvements in performance of the various departments needing feedback loops to achieve success.

Remembering From Og Mandino

Over the years, I have been coming back to read The Greatest Salesman in the World Og Mandino. I have just started reading the scrolls again... it has been my best habit since I first read them in 1986. In 1991 I actually did the scrolls, as they were recommended by their fictional writer, reading them thrice daily, out loud in the evening; thirty days for each of ten, and lived them as best I could.

1990 and early '91had been my most difficult period up to then, for many reasons. I had left a job I loved because I didn't think I was being treated well. But I made a mistake with my choice of new work... and soon I left it. I had my first health scare... and it gave me a chance, no, an excuse to back away honorably from what I was doing. I got into some consulting that was very unsatisfying... and it was then that I remembered this little book with the weird name... The Greatest Salesman in the World. I bought it again, sat in my apartment near Denver where I was spending my weeks consulting, and started reading. Forty-five minutes later, I made up my mind that I would study the scrolls.

There is a good little story at the beginning that seems a little far fetched, even a little religious. At first it is hard to take the story seriously. But then as the scrolls un-ravel, they begin to make sense. I will go over them here on this blog, and what they meant to me... but in no way can I do justice to the real thing.

The most striking line in the first half of the book comes after the writer describes that "failure is man's inability to reach his goals in life, whatever they may be"... he goes on to say "my actions are ruled by appetite, passion, prejudice, greed, love, fear, environment, habit, and the worst of these tyrants is habit". I started to think about my own life, and began to check off most of these... and by that stage of my life, honestly, I was feeling like a failure.

He went on to say "therefore, if I must be a slave to habit, let me be a slave to good habits".

Now there is an interesting contrast... I had learned from Danny Cox, an accelerationist from Tustin, California that I had heard speak several times, that the only way to overcome a bad habit is to replace it with a good one... Danny was circa 1988 and the book was staged in the BC years... maybe there is something to this, I thought.

So, I started to work on me... especially my bad habits. Looking back, I did get to some of them... but I fear that I have fallen back into a few, and grew some that need to be dealt with... more on that later.

Networking... is there a Networking Queen

I recently attended a presentation by the Networking Queen... at least that's what she calls herself... Donna Messer. The event, that invited her to speak, was a networking function for people who have a couple of commonalities... they are mostly on LinkedIn.com; and they must have come into contact with Wayne Percy at Derhak Ireland Executive Search. Wayne and colleagues from Sharp Electronics, DDB Advertising, Molson, Maritz Research and ACH Foods sponsor a foundation called Jake's House. Together, they sponsor these networking functions... about 50 people paid $10 to attend this on... the $ went to Jake's House.

Anyway, the event came off well, there was a lot of energy among the participants. Although I didn't go to network, I left having met an investment counselor who works with TD Bank, who knew a lot about foundations (a rarity); a PhD candidate from Cleveland's Case Western University... she is working with neurons and considering a career in the biotech industry; an Aussie who has worked practically all over the world and does business restructuring; an executive search consultant who has a strategic purpose in promoting networking and the Jake's House Foundation; and a professional networker, come self-promoter, come teacher/presenter/coach. In short, without trying, I met five people who could help me in some way, and perhaps me... them.

The others at the meeting were having various levels of conversations... clearly they were collecting business cards... that seems to be the badge of success at networking events. But even the Networking Queen clearly communicated on that measure... if you can't add value, through the information you give and receive with the owner of the cards, the card is not a badge of honor... my words.

Actually, the speaker was doing many really cool things to demonstrate that she is very capable of the lingo that is necessary to gain information... open probe, narrow probe, closed probe, if/will statement, move on... she is a likable person, and had I stayed for her whole presentation, I likely would have learned more from her... unfortunately, I walked out!

About 10 minutes into her discussions with the audience, she started on a subject near and dear to my heart... negotiation and sales. Having run sales teams for thirty-five years, in every continent of the globe, I am confident of my knowledge in the areas of negotiation and sales. With absolutely no data, the speaker claimed that Americans were better negotiators than Canadians... no exceptions apparent!

This was such poppycock, and supported by no apparent data, I decided to quickly retrace the first ten minutes of her presentation in my memory bank... again, no data, anywhere. I decided that if she would make such a point of the Canadian/USA negotiation issue, supported with no data, and making a claim that I believe to be patently untrue... the rest was BS as well... so I walked out.

On the way out, I mentioned to Wayne Percy that Americans, Canadians, Europeans, Asians, Indians are all capable of being great negotiators and sales people... if they are trained! It has nothing to do with nationality... it has to do with training, and practice. If the Networking Queen wants to put out data on her techniques, and what results occur with the general population when they are using her techniques, I will gladly come back and listen to her... but for the moment, I believe her positions are Poppy Cock.