VAR vs. Retail Distribution in Software and Technology Markets

There is much talk in the software and technology industry about distribution through the "Channel". Generically that means selling through some type of a third party company, rather than selling directly to the end customer. But in reality the "Channel" includes a wide variety of disparate types of third party resellers. Today we'll take a look at when to consider partnering with two of the main channel reseller types, VARs and Retailer--which also happen to be two of the most different.


What's the difference between a VAR and a Retailer?

Let's start with the retailer, as that's a bit more obvious. With respect to software and hardware products, we're talking about computer, specialty electronics and mass market stores, independents as well as regional and national chains. Retail is both a B2C channel and a B2B channel, especially when talking about serving the small and medium size business (SBM) market. While retailers may offer some "value-added" services such as extended warranties, delivery, installation, etc., the main purpose of a retail store is quite simple. The retailer serves primarily as a point-of-sale location, holding inventory and enabling end customers to have immediate access to products at favorable prices.

VARs (Value-Added-Resellers) are in many respects the polar opposite to retailers. The VAR channel is strictly B2B, and sells to both large enterprises and the SMB market. Usually there isn't a retail storefront--if there is, it's not a big part of the business. Expensive retail space is avoided to minimize their real estate costs, because walk-in traffic isn't part of the business model. Unlike retailers, VARs are focused on selling their services, such as installation, configuration, integration, customization, etc, rather than turning over large quantities of products. VARs aren't interested in having a large "assortment" of products like retailers. This is a key point that channel newbie are prone to miss--at great cost to their company. While VARs do sell products, they are motivated to do so in only two instances:

1) Core products which are strategic because the VAR's services are built around them
2) Easy to sell, demand-driven commodity products requested by their customer base

If you take just one thing away from this article, let it be this: VARs aren’t dying to sell most products. If your product doesn't fit into one of the two categories above, you will be pushing on a rope trying to make progress in the VAR channel.

Is one of these channel types "better" than another?

One is not superior to the other. Each reseller type is better for different product types and circumstances. They both can be used quite profitably, but they serve different purposes. It's important when designing a channel strategy to start with the end customer and work backwards. Where would the end customer like to buy? How important is price vs. services and support? What reseller type best meets the desires and needs of your target customer type(s)?

When you should use the VAR channel

While VARs aren't product-oriented businesses, in aggregate they are still a very important channel for many product types. If you have a product which requires a high level of support, or "value-added" services such as expert installation, integration with other products, customization or 24/7 support, VARs can play a key role in your distribution strategy. If you have a popular commodity product, they can be useful (in aggregate) to greatly expand your distribution points. The VAR channel is highly segmented by vertical market, so if your product has a vertical orientation (networking, medical, insurance, etc.) this often creates an opportunity for VARs to be an important channel partner.

When you should use the Retail channel

Retailers are usually best for horizontal, commodity or mature products. They are effective at providing broad, immediate access to your products across a wide geographic area. Retailers typically are "inventory turn" oriented in their business models, and tend to work on thin margins. So if keeping your price point low is important while still using a third party channel, they are an excellent choice. Of course the fact that they provide instant access to your products during business hours can be a very important asset.

Can you use both VARs and Retailers for the same product?

Yes, but you must know what you are doing, or you may end up very sorry that you did. Since VARs and retailers bring very different things to your distribution, there is a strong chance of serious channel conflict if you use both reseller types for the same product. The biggest potential issue is degradation of your product street price, because while VARs typically work off high product margins and low turnover, retailers are the opposite. Retailers optimize their businesses for high inventory turnover, while accepting low product margins. The low margin strategy causes the street price of your product to fall for all channels distributing your product. If the street prices drop too low, the margins may drop too far to be interesting to VARs (even though they are focused primarily on their service offerings). Companies new to multi-channel distribution sometime make this problem even more acute by offering price discounts based on volume, which makes the situation even worse. A volume-based pricing strategy favors the higher volume retail channel, and also incentivizes even deeper street price drops, to create higher volumes and resulting better wholesale prices. Multi-channel pricing is a complex area fraught with danger for the uninitiated--new players should solicit outside advice, and tread carefully.

VARs and retailers can be important, high volume distribution channels for many software and tech companies. They can each be primary distribution channels, or combined with direct a sales approach and other channels to form highly efficient multi-channel distribution networks. More distribution is not always better, however. Companies need to know what they are doing when proceeding with a multi-channel strategy, or risk doing great damage to their sales and marketing efforts.

That's how I view using VARs and retail in your distribution strategy. How do you see it? Post a comment to get a discussion going. Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter.

Startup Mistakes by Software and Tech Companies

Starting a company, any kind of company is the hardest thing to do in business. Sez me.

It's also one of the most rewarding and fun, if you're built for the startup experience--though not everyone is. Technology startups have their own unique challenges. There are many different ways to drive off the road, some of which I list below. Keep in mind that no startup is perfect, and mistakes will be made. The future can not be forecast, and in a software or tech startup you're often flying nearly blind without a map, because you are trying to do something new and different.

In the end, if you are able to make it through, overcoming your mistakes may be the most satisfying part of the whole startup experience. So keep in mind that it's almost impossible to play a perfect game. On the other hand, it's crucial to steer clear of the mistakes which are often avoidable--because you only get some many chances to recover from errors.

Here are some of the common, often avoidable missteps to be aware of:

Too little capital
Sometimes this is unavoidable--but if you really don't have enough capital maybe you shouldn't start up in the first place. Activities such as software product development are notorious for going way past schedule and over budget. Most products don't move like a knife through butter with the first modest promotional campaign. So build a decent amount of backup money into your plan, because things rarely go as planned. If they do, great, you can use the money to accelerate growth. But when things don't go well, you'll at least give yourself a fighting chance, if you've set aside a bit of money for a rainy day.

Don't try to be a "Big Company" right off the bat
Many startup management teams are jealous of the resources available to their established competitors. These folks can become "Big Company Wannabes", a classic formula for going out of business early. Don't spend your precious time and resources on activities that don't efficiently bring the product out, or market it. Period. Lavish trade show booths, company parties, expensive or large offices, administrative assistants for all the execs, etc., etc. Don't hire a lot of big company people who don't have early stage experience--they are prone to the types of costly waste listed above.

No backup plan
It is a startup and you have to expect little margin for error in reaching success. But that's no excuse for a lack of strategic planning--within the constraints of your resources. A backup plan might be something simple: software companies going to open source if your high-priced commercial strategy meets resistance, a service-oriented revenue strategy with a cheap or free product, using a channel rather than building a full sales force, licensing your technology instead of marketing a full product to end users. It depends on your circumstances, but do try to have some type of a contingency plan going in.

The "Techies know everything" syndrome
This is a common malady in tech startups, because many new software and tech companies are led by management heavy in experience from the engineering or software development side of the business. Usually these folks are very smart, but in some cases also a bit full of themselves, unable to know their own blind spots. Those blind spots often appear in marketing and sales (which every engineer and software developer knows are easy, non-complex activities). The really smart guys quickly figure out those other parts of the business besides the tech stuff is hard as well, and make adjustments through education and bringing in outside expertise.

The "Technology is everything" syndrome
This is a corollary to the bullet point above. The technology and product is crucial in a tech startup, since it is usually the basis for your competitive advantage. But it's not everything, and many a startup has failed despite great technology and an exciting new product.

No marketing budget or in-house expertise
Believe it or not, I see a lot of companies with little or no promotional budget. Its insanity, but they only have enough money to get the product built, apparently thinking "if you build it they will come". This is nearly always a failure mode. If there is someone with marketing expertise among the founders, they usually won't allow this to happen. So secure a marketer on your founding management team, or at least find a close advisor you will listen to, early on.

Under-estimating time to market
This is a very common mistake. By definition, you are trying to do something new, which isn't forecast-able. So don't believe your own pretty Gantt charts--garbage-in equals garbage-out when it comes to schedules. Don't count on making it to the big trade show, commit to costly promotional activities with no recourse, or let the developers all plan to leave for that well-deserved month in Hawaii. Get the product done first. I tell you this with many painful experiences as a teacher, both personally in software and tech companies and through my clients.

Under-estimating time-to-success
Even if you are able to get the product out on time, that doesn't mean version one will hit the ground running. They often crawl, stumble and fall at first. After all, this is your first opportunity at really accurate market research. Even if the product is right on target, finding the marketing mix that works is generally trial and error. Many products don't find success until their second version is released, so have some money in the bank, and some emotional bandwidth available for this possibility.

Introducing a "buggy" product
This is one of my biggest pet peeves, especially for software products. Most products aren't fully stable when the developers think it is ready. They work on it so long and hard, that human nature wants it to be finished near the end--and dangerous shortcuts can be the result. Dedicate as many resources as you can spell to ensure a credible, third party view that the product is as stable as it can be, before the market gets the opportunity to "debug it" for you. You only get one chance to make a first impression. If the situation is bad enough, it can cost you your business.



There are my thoughts on what critical mistakes to avoid in a technology startup. I'm sure many of you have your own lessons and ideas to share. Post a comment to start the discussion! Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter.

Compensating the High Tech Sales Force

A very controversial topic within many software and other tech companies is how to best compensate the sales force. How much is required? How much is too much? What's the best mix of salary and incentive comp?

If you've read anything I've written before, you'll find my next comment familiar:

It all depends on your particular situation.

There is no across-the-board best practice for optimizing your sales force's performance via compensation strategy. Every company, market and competitive landscape is different at any given point in time.

Let's take a look at some of the more common variables and how they might affect your compensation strategy:


Established brand vs. startup
If you're a startup, plan on paying your sales reps more. It will be harder to attract great reps as a startup, unless you are in a special situation with an incredibly hot new product (of course, every startup CEO thinks this way about their product!). You may need to pay reps a higher base, and certainly richer commissions than your established competitors. Some of this can be mitigated if you are offering an equity opportunity, as discussed later. But for sure, prospective reps need to believe that there is a good chance they can make more money at your startup, or you won't be able to compete with established companies for the same level of folks. That's just a fact of life.

Price Point
If your price points are higher, you may need to pay a higher base salary, if the total number of sales made will be low. Lower price points lend themselves to higher commissions and lower bases, because the rep will be able to start making money sooner, and more regularly.

Length of sales cycle
The sales cycle aspect is pretty straightforward, and tied closely to the price point discussion above. Price points and sales cycles almost always have a direct relationship. High price points lead to longer sales cycles, and low price points to shorter cycles. It's harder to compensate heavily on commission if there is a long sales cycle, because sales reps need to eat regularly, too. If you have a product that takes a long time to sell, make sure that you have a decent base salary for your reps, if you want to keep the good ones.

Growth vs. harvest
Companies generally highly value reps that can sell new products and into new accounts--they want to pay for growth. So the more you are asking your reps to do what is considered to be the hardest thing in sales -- sell "new"-- the higher the commission structure should be. Selling "new" is the highest form of risk in sales, and it should be compensated by the highest reward. Selling established products and selling into established accounts (harvesting) is not as risky, and as a result can often carry lower commission structures.

Initial sale vs. ongoing revenue
Similar to the growth vs. harvest discussion, sometime you are selling a product that has upfront revenue as well as ongoing revenue, typically from updates, replacements or services. You generally want to pay higher commissions for the upfront portion than you do the ongoing revenue. A good example of this is a traditional software license with an annual maintenance fee. If you pay commissions on the maintenance portion at all, in most circumstances the payout should be lower than the incentive on the upfront license fee.

Commodity vs. missionary sales
Commodity sales lend themselves to high commissions and low (sometimes even zero) base salaries. This is because sales cycles are usually short for commodities, and since they are by definition in big markets it's easier to make a base level of sales and resulting commissions, even for a new rep. By the very nature of commodities the rep's service is often a major differentiating success factor, so a comp mix toward commissions rewards the exceptional rep to really work hard. Missionary sales, on the other hand, require a great deal of patience by the rep, as well as a lot of hand-holding and relationship building. To keep good sales reps in such a situation, it's important to have base salaries which are adequate to enable the best sales reps to exhibit patience with the long sales process. Missionary sales are an area that really demands both high bases and strong commission structures, as they are one of the most demanding forms of selling.

Hunters vs. Farmers
Hunters obtain new accounts while Farmers maintain and maximize the sales into existing accounts. These two situations require two different sales personalities, and the compensation packages should be different as well. The hard-charging hunter will require a decent base salary, but really needs the high commission structure to keep him motivated. The Farmer is likely to be a more stability-oriented, relationship-building style of rep. A relatively higher base and lower commission structure is usually more comfortable for reps in situation.

Equity
In most cases, the playing field is slanted toward established companies when it comes to compensating and attracting sales reps. Equity participation can be the great equalizer for startups in compensation. Every company has a different view of how broadly to offer equity. But a startup that offers equity participation to its sales force can often give up less in cash compensation. For risk-taking reps, equity can even be the deciding factor in recruiting, in some cases. The lure of equity that might grow into a significant stake at a successful startup can help pull a rep from a more established job.


So what specifically should you be paying your reps? Laying out actual numbers is beyond the scope of this discussion, because there are too many factors and potential situations to generalize. All the factors above come into play in structuring a sales compensation package, as well as factors such as inside vs. outside sales. Every situation is different, and competitive factors also come into play, if you're competing directly with your rivals for reps. Local market circumstances, as well as the overall economy, can also play a strong role in setting the final package.

Above all, if you want to optimize the performance of your sales force using compensation as a tool, you must do your homework. Don't just quickly come up with something that "sounds good" or is "how you've done if before". Analyze the situation of your unique company at this particular point in time, and at certainly consider at a minimum the factors mentioned above.

That's my thinking on how to compensate your sales force--what's yours? Post a comment below or shoot me an email if there is a particular situation you'd like to discuss.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter.

White Papers in the High Tech and Software Marketing Mix

There are many marketing methods in Software and IT marketing that can be appropriate in some, but not all situations. I'd put White Papers in that category. The term "white paper" is a broadly used term, and can mean different things to different people. I define a white paper as a document written to provide insight or expertise specific to a market, process or product category.

PRODUCT & MARKET APPLICABILITY

White Papers are used far more often in B2B marketing than in B2C marketing. I have seen them used in a B2C environment, but only infrequently. A White Paper is most often useful when there is complex technology or work processes involved. In a B2C environment, they would usually only be used in an "early adopter" market where a product concept is new, and prices and sales cycles are still long.

MARKETING RATIONALE FOR WHITE PAPERS

Why use a White Paper at all? The best reason is to build credibility for your company or product. White papers are most frequently accessed by prospects early in the sales cycle, when a prospect is just beginning research on a product category. These documents allow company personnel to show off domain or technology expertise, which should reflect well on the product you eventually want to sell the prospect. The white paper shows off your company as thought leader in your category. It also allows you to subtly and gently position your company and product in the prospects mind, very early in the sales process. It is often helpful to designate one (or a few) people in the company as the author of the white paper and as an expert in the field.

THE "RIGHT WAY" TO DO WHITE PAPERS

So what are the key factors to creating a successful white paper? Here's a few:

* Written by a domain or technical expert
* Succinct-no fluff or overt marketing, to the point
* Aimed directly at your target prospects
* Provides valuable information to your target
* Mostly solution-agnostic, any product or company promotion must be subtle

WHAT NOT TO DO IN A WHITE PAPER

And what are the things to avoid a wasted effort? Keep these points in mind:

* Can't be a product brochure -no relentless promotion
* Don't make it the length of a book
* Never stretch the truth
* If it's too general, so that no one will invest time to read it

BEST USES FOR WHITE PAPER

What can you do with your white paper, once you've put in the time, money and effort to create one? There are many good uses--here's a few to consider:

* It will contribute positively to Search Engine Optimization on your website
* An excellent item to use in a PPC campaign offer
* A great email marketing campaign offer
*An important intermediate step in the sales process; often useful just after a website visit, but prior to a webinar or product trial
* Versatile as "lead bait"; regardless of the medium or campaign, you should require contact info from the prospect prior to a white paper download
*Assists in moving a prospect along without "high touch" interactions--helping automate the sales process and shorten the sales cycle

SUMMARY

White papers can be very valuable tools in a number of market segments. These documents should be used to differentiate your company as a progressive thought-leader in your market category. The optimal goal for a successful white paper is to position your company as a preferred vendor or serious alternative for prospects in your market segment. This is accomplished by demonstrating expertise and providing credible, valuable and unbiased information which is valued by the target prospect. It is NOT accomplished by "tooting your own horn", playing fast and loose with facts, or duplicating your company brochure. If you want to be a successful white paper marketer, it's important to restrain yourself from tactics in the latter category. That's what I think about making white papers an important part of your marketing mix. Please post a comment and add your experience and thoughts on this topic.

Phil Morettini
PJM Consulting
www.pjmconsult.com

The Future of Venture Capital Funding in High Tech

Like almost every aspect of the current economy, Venture Capital Fundings of High Tech and Software startups are way down.

There is pressure on virtually every segment of our economy, and the worldwide financial system is in by far the greatest disarray of our lifetime. The preferred exit strategy for Venture Capitalists, the IPO, pretty much shut down quite a while back. Financial returns at Venture funds have taken a hit like everything else financial, and VCs are definitely not in good position to attract new capital in the near term--given the current frantic flight to quality by investors. Things look dire in the VC business. There are even suggestions by many people, including some prominent VCs, that the long running and revered Venture Capital business model is "broken", and that it will cease to exist as we now know it.

So what really is going to happen? Is the end of the world near? (well…maybe, based on the news headlines every day). Will a software or technology entrepreneur be able to fund their company via the VC route in the future? Let's take a look at some of the things I expect to see happen.

SHORT TERM AND LONG TERM IMPLICATIONS
First of all, I don't believe the end of the world is near. Nor do I think that the Venture Capital business is going away. There is a fair bit of pain left to go in this very down economic cycle, and the VC business will be no exception. So in the short term, new VC funds will have a difficult time raising money, startup capital will remain very tight, valuations will be lower and the whole experience of raising money will be even more painful than normal (and it's always painful). Many VC-backed startups which haven't gotten sufficient traction have been told if they don't have 12-18 months of cash in the bank, additional funds won't be forthcoming. But make no mistake, there are software and tech companies closing funding rounds every day. VCs still have not deployed a very large amount funds they raised in better times--that money needs to be put to work. There is still money out there in the short term for deserving business plans. And in the long run, the economy will rebound and things will go back to "normal". I do believe that the Venture Capital business needs to make some adjustments, however--so it will probably be a "new normal".

HOME RUNS VS. SOLID SINGLES AND DOUBLES
One of the staples of the VC business model has been finding "home runs", meaning those companies that can grow large enough for an IPO. These are few and far between. VCs have always said they would gladly invest in 5 to 10 failures to find that one big hit. The IPO market has essentially gone away for the time being, which puts a lot of pressure on the basic premise of how to make money as a VC. I've always thought the "big hit" model was lunacy, and akin to throwing darts at a board--it's so hard trying to pick out who the huge winners are going to be a startup stage. There's a lot of luck involved in a company getting to an IPO, and even more luck involved in picking them out at birth. This strategy seemed to work fine when the markets were consistently heading up and to the right, and quite a few companies could do an IPO and get a billion dollar market cap. But I've always thought the very basis of investing and company building is in finding those companies that can give you a return on your money, skillfully balancing risk and reward. Considering those companies that have truly developed a strategic advantage and a sound business plan, some of them may get very big, others not so much--depending upon the specifics of their target market and business. But VCs for years have been basing investment decisions almost solely upon huge markets and the potential for the big hit. I think it was lazy investing, and that part of the VC business model may need some adjustment.

VC COMPENSATION MODELS
As VC fund size and limited partner returns increased during this golden era of VC funds, so too did the compensation to the General Partners of the fund. When funds and returns were outsized, limited partners swallowed hard or looked the other way. It's analgous to a mutual fund with a hefty management fee--when the returns are great, it's no problem. But in times like today, the small fees associated with an index fund look pretty good compared to that underperform mutual fund with active, expensive management. VC fund Annual Management Fees which have typically been in the 2-3% range will likely be reduced, or maybe even go away entirely. The 20% carry standard will probably hold, and may even go up and bit if there is heavy pressure to reduce the management fees. LPs won't mind the carry if they are realizing good returns. What does this mean for the software/tech entrepreneur? It may not mean much, on the surface. But I do think it will require VCs to do more homework on their potential investments, which possibly gives an edge to those entrepreneurs will less dramatic, smaller business plans, but better risk profiles.

THE OXYMORON OF "LATE STAGE VENTURE CAPITAL"
I've always thought that the idea of "late stage" venture capital was kind of a joke. However, the Venture Capital business has been moving this direction for quite a while. Part of the reason is that VC funds have gotten so big that it's hard to deploy all of the money with "real" startup investing. And also it's a less risky way to get to that big IPO payoff. But really, these late stage funds have gotten pretty similar to Private Equity firms, except their time horizon may be shorter. So maybe these investors should really just be re-classified--in many ways they don't look anything like their early stage brethren. At this stage, there are usually many other potential sources of capital. I believe that this late stage segment of the venture capital business is one that is due to shrink the most in the near term.


CAPITAL-EFFICIENT BUSINESSES VS. KISSING FROGS TO FIND THE "BIG ONE"
I think that the Venture business will trend back to true startup investing, and will reduce it's reliance on the long home run as its basic method of making money. This is where they really add value to the "business-creation value chain". What I expect to see is a renewed search for businesses which are "capital efficient". What I mean by this are companies that will turn an invested dollar into a high multiple of that investment, in terms of revenue, profits and valuation. You might say this has always been true. But the key difference, I believe, is that that venture funds will be smaller, and as a result will feel less pressure to fund high risk, high ceiling businesses where a lot of capital needs to be deployed. As I stated earlier, VCs with large funds have previously felt that the economics of their business demanded this approach. With smaller funds, I believe that capital efficient businesses in smaller markets will no longer be ignored. Solid singles and doubles may come back in vogue (for those of you that understand baseball analogies!).


IS MONEY REALLY "SMART'? OPERATIONAL EXPERTISE VS. FINANCIAL GUYS
I've always felt that the idea of "smart money" has always been a fallacy, or least one that was greatly overblown in the Venture Capital business. I know that there are A LOT of people that will disagree with me on this point. A lot of startup advisors will tell you that it's imperative to raise money from investors who will provide much more than cash. I think it's a bunch of malarkey. No doubt that there are some experienced, skilled and very well-connected VCs that can provide a strategic advantage to entrepreneurs, who are fortunate enough to attract them as investors. But with money being a commodity, this is mostly about a VC firm trying to differentiate and provide a value-add. Fundamentally, the need for capital and the need for advice and other business assistance aren't tied at the hip. Both are often needed, but they don't need to come from the same place--they are important, but separate ingredients to the successful startup recipe. If you can get both in one package, that's great. But too many VCs present themselves as experts in areas where they've really just been investors. This is especially true for those many VCs that come from a financial background, rather than from a high tech startup management background. Frankly, entrepreneurs need to be careful of utilizing faulty advice, regardless of whether it comes from someone who has put money in their company or not. Having money in a pocket should not be confused with operational knowledge or expertise. I'm not sure whether it will happen or not, but I'd like to see the Venture Capital business present a more realistic view of the value that they are adding--it's not the same in all cases.


SUMMARY: WILL VC FUNDING GO AWAY?
The short answer is "definitely not". I do think that the bubble excesses have highlighted some weaknesses in the Venture Capital model. There will be adjustments to it--just like there will be adjustments in many other businesses, as a result of our economic duress. I've offered some ideas to get everyone thinking--please feel free to disagree, or otherwise add to the discussion. I'd welcome everyone to post a comment, if you have an additional take on this always interesting topic.


Phil Morettini
PJM Consulting
www.pjmconsult.com

Inside TeleSales versus Outside Sales in Software and High Tech Companies

There are many ways to deliver your software and technology products to the market. For example, one and two step distribution through third party channels, direct marketing/sales over the Internet, OEM relationships and many variations of these, as well as other methods.

One classic method of delivering products to the marketplace is by using a direct sales force. Within the direct sales methodology, two of the most popular variations are an outside sales force and an inside telesales group.

Inside sales forces utilizing telesales are cheaper per rep, so your cost of sales is reduced, and you can potentially afford more reps. Outside sales forces can provide additional credibility and stronger relationship with the account. How do you choose between the two methods? Does it sometimes make sense to use both? Let's take a look at some of the key aspects to consider when making this decision:

PRODUCT COMPLEXITY AND LENGTH OF SALES CYCLE
Probably the most important consideration in this discussion is the complexity of your product offerings, and the corresponding typical length of your sales cycle. Simple products with shorter sales cycles obviously lend themselves to the less expensive telesales approach. If you have a complex product that requires more in the way of hands-on demos, application engineering and other high-touch sales support, an outside sales force may be warranted.

BRAND STRENGTH AND STAGE OF COMPANY LIFECYCLE
Another important factor is the position of your company in the marketplace. Take an example of two companies selling the same product, to the same market. The newer company with less market presence and a weaker brand may require an outside sales force to maximize its market penetration. The more established brand and company might be able to get by with a lower cost inside telesales approach in similar circumstances.

PRODUCT PRICING
Product price is another important element in this discussion. All things being equal, higher priced products are more likely to require outside sales, while more modestly priced ones may be able to be sold effectively with only an inside sales force. Low price products, unless sold in high volumes, may just not profitably support the use of an outside sales organization.

TARGET CUSTOMER PROFILE
Is the target company large or small, is the prospect themselves young or old, progressive or traditional? It's important to understand your customer profile and buying style in deciding how best it will be to sell to them. This is of course often decided on a case-by-case basis for individual customers. But in making this decision on how to structure your direct sales force, it's important to characterize your target market in aggregate. For example, if the bulk of your target market is older, traditional companies and you are trying to sell to their IT departments, you'd better strongly consider building an outside sales force. Many of these customers come from the old "Glass House" era that was dominated by IBM, and are used to having sales people physically call on them. On the other hand, your prime prospects may be in a newer, SMB market segment that has prospects who are more comfortable with remote communications methods. These folks also have less staff, and less corresponding time to meet with outside reps. These targets may be well-served by a competent inside sales force.

HYBRID SALES STRUCTURE
In some cases a mix of inside telesales and outside reps works best. Here are two examples of when this might be optimal: 1) Outside reps for Major Accounts, Inside reps for the rest of the territory and 2) a product with a low sales price that lends itself to an inside sales force, but the product is something that major accounts can use in great quantities, justifying an outside sales force to call specifically on these accounts.

COMPANY CAPITALIZATION
How much money does the company have? Sometimes, there just isn't enough capital to initially invest in an outside sales force, even if the situation ideally calls for it. In these cases, it makes sense to start with an inside sales force, and do the best you can. There are many ways to compensate in this situation, even if it's not ideal. We'll cover the details of this scenario in another article. Suffice it to say that it's preferable to get by with a sales structure that may not be optimal, rather than bankrupt the company with an outside sales force that it can't yet afford. I've seen this occur more than once in my practice at PJM Consulting.


SUMMARY
Like any other key structural decision that senior management faces in developing a software or technology company, it's important to carefully consider the details of your particular circumstances. Many times managers will quickly settle on replicating what they know, and are comfortable with from their past experience, or simply attempt to copy what the market leader does. Both of these approaches leave you vulnerable to a potential critical strategic mistake. Be thoughtful upfront in your approach to how to structure your direct sales force, and you are likely to be rewarded with optimal push in your chosen market segment.

Phil Morettini
PJM Consulting
www.pjmconsult.com

What Happens to Apple after Steve Jobs?

I've written several times on Steve Jobs and Apple, one of the most fascinating companies and executives that we've seen in the history of high technology.

I don't mean to make this a morbid article; the current speculation on Steve Job's health has been well-documented. I hope that Mr. Jobs is fine, and that he has many more years of good health, with a continued long reign at Apple.

But it does raise a slightly different question that is interesting to ponder. There has always be a "cult of personality" surrounding Apple and Steve Jobs. In fact, when Jobs recently announced that his recent weight loss was do to a minor hormone imbalance rather than a reoccurrence of cancer, the stock was up 4% that day. Mr. Jobs is joined at the hip with Apple in the investment community and public's eyes. Jobs will leave Apple at some point, hopefully to go into a happy retirement, as I stated above. Regardless of the circumstances of his leaving, what will become of the company once he is gone?

I can think of no tech company more closely associated with a founder/CEO than Apple and Jobs. Gates and Microsoft certainly are in that league, and I'm sure that you can think of others. But I doubt if you can think of any combination that is clearly more high profile and closely-linked.

Jobs has obviously been a major driver of Apple's current success, and has enriched its many shareholders and other stakeholders. While it may be blasphemy to the Apple faithful, especially in recent times, in my opinion he has also been responsible for some of the company's periodic downturns. Whether viewed strictly as the company's savoir, or also an unstable dictator that has wrought big swings in the company's performance over a long period of time--it's undeniable that an unusual amount of responsibility has laid in Job's hands--especially for a company of Apple's enormous size. He is known to be detailed-oriented and involved (from a positive perspective), and a micro-manager and poor delegator assuming a more negative viewpoint. The basic premise of this article is that once he leaves Apple, there will be a leadership vacuum. This isn't necessarily a prescription for catastrophe--but it is rarely a good thing for a company, at least in the short term. So what are the broader lessons we can glean from this fascinating situation with respect to managing high tech businesses? Apple really isn't a rare case--tech companies cultures are built around their founder/CEO quite often, as I see often in my practice at PJM Consulting. This is a case study that can be instructive for many managers. Let's take a look at a few potential lessons:

Difficult or Odd Corporate Culture
There is obviously much to be admired about Apple's corporate culture, since it is a very successful company. Yet by many it is considered to be somewhat dysfunctional from a management standpoint. Much of this can be attributed to having a leader with a very strong and quirky style. Cultures tend to develop haphazardly as companies grow, even if its leaders have given some thought to the issue. In a corporation, everyone has a boss and other constraints put on them by the company's social structure. This tends to dampen the effects of dysfunctional behavior by people up and down the organizational chart. The exception to this is the Founder/CEO who is the head of the organization. Much like the old story about the "Emperor who has no Clothes", no one in an official capacity will call out the person at the top of the org chart on their bad behavior, decisions and eccentricities. This is dangerous and can lead to a culture and company policies becoming embedded with inappropriate ideas for no good reason, sometimes based on what lower level people BELIEVE the CEO would want. The takeaway is that leaders (especially strong ones) must take care not to have TOO GREAT an influence on the culture of the company simply because of their personal style.

Corporate Succession
Strong leader such as Jobs often tend to run companies in a dictatorial manner. They also have a tendency to have a "self-centric" view of the world, and don't give sufficient thought to planning for the company's future after their tenure. This may work well while they are in charge, but can lead to a company in disarray when they leave. It's not clear that there is a clear successor, or strong group of potential successors, in place to follow Jobs at Apple. For a company of the size and stature of Apple, most people would think that this isn't a good idea. Founding CEOs and Senior Executives with a similar organizational impact need to force themselves to step back from the present, and plan for a future without themselves. This isn't a comfortable thing for many people, but is critically important for the full potential of their legacy to be fulfilled.

Dangerous Concentration of Responsibility in a Single Person
In a startup, the founders often wear many hats, and make all of the important decisions themselves. No doubt that Jobs and Wozniak personally handled nearly everything when Apple was formed. This is a very proper operating model for a startup. As a company grows, at some point it becomes a VERY INAPPROPRIATE model, and can put the company in great jeopardy. What if that leader has a heart attack or is in some other way unable to fulfill their critical role? Chaos can occur, and the company's decision-making can be paralyzed, especially in the short term. In addition, I believe that the old saying of "two heads are better than one" usually holds true. I'm not one to endorse decisions-by-committee, but many corporate situations are complex and inherently risky, and the decision-making in these circumstances can benefit by having several strong viewpoints. CEOs should ensure that important decisions include at least some level of peer discussion and review, to avoid blind spots and major mistakes.

Micro-Management
Strong leaders, especially those who are able to create a company from the ground up like Steve Jobs, are often "type A" personalities and micro-managers. This may be highly efficient when a company is in startup mode. Later on, however, it can lead to a lack of development of people down in the organization, as well as paralyze the organization's ability to make quick decisions. The most effective leaders are those who are able to "let go" much of the decision-making as the company grows, while keeping their fingers on the pulse of what's truly important. This is a very fine line to walk, no doubt, but it imo being able to successfully pull this off is one of the more important attributes of the very best corporate leaders.

Bench Strength - Can Worthy Managers Survive Under A Strong Leader?
Along the same lines as the Succession discussion above, attracting and retaining talented managers lower in the organization is usually critical to a company's current success. If the leadership of the company tends to be dictatorial, micro-managers who hold on to most of the responsibility, lower-level managers may become demoralized. The management team needs to be developed, and feel like they have real responsibility and some control of their own destiny. When the guy at the top is holding on to all the power, strong leaders further down in the organization have a tendency to move on to other companies, where they feel like they are making an impact and have an opportunity to progress. The best leaders ensure that the conditions are in place attract, nurture, develop and retain the management talent required for a company's continued growth and success.


SUMMARY
Apple is a great tech company, and Steve Jobs is one of our industry's legendary entrepreneurs and managers. Yet every company, even highly successful ones like Apple, has holes in its game. There are many strong leaders much like Jobs at the head of software and tech companies. Too often their strength is manifested with a very short term view of the organization. Although difficult to do, the strongest leaders operate with a view on not just optimizing the immediate issues facing them, but also plan ahead so that the company can function well even without their personal involvement. Often this means suppressing some of their own natural tendencies so that the overall organization can more fully develop. The resulting decentralization of power reduces a number of risks that are inherent when too much depends on a single individual. That's my own view--post a comment if you have additional views to add to this discussion.

Phil Morettini
PJM Consulting
www.pjmconsult.com

Structuring a High Tech Sales Force

There are many ways to organize a sales force. In my opinion, there is no one "right" way. There is only the BEST way for unique circumstances of your current company.

Like most aspects of developing a software or technology company, there are guidelines, but no exact roadmap to building a successful sales force. In my practice at PJM Consulting, I often suggest that a management exercise like structuring a sales force should begin with a series of questions:

What stage of development is your company in?
This important, because an early stage company may not have the resources to fully fund the outside sales force that may be ideal for its situation. Or the company may want to sell primarily via an inside sales force, but hasn't had enough early success or nailed down the sales process sufficiently, to sell effectively through this less "high touch" method. Stage of development can be as important as what the ideal "steady state" organization would look like--don't over shoot your development stage in designing your sales organization.

What are you asking your sales force to do?
Are you using your sales force primarily as closers, supported by strong marketing, etc -- or will your sales force be doing a lot of cold calling, handling the customer "cradle to grave"? In general the more you are asking your sales force to do, the more "high touch" the structure needs to be.

What markets are you targeting?
In some markets (such as many enterprise IT market segments) an outside rep knocking on the customer's door is absolutely expected, and essential. In other markets (like many SMB markets), this type of attention would be considered a nuisance, not a service. It's important to understand what the target customers want and are expecting in a sales interface.

What are your product price points?
The implications of this question are usually well understood. High priced products can support a more expensive outside sales force, and may require one to make the sale. Lower priced products can't usually be sold profitably this way, and an inbound or outbound telesales operation is often the optimal structure.

Is your product more of a commodity sale, or is there a longer, more complex sales cycle?
Commodities lend themselves to lower cost inside sales, as well as a higher mix of channels. The more complex your sales cycle, the more likely your company will need a captive, outside direct sales force.


This is just a sample of key questions to ask yourself as you design your sales function. There are many more relevant questions that should be asked, depending upon the specific situation. I won't attempt to cover them all, or this article will become a book. Once you've done a good job of asking and answering the relevant questions, it's time to actually start designing your organization. Below are some of the personnel types and organizational structure that a software or tech company would typically consider as part of its sales organization:

SALES REP TYPES

Outside Reps
This is the classic sales rep style that has been around since the beginning of time. In the "old days" even consumer products were often sold this way (those of a certain age can remember the "door to door" Fuller Brush Salesmen). But this is the most expensive form of sales person, and depending upon the market, products and other factors, is not always the most efficient or even effective. There are still a lot of companies that sell almost exclusively through outside direct sales forces. But in companies where they direct outside sales reps do exist, they are often used more sparingly, in combination with other types of reps and channels.

Inside Reps
This is a favorite form of rep for commodity products, companies that sell heavily through third party channels, and inexpensive, higher volume products. Inside reps can also be used effectively in a "teamed" approach with outside reps, helping to optimize a territory. They may source or qualify leads for the outside reps, handle smaller accounts in the territory or generally act as a "junior sales rep" to the more senior outside reps.

Hybrid Reps
This rep type is own invention (the term is at least). This rep is part outside rep, part inside rep. A rep of this type would be appropriate for those "tweener" products and markets, which don't fit neatly into a pure inside or outside model. For example, software products with an average sales price of $5-10,000--too low cost to be sold strictly through an outside sales force, but maybe too complex or expensive for a pure phone sale. Hybrid reps spend most of their time in the office on the phone, but also travel modestly, approximately one trip/month. Example trips might be to staff trade shows, visit channel partners and call on major accounts. This type of rep may be very appropriate for early stage companies that can't yet afford to build out full inside and outside sales organizations.

Sales Managers
This is pretty self-explanatory, but not every tech company can afford a classical, full-time sales manager. Often you will see individual reps reporting to a manager of another function in startups, and occasionally you will see the concept of a "producing manager", who has line sales responsibilities in addition to management. This personnel type is very important to setting the tone for your sales organization, and is applicable to managing all rep types within any organizational structure.

Sales Administrator
A specialist that you tend to see in larger sales organizations, or at least those that have a lot of complexity (a lot of return activity, inventory management, repairs, rep splits, etc.)

SALE ORGANIZATION TYPES

All of the organizational types listed below can be commonly found as the dominant sales organizational type in many companies, as well as in combination with each other in larger, more complex companies:

Region-specific organizations
This is probably the most common organizational structure, which may include any of the sales reps types, who are assigned to specific territories. In many cases I favor this arrangement, as it tends to be the most unambiguous to measure and manage. The downside is that certain regions can prove to be much more naturally fertile than others, which can make the management process more difficult to do fairly. You also may lose the advantages that certain reps may have in terms of contacts or vertical market knowledge which lies outside of their geographic region.

Channel-Specific organizations
This is the second most common sale organizational type, which of course tends to be found in companies which make strong use of third-party sales channels. There may be a direct sales force, a VAR or retail sales force, an OEM sales force, and so on. Sometime there is an "intermixing of these organizations, for example, an "overlay" VAR channel rep as part of a direct sales force.

Industry-specific organizations
Likely the least common of organization types, but one which is very appropriate in certain circumstances. For example, a tech company which has very different value propositions in a number of vertical industries, where "insider status" in important to selling into a particular vertical market, or the product offerings are arranged by vertical market.


SUMMARY
There are many possible sales organization types and styles for software and tech companies. Many different ways of organizing can work--and the people you have are always more important than organizational structure to your ultimate success. But by carefully considering your company's specific situation, and matching your organizational structure to your market, products and available resources, your company will have the best chance of achieving sales optimal results.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Structuring Channel Discounts for Software and Technology Companies

Selling through sales and distribution channels of various types is very important to many software and tech companies. Yet channel programs, and specifically discount structures, are often thrown together quickly and haphazardly, without looking at any real hard data. Let's examine some of the key items it's advisable to consider, when structuring a channel discount program:

Market Norms
The absolute first place to start when considering channel discounts is to survey the SPECIFIC market that you are entering. By this I mean look at similar products through the EXACT profile of channel partners you are considering selling through. For example for consumer software, retail margins of 15-18% are common, whereas for a specific VAR segments the discount norms may be in the 25-40% range. If your discounts fall too far below the market norm, your program will likely fail. If discounts are set much higher than the market norm (without good reason), your company will be leaving considerable profits on the table. It is very important to do upfront research on actual conditions in your segment--don't just "assume"! Preferably, you want to find out what your direct competitors are offering in terms of a channel program. This may seem obvious. But in my consulting practice at PJM Consulting, instead of using objective data, I see significant numbers of companies use their own theories about what the right discount structure SHOULD be from their perspective. This often ends up being the main reason for a painful "restart" of their channel program at a later date.

Product and Pricing Strategy (Street Price)
Channel discount structures cannot be constructed in a vacuum. They are but one component of your overall product and distribution strategy. As such, they must be consistent with the overall goals you establish for the product. If you are seeking to penetrate a new market or a new channel, it may be wise to be more aggressive than the market norms to gain market share and shelf space. If your market is more mature and you are in a harvest mode on a particular product line, it may be wise to minimize channel discounts to maximize profitability. In any event, consider channel discounts early in the product planning phase as part of your overall product pricing strategy.

Type of Channel
There are many different types of partners for software and tech companies that fall into the category of "channel resellers". Computer retail, mass market retail, Value-Added resellers (VARs), Systems Integrators (SI), Domestic Distributors, International Distributors, Manufacturers Reps--and many more. Each of these reseller types are quite different from the others, and each add different types and levels of value to your distribution systems. Yet every one that you distribute through will be competing with the others (as well as your direct sales model), at least indirectly.


Multi-Channel Pricing Equity
It's important if you are selling through more than one channel (including direct sales) to attempt to equalize, as much as possible, the street prices charged by the various channel types. The best way to do this is to consider the costs incurred by the various types of resellers in delivering your products to the target customer. For example, a VAR that provides support, pre-sales consulting and other services may need a higher level of discount to achieve an adequate profit margin than a retailer that simply is providing shelf space might. In reality, the retailer is likely to have a lower street price, but it is important to try to minimize this gap. Otherwise the VAR who may be providing important services to a segment of your customers may be driven out of the market, and refuse to sell your product--which is not in your company's interests. The most common practice which causes inequities in channel pricing is a volume-driven discount model. New entrants to the channel often use this approach--why wouldn't you want to incentivize volume sales by giving the biggest discounts to the largest volume sellers? Although this may work fine if you have a monolithic reseller channel, where all the players have the same business model and offer the same value add, it otherwise will quickly cause the problems discussed here. The resellers possessing the lowest cost structure and providing the lowest value-add will quickly dominate the market, driving the high-cost/high value-add resellers away. This may be ok with you; just make sure you explicitly consider this possibility before embarking on a volume-driven channel discount strategy.

Value Added
One of the things that I recommend considering explicitly up front is: what is the key value-add that you are seeking from the channel? Is it pre-sales consulting, installation services, post-sale support, shelf space and inventory for immediate customer access, or one of many other factors? Make sure you understand what channel value-add is most important to you, and build protections into your discount structure for the reseller type who best provides this value.

Components of Discounts
It's not always necessary (or wise) to offer a single, monolithic discount level for resellers. How you structure your discounts components should be closely tied to your product and pricing strategy--what you are trying to accomplish with your overall channel strategy. For example, if you are trying to manage your street price at a certain level, it can be dangerous to offer a large discount to certain types of resellers who may pass that discount on as a lower street price. Yet this segment of resellers (for example, retailers) may be an important, high volume channel for your product type. In this case, it may be wise to offer additional, conditional discount for activities that you value. Again as an example, to keep your street price up but incentivize a high level of activities through retail, you could offer a high level of added discount for approved co-op marketing activities. A segmented discount structure driven by costs and value-add, rather than volume, is often the most effective structure to maximize multi-channel sales. This will also limit discount-driven reductions in street price, which ultimately can severely reduce profit levels and incentives to sell for both the vendor and all channel partners--if not properly controlled.


SUMMARY
Creating a Channel Discount Strategy and structure is NOT a theoretical exercise. It should be primarily a tactical exercise based on a realistic view of market conditions, and include collection and analysis of objective market data. While what you hope to accomplish with your discount strategy is important, the overwhelmingly most important factors in creating your discount strategy should be what is happening in your segment of the channel--and what will work best for your company. Try not to create a structure based on what you'd like to see with respect to the channel. Focus on creating a pragmatic, workable strategy upfront, to avoid an unsuccessful channel entry and painful restructuring that results. If you are new to the channel game, seeking outside assistance may help you avoid experiencing one of these painful false starts that happen frequently in the channel.

That's my view of how best to create a channel discount structure. I welcome you to post a comment with your own thoughts on this important technology management decision.

Phil Morettini
PJM Consulting
www.pjmconsult.com

The End of Customer Service

No one answers the telephone anymore.

At least, technology companies in the US surely don't. With big companies, you are either presented with an endless phone tree--"press 1 for a company directory"--or the newest innovation in communications technology: the cheerful "automated voice attendant". In many cases these attendants, and several other "innovative" service options, can lead to a great deal of frustration for customers and prospects.

As a consumer and business buyer I've found this frustrating, not to mention an incredible productivity sink. As a High Tech industry executive and consultant with a strong marketing background, I find this practice curious at best--and insane at worst!

Think about it--how many BILLIONS of dollars companies spend trying to get the attention of potential new customers--most of who are going to need to contact the company at some point. Yet it seems that once we've got their interest, or God forbid, they've signed up as an actual customer--we are doing everything possible to keep them away. Doesn't anyone remember the old marketing adage about current customers being your best source of additional business? Management guru Peter Drucker once said "The purpose of business is not to make a sale, but to make and keep a customer." Apparently not many people agree with this, or have forgotten it, because "modern" customer service practices are doing there best to drive these folks away. Let's examine some of the new customer service approaches:

OUTSOURCED CALL CENTERS IN OTHER COUNTRIES

This may be everyone consumer's favorite new "pet peeve"--calling an American company based in Chicago, or Iowa or San Jose--only to be connected to some call center somewhere in India. Often this leads to a very, very frustrating experience. Companies are going this route for support as an expense driven decision--to obtain cheaper labor. But the reps on the end of the line are often poorly trained, probably aren't employees of the company that you are calling, and often don't speak English with an accent that is easy to understand for most Americans. Are there good reps who give great service available in these call centers? Certainly, I have spoken to more than a few. But compared to the "good old days" of local support, the average caller experience has degraded significantly. Add this to the initial frustration that the caller who is dialing has because of a problem with his or her new $1200 PC--and you don't get a prescription for a happy customer.

PHONE TREES

This one has been around a while, but the increasing complexity of the tree, and well as the difficulty of exiting it to get to a live person, has continually made the situation worse. You can literally spend 5-10 minutes just navigating the phone tree these days. Oftentimes, callers just give up--which appears to be what companies want. I'll discuss below why companies shouldn't.

AUTOMATED ATTENDANTS

As I discussed above, this is one of the more recent scourges of the besieged customer with a problem. Ironically, Automated Voice Attendants have been made possible by a really nice leap forward in voice recognition technology. And there is no doubt that these products have come a very long way from the days in which they were first implemented. But talking to a machine is at this point still inherently inferior to speaking with a real human. I endorse the use of these Automated Attendants, but they should be used judiciously. I would still utilize them only at the very beginning of calls, and not require them to take a customer too far down the line of getting their problem addressed. Also, please make it easy to get away from them to a live human. With the high market share of some of the Automated Attendant companies, I am having far too many conversations with the same perky, Stepford Wife-ish-sounding artificial female voice. It's getting a bit creepy. While we're at it, let's talk about my biggest customer support pet peeve. With all of the sophisticated software available today, why is it that I have to give my account number and god knows what else to this robot lady, and then repeat all of the same information to the first live person that I speak with, as well as everyone that they transfer my call to? I understand security concerns, but geez! Hasn't anyone heard of data sharing and company firewalls?

"INTERNET COMPANIES"

The advent of the Internet has allowed for the creation of the ultimate small company: one man or woman, behind an Internet site. These companies invariably list no contact phone number or physical address. You can only email them for support, or if you're really lucky, IM them. Unfortunately, potential customers figured out that this is likely a one man operation long ago. They will be reluctant to buy your product as a result, because they don't believe you are "for real", or at least they won't be able to get good support. If you have the capability of offering real support, I urge you not to present your company in the image of one of these "Internet companies". If you do, it will cost you business.

FEE-ONLY TECH SUPPPORT

I won't deny that is some cases tech support fees are justifiable, and necessary. Even for consumer tech products. But in most cases tech support, and least at some level and for some period of time, really needs to be bundled into the base product offering. This trend came about with the intention of making tech support a "profit center". While I believe that tech support can drive profits, in many cases it shouldn't be done by attempting to extract additional money from customers (especially upfront or on the initial call) for the right to call in to get product issues fixed. There is a standard of care that most customers believe is fair: Help them get the product installed, up and running. Take care of any bugs or product defects. If you don't meet this standard, you will likely pay for it yourself--in reduced customer satisfaction and loyalty.

I want to emphasize that I am not a racist, market protectionist, political isolationist or technophobe. I have nothing against a man or woman working in a call center India, doing their best to do their job. I'm also a tech guy, and certainly love the idea of using technology to increase labor force productivity. But as a marketer, above all else, I believe in the old axiom: THE CUSTOMER IS ALWAYS KING. Customer service today is not treating the customer as King, but like the lowest creature on the food chain. It's possible that we are just undergoing a period of "growing pains", implementation issues, and the new customer service methods discussed here will be the way to go in the long run. Maybe technology maturity and some additional training for the folks in those faraway call centers will correct the current painful situation.

BIG OPPORTUNITY TO GAIN AN ADVANTAGE

But my guess is that those corrective measures are a long way off. In the meantime, there is a big opportunity for savvy software and tech companies to use this "gap" that has occurred in most company's customer service, to gain a strategic advantage in their market segment.

Unfortunately, in my Software and High Tech Practice at PJM Consulting, I find that customer service operations are usually an afterthought to senior management--especially in early stage companies. It's understandable, since it doesn't appear to be part of the strategic core that will mean the difference between success and failure for a young company. But in today's world, used properly, customer and tech support can indeed be a strategic weapon.

Not only can good support cement the relationship with the customer and build long term loyalty, but don't forget that you've got a customer on the line! Remember the old adage I mentioned above about your current customers being the best place for incremental business? Once you've satisfied the caller's concerns, you have an opportunity to educate them about new offerings, present them with a special offer, etc. The possibilities are nearly endless to profit from this customer interaction. This interaction by the way REQUIRED NO INCREMENTAL MARKETING EXPENSES TO INITIATE. Companies don't realize the opportunity that they are leaving on the table, both to increase customer loyalty, and sell incremental offers to existing customers.

DIFFERENTIATION FROM COMMODITIES

Let's talk about a specific example: HP & Dell in the PC business. I'm an old HP alumnus, and until recently, a long time Dell customer. Over a long period of time, customer support, specifically technical support-- has gone from a major strength, to a nightmare for customers of both companies. At various stages of the customer ownership lifecycle, both of these companies throw every obstacle I've discussed in this article at you--Endless phone trees, automated voice attendants, email-only or IM-only tech support, and clueless representatives in foriegn call centers. PCs are as close to a commodity as anything in the High Tech business these days. These two market leaders, along with their competitors, are pretty much slugging it out on price (and brand, which means less and less in a standards-driven market like PCs). This is certainly not the way to achieve high gross margins, let alone customer loyalty.

Personally, I'd pay 10-15% more to buy a computer from a company who guaranteed good, local tech support. I run my business on my PC; when a problem occurs that I can't fix on my own, it is often excruciatingly painful. I'm sure that these companies don't believe that I, or many others, would pay more. But if a PC company put forth a well-developed marketing message touting their emphasis on technical support and customer service--and stuck with it--they would obtain a customer for life. Now, I may not have been willing to pay such a premium 10-15 years ago, before real customer service "ended". I may have gone for the lowest price. But with personal service and support nearly gone the way of the Dodo bird (become extinct), things are different. Since good, personalized tech support has become a scarce commodity--it is therefore an opportunity that some smart company can exploit.

SUMMARY

There's a big opportunity out there for smart technology companies to go against the current trends in customer service and tech support. Make it easy for people to reach you, using whatever method they prefer. I'm suggesting short phone trees, live operators, and an adequate number of representatives to eliminate long waits. Focusing completely on expense control or technology solutions, not personal service, is a mistake for tech companies. Savvy, "forward-thinking" software and tech companies can increase market share and customer loyalty with an "old school" approach--personalized customer service and support.

That's what I have to say about the state of customer and tech support today--what's your opinion? Post a comment if you'd like to discuss this further.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

High Tech Market Research for New Products

One of the biggest problems in High Tech businesses is the "technology-driven" approach that tends to predominate, especially among startups. Much of this occurs due to the fact the many founders of software and technology companies tend to come from an engineering, programming or other technical background. While a strength in creating a flow of technical innovation, this can be a real problem when companies are planning new products which they hope to find a real market for.

Everyone has a tendency to focus on what they know best; that's just human nature. Folks spend more time on the issues that they enjoy, are more comfortable with, and are more confident about their ability to make good decisions on. Things that don't fit into this category tend to be put off, or given short shrift.

The result is often products are well thought out from a technical viewpoint--but much less well so from a "meeting market needs" perspective. While both are important, the market perspective is absolutely critical initially. So what's the right approach to product planning-oriented market research?

When Should The Research Should Be Conducted?
The answer to this is early, often and forever. The earlier you start prior to design or coding, the more time you will have to obtain the most accurate picture of the market that's possible. Sometimes there are practical limitations to how early you can start--Trade secrets and patent filings, for example, or the lack of a prototype which may be considered crucial to receiving realistic market feedback. Within these limitations, get out and begin interacting with the marketplace as soon as practical. And don't ever stop. Markets, especially the software and technology variety, are like living organisms. They are constantly growing and changing. What may be true in the early phases of a market could change dramatically over even a short period of time. Companies tend to develop an internal "common sense" that is used in making decisions, which is based upon past inputs. When doing Product Planning this can very dangerous in a dynamic market.

Who Should Do The Research?
The best way to do this research is what I often refer to as the "two-headed monster" approach: one marketing person, and one technical person. Not a lone wolf if you can help it, and please--no committees. Most often, this would be a Product (Marketing) Manager along with the Engineering Project Manager who will lead the actual development of the project. In the smallest startups, it might be the technical founder and the "business" founder, for example the CEO and CTO, or CEO and VP Marketing. The Business/Marketing manager should be in the lead for this task, but it's important to note that both camps have a role to play in this endeavor. There are two different perspectives on market feedback, and well as two different priorities in questions to ask. Having both parties involved (assuming there isn't a dysfunctional relationship) usually leads to the most complete and risk-reducing result. In addition, it often eliminates arguments over priorities later in the process after coding starts (and schedules inevitably begin to slip) If only one can be available, it should be the Marketing side--working closely with the Product Development/Engineering lead to make sure their input is included in the process.

How Should The Research Be Conducted?
This is a really broad question which of course depends heavily on the situation. How much do you have available to you in terms of money and other resources? If you're in a big company, you may be able to commission some objective research. If you are a startup with modest resources, it usually is an ad hoc exercise of visiting and interviewing potential customers.

What's most important to keep and open mind, and eliminate your own biases and pre-conceived notions. This exercise needs to be a search for the truth, not an attempt to validate your own theories. Also, make sure that you are talking to the right people. If you are planning a market-creating breakthrough product, you really need to be talking to Early Adopter types, not the guy or gal that only buys after everyone else they know. If you are introducing a product that is very similar to other products in an already large market--but maybe at a lower cost--by all means, talk to those mainstream buyers and even the late adopters. Use the current market phase to guide who to get input from.

It's great if you have the money to do some formal secondary research, but be careful about confusing formality with accuracy. For example, I know of large companies that spend huge amounts of money on Focus groups, while their Product Managers only reluctantly talk to actual potential customers directly. I find this very dangerous (you might say stupid!). Particularly with breakthrough technology, you tend to find a "garbage in, garbage out" phenomena with professionally managed focus groups. But there is that formal, professional looking report that appears very convincing in the aftermath. They can be great if constructed properly, but I have seen a lot of money spent for a very bad result. If the focus group wasn't run properly, or the technology is very revolutionary, the results can be total garbage covered in a beautiful wrapper. I always advise that there is a good amount of old-fashion ad hoc research--talking directly to customers--to be used as a sanity check, if not the main research technique. There are exceptions, of course. If you are doing incremental product research, where the product is well-understood and the changes are evolutionary, objective research methods such as surveys may be a great way to get a quick and definitive read on the market's reaction.

How Do You Know When You're "Done"?
This really depends on what you are doing, but my general answer is that "you will know when you are done when you get there". It's important to not put an absolute time limit on the research, if it is at all practical. In some cases in the real world, this isn't possible, of course. Sometimes you just have to go with the information that you have gathered up to a set point in time, along with your market common sense, intuition, and gut feel. With incremental product releases, waiting may not be possible or necessary. But if you can avoid it, especially if starting a new company, division, or business area, resist the temptation to "go with what you have", if it just doesn’t' feel right. In my experience, when you've "done enough" research to begin serious product planning--it's obvious. You will feel very comfortable with regards to the clarity of the current market snapshoot, and feel you've really nailed the wants and needs of the market as it relates to the new product opportunity. Try not to get "antsy" and move forward because you've reached the original market research end date on your theoretical timetable. Resist that temptation and keep working until you are CONFIDENT that you are there, unless other factors just won't allow it.

Summary And Conclusions
Make sure that you do sufficient market research before you begin building products; product development on a developer's gut feel is most often a prescription for failure. There are a few high profile companies which have entered our folklore that were lucky enough to start that way, but usually this approach will quickly empty your pockets, rather than make you rich.
Include both Marketers and Technologists in the Research if at all possible. In summary:

*Marketing should take the lead on market research for new products
*Always make sure you talk to at least some customers directly and informally
*By wary of formal market research results, if not supported by an informal research "sanity check"
*Make market research a continuous company function
*Don't stop an individual product-oriented market research project until you are comfortable that you've got the correct answer.

There you have my thoughts on market research for product planning purposes. I'd love to hear yours as well.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Strategies for a Technology Market Slowdown

Is the world economy slowing down? What are the implications for technology companies?

Recently, technology stocks (along with the stock market in general) have tanked. There is a credit crunch that shows no signs of abating, and inflation is rearing its ugly head, with the continual climb in the prices of oil and other natural resources--commodities which touch every aspect of the world economy. Is the economy headed for a severe downturn--taking technology businesses down the drain with it?

I hardly think so, but we have had a very long running economic expansion, that eventually will reverse by the universal law of "what goes up, must come down". Economies are cyclical by nature, so a downturn has to happen eventually. And tech stocks are usually affected more severely than average in an economic downturn, which affects technology industry investment and ultimately tech growth rates.

So what should you do if you're the CEO of a software or hardware tech business?

Be Prudent, But Don't Panic
Now's certainly not the time to stick you head in the sand, and hope the economy doesn't get any worse. It almost certainly will; but more importantly, how will it affect your company? That's what you need to ponder. Is your product a "must have" or a "very nice to have"? Obviously the "nice-to-haves" will have a tougher time in a declining economy, and should plan accordingly. So take the time to analyze you situation, and make a forecast for your own business, based up the unique circumstances of your market and company. Remember, hope is not a strategy.

Look For Opportunities to Outflank Weaker Competitors
For strong players, declining economies can be a great time to pick up market share from weaker competitors. If you have the resources and can do it safely, now might be the time to run a promotion, or selectively increase your marketing. It's counter-intuitive to most managers' instincts. But weakening the competition during a downturn can lead to stronger growth when things turn back upward.

Slow Near-Term Expense Growth, But Don't Compromise Long-Term Initiatives
In most cases, companies will want to carefully monitor, and possibly cut back on their spending. You want to make sure that you don't put your company in jeopardy, by have expenses out of sync with flat or declining revenues. But try your best to keep intact the initiatives that are critical to long-term growth. You must continue to think long-term as well as short term, assuming you don't get in a situation where your survival is at stake. Cut back on advertising and office space if you're seeing a slowdown--but make sure you don't cut the product development project which will lead to growth 18 months hence. These can be tough decisions, but they really separate the long-term successful CEOs from the flash-in-the-pans. Almost anyone can manage when times are good.

Limit The Growth Of Your Staff
While prudent spending can be wise during a downturn, aggressively increasing the size of you staff usually isn't. There are always exceptions, of course, but adding too much staff can really bloat your fixed cost structure, in a manner that limits your management flexibility. Unfortunately, many companies are often most aggressively adding staff at the end of a growth cycle--just in time for the downturn. If this leads to layoffs, it can have a devastating effect on your company's morale.

Although layoffs are sometimes necessary, they are always painful and hurtful to the company culture--unless the company culture is already of the "Attila the Hun", cutthroat variety. The founders of one of my former employers, Bill Hewlett and David Packard, ran HP for many years with a rule of thumb that limited staff increases to 25% of revenue growth. This helped them avoid the natural inclination to hire someone new every time a new task was identified. I believe was an important factor in many years of smooth growth--without layoffs. This particular metric might not be right for your company, but something similar could prove to be a useful damper on excessive hiring.

Make Sure That You Have Money For A Rainy Day
While it's no time to panic, it IS time to make sure that you have the financial resources necessary to comfortably cruise through a downturn. VCs and Private Equity firms have been flush with cash; if you are close to a deal to bring in outside investment capital--don't wait--so it now. Availability of funds and terms will only get worse, as the stock market heads down and the credit crunch continues. Also, make sure that you have available the largest line of credit possible with your bank. It may cost you an extra few thousand dollars a year, but its excellent insurance, if you are surprised on the downside. If you're in startup mode and financing yourself on credit cards and home equity lines--maximize your future access to these as well! Whatever your sources of funds, make sure now that you're financially well prepared for whatever the future holds.

Be Poised For The Next Upturn, Whenever It Happens
I mentioned earlier that you should try your best to keep long-term initiatives alive. In that same vein, your thought processes should CONSTANTLY be focused on the next upturn, in all of your decision-making. Again, this assumes that your survival isn't in question. For example, while massive hiring isn't usually wise during a downturn, you want to always be open to unique opportunities that may not come along often. Say there is a talented executive available, only because of the downturn. If you can safely afford him or her, snap them up now, before a competitor grabs them. Downturns often present opportunities to improve your business when the next growth cycle occurs. But you need to be "looking ahead" and making good decisions now, to take full advantage of the upturn when it finally does.

Summary
Once again, now is not the time to panic. But it is an important time to plan. Anyone that can predict what will happen with an economy should go to the nearest casino--no need to waste your time with a software or technology company! So I suggest that it might be wise to do a "best-most likely--worst" 2 year forecast now, and try to plan as best you can for the two extreme cases. Post a comment and let me know your thoughts on how the economy and the tech industry will fare in the coming months.

Phil Morettini
PJM Consulting
www.pjmconsult.com

Negotiating and Working with Large Technology OEM Partners

The Holy Grail for many software and technology companies, especially the early stage type, is the big deal. Everyone is looking for the big deal, the one that will fund the company's early activities, provide market credibility and momentum in the marketplace. Of course, if it goes well, there can be nothing better. Many times the big deal takes the form of an OEM partnership with a much larger company. But often when these deals do happen, they end up fitting in the category of "be careful what you wish for".

TARGET YOUR OEM PARTNERS CAREFULLY
This is where it all starts, good or bad. It's important to pick compatible partners. Companies looking for large OEM partners are often blinded by the potential of what the OEM can do FOR their business. They often fail to pay any attention at all to what the OEM might do TO their business!

Can the partner cause severe channel conflict? Will they tie the small company up in endless meetings, procedures and negotiations? Do they have a corporate structure and culture so foreign to your way of doing business, where you end up pulling your hair out from frustration--unable to accomplish even the most simple business objective without moving mountains? Sometimes with large companies, its difficult even figure out who you need to speak with--let alone get a prompt, unambiguous answer.

Get to know your partners well before you sign a deal. It's tempting to rush in before "they change their mind", but the actual relationship is critical to potential success. It's like dating before a marriage--no matter how attractive the partner is, you need to make sure you can live with them later on.


NEGOTIATE FROM STRENGTH
I don't like to do deals with people that are sure they have the upper hand. If they think they can push you around--they almost certainly will. Usually one partner needs the other to a greater extent, but you want to try to avoid dealing with partners where you have no leverage at all. It generally doesn’t' turn out well. Make sure that you negotiate a deal that you can live with. Above all, you need to have a "line in the sand" that you won't cross--and be prepared to walk away if the negotiations cross that line.

This can be a painful and difficult thing to do when you are seeing big "dollar signs" in your eyes--and fear if you stay strong, you might blow the deal. But remember, you have something that the other side wants as well--or they wouldn't be talking to you. If you don't know what your minimum successful deal looks like, and you aren't prepared to walk, you may sign a deal that you will regret. Not to mention tying up your time and resources, which might have been used working with a more compatible partner.


WORK ON EVEN TERMS
Once you've negotiated a deal that you can live with (and hopefully prosper with!), it's time to get to work with your partner. Try to keep things as fair and even as possible in the relationship. Of course, it's important to be accommodating to your partner, and respect the differences in operational procedures. Big OEMs will usually move slower than you, be more process-oriented and structured, and include more people in the relationship. All of this is fine, but it needs to be tempered so that the larger partner doesn't "swallow all of you available resources whole". It can easily happen if you don't guard against it. They have more resources than you (but will always think they are busier!) as well as more process-driven requirements that need to be met. But don't be afraid to draw the line at a reasonable point, and remind them that you have fewer people and resources available. Suggest a phone meeting instead of flying three people across the country--ask that they come to your place, rather than always trekking to their headquarters. Propose that one of there folks spearhead writing that joint position paper, instead of some scarce resource in your company--you get the picture. Sometimes larger companies will smother you without even knowing they are doing it--don't be afraid to remind them that you need to do business a little differently.

KNOW WHEN TO SAY "NO"
If you've tried everything you know, politely, to keep the relationship equitable and reasonable--but it just isn't--don't be afraid to say NO. I meet many smaller company executives in my consulting practice whojust don't feel they can do this with a larger partner. They'll talk tough in internal meetings, but when back in discussions with the partner, the tough talk turns to submission. They just feel like the partner is too important to their business to risk ever offending them in any way. That attitude is a prescription for servitude for your company. I'm not suggesting being unpleasant; in fact, when standing up to a larger partner, it's critical to be calm, polite and non-defensive. But by all means be firm in delivering the message of what your business can, cannot--and won't'--do. If you don't, what could be a profitable relationship can turn very sour.


HAVE REALISTIC EXPECTATIONS
The last point I'd like to convey is that it's important to have reasonable expectations in partnering with large OEMs. Many companies go into these deals believing they will be "company-makers". In my experience, this rarely happens. Understand what the OEM can do for you, and build your business model around the most conservative projections of their performance that's possible.

Companies usually turn to OEM products from partners to fill niches that they don't fully understand, or don't feel would pay back--if they invested in developing it themselves. It is very rare for products licensed or resold from partners to get anywhere near the push that internally-developed products do. Be realistic about this, and you won't be disappointed. If revenue exceeds your conservative expectations, you'll be overjoyed.


SUMMARY
That's my condensed advice on working with the big software and technology OEMs of the world. This is a common activity for many companies--what's been your own experience? Post a comment and let me know your own view.

Phil Morettini
PJM Consulting
www.pjmconsult.com

The Haphazard Development of People in Early Stage High Tech Organizations

Many entrepreneurs start out giving little thought to how they will grow their embryonic technology business in the long run. They are totally focused on designing and releasing the first product, or making that first sale. This focus is usually a very positive thing in a new company, since grandiose plans of startups have a way of getting derailed by the harsh realities of trying to survive.

Other more organized and contemplative entrepreneurial types have a master plan all laid out, including the steps on how they are going to grow their company all the way to the happy exit they have planned. This approach can be of great benefit as well; even though things won't go exactly as planned, it's great to have a road map that you can adjust as conditions change.

One thing that many younger organizations don't do so well, is in planning the development of their staff. Don't misunderstand; there are a lot of development opportunities for employees of newer and smaller companies. But this development often just "happens"; there is little thought that goes into it. A job needs to be done--and a particular body is more available than any other. The fit may not be ideal--and the amount of training given minimal. But the person is thrown in to sink or swim, because like the old saying "necessity is the mother of invention". It needs to happen, and it often works out well a surprisingly large amount of the time, given the haphazard way in which this "personnel development" often occurs.

But is this optimal, even within the constraints of a hard-charging software or hardware company? Most of the time, with a bit of foresight and a strategic pause, you can increase the odds of successfully stretching your current staff, into areas where expertise or experience are lacking. Below are five simple steps that may greatly increase your success rate in growing

Consider Psychographic Profiles Of Candidates In Your Hiring Choices
Like most things that are done in company development, if you hire the right people, things are likely to turn out better--no matter WHAT curves the marketplace throws your way. So try to think ahead when hiring that next entry-level employee, to fill the open clerical or support role. What other activities may need to be done in the near future? In what areas could this new employee be grown? Are you hiring the most flexible candidate, the type that will be most comfortable when you try to "stretch" them into an unfamiliar role? Will they freak out at being asked to perform a new and challenging activity, or will they embrace it as an attractive career growth opportunity? Try to think ahead, and the answer to your next personnel crises might be right down the hall.

Plan Ahead As Much As Possible
As mentioned above, it's really useful to try to think ahead to what functions will need staffing in the next 3, 6 or 9 months. This type of strategic thinking is difficult for many early stage managers, who are focused on getting through the end of the month. Unfortunately, this mentality often leads to hiring the person that will save a few nickels in initial salary, or has the most experience for the immediate position--therefore "hitting the ground running" with the least amount of training. But if you factor the medium and long term needs of your business into your hiring decisions, you may hire different candidate--who may add much more to the growth of the business over time.

Train At Least A Little--Don't Just Throw Them To The Wolves
Startups have a tendency to "throw people in the pool and see if they'll float". Many times managers will ask an employee to get started, and just do the best they can in the short term. It's often a crisis situation, and the manager intends to come back and train them when things settle down a bit. Unfortunately, in early stage companies, the situation NEVER settles down. As a result, you end up with an employee that fails, feels abandoned and neglected, or develops bad habits that become hard to undo. While it's hard to find the time or resources to provide training, for most people, it's an important factor in ultimately achieving success. So make it a priority to give the person in a new role some basic training, no matter what it takes.

Supplement And Train Using Consultants As Mentors
One great way to provide training and support to employees in new roles is to get some outside help. Many smaller companies don't believe that they can afford consultants, because their price tags for providing expertise and short term work are much higher than permanent employees. But that is usually "penny wise, but pound foolish". Most jobs that need doing, also need to be done right. If there isn't the expertise or senior management bandwidth available to train and support the employee in the new role, the job may not be done the way the manager intended--costing the company far more than the amount that outside help would. In these instances, an outside consultant is actually a very cost-effective way to prevent costly early mistakes, as well as putting the employee solidly on a track to long-term success in their new role.

Allow Room For Errors
Margin for error is usually less in early stage companies, with a resulting amount of high pressure to "get things right the first time". But it's unrealistic to think that someone new to a job, with minimal experience and support, will do everything perfectly the first time. Startup managers need to factor this into to their expectations, and plan for results to be a bit uneven at first. It's especially important that the demeanor of the manager makes the employee feel comfortable to take educated risks in the company's best interests, without feeling like any missteps could cost them their career.

SUMMARY
It's true that early stage tech companies can't afford to engage in the same type of organizational planning and personnel development that occurs in most giant corporations. However, that is somewhat offset by the vast opportunities for development that are found in these fast-changing, non-bureaucratic environments. Early stage tech companies are well served if they force themselves to engage in just a fraction of the planning done in larger corporations. Post a comment and let us know what you think about organizational development in startup companies.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Is It Time to Sell Your Hardware or Software Company?

This is the point that most, if not all, technology entrepreneurs aspire to reach. They dream of selling their company and laying on a beach somewhere, a colorful drink with the requisite umbrella, cooling in their hand.

There are a few of you out there that would never sell your company (it's your identity, after all), preferring to work forever lest you slow down and quickly deteriorate. But that's another story; we'll save your psychoanalysis for another day…

Some of you that want to sell your company have the most grandiose plan of all in mind: An initial public offering (IPO) through a brand name investment banker, bringing not only unimaginable riches, but fame along with that fortune. But that rarely happens--we'll also table that discussion for another column…

So let's get back to the great majority of you out there, who set out to some day cash in all of your hard work, by selling your company directly to another company. How do you know when the time is right?

WHAT MAKES PEOPLE WANT TO SELL

There are many triggers that set off serious reflection about whether or not to pursue a sale of a software or tech company. Let's examine a few of the more common:

1) A potential acquirer approaches the company with an offer
2) A strategic partnership grows closer, and it seems to make sense to grow closer still
3) Business is bad, and the principals begin to worry about losing everything
4) Negative cash flow is starving the business, forcing a sale to ward off bankruptcy
5) The owners need cash for another reason; be it investing in another business, or personal reasons
6) The owner/operators are burnt out, and no longer enjoy the business
7) Business has been robust, and the owners astutely consider whether now is the time to maximize their return, and minimize their risk by selling now
8) It becomes clear that there is a viable business, but is better suited/more valuable within a larger company
9) It's time for the owners to retire (it seems that very few high tech entrepreneurs make it that far!)

These are the most common reasons that come to mind--it is certainly not a complete list. Although we are talking about companies, the decision to sell ultimately comes down to a personal decision by one or a few individuals. So the reasons that these decisions happen are as varied as the population overall.

Given this list of common rationale for considering a sale, what are the RIGHT and WRONG reasons to consider a sale--if you want to maximize your return within your particular circumstances?

WRONG REASONS TO SELL

On an impulse--you've been running your business, not even think about selling your company. An offer comes along, and you get caught up in it--without having planned for it. Or things have been going poorly, and you are at an emotional low. Acting in these circumstances is similar to married, divorced or starting a new business--don't do it without thinking it through, or planning it properly.
Fear--don't sell just because you are scared; that's probably the best way to leave money on the table. There are ups and downs to every technology business. In my experience, things usually aren't as bad as they look at a specific "down" point in time--or as good as it looks at an "up" time. It's important to look at the prospects of a business over a period of time, considering both how things have gone and the forward-looking forecast.
Sales are in decline--this is the worst time to sell. If you do this, all leverage goes to the buyer. Of course, panic sets in, as you see your valuation melting away, and human instinct is to "get what you can" before it degrades further. But first consider the situation--is it reasonable that you can turn it around and reignite growth? Is the decline all specific to your business, or is it a cyclical market, or a bad economy overall--which might turn around in some reasonable time period? Sometimes selling under these circumstances is the right thing to do, and is unavoidable. But with proper planning, you may be able to sell your company BEFORE this happens, or turn it around first.

RIGHT REASONS TO SELL

You believe you've reached the peak of valuation--this seems obvious, but it is difficult to do. Finding the right time to sell is tricky; you don't want to exit too early and leave money on the table. So the inclination, given that tech businesses are value as a multiple of revenue or EEBITDA, is to hold on until growth stalls. But if you wait until you built up your sales so much that little "natural" growth" is left in your product/market cycle, the business may not look as attractive going forward, for potential buyers. Most strategic buyers, at least, would like to see growth prospects in a potential acquisition. So it might be best to "leave a little growth on the table"; it might lead to a higher multiple from the buyer.
You haven't been enjoying running the business for a very long time--I believe strongly this is a time to get out. If you have someone else whom you feel comfortable leaving in charge, that's fine. But otherwise, either you'll run it in to the ground from burnout, or you'll walk away and let someone else destroy it, because you just don't care anymore. Passion is important in our business; when it's gone, it's usually a good time to sell.
A fundamental shift in the market or your business--This could mean many things: you have lost a number of key people, the economics of your market changes, or a major investment will be required to keep the company on a growth path. The specifics here could be quite varied; the common thread is that with the change in fundamentals, there are real clouds on the horizon. This lead you to a thoughtful belief that continuing to operate the business as a standalone entity isn't optimal.

SUMMARY

An exit, or sale of your company, is a very important "life changing event" for the owners, founders and managers of a software or hardware company. I've seen sales come together very quickly, and completely unplanned. I view unplanned company sales as the business equivalent to a quicky divorce that comes out of an emotional event, without careful consideration, or an objective study of the alternatives and consequences. It is a once in a lifetime event for many, and should be given the careful consideration that those types of events deserve. That's my view--post a comment with your own Exit tales or opinions.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Strategic Acquisitions for Software and Technology Companies

Acquiring new products or whole companies is a popular activity for many growth and market-share oriented companies. Is it a good idea?

Well, as I often say--it depends. I get involved in company or product acquisitions quite often in my consulting practice. There is nothing inherently good or bad about acquisitions in the technology business. However, there is nothing inherently bad about opening a restaurant, either. Nonetheless, a very high percentage of restaurants (I've seen figures as high as 90%) fail within 5 years. The failure rate for acquisitions may not be quite as high as for restaurant startups, but technology acquisitions are also judged to be failures at shockingly high rates. Caution should rule when approaching either of these very popular activities. As I'm fond of saying about success or failure in any complex business activity--the devil's in the details.

Common Motivations for Acquisition Activity

Let's examine the common reasons that acquisitions are considered in the first place:

1) It's exhilarating and "sexy" to buy another company
2) Growth for growth's sake (often pushed by investors)
3) The belief that buying a competitor is the ultimate "victory"
4) A consolidating market (often commoditizing) where there is only room for a few large players
5) Diversification
6) A great strategic fit where 1+1 truly equals 3

As you might have guessed, reasons 1-3 above aren't great justifications for such a risky activity. Number 4 can be a good justification, but often this is given as the rationale, when the actual market case doesn't truly support it. Number 5 can be a good or bad rationale, depending upon whether the business case really calls for diversification--or if focus would make more sense. Number 6 is by far the best reason to acquire a company, particularly if you aren't an industry giant, pitted in a death match with another titan of your marketplace.

So let's say you've actually thought it through, and have used sound analysis and judgment in deciding to pursue an acquisition. Congratulations for passing the first test--but there are still myriad things that can trip you up, on the way to acquisition success:

Great Ways to Fail

First acquisition done "on your own"--I strongly urge all first time acquirers, whether of the product or company variety, to seek assistance. Acquiring a company and even a product is very complex, with a lot of places to trip up. Retaining an experienced hand that has seen and gone through the mistakes before, can prevent you from the most expensive education of your life.
Bad cultural fit--In the excitement of an acquisition or a merger, people have a tendency to not look past the surface. It's much like dating an attractive potential mate, and proposing based upon infatuation, without establishing whether there is common ground in the way you live your lives. This is the business equivalent of marriage, folks. Compatibility in business philosophies and practices is crucial--and often overlooked, until after the fact, when everything is unraveling.
Poor organizational integration-- Even with an excellent evaluation of potential partners, a great many mergers fail based on the execution of integrating the organizations. That's because it is HARD. You are generally merging two organizations with disparate operating styles, as well as overlapping functions and people. Fear, uncertainty and doubt of the individuals involved can by ITSELF scuttle a potentially great fit. This area is often quoted as the reason most acquisitions fail.
Poor product integration--This is the reason a lot of acquisitions in software and high tech should be called off early in the process. It is often very difficult to rationalize how you are going to support two different code bases or technologies, aimed at the same market. The plan usually call for integrating them over time, but that often proves to be very difficult from a technical perspective. This is a real red flag when buying a direct competitor. Yet the price of the merger in high tech often assumes that the products can be integrated acceptably, without losing customers from either of the existing products. Unfortunately this is usually a very tall order
Paying too much--Price plays a big role in software and technology acquisitions. Due to high growth rates and the perceived need to move quickly in fast-growing, competitive technology markets, acquisitions are often priced in multiples of revenue. This is in contrast to the more conservative multiples of EBITDA in other less dynamic industries. Often the target isn't even profitable yet, but still commands a high price-to-revenue multiple, due to the "hot" nature of the market space, and perceived value of the acquired technology. This high price puts a severe strain on downstream execution of the merger to be "perfect", as discussed above.

So with all of the landmines out there in the acquisition arena, along with the high failure rate, is it simply nuts to consider acquisitions? Doesn't it make sense to just stay away from them? NOT NECESSARILY.

Sound Approaches to Pursuing Mergers

Buying innovation--This often happens when companies reach a certain size; they simply lose their ability to innovate. Rather than innovate internally, they do so by acquiring small companies with market-changing technologies, which may not have the resources to fully exploit in the marketplace on their own. Even though multiples here tend to be high, risk is somewhat mitigated relative to internal Research and Development that might not "pan out", and the size of the acquisition is often very modest, relative to the resources of the acquirer. This is an example of a true 1+1=3 strategic fit. This strategy has been used with great success by Cisco, Microsoft, and many other large companies with successful acquisition programs.
Buying companies or products that truly fill a hole in your offering--While some companies tend to overuse this as justification, acquisition of a reasonably priced company or product at just the right time, can mean the difference between continued growth or inevitable stagnation.
Buying undervalued assets--This is harder to do in high tech than in other industries; high tech companies have a habit of overvaluing their businesses and technologies. But an executive team with a key eye for a bargain can often pick up a diamond in the rough, for example a division that has suffered because it isn't a good fit with the parent company's core business
Truly appropriate diversification--Sometime you run out of steam in your current market, and the amount of cash flow generated by your current business dictates that an investment in another growth area may be prudent. The key here is to pick a market segment adjacent to the existing business, or at least a business that the management team can easily adjust too. However, management teams often are over-confident and deceive themselves, and end up investing in an area where they really don't belong.


I could go on and talk more about acquisitions for a very long time. But instead of putting you all to sleep, let's begin a dialogue on this topic. Inform us of your own Merger and Acquisition stories, best practices, and cautionary tales.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/

Selling Through OEMS

I've recently discussed selling through VARs as a distribution channel strongly favored (maybe a bit too much!) by many early stage technology and software companies. In this article I'm going to look at another channel that is often misunderstood and misused: The OEM channel.

When a company goes about it the right way, OEM business can be an excellent additional revenue source for startups--and any high tech company, for that matter. Where I want to throw out a caution flag, is when a company decides they are going to rely on OEMs as its primary--or only--channel.

Now this can work, you might say. And you would be right. But in most cases, I believe, it isn't the best way to proceed. It can work, if you have the right type of product, and you've thought your strategy through very thoroughly. The problem is with most companies, this the usual scenario. What I find more prevalent is the old "let's make it, and we'll get someone else to sell it for us" approach. As I've discussed before, 'let someone else sell it' almost never works. This sentiment often occurs with a technology-driven senior team, without a good feel for marketing or sales. The natural tendency in these situations is to avoid the current weaknesses in this organization, and "let somebody else do it".

The problem here is that sales and marketing needs to be a core competency, in most situations, if a technology company to become as successful as possible.

So what are the "bad effects", when an early stage technology company pursues OEM relationships as their sole distribution strategy--or at least "too early" in their company development?

EFFECTS OF "BAD" OEM STRATEGY

No Leverage
If you approach potential partners with a brand and existing sales, there is no leverage in negotiating with the larger, more established OEM prospective partner. In addition, it's a much harder sale, because your company and product don't have a track record.

No development of internal sales & Marketing
Companies with OEM-only business models tend to have weak (or nonexistent!) sales and marketing departments. My belief is that sales and marketing is a core competency--making this a bad idea. While you can run a company this way, in most cases, the ultimate size and profitability will likely be a fraction of what your technology could have otherwise supported.

All push, no pull
Every sales and marketing activity works better if there are "pull" elements, in addition to "push". If selling to the OEM is almost solely a "push" activity, with no brand or your own market share to help pull--the process is much harder.

All the eggs in one basket
Even if you do well and gain OEM deals with premier partners--success is far from guaranteed. It isn't unusual for OEM deals, especially early ones, to yield actual revenues in the 10-15% range of forecasts. If this happens to you and you've built your company around these projections--you're basically screwed. You risk "crib death" or at least a difficult restart with your own brand, due to the disappointing sales from the OEM relationship(s).


Your OEMs swallow you whole
A very common scenario is a much larger OEM that starts treating its small, entrepreneurial partner like another department in its bureaucracy. The OEM stunts your overall company development by "tying up" the scarce resources of your smaller company in meetings, special projects, ever-changing product development requirements--and yes--more meetings.


Given the potential pitfalls, how do I recommend using OEMs?

THE "RIGHT WAY" TO INCORPORATE AN OEM STRATEGY

Develop your own brand/channel first
Pursue OEM business only AFTER you've established products under your own brand. It not only will provide you with a product that will be more attractive and stable to potential OEM partners, but you've got your own branded business to sustain you

Important--but secondary--revenue source
Treat OEM business as an important, but secondary revenue source relative to your own brand. This will keep things in perspective and prevent you from putting your company's future in someone else's control.

Bundle rather than integrate
Once way to take advantage of large OEMs without the downside of losing your own identity is to seek bundling deals, rather than private label deals. By doing this you are essentially co-branding, building the power of the partner brand through affinity with the bigger company. This leaves you with greater marketing, selling and support requirements, but may lead to a larger, more profitable company in the long run.

Address a vertical out of your reach
A good way to utilize OEMs is to fill a key vertical where your technology has a market. This occurs when you decide that you can't address this vertical well with your own brand, because you don't have a presence, and have decided that it doesn't make sense strategically to expend resources to develop one.

Final harvest
Another smart way to use OEMs is to "harvest" a volume product which is now in decline, and is a product which you don't intend to continue major investments. If you can get such a deal, it can be great way to maximize end-of-life revenue with minimum incremental investment.

Offer another price point
A strategy that can be used successfully in some cases (but is a bit dangerous) is to use an OEM to offer another price point in the market, one that you choose not to address with your own brand. More often you would do this with your own alternative brand or sub-brand. But there are instances where this investment might not make sense. Special care should be taken if the OEM is to fill a lower price point--care needs to be taken so that your own brands share isn't eroded significantly.

Integration with complementary products
There are some instances in the marketplace where 1+1 does indeed equal 3. In these cases it may make sense to team with an OEM, to gain the advantages of product integration with a key product in your market, offering them as a single, integrated solution.

Leverage your IP into a new market
There are also cases where you main technology base can be easily used to create an entirely different type of product, which is intended to serve an entirely different market, relative to what you are selling under your own brand. In these cases it may make sense to team with an OEM in this disparate segment, to market this spin-off product from your main technology.

Summary
The bottom line is that OEM marketing is very important in the software and technology business. I strongly recommend that most everyone pursue this type of business; however, do it as part of a balanced, overall revenue strategy. Tread carefully and wisely and this may be the distribution channel that makes a break-even, or modestly-profitable business, into a profitable winner. It's easy to say you want OEM revenue, but like most things in business, doing it right is hard--the devil's in the details.

That's my thoughts about how OEM strategy best fits into a typical high tech business. Post a comment and let us know how YOU approach OEM relationships--I look forward to your opinions.

Phil Morettini
PJM Consulting
http://www.pjmconsult.com/