Sunday, May 17, 2009

Creating Leverage

For any business to be really successful (and achieve "hockey stick" growth that is every business dream)  we need to create leverage. Leverage is the ability to put a small amount of input resulting in a much larger outcome.

Early in my career I founded a consulting firm, specialising in Novell NetWare and Lotus Notes consulting.  The business was very successful, and soon we were employing ten consultants - but I learned that even if they were all in contracts, there was only a finite amount of money the business could earn.  And if any of them were not busy earning money the profit was walking out the door.

I learnt a valuable lesson - you can't leverage people.  One person = revenue from one person.  You can attempt to maximize this by training, repeatable process etc, but fundamentally there is no leverage. So building a large consulting company takes a lot of people, and the accompanying overhead (and headaches).  The only way to create some leverage is how accountants are lawyers structure - create a "sweat shop" of low paid graduates, all beavering away in the hope of one day being a partner.

In the technology business we achieve leverage by selling the same product multiple times.  Yet this leverage can be destroyed through a focus on custom work or extensive customization. There is nothing wrong with doing these deals for short term revenue (at Netoria we did some great work for the Union Bank of Switzerland and McAfee that funded our expansion) but at some point you need to focus on repeatable products.

What does a product need to achieve rapid (hockey stick) growth?
  • Solve a problem for a segment of customers - it's better to make 20% of the market really happy, than 80% feel ambivalent. You can expand later into adjacent segments and markets. Don't make the problem too large in scope - focus on a small known problem can be extremely effective ("don't try to boil the ocean").
  • Focus on a small number of products and services.  Novell, VMWare, Citrix and others got to $1bn on the strength of a single product. I've also seen startups that have between 10 and 20 products - this is far too many (how can a business communicate 20 products?).  Collapse multiple products into larger bundles, or discard products that are not creating revenue. Sales analysis will tell you quickly what products customers care about.
  • Create clear communication about what your product/solution/service does - if you can't explain in a few minutes what your product does, how will customers or channel partners understand? Can a customer go to your web site, and understand your product(s) in a few minutes?  Use Google Analytics and understand your bounce rate to get some measurement on whether customers drill deeper into the site - If I cannot comprehend what the company/product/solution does I immediately leave the site.  For an example of a very good web site, with clarity around products and the problems they solve, take a look at http://www.37signals.com/ - for something on the opposite side, check out the list at http://www.webpagesthatsuck.com/.
  • Have a leverageable distribution model - this may be selling directly via the web or a traditional 2-tier channel model. Creating leverage is extremely difficult if you need to add direct salespeople to increase sales. A direct sales force is an important part of the overall mix, but have them focused on the top customers, and create another channel for the transactional business.
  • Share revenue with your channel partners.  Give them a reason to sell your products, and make them feel like an extension of your company.
  • Create a recurring revenue stream.  Before you try to get new customers, ensure that existing customers are paying their maintenance renewals - this is easy money that accumulates as your customer base grows.  If your renewal rate is not around 80%, then you have a customer retention problem.
Of course there are many other ideas to help create or increase leverage, but a focus on the basics above will ensure a solid foundation for growth.

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