Due to the fact that software companies are in a rapidly changing market, Brown (Brown & Eisenhardt, 1999, 72) recommends institutionalising organisational change by creating only temporary organisational structures.
Known as “patching”, Brown advocates changing business units as the market changes. Although used for successful organisations, this is similar to Khandwalla’s (Khandwalla, 1983) and Hay’s (Hays, 1998) recommendation of making changes to the organisational structure as the turnarounds recovery progresses.
It could be argued that patching for companies in rapidly changing markets is in fact the organisational equivalent to a turnaround recovery situation. Actively moving people, resources and assets about, to reflect the organisation’s new place in a changing market market.
Thursday, 24 December 2009
Friday, 20 November 2009
Thesis work paper Kill Delayed Projects
Likewise, Davidson (Davidson, 2001) warns of “flogging dead horses”. With managers not willing to cancel delayed software projects (so further endangering the firms cash flow), in the hope they can turn the product development around.
In these cases Sutton (Sutton, 2002) and Teng (Teng, 2002) recommend, selecting only the most promising project(s) and cancelling the rest.
Furthermore, it is normally advisable to stop all further research on the product and set a development and marketing timeline to release a basic version within three months, with only major benefits included.
This is because as Shapiro (Shapiro et al., 2000) remarks, 80% of the value will come from less that 20% of the product’s features. He gives the example of Microsoft Office where customers use fewer than 20% of the product features, but the product still commands a price premium.
In these cases Sutton (Sutton, 2002) and Teng (Teng, 2002) recommend, selecting only the most promising project(s) and cancelling the rest.
Furthermore, it is normally advisable to stop all further research on the product and set a development and marketing timeline to release a basic version within three months, with only major benefits included.
This is because as Shapiro (Shapiro et al., 2000) remarks, 80% of the value will come from less that 20% of the product’s features. He gives the example of Microsoft Office where customers use fewer than 20% of the product features, but the product still commands a price premium.
Thursday, 17 September 2009
Thesis work paper Case Study Summation
It can be seen from the cases above that all followed a similar order and pattern.
First the board of directors sought a new Chief Executive Officer to run the company. This was followed by the new CEO finding out what was wrong with the company in general terms and where.
It should be noted that after this had been done the turnaround manager then recruited the turnaround management team. This makes sense, as by finding out the particular problems in the firm, one can then hire the appropriate person to solve that particular issue. In nearly all cases both the CEO and CFO were removed.
Secondly once the turnaround management team has been assigned, large-scale management changes seem to be in the order of at least 10% regardless of the number of staff laid off.
Thirdly, not all layoffs were done at once. This may reflect the international business element of some of the companies or the perhaps the logical and financial difficulties or remove large numbers of staff at the same time.
Fourthly all the software turnarounds focused on financial discipline, budgeting and general human resource and performance management restructuring prior to removing people.
Fifthly all development projects were investigated and late projects terminated, while promising one’s were given more resources, money and made the central focus of the business through cultural and strategy realignment.
Again it is noted, that the projects that did succeed were all based around the firm particular core competencies.
Finally all the turnarounds sought new product categories to not only enhance revenues, but in many cases to also spread revenue risk.
First the board of directors sought a new Chief Executive Officer to run the company. This was followed by the new CEO finding out what was wrong with the company in general terms and where.
It should be noted that after this had been done the turnaround manager then recruited the turnaround management team. This makes sense, as by finding out the particular problems in the firm, one can then hire the appropriate person to solve that particular issue. In nearly all cases both the CEO and CFO were removed.
Secondly once the turnaround management team has been assigned, large-scale management changes seem to be in the order of at least 10% regardless of the number of staff laid off.
Thirdly, not all layoffs were done at once. This may reflect the international business element of some of the companies or the perhaps the logical and financial difficulties or remove large numbers of staff at the same time.
Fourthly all the software turnarounds focused on financial discipline, budgeting and general human resource and performance management restructuring prior to removing people.
Fifthly all development projects were investigated and late projects terminated, while promising one’s were given more resources, money and made the central focus of the business through cultural and strategy realignment.
Again it is noted, that the projects that did succeed were all based around the firm particular core competencies.
Finally all the turnarounds sought new product categories to not only enhance revenues, but in many cases to also spread revenue risk.
Tuesday, 8 September 2009
Thesis work paper Improving Cash Flow in Software Companies
The basic premise is to produce more versions with fewer features more quickly (Davidson, 2001), with a more targeted customer base and at a lower cost. In short using continuous incremental improvements to improve cash flow and thereby increasing profitability.
This follows exactly on from Dr W Edwards Dening’s “Process of Continuous Improvement” (Walton, 1996). The increase in the number of software releases is similar to a ‘virtual subscription’, with customers updating their software more frequently.
One example of this has been in the software gaming industry. Epic Games Unreal Franchise has moved from releasing a brand new gaming version every 5 years, to a new version minor version every year. For example the original Unreal Tournament was released in 1999, and the next version was released in 2003. Although the product met with commercial success, customers were also faced with increasing choice from new market entrants. Europe, the United Kingdom, Australia and former “Eastern Block” countries have all entered the software gaming industry and prices have begun to drop as competitors fight for customer’s share of wallet. Responding to the change in competition, Epic released the minor upgrade version of Unreal Tournament 2004, which met with huge success. Davidson (Davidson, 2001) and Shapiro (Shapiro et al., 2000) both observe that releasing software more often and at lower prices not only improves cash flow, but also generates significantly better customer feedback.
This follows exactly on from Dr W Edwards Dening’s “Process of Continuous Improvement” (Walton, 1996). The increase in the number of software releases is similar to a ‘virtual subscription’, with customers updating their software more frequently.
One example of this has been in the software gaming industry. Epic Games Unreal Franchise has moved from releasing a brand new gaming version every 5 years, to a new version minor version every year. For example the original Unreal Tournament was released in 1999, and the next version was released in 2003. Although the product met with commercial success, customers were also faced with increasing choice from new market entrants. Europe, the United Kingdom, Australia and former “Eastern Block” countries have all entered the software gaming industry and prices have begun to drop as competitors fight for customer’s share of wallet. Responding to the change in competition, Epic released the minor upgrade version of Unreal Tournament 2004, which met with huge success. Davidson (Davidson, 2001) and Shapiro (Shapiro et al., 2000) both observe that releasing software more often and at lower prices not only improves cash flow, but also generates significantly better customer feedback.
Sunday, 16 August 2009
Thesis work paper Case 2: Intuit Software
Intuit Software’s turnaround began in Nov. 29, 1999, when Stephen M. Bennett was headhunted for the job of Chief Executive Office (CEO). Like Adobe, Intuit had been stagnating and stumbling during the dot-com boom.
As the new CEO Bennett formed a turnaround team and began a major reshuffle of Intuits QuickBooks small-business programs and TurboTax consumer software.
Further, all money losing business like Intuits online finance businesses were sold or shutdown. Again, we see a consistent pattern on removing non-profitable projects as advocated by Blumling (Blumling et al., 2002) and Davidson (Davidson, 2001). Intuit also purchased half-a-dozen small acquisitions to beef up Intuits small-business offerings and to increase earnings. This follows the trend observed in the research above, of instituting a strategic turnaround by creating or purchasing new products (Hofer, 1980) to increase and stabilise cash flow (Sutton, 2002).
Intuits turnaround also shows the same trend as other software companies. With the new CEO and turnaround team changing the company to a disciplined and results focused organisation, before beginning any cutbacks (Davidson, 2001). He recruited former General Electric (GE) subordinates to run both of Intuits major divisions and demanded better-thought-out budgets and clearer objectives from all of his managers.
To make Intuit much more efficient, the goal was set to deliver like software's top performers whose margins are more than 30%.
To get employees focused on the bottom line, he adjusted pay incentives. Like Teng’s (Teng, 2002) preference for more worker commissions or bonuses, workers at Intuit with top performance reviews get annual salary raises up to 10%, even when the average raise is 4% or less.
Furthermore, the turnaround team began pushing GE-like programs to boost software quality and trim waste. An argument supported by Davidson (Davidson, 2001) on the huge cost of supporting bad quality software.
One result was that error rates for Quicken’s Personal Finance software fell to 2% during the release of the 2003 version from 22% for the 2002 edition. Intuit says its quality efforts have saved $10 million so far, with an additional $20 million due from projects under way.
Like Teng (Teng, 2002), Bennett requires Intuit managers to groom their replacements. He also follows Sutton’s (Sutton, 2002) opinion that only be leading and teaching by example in management seminars to the up-and-comers, can the disciplines needed to turn the company around become truly effective.
Strategically, Bennett follows the same advice of Pate (Pate et al., 2002) and Harker (Harker et al., 1998) on sticking to businesses product areas where Intuit was number one or two.
Hence Intuit focuses on its core competency of small business software for companies with up to 250 employees (these companies are still considered small by US standards). Its new software applications extend Intuits hold on this market by adding human resource and payroll functions.
Like most software turnarounds, the effect on the companies’ profitability was exceptionally quick, with a net income that went from an $82 million loss in 2001 to a profit of $140 million in 2002.
As the new CEO Bennett formed a turnaround team and began a major reshuffle of Intuits QuickBooks small-business programs and TurboTax consumer software.
Further, all money losing business like Intuits online finance businesses were sold or shutdown. Again, we see a consistent pattern on removing non-profitable projects as advocated by Blumling (Blumling et al., 2002) and Davidson (Davidson, 2001). Intuit also purchased half-a-dozen small acquisitions to beef up Intuits small-business offerings and to increase earnings. This follows the trend observed in the research above, of instituting a strategic turnaround by creating or purchasing new products (Hofer, 1980) to increase and stabilise cash flow (Sutton, 2002).
Intuits turnaround also shows the same trend as other software companies. With the new CEO and turnaround team changing the company to a disciplined and results focused organisation, before beginning any cutbacks (Davidson, 2001). He recruited former General Electric (GE) subordinates to run both of Intuits major divisions and demanded better-thought-out budgets and clearer objectives from all of his managers.
To make Intuit much more efficient, the goal was set to deliver like software's top performers whose margins are more than 30%.
To get employees focused on the bottom line, he adjusted pay incentives. Like Teng’s (Teng, 2002) preference for more worker commissions or bonuses, workers at Intuit with top performance reviews get annual salary raises up to 10%, even when the average raise is 4% or less.
Furthermore, the turnaround team began pushing GE-like programs to boost software quality and trim waste. An argument supported by Davidson (Davidson, 2001) on the huge cost of supporting bad quality software.
One result was that error rates for Quicken’s Personal Finance software fell to 2% during the release of the 2003 version from 22% for the 2002 edition. Intuit says its quality efforts have saved $10 million so far, with an additional $20 million due from projects under way.
Like Teng (Teng, 2002), Bennett requires Intuit managers to groom their replacements. He also follows Sutton’s (Sutton, 2002) opinion that only be leading and teaching by example in management seminars to the up-and-comers, can the disciplines needed to turn the company around become truly effective.
Strategically, Bennett follows the same advice of Pate (Pate et al., 2002) and Harker (Harker et al., 1998) on sticking to businesses product areas where Intuit was number one or two.
Hence Intuit focuses on its core competency of small business software for companies with up to 250 employees (these companies are still considered small by US standards). Its new software applications extend Intuits hold on this market by adding human resource and payroll functions.
Like most software turnarounds, the effect on the companies’ profitability was exceptionally quick, with a net income that went from an $82 million loss in 2001 to a profit of $140 million in 2002.
Sunday, 5 July 2009
China statistics, market structure changes and target marketing
The massive availability of credit at cheap prices allowed numerous companies and entrepreneurs to invest in stupid ideas. Many of which, had no market research to indicate that there was even a target market for their products.
I will admit I was guilty of the same crime myself. My first software didn't sell, and it was completely my own fault.
Thinking that something is a good idea, doesn’t make it a ‘profitable good idea'. I had not correctly narrowed down who my target market was and so had produced some high quality software that simply did not sell; but at least it was with my own money and in my own time and so I learned to think like an investor.
Once I realized I had screwed up 'I stabbed it in the crib' and started again on a new project.
The rules this time were:
The point is losing your own money is one thing, losing other people’s money however, is entirely another matter. Directors have a legal duty of care towards their investors (read: bosses) and so making mistakes with other peoples money takes on a moral aspect; not just the financial, legal and marketing ones outlined above.
The moral aspect is at the very least ‘knowing when to quit when you’re behind’.
For example many start-ups not only fail to do their marketing home work like above, but worse once the product fails to sell, they make the even bigger mistake of creating a version 2 or 3 or 4 of the product.
If that wasn’t bad enough, the managers forget the basic product development lesson of ‘the longer you stay with a failed product, the less objective you become and the more emotionally attached you become to it’. This results in classic creeping commitment but with someone else’s money, resulting in throwing good money after bad in an attempt to improve on a product that no one wants.
Naturally having a go and failing is part of business, but continuing with a failed product is one of the most common errors seen by turnaround managers.
The love of Power Point and Excel of course adds to the problem. People turn on their software and turn off the judgment centre’s of their brains.
A case in point is to start going through managements financial and marketing projections and question the underlying assumptions.
Once you start questioning people on where these assumptions were made, you will notice many are ‘made up as we went along’ as the 'business model' was built; many without them ever being tested.
The most common errors seen are the widely optimistic growth rates for the firm and its target market.
Many firms make the mistake of using 'China statistics'.
This is thinking at its most lazy and simplistic and goes something like this:
This shows a classic lack of proper target marketing.
As always it comes down to the cost of the new technology versus the existing low cost alternatives, and sometimes the cheaper alternative for the customer is to simply not buy.
Another 'china statistics' example is to use existing market data for a competing product to estimate the size of your products target market. All the while not realizing that your market is completely different from the one whose figures you are using e.g. using the market size of the domestic television market in the US to estimate the size of the home video projector market in the US.
These products not only compete against each other but their pricing structure is different, as is the amount of wall / floor space required by the customer.
Further in many cases, the target market is not only incorrect but the firm has not realised what industry they are actually in. This means they discount the differing economics they will experience compared to existing players.
E.g .The wire industry and the fibre optic cable industry both target the telephone infrastructure market, but their cost structure, inputs, outputs, suppliers and economic make up are totally different.
Let’s look a bit further to see what I mean.
E.g. if we were to apply this to Women's High Heel shoes (The Product), lets see what happens.
1. The cost of the shoes narrows down the market size - The Price
2. The sex of the consumer cuts the size of the market - The Position
3. If the woman in question is on a sheep farm then the market is also effected by the location - The Place
4. She is 60 years old and does not go out much, and the advertising is put in the city - The Promotion
5. Finally are their competing / alternative products - e.g. boots which may be more practical to her than high heels etc.
As we can see the good old 4 Ps of marketing start to give us an idea of how 'China statistics’ complete with generalizations and bad assumptions can really damage a start up investment. Hence any marketing, sales and revenue projections based upon them are simply rubbish. Combine this with managers creeping commitment, and you end up with multiple versions of a product that will not sell, but will be guaranteed to burn investors money every time..
By the time a turnaround manager is called in, the damage is pretty severe.
If you think your business is not delivering, do the following:
1. Write up the 4 P's on a piece of paper and hang it above your desk - using the 4P's as your guide, research what you think the target market size should be - (get outside help if you need to - it will pay for itself in no time)
2. Draw up the total investment made so far in a profit curve (see previous blog) and beside it draw / write up the current interest rate and the money you could have made if you had invested somewhere else
3. Go back to the financial projections and compare / plot these against the financial statements, note the irregularities in the projections
4. Check the target market of the marketing models against you own - just make a rough guess - chances are your target market is way smaller than the projections - you may be wrong but you have more than a 50% chance of being right because of the lousy revenue figures - note the irregularities’ in the assumptions.
5. You now have a very rough idea of few things
If they have, then you should have received notification of the updated model and updated target market numbers, plus you should have been warned of the possibility that maybe you are losing money.
If you haven't received any of this, then demand to know why.
I will admit I was guilty of the same crime myself. My first software didn't sell, and it was completely my own fault.
Thinking that something is a good idea, doesn’t make it a ‘profitable good idea'. I had not correctly narrowed down who my target market was and so had produced some high quality software that simply did not sell; but at least it was with my own money and in my own time and so I learned to think like an investor.
Once I realized I had screwed up 'I stabbed it in the crib' and started again on a new project.
The rules this time were:
- If it doesn’t have a measurable target market, it doesn’t get made.
- If it does not have a target market big enough to make me money, it doesn’t get made.
The point is losing your own money is one thing, losing other people’s money however, is entirely another matter. Directors have a legal duty of care towards their investors (read: bosses) and so making mistakes with other peoples money takes on a moral aspect; not just the financial, legal and marketing ones outlined above.
The moral aspect is at the very least ‘knowing when to quit when you’re behind’.
For example many start-ups not only fail to do their marketing home work like above, but worse once the product fails to sell, they make the even bigger mistake of creating a version 2 or 3 or 4 of the product.
If that wasn’t bad enough, the managers forget the basic product development lesson of ‘the longer you stay with a failed product, the less objective you become and the more emotionally attached you become to it’. This results in classic creeping commitment but with someone else’s money, resulting in throwing good money after bad in an attempt to improve on a product that no one wants.
Naturally having a go and failing is part of business, but continuing with a failed product is one of the most common errors seen by turnaround managers.
The love of Power Point and Excel of course adds to the problem. People turn on their software and turn off the judgment centre’s of their brains.
A case in point is to start going through managements financial and marketing projections and question the underlying assumptions.
Once you start questioning people on where these assumptions were made, you will notice many are ‘made up as we went along’ as the 'business model' was built; many without them ever being tested.
The most common errors seen are the widely optimistic growth rates for the firm and its target market.
Many firms make the mistake of using 'China statistics'.
This is thinking at its most lazy and simplistic and goes something like this:
- 'China has 1 Billion people, so that is a huge market for our product, lets invest' or
- ' China is growing at 10%, that’s the market to be in' or
- 'The Internet is going to totally change the structure of this market. Lets get a head start and start pushing this new technology now'.
This shows a classic lack of proper target marketing.
- The first reason being is that most people in China are on the poverty line, so the majority of the population may not be able to afford to buy your product.
- The second reason is the growth assumption. Just because China is growing fast does not mean your target market is growing fast. E.g ever brought a buggy-whip lately?
- The final reason is the structural change argument. When a new technology comes along, many start ups rush in thinking that the technology will cause a structural change in any existing market. Many don't. In fact the majority simply fail. The main reason is because they are e they are competing against a CHEAPER existing technology.
- Even in the ones that do succeed, many take while to gain a foot hold. Faxes for example took over 100 years - not the 5-6 most people assume. Again because the prices of fax machines had to come down to a price that was the same or less than average same-day courier costs.
- Likewise, the Internet didn't take hold until it was not only deregulated,But also that desktop computers were again cheap enough for households to be able to buy one.
As always it comes down to the cost of the new technology versus the existing low cost alternatives, and sometimes the cheaper alternative for the customer is to simply not buy.
Another 'china statistics' example is to use existing market data for a competing product to estimate the size of your products target market. All the while not realizing that your market is completely different from the one whose figures you are using e.g. using the market size of the domestic television market in the US to estimate the size of the home video projector market in the US.
These products not only compete against each other but their pricing structure is different, as is the amount of wall / floor space required by the customer.
Further in many cases, the target market is not only incorrect but the firm has not realised what industry they are actually in. This means they discount the differing economics they will experience compared to existing players.
E.g .The wire industry and the fibre optic cable industry both target the telephone infrastructure market, but their cost structure, inputs, outputs, suppliers and economic make up are totally different.
Let’s look a bit further to see what I mean.
E.g. if we were to apply this to Women's High Heel shoes (The Product), lets see what happens.
1. The cost of the shoes narrows down the market size - The Price
2. The sex of the consumer cuts the size of the market - The Position
3. If the woman in question is on a sheep farm then the market is also effected by the location - The Place
4. She is 60 years old and does not go out much, and the advertising is put in the city - The Promotion
5. Finally are their competing / alternative products - e.g. boots which may be more practical to her than high heels etc.
As we can see the good old 4 Ps of marketing start to give us an idea of how 'China statistics’ complete with generalizations and bad assumptions can really damage a start up investment. Hence any marketing, sales and revenue projections based upon them are simply rubbish. Combine this with managers creeping commitment, and you end up with multiple versions of a product that will not sell, but will be guaranteed to burn investors money every time..
By the time a turnaround manager is called in, the damage is pretty severe.
If you think your business is not delivering, do the following:
1. Write up the 4 P's on a piece of paper and hang it above your desk - using the 4P's as your guide, research what you think the target market size should be - (get outside help if you need to - it will pay for itself in no time)
2. Draw up the total investment made so far in a profit curve (see previous blog) and beside it draw / write up the current interest rate and the money you could have made if you had invested somewhere else
3. Go back to the financial projections and compare / plot these against the financial statements, note the irregularities in the projections
4. Check the target market of the marketing models against you own - just make a rough guess - chances are your target market is way smaller than the projections - you may be wrong but you have more than a 50% chance of being right because of the lousy revenue figures - note the irregularities’ in the assumptions.
5. You now have a very rough idea of few things
- Whether or not your managers have actually done their homework - or
- Whether or not, they even know how to do their homework
If they have, then you should have received notification of the updated model and updated target market numbers, plus you should have been warned of the possibility that maybe you are losing money.
If you haven't received any of this, then demand to know why.
Thursday, 11 June 2009
Thesis work paper Case 1: Adobe Systems
Adobe Systems began in the 1982 as a small software company for creating and printing graphics and text. By 1998 Adobe was coming close to having billion dollar sales. However while other software companies were booming, Adobe was in trouble.
Adobe’s flagship product Adobe Illustrator ran late. Further the Japanese market tumbled as the effects of the Asian financial crises and the troubles of the Japanese banking system began to eat in to Adobe sales. Since the Japanese market contributed 25% to Adobe’s revenue, net income dropped drastically down 46% on the previous year. Managerial strife and a 20% staff turnover also wracked the company as desperate managers began to point fingers. An altogether common situation as Teng (Teng, 2002) points out, when no clear lines of accountability and delineation occurs.
Watching the firms ratios decline over the year, and pressuring for the delivery of software products Chief Executive John E. Warnock and cofounder Charles Geschke finally decided to implement a turnaround plan.
Eliminating the jobs of the other three top executives and laying off 10% of management, Warnock began an effort to cut through Adobe lays of bureaucracy.
Two other layoffs also occurred as the company sought to cut expenses. It could be interpreted that although cut backs were done, they were originally not deep enough as Davidson (Davidson, 2001) above warns.
A new Chief Financial Officer (CFO) was hired and the accounting disciplines were tightened and reorganised. Financial Controls were updated and changed to let manager’s track sales daily, instead of at the close of each quarter allowing for more responsive action and better accountability daily (a tactic strongly advocated by Sutton (Sutton, 2002) especially during the initial emergency action phase).
Adobe also amalgamated its four divisions and consolidated each of the geographically separate marketing, sales and engineering groups back in to the organisation.
The companies information systems were also centralised, so that less time was spent trying to integrate accounting data from differing geographies.
The amalgamation of international business units (and networks) back in to a centralised form is very common for international turnaround as Teng (Teng, 2002) indicated previously.
Khandwalla (Khandwalla, 1983) also advises such a move because it enables consistent global communication and co-ordination during restructurings.
Since 40% of Adobe's revenues had come from product upgrades sold to existing customers and another 30% of revenues came from Adobe Illustrator, made management realise that too much reliance on one product had created a revenue and cash flow shortfall. Therefore to allow for smoother income streams and reinvigorate itself Adobe began to focus on new products. A consistent approach in software turnarounds as stated by Davidson (Davidson, 2001) and Blumling (Blumling et al., 2002). As a result Adobe developed and extended the PhotoShop product range, and began implementing it’s new Adobe Internet Document Management Server range.
Adobe’s turnaround was exceptional. In 1999 it had exceeded US$1 billion in revenues, and achieved a 226% increase in net income.
Adobe’s flagship product Adobe Illustrator ran late. Further the Japanese market tumbled as the effects of the Asian financial crises and the troubles of the Japanese banking system began to eat in to Adobe sales. Since the Japanese market contributed 25% to Adobe’s revenue, net income dropped drastically down 46% on the previous year. Managerial strife and a 20% staff turnover also wracked the company as desperate managers began to point fingers. An altogether common situation as Teng (Teng, 2002) points out, when no clear lines of accountability and delineation occurs.
Watching the firms ratios decline over the year, and pressuring for the delivery of software products Chief Executive John E. Warnock and cofounder Charles Geschke finally decided to implement a turnaround plan.
Eliminating the jobs of the other three top executives and laying off 10% of management, Warnock began an effort to cut through Adobe lays of bureaucracy.
Two other layoffs also occurred as the company sought to cut expenses. It could be interpreted that although cut backs were done, they were originally not deep enough as Davidson (Davidson, 2001) above warns.
A new Chief Financial Officer (CFO) was hired and the accounting disciplines were tightened and reorganised. Financial Controls were updated and changed to let manager’s track sales daily, instead of at the close of each quarter allowing for more responsive action and better accountability daily (a tactic strongly advocated by Sutton (Sutton, 2002) especially during the initial emergency action phase).
Adobe also amalgamated its four divisions and consolidated each of the geographically separate marketing, sales and engineering groups back in to the organisation.
The companies information systems were also centralised, so that less time was spent trying to integrate accounting data from differing geographies.
The amalgamation of international business units (and networks) back in to a centralised form is very common for international turnaround as Teng (Teng, 2002) indicated previously.
Khandwalla (Khandwalla, 1983) also advises such a move because it enables consistent global communication and co-ordination during restructurings.
Since 40% of Adobe's revenues had come from product upgrades sold to existing customers and another 30% of revenues came from Adobe Illustrator, made management realise that too much reliance on one product had created a revenue and cash flow shortfall. Therefore to allow for smoother income streams and reinvigorate itself Adobe began to focus on new products. A consistent approach in software turnarounds as stated by Davidson (Davidson, 2001) and Blumling (Blumling et al., 2002). As a result Adobe developed and extended the PhotoShop product range, and began implementing it’s new Adobe Internet Document Management Server range.
Adobe’s turnaround was exceptional. In 1999 it had exceeded US$1 billion in revenues, and achieved a 226% increase in net income.
Monday, 4 May 2009
Thesis work paper Limit Research and Development to 10%-20% of Sales
Davidson (Davidson, 2001) explains that software firms typically spend too much on the product features, because the firms themselves have “over-developed” the product. He cites a common programming joke to illustrate this:
“It you work on a program long enough, it will eventually send email (Davidson, 2001)”
Such an inside joke does however demonstrate the “My Baby” syndrome that can get software companies in to trouble. By spending too long on software development the firms resources and capital are squeezed.
Further, because product development is slowed, a consistent cash flow is denied. Davidson (Davidson, 2001) and Tarter (Tarter, 2001) both recommend that software turnarounds begin with strong version control, limiting research and development of products to between 10% and 20% of sales.
What’s more developers should ship only a limited set of customer benefits (e.g. 10 features) for each product version.
“It you work on a program long enough, it will eventually send email (Davidson, 2001)”
Such an inside joke does however demonstrate the “My Baby” syndrome that can get software companies in to trouble. By spending too long on software development the firms resources and capital are squeezed.
Further, because product development is slowed, a consistent cash flow is denied. Davidson (Davidson, 2001) and Tarter (Tarter, 2001) both recommend that software turnarounds begin with strong version control, limiting research and development of products to between 10% and 20% of sales.
What’s more developers should ship only a limited set of customer benefits (e.g. 10 features) for each product version.
Wednesday, 1 April 2009
Thesis work paper Cash Reserves
Keep Cash Reserves at a Minimum of Eight Months
Davidson (Davidson, 2001) also suggests that software firms should not go lower than six months cash flow, as any product launches will increase expenses when money is already tight. This plus the fact that it could take another three to six months to find, interest and negotiate with potential investors does not leave much time for the firm operate in, especially during industry downturns or recessions.
Accordingly, Blumling (Blumling et al., 2002) points out that a firms management credibility is normally damaged unless the team has been changed and turnaround manager appointed.
“To put all this right, a company must give a turnaround team the power to act fast. First, the board of directors should decide whether the current CEO (who often has an entrepreneurial mind-set) might have forfeited the respect of customers, investors, and employees….” (Blumling et al., 2002).
Due to the constraint of finding and hiring a turnaround manager, assembling a turnaround team and going through the removal of senior managers, it is highly unlikely that this scenario alone will leave six months for the turnaround manager to seek funding and have time to implement a turnaround. As such, it would seem prudent to begin looking for the turnaround manager when eight months cash flow is left.
This argument is supported by the large cash holdings of many successful software companies. Adobe for example currently holds cash, cash equivalents and short term investments of US$1.1 billion (See Appendix A), while Intuit also keeps US$1.26 (See Appendix B) on hand. Cash reserves seem to be part of normal business planning (Davidson, 2001), despite critiques from industry analysts, that these should be invested elsewhere or returned to shareholders.
Like all turnarounds denial of the firms current predicament can exist, but fortunately the “burn rate” in software industries is sufficiently high to mean that getting both management and staff involved in the turnaround is normally easier. Failures therefore occur because of insufficient capital, lack of new products, poor strategic positioning and inadequate cost cutting.
Davidson (Davidson, 2001) also suggests that software firms should not go lower than six months cash flow, as any product launches will increase expenses when money is already tight. This plus the fact that it could take another three to six months to find, interest and negotiate with potential investors does not leave much time for the firm operate in, especially during industry downturns or recessions.
Accordingly, Blumling (Blumling et al., 2002) points out that a firms management credibility is normally damaged unless the team has been changed and turnaround manager appointed.
“To put all this right, a company must give a turnaround team the power to act fast. First, the board of directors should decide whether the current CEO (who often has an entrepreneurial mind-set) might have forfeited the respect of customers, investors, and employees….” (Blumling et al., 2002).
Due to the constraint of finding and hiring a turnaround manager, assembling a turnaround team and going through the removal of senior managers, it is highly unlikely that this scenario alone will leave six months for the turnaround manager to seek funding and have time to implement a turnaround. As such, it would seem prudent to begin looking for the turnaround manager when eight months cash flow is left.
This argument is supported by the large cash holdings of many successful software companies. Adobe for example currently holds cash, cash equivalents and short term investments of US$1.1 billion (See Appendix A), while Intuit also keeps US$1.26 (See Appendix B) on hand. Cash reserves seem to be part of normal business planning (Davidson, 2001), despite critiques from industry analysts, that these should be invested elsewhere or returned to shareholders.
Like all turnarounds denial of the firms current predicament can exist, but fortunately the “burn rate” in software industries is sufficiently high to mean that getting both management and staff involved in the turnaround is normally easier. Failures therefore occur because of insufficient capital, lack of new products, poor strategic positioning and inadequate cost cutting.
Wednesday, 18 March 2009
Thesis work paper Software Cutbacks
Software Cutbacks Will Normally Be Harsh Because the Expense Saving to Operating Income Ratio will be 3:1.
Due the large revenue changes that can effect software firms (Blumling et al., 2002), operational cutbacks for software companies will normally be exceedingly harsh on the companies employees because the turnaround must start earlier. Where as other firms may begin cutting back when sustained losses occur, software companies should begin prior to this, because the chances of company renewal are so much harder. Davidson explains
”Suppose…you have 3-6 months of cash flow available. The first thing that you have to do is cut back. This will be painful. It will go against all the things I have written earlier about the value of retention, the value of being an employer of choice, but if the company is going to survive, cut early rather than late” (Davidson, 2001).
For software turnaround’s, there are several ways to improve profitability quickly. Tarter (Tarter, 2001) gives the industry benchmark for the number of sales and marketing employees to the total number of the companies workers to be approximately 23%. But for computer programmers and IT employees gives the caveat that the value of the software and the type of industry the firm is catering to will determine the number of employees. He cites the examples of Rockwell Software against ID Software as examples. These firms have differing numbers if software developers, from 5000+ at Rockwell Software to only 15-20 at ID Software. Hence generic benchmarks can not be used.
Blumling (Blumling et al., 2002) recommends cutbacks should include changing the scope of its operations by eliminating products, customer segments, distribution channels, and geographies that are not linked to the companies core franchise or growth options, a tactic similar to that voiced by Sutton (Sutton, 2002). Likewise controlling outlays on IT equipment, office supplies, travel, and outside services areas that might account for 30% to 40% of overall spending are often over looked. This tactic of cost cutting is supported by both Sutton (Sutton, 2002) and Teng (Teng, 2002) above.
Blumling (Blumling et al., 2002) states that for software companies turnaround savings of 10% to 20 %, can enhance operating income by 3% to 8%. That is, on average a 15% saving will approximate to a 5.5% increase in operating income, a 3 to 1 expense savings to operating income ratio.
From these figures it can be seen that operational turnarounds for software will normally not be enough, as the cost savings needed (although deep), will probably not have a significant effect on revenue. Such a ratio supports Davidson (Davidson, 2001) and Hofer’s (Hofer, 1980) argument that some turnarounds require a strategic realignment rather than simply operational cost cutting. Furthermore, industry benchmark firm Software Success (Tarter, 2001) found that general and administrative expenses averaged to around 13.8% of total revenues over a three year period of 2000 to 2003 for the United States software industry. With the average range being between 10.1% to 14.4%. The statistics also indicate that larger firms are at an operational advantage due to economies of scale.
Due the large revenue changes that can effect software firms (Blumling et al., 2002), operational cutbacks for software companies will normally be exceedingly harsh on the companies employees because the turnaround must start earlier. Where as other firms may begin cutting back when sustained losses occur, software companies should begin prior to this, because the chances of company renewal are so much harder. Davidson explains
”Suppose…you have 3-6 months of cash flow available. The first thing that you have to do is cut back. This will be painful. It will go against all the things I have written earlier about the value of retention, the value of being an employer of choice, but if the company is going to survive, cut early rather than late” (Davidson, 2001).
For software turnaround’s, there are several ways to improve profitability quickly. Tarter (Tarter, 2001) gives the industry benchmark for the number of sales and marketing employees to the total number of the companies workers to be approximately 23%. But for computer programmers and IT employees gives the caveat that the value of the software and the type of industry the firm is catering to will determine the number of employees. He cites the examples of Rockwell Software against ID Software as examples. These firms have differing numbers if software developers, from 5000+ at Rockwell Software to only 15-20 at ID Software. Hence generic benchmarks can not be used.
Blumling (Blumling et al., 2002) recommends cutbacks should include changing the scope of its operations by eliminating products, customer segments, distribution channels, and geographies that are not linked to the companies core franchise or growth options, a tactic similar to that voiced by Sutton (Sutton, 2002). Likewise controlling outlays on IT equipment, office supplies, travel, and outside services areas that might account for 30% to 40% of overall spending are often over looked. This tactic of cost cutting is supported by both Sutton (Sutton, 2002) and Teng (Teng, 2002) above.
Blumling (Blumling et al., 2002) states that for software companies turnaround savings of 10% to 20 %, can enhance operating income by 3% to 8%. That is, on average a 15% saving will approximate to a 5.5% increase in operating income, a 3 to 1 expense savings to operating income ratio.
From these figures it can be seen that operational turnarounds for software will normally not be enough, as the cost savings needed (although deep), will probably not have a significant effect on revenue. Such a ratio supports Davidson (Davidson, 2001) and Hofer’s (Hofer, 1980) argument that some turnarounds require a strategic realignment rather than simply operational cost cutting. Furthermore, industry benchmark firm Software Success (Tarter, 2001) found that general and administrative expenses averaged to around 13.8% of total revenues over a three year period of 2000 to 2003 for the United States software industry. With the average range being between 10.1% to 14.4%. The statistics also indicate that larger firms are at an operational advantage due to economies of scale.
Tuesday, 3 February 2009
Thesis work paper Is the firm worth saving?
The difficult question of whether or not to turnaround a software company greatly depends upon the value of the firm’s products and its intellectual capital. When there are few fixed assets, the valuation methods to assess Altman’s (Altman, 1993) argument must move beyond operational turnaround methods to the underlying strategy itself. As such, most turnarounds of software companies will involved at least a strategic turnaround because as Davidson (Davidson, 2001) argues, the firm’s products may simply not be suitable for it’s markets regardless of the intellectual capital of the firm. Like any firm, having highly skilled workers is not enough. Rather there must be a concentration on whether there is a market for the product and if not, then that particular product should be dropped. Therefore software turnarounds will be nearly always a combination of both strategic as well as operational turnarounds.
However Davidson (Davidson, 2001) warns that all good software companies must have a turnaround plan set up ahead of time.
He proclaims
“success requires a certain ruthlessness – willingness to define hurdles early on in the game that will determine whether you should proceed. Only be defining these hurdles, these criteria, can you avoid the problems of foregoing income…Remember that killing off a commercial idea quickly gives you the opportunity of tackling another.”
This assessment supports Khandwalla’s (Khandwalla, 2001, 1072) assertion that successful companies have turnaround plans and the necessary resources to implement these plans mapped out ahead of time.
However Davidson (Davidson, 2001) warns that all good software companies must have a turnaround plan set up ahead of time.
He proclaims
“success requires a certain ruthlessness – willingness to define hurdles early on in the game that will determine whether you should proceed. Only be defining these hurdles, these criteria, can you avoid the problems of foregoing income…Remember that killing off a commercial idea quickly gives you the opportunity of tackling another.”
This assessment supports Khandwalla’s (Khandwalla, 2001, 1072) assertion that successful companies have turnaround plans and the necessary resources to implement these plans mapped out ahead of time.
Wednesday, 21 January 2009
Thesis work paper Analysis and Interpretation
Turning around Software Companies
Although the turnaround management process of many companies is comprised of cutting costs (operational turnarounds), realigning products to new or existing markets (strategic turnarounds) and sorting out financing problems (financial turnarounds). Davidson (Davidson, 2001, 1-102) indicates the rise of software and information based companies and their corresponding wide variability in revenues has added a new difficulty for turnaround management. This view is supported by Blumling (Blumling, Frick, & Meehan III, 2002, 76) who reports that only one software turnaround in eight succeeds.
Although the turnaround management process of many companies is comprised of cutting costs (operational turnarounds), realigning products to new or existing markets (strategic turnarounds) and sorting out financing problems (financial turnarounds). Davidson (Davidson, 2001, 1-102) indicates the rise of software and information based companies and their corresponding wide variability in revenues has added a new difficulty for turnaround management. This view is supported by Blumling (Blumling, Frick, & Meehan III, 2002, 76) who reports that only one software turnaround in eight succeeds.
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