Large IT Projects are known to be difficult, over budget, overdue and not provide expected benefits

There are many challenges facing a business undertaking large, critical information technology projects. Such projects are known to result in less capability than expected and at a significantly greater cost. In hindsight, can be categorized into fundamental root causes:

• Estimates for costs, schedule and derived benefits are overly optimistic while risks are rarely considered or quantified.
• Project Scope may double or triple during the lifecycle of the project.
• Business logic inherent in legacy systems is often not well understood, thus delaying delivery.
• Cultural and skill requirements from radical changes to critical business processes require a longer period of adaptation than expected.
• And most importantly: senior management, although capable, did not have the time or previous experience needed for success.

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Business owners looking to find a way to share the wealth with those required to help create it have an option in incentive compensation (IC). This concept rewards performance and teamwork that produce results.

If you’re willing to invest in realistic incentives that reward achievement, you’ll reap the proceeds. When employees can see dollar signs, and their goals are clearly stated to clarify direction and eliminate confusion, their mindsets change and they become more creative.

The keys to success with IC are to:

1. Set realistic goals and time frames

2. Hold managers accountable for performance

3. Communicate measurement and reward methodology

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The process of turning around a troubled entity is complex, due to multiple constituencies, usually including lenders, creditors, investors, owners and employees. All have different agendas. In my work I address the turnaround process as if all constituents are in favor of proceeding to the end, when a restructured entity emerges. Nothing about a turnaround is simple, but that approach at least clarifies the forward movement.

Above all, focus on the management team. Businesses fail because of mismanagement. According to a study conducted by the Association of Insolvency and Restructuring Advisors, only 9 percent of failures are due to influences beyond management’s control. Mismanagement is most often seen in more than one of these multiple areas: autocratic style, ineffective personnel management, vague goals, lack of new customers, inadequate strategic analysis, and mismanaged growth.

So, as Will Rogers said, “If you find yourself in a hole, stop digging.” Good advice for directors with responsibility to lead a company.

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What are your strengths in taking on interim assignments?

I focus on turnarounds of small to mid-sized companies, and on helping healthy companies grow and prosper. One of my strengths is to quickly grasp the major issues a company faces at a high level. After identifying the major issues, I delve into the nitty-gritty and develop a plan with the senior management team to address each challenge. I then lead the execution of the plan, and once the company is on the right track, the management team can successfully run it on their own.

Even if sometimes it ends up being a wrong decision, it’s better to make a decision, than not make one at all.

Give me an example of when you took a company to the next level.

I was brought in as CFO of a telecom company that was losing $4.5 million. I was able to identify the cause of the loss, which was actually one major product, and then work out a plan with their recently hired CEO to exit from selling that product while still servicing current clientele. We also focused on research and development to create and commercialize new products. Within a year the company became cash-flow positive, and continued to be profitable and generate cash going forward.

A good outcome.

Another example – I was referred by an asset based lender to one of their clients, an established distribution company that was losing money. The owners, who were in their late sixties, were looking for an exit, and the lender wanted to get paid in full. I first brought their costs down and then, within six months, I identified an acquirer who purchased the company, and the bank was paid in full. The new owners then hired me for six months to help them with financial and operational challenges. I initiated a drastic change in the way they distributed their products, leading to substantial savings and improved service to their customers. In the end, I helped the new owners increase profitability while becoming more responsive to their customers’ needs.

It sounds like you have worked in many different industries.

It’s one of my strengths. I think the only industry I haven’t worked in is retail. My focus is always finance, operations, and management at the C-level. This diversity helps me bring ideas and best practices from one industry to solve business challenges in another.

What attracts you to interim roles?

When acting as CFO of a company that is doing well, there are usually few challenges. While you can always improve a company’s metrics, I prefer tough challenges, which usually come by way of a turnaround project, or by working with a healthy company aggressively seeking to increase revenue, expand nationally or globally or improve its bottom line. I also find it challenging to work with successful companies interested in expanding through acquisitions.

How so?

Because going after an acquisition involves analysis of the market and identifying potential targets, negotiating the acquisition, and then integrating the acquired company. You need to be highly creative and think strategically, and address the needs of the seller and the buyer so that at the end both sides feel like a winner.

You worked a year and a half at Selway Partners, a private equity group, starting several technology companies and leading $38 million worth of investments and private placements. What did you bring away from this PE experience that has helped you in other assignments?

It honed my negotiation skills and ability to manage multiple efforts at one time. With each startup, I was involved in the due diligence process and negotiating not only with the startup founders, but at the same time I negotiated the investment terms with other private equity groups. We were usually the lead investors and we frequently brought in additional co-investors. Each investment was a relatively complex deal to put together. I needed to make the founders happy with the investors, make the investors happy with the terms of the deal, and coordinate with the accountants and attorneys, basically ensuring everyone was on board with the final terms and conditions.

What was your role after the startup was up and running?

I mentored the CEO and the CFO and helped them with their growth plans. I was actively involved on the finance side and attended board meetings.

You also served as CFO and acting COO of a NASDAQ-listed medical device company. What was the state of the company when you stepped in?

The company had been losing money since its inception about 20 years ago. I remember when I got the call from the CEO, my first question was, “Why would I ever want to join a company like that?” I was convinced to join once he told me about his plans to turn around the company and his exit strategy.

What was his plan?

To invest extensively in R & D to develop new and innovative products. He also planned to invest in sales, marketing and improve the financial and operational infrastructure of the company to support accelerated growth. After joining the company, I developed a plan to reduce costs and increase efficiency and productivity.

Were you successful?

Two years later the company had better cash flow and increased productivity. We reduced inventories by better managing the purchasing cycle and vendor relations, we increased manufacturing productivity by more than 200 percent in five months by improving the manufacturing and the quality control processes, and we restructured the balance sheet. I also improved the accounting process and the SEC filing, increased transparency and implemented Sarbanes-Oxley.

What is the biggest mistake troubled companies make?

I cringe when I hear “We’ve always done it this way, so it’s the right thing to do.”

True! Where do you go with that?

This type of statement gives me the incentive to find a better way of planning and executing a process, by evaluating it from a different angle, in order to improve it or change it entirely. The fact that somebody has done something for many years is not really a good reason to continue doing it in the same way.

You have experience working with and serving on boards of directors. What are the attributes of a good director?

You have to be direct and honestly express your opinion. This is important because boards tend to not ask the tough questions. They often listen to what the CEO is presenting, and usually approve what is asked of them. I’m always inquisitive, and before reaching a decision, I take into account the CEO’s suggestions, while considering the board’s view and what’s best for the shareholders.

That’s a tough challenge.

I am able to deal with tough decisions. Even if it sometimes ends up being a wrong decision, it’s better to make a decision, than not make one at all. I also have high integrity and strong ethics, which make people want to work with me.

Tell us about an ethical challenge or lack of integrity?

I was contacted by a board member of a company I did some restructuring work for a few years earlier. He asked me to come in and take a look at the financials of a company he invested in, because he suspected the CEO was not giving him the correct records. Within a week I found that the CEO was defrauding him and the bank.

What did you do next?

I met with the bank, the CEO, and the investor and told them what I found. A week later the CEO was fired and I was installed as the interim CEO. My goal was to help the bank recover some of its losses and then prepare the company for sale. Within a year and a half, we were able to sell the assets and recover part of the bank’s losses. The bank gave me a few more restructuring assignments after that.

How do you describe yourself as a leader?

I am a very demanding, but fair leader. I always make sure that if my team needs to stay late in order to meet a deadline, I stay with them and am available to answer questions or respond to a crisis. I also make sure they get rewarded in some way for their hard work. I highly value each and every employee’s contribution to a company.

Valuing a company is the easy part; creating that value in the first place so you can measure it is a more formidable task. Create a Value Equation to build worth into your company.

Buyers and sellers look at the component make-up of a company differently, and therefore, place different values on these ingredients and on the whole. To enhance the real value, analyze company components as they relate to worth in the mind of potential buyers. Value to one buyer often does not necessarily hold the same value for another. Establish multiple buyer profiles depending upon the circumstances and prepare to build value each would be willing to pay for.

There are essentially two kinds of buyers — strategic buyers and annuity buyers, each with different motives.

Strategic buyers purchase for reasons that fit into their strategic plan. They benefit through synergies like acquiring customer base in expanded territories, new products, added capacity, and reduced costs. This type of buyer may place some value in the first line management team, but will see added value in the ability to place their own managers into key positions.

The annuity or financial buyers, on the other hand, see value in the stand-alone entity’s ability to generate cash flow from profits year after year. The institutional buyer places the highest value on how motivated and incentivized the existing management team is, and their receptiveness to remain to generate cash and profits. The owner/operator conversely will look at ‘buying a job’.

Typically, strategic buyers of closely held companies purchase at six to 10 times earnings and/or cash flow, while annuity buyers pay two to six times cash flow. The ultimate worth of the company depends upon who the buyer will be. These multiples are usually considerably higher in public companies, but the concepts of building value are the same.

It is essential to look at what is valuable and understand how to exploit and preserve this value. From the start, plan to sell the business and put value creation into perspective.

Free cash flow and the continued ability to produce it with reliable probability creates the greatest value. This is not as easy as it sounds. In fact, it can be complicated, is often misunderstood, and frequently is bungled. Look at the elements in the Value Creation Equation to see how each brings forth value and how together they compound the effect.

Value Creation = Net Asset Value + Future Revenue Stream + Going Concern Value + Incentive to Purchase

The Breakdown

Net Asset Value (NAV)

Sometimes referred to as Orderly Liquidation Value, it is the cash net worth of assets less encumbrances if you were to liquidate these assets at a fair market price under orderly disposition conditions when liquidation is not necessary. This NAV can equal Net Worth on the Balance Sheet, but is often adjusted for the value of intangibles.

Tangible Unencumbered Book Value + Intangible Assets + Adjustments to Market Value (Over-amortized/depreciated/expensed assets, or usable Inventory written down lower than market value) – Obsolete Inventory and Bad Debts – Outstanding Obligations on open contracts = market value. Build a strong, healthy balance sheet with adequate reserves and proper statement of asset value, because this is a fundamental on which to expand a company and increase its worth.

Utilize just-in-time and consignment agreements to keep raw materials at the lowest levels possible to minimize obsolescence. Produce in-process work expediently to cover short-term needs. Build finished goods for firm orders or reasonable short-term expectations of sale; don’t overproduce. If in a seasonable business cover production levels over the off-season with contracts for sale of goods just before the season, cover the risk with orders for goods. It may be better to have less than market demand if projections were off, compared to interest and carrying costs to hold artificial Christmas trees until next year.

Customer Lists, contacts, name recognition, trademarks, reputation, Web distribution channels and Internet presence are often not considered in asset valuation because they are not carried on the balance sheet. These assets, however, are often worth considerable value in the market place. The reasoning for this theory is that these assets can be turned into cash; therefore, should equal the related value they could generate in return for their sale. These intangible assets can produce future sales, profits, and cash.

Future Revenue Stream

A real value in any company starts with its revenue stream; the more you can count on it occurring, the more value it has. The value becomes the net present value of the after tax free cash flow stream of revenue under contract, plus repeat customer base. Contract backlog is worth much more than revenue that you must locate every year. The cost to re-create the sale each year is high in terms of time and human energy. Locate customers where multiple year contract environments can be set up. The government often awards contracts for multiple year periods. Many larger companies favor contract relationships with vendors to reduce the overall cost of screening vendors again and again.

While not as quantifiable as backlog, there is value in a customer base that’s been maintained for a long period of time. The longer customers remain with a company, the more likely they will be loyal in the future.

Clearly growth in revenue volume is an indicator of valuation in a company that investors are willing to pay for. If customers flock at above industry levels to a company for the services that they provide, this is a good indication of the company’s ability to perform at above expected levels.

When a company has a great, and believable, prospectus for the future, the buyer will often plan additional capital investment to fuel growth. If this case, the buyer could be motivated to pay a higher valuation for the company and then invest on top of it.

Going Concern Value (GCV)

Here is where the fun begins in all transactions. The going concern value and goodwill, or soft assets, will always draw the most controversy and discussion in terms of their valuation. These elements are most prone to differing interpretation by buyer and seller.

Here, too, is where you can build the most value into a company. Transaction value is only at a point in time. Buyers and investors look more to the company’s ability to create additional value to enhance returns on invested capital as they hold their investment. Impart the elements that future buyers look for:

Businesses that create value. Consistency is the key. You must demonstrate growth in revenue, profit, and cash flow. Do everything in your power to eliminate and manage hiccups along the way. Audited statements go a long way toward verifying results, in spite of some recent press.

High probability of future cash flows. A history of positive cash flow at increasing levels is very important. True annuity buyers purchase cash flow, not the business. Strategic buyers will value cash flow plus what could happen if additional capital is provided. After all, free cash flow determines the periodic return on investment and increases the potential for a much higher purchase price in the future.

Management team and human capital. Attract and motivate a marketing oriented management team with the ability to produce recurring profits, return on capital, and free cash flow as an annuity for the owners. Develop an in-place, stable, well-trained workforce to implement operating processes on an ongoing basis. This is the most valuable off-balance sheet asset.

Incentive to Purchase

Create reasons for a buyer to want to consider your company as an acquisition candidate. Buyers want a fair entry valuation so that they can expect a realistic return potential. There must be exit options so that the buyer who buys your business can realize high ROI at the time they resell.

The better the company is at creating stakeholder value and shareholder return, the more interest there will be in buying some or all of the stock. While investors often buy on hope and promise, the dot-com market sector collapse clearly indicated a need to ultimately produce returns to substantiate investment. Think for a moment, had many of the dot com managers built GCV to support their promising technologies, they might still be around today. Those that have built GCV have strong balance sheets, can weather the storm, and will undoubtedly find opportunities to gobble up assets from those who didn’t.

Ultimately, if you build on any one element in the Equation you will increase its individual value. Build up all elements in the Equation and you will realize an exponential creation of value to the right buyer.

Director Summary

What makes a good leader in a healthy company? What about a company in crisis? The two styles are different in focus, decision making, authority, and people. Understanding and managing these differences can help directors recruit the right talent to lead a company through good times and bad.

Clear Thinking

In a time of crisis and transition, who can handle the crisis management role within the company? This is a predicament. At such a turning point, clear thinking must prevail and a special set of skills must be applied.

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In India, as across the globe, interim management is less familiar than consultancy work. Sanjay Dwivedi and Ram Rao, two professionals who take on interim assignments in India, are o.k. with that.

Their firm’s Synergy division provides both consulting and interim management services, not unlike many executives who don’t rigidly define themselves as one or the other. Although the engagements involve different levels of involvement, many of the required skills are shared.

“At the end of the day, it’s what the client wants,” according to Dwivedi.

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Cash flow mismanagement is a common problem among small and mid-sized businesses. But many owners do not have the experience to precisely pinpoint where cash flow mismanagement has occurred, nor the background to develop plans designed to counter those cash flow issues.

Cash Flow Analysis and Financial Statements

A typical small or mid-sized business owner can spend hours examining his or her company’s financial statement, and nevertheless fail to see the underlying causes of cash flow problems, whether they be mismanagement of receivables, problems in pricing strategy, erosion of margins, escalating operational costs or other cash flow problems.

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Boards of directors help set a tone that seeps throughout an organization’s culture, and confirm that an organization actually behaves in the way it promises to behave. When the board doesn’t do its job, things can go very wrong.

A recent Grant Thornton webcast, “Reputational risk: Protecting the good name and reputation of the not-for-profit organization and its board,” explored ways to keep a non-profit on track, with the recent Penn State scandal emerging as the prime example of inadequate governance. Penn State wasn’t on the prepared webcast slides, but clearly on presenter Larry Ladd’s mind as he fleshed out how things can explode when a board fails.

Ladd currently is Grant Thornton’s director of national higher education practice, and a past administrator at both Harvard and Tufts universities.

A BOARD “NOT DELVING DEEPLY ENOUGH”

“Think of how culture and governance of the university allowed bad behavior to remain unreported for approximately 2 decades,” Ladd said in reference to the Jerry Sandusky sexual abuse scandal.

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Turning a quick profit is always music to an investor’s ear. But sometimes, patiently sitting through the entire symphony, so to speak, can result in a particularly satisfying ending. An investor’s proverbial “Ode to Joy” that requires waiting until the final movement of Beethoven’s 9th.

Steve Vivian is an investor with a platform that puts a twist on the traditional PE stance, including relaxing the traditional timeframe for realizing profit.  With 15 years behind him in the world of private equity, Vivian recently launched Kestrel Capital Group with partner Bill Harlan.

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