Are Your Portfolio Companies Playing Minor or Major League Ball? Part 2 - Building a Major League Business Case
In Part 1 of this two part series, we celebrated the spring training season in discussing reason #1 of why sellers are stuck playing Minor League ball instead of making it to The Show (The Major Leagues). The article dealt with sellers failure to effectively understand and align their solution to their prospects business. If you haven't read this article, you may read it here: Are Your Portfolio Companies Playing Minor or Major League Ball? - Part 1.
At some point in the sales process the customer will need to justify the cost of your solution in order to spend company funds. If you don't know the value of your solution in the context of the business environment, not just the end-user environment, you will wind up negotiating on price and you will be forced to discount, ultimately getting a fraction of your solution's worth. We refer to this as playing Minor League Ball.
There is more to it than simple "Minor League" cost savings.
If you are skilled in developing the business case, your deals will achieve Major League Status and your prospects will attach a much greater sense of urgency to them. I am not talking about calculating simple headcount cost savings in the end-user organization which often gets pooh poohed and turned into a soft savings because "we don't lay people off".
I am talking about the ability to calculate your solutions impact on the Major League Values of Revenue and Risk in the context of what the business is trying to do over the next 1-3 years.
Of course cost savings is important, but it is often dwarfed by the value of revenue and risk. If you can successfully calculate and take credit these values you will enter the Major League. These values may also be multiply by orders of magnitude when you successfully align them to your prospects existing business goals and objectives.
I recently helped an AI company in New York do just that. The Seller had been working with a billion dollar business process outsourcer for months and was developing his own business case. It wasn't bad, he did a good job of calculating wages, benefits and other costs associated with the FTEs his solution would replace. The customer was even willing to lay off headcount to achieve the savings. The calculations were vetted with the customer and considered reasonable. Unfortunately, all the FTE affected were offshore earning about $3,200 per year, including benefits. Based on the $830,000 headcount savings, the seller
Luis Valenzuela hits a solo homer for the Nights
was considering pricing the proposed land deal at approximately $200,000. It was like a solo home run for the Nights at their minor league ballpark. Not that many people cared. For a land deal, it wasn't a bad value, but was the seller leaving money on the table? What about the impact on revenue, on risk? What about the context of the business? What was going on which may have a multiplying effect on the deal?
Understanding the Business Makes a BIG, BIG DIFFERENCE!
Victorino's Grand Slam Power Red Sox into World Series
After studying the company and building a Value Pyramid to understand the business, I was able to find significantly more value than the simple cost savings of FTE. Turns out the business did a few shady deals involving state governments and was facing over $200 million in lawsuits and millions more in cancelled contracts. Add to that, a hiring discrimination suit and the resignation of the CEO. An interim CEO, a real straight shooter, was appointed.
The top two concerns of the (interim) CEO were:
- Restoring customer trust and (25% of the sales force quit over integrity issues)
- Improving customer retention (Customer retention had dropped from 90 to 60%)
As it turned out, the process this solution would automate is tied directly to revenue. In fact, the POC results showed that the solution executed the process 22.7 times faster than the manual method with 16 vs. 500 people at a fraction of the cost!
The new business case modeled reducing the FTE headcount yet greatly increasing capacity and dramatically reducing cost per unit. The solution enables the prospect to comfortably lower their prices in the market place by 20%, thereby tripling the potential amount of revenue they capture, from $1 Billion to $3 Billion. In addition, because the new cost structure was so low, the prospect could afford to lower existing contract fees by 20% for all existing customers while at the same time improving profitability per customer.
When it had to get done, Yankees brought in Mariano Rivera The Closer!
This solution was now directly aligned to the CEO's top two objectives. Extending a 20% savings to existing customers would go a long way towards restoring customer trust and improving customer retention. A 20% lower price in the marketplace going forward would also make it a no brainer to win new business and improve customer renewals. Now the business case was based on:
- Achieving the CEO's objectives,
- Tripling revenue (Billions) and
- Improving customer retention 20% (Millions) and
- oh yes, the headcount cost savings was a nice number as well.
The Bottom Line to being a Major League World Series Winner.
Ultimately, the new business case calculated $39 million in annualized value, easily supporting a $10-14 Million expand price deal, tripling the original potential. And why not? The CEO was considering selling the $1 billion per year business as one option to solving the top two challenges. Now, with the ability to win 3X the revenue, additional $2 Billion, at a much higher gross margin due to the cost savings and restore customer trust, the solution value tripled and there was no lack of urgency moving forward. The land deal went from $200,000 to $2,000,000 with the expand deal worth 5-7 times the land deal.
Knowing how to align your solution value to what your prospects business is already trying to achieve AND knowing how to identify, calculate and connect your solution value to revenue, risk and cost savings, puts your portfolio company sellers into the big time, The Show, The Major Leagues. So, what type of ball are your portfolio companies playing?
If the answer is small ball visit my website at www.rwtsalesconsulting.com, call or text me at 602-684-4471 or send an email to [email protected]. I can get your team into the Major League of Selling. That's my passion!
Dick Thomas founded RWT Consulting and has over 33 years of experience selling across all company functional areas. Dick has 27 years in technology sales, 25 years in sales management and is a 4 time VP of Sales. Dick founded and lead BMC Softwares' Global Business Value Consulting team and has achieved the largest deals in history at PTC, Ariba and Mintigo. He founded and ran JD Thomas Company, a Sales Software company early in his career. Dick has been married for 28 years to his darling wife Patti. The picture you see is Dick and Manual, who lives at Rancho Del Nino orphanage in Emplame Mexico. Rancho Del Nino is a cause Dick has personally supported for the last 8 years.