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Recognizing
Lifecycles that Influence Growth of Revenue & Profit
The
ROBB Group LLC Executive Briefing
March,
2005
Copyright
© 2002 - 2005 The ROBB Group LLC. All rights reserved.
Trademark
Notice
Revenue
Balance
Revenue
balance relates to the total amount of revenues flowing
into a company in relation to lifecycle factors. Your
organization, product, market and buyer that produce one
time or ongoing revenue streams each have a lifecycle.
A
lifecycle is defined as something that has a beginning
(birth) and a end (death). Each lifecycle includes stages
of maturity. Maturity stages within lifecycles will impact
your revenue balance and revenue generation. In order
to effectively plan for growth an organization must analyze
these lifecycles and map them against their existing organization’s
lifecycle and growth plans.
Lifecycles
include certain influencing factors. An influencing factor
could be something as subjective as analyst coverage or
something much more tangible such as a buyer procurement
cycle. The objective of this briefing is to expose specific
lifecycles and illustrate how your organizations revenue
balance and growth could be impacted based upon lifecycle
stages and influencing factors.
Lifecycles
Influencing Revenue and Value Growth
Product and services organizations are structured and
managed differently. Both have unique revenue recognition,
utilization, profit and lifecycle nuances to manage. Organizations
that fail to find the "right" revenue and profit
balance supporting double digit revenue and value growth
often find themselves struggling with cyclical cash flow
issues that typically inhibit profitable growth. Identifying
various lifecycles that impact your organization and creating
a strategy to ensure proper revenue balance will be critical
to the success of your organization.
Executive
teams should consider that revenue and profit projections
are dependent upon lifecycle stages and must factor the
following lifecycle influencers when creating growth strategies:
•
The Lifecycle of the Marketplace or Market Segment:
o
Immature
o
Evolving
o
Emerging
o
Mature
o
Declining
•
Lifecycle of the organization selling within the segment:
o
Start Up
o
Early Stage
o
High Growth
o
Mature
o
Declining
•
Lifecycle of the product or service being sold within
the market segment:
o
Immature
o
Emerging
o
Mature
o
Commodity
o
Declining
Copyright
© 2002 - 2005 The ROBB Group LLC. All rights reserved.
•
Demographic and adopter cycle of buyer within market (based
on Geoffrey Moore's Crossing the Chasm):
o Innovator
o Early adopter (Visionary)
o Early majority-MAINSTREAM MARKET POPULATION
o Late majority
o Laggard
Case
Study / Example
The
following is an example of an organization that struggled
with identifying, understanding and planning for various
lifecycle factors and how those factors inhibited revenue
and profitability.
Newco
was formed by seasoned technology and business leaders
created to provide technology consulting, professional
services and education on a new technology - web services
& SOA (Service Oriented Architecture).
Newco
had highly skilled, seasoned engineers with deep knowledge
and practical Fortune 500 experience in consulting and
building enterprise / commercial quality software applications
with this new technology. They had a strong relationship
with a leading high tech company that had made significant
investments in R&D on web services and had been quoted
to be betting their business on this new technology, providing
Newco leadership with a market leader as a strategic partner
and ally.
Initial
Planning Assumptions
With
proper strategy, conservative cash management and proper
sales and marketing, Newco should have been able to build
a solid name and brand for itself in its market and win
business from the existing, more established consulting
organizations that offer a broader range of services and
technologies. With controlled growth and limited capitalization,
Newco should have been able to become profitable within
12 months and continue to grow based upon demand of a
growing marketplace eventually creating deep intellectual
capital around a vertical market adding to its specialization
of creating web services based enterprise applications.
Newco
begins to target software companies as clients in hopes
to leverage commercial software development competencies
and the growing trend among software organizations looking
to implement web services support within their applications.
Market
Challenges
Newco competed regionally initially, to reduce costs.
However, its regional market has very few innovators or
early adopters of SOA and web services. The regional market
already includes dozens of established local and regional
consulting organizations with national accounts that can
offer a broader range of services. Because of the heavy
competition, all the players, including the national companies
with regional offices, are struggling to maintain and
increase revenues.
The
Quest for Revenue – Organizational Timeline
Copyright
© 2002 - 2005 The ROBB Group LLC. All rights reserved.
Newco
begins its lifecycle by selling direct and supporting
its sales activities using heavy guerilla sales and marketing
tactics. Newco Technologies leveraged its activities with
alliances and partnerships but those relationships failed
to produce revenue.
•
First 6 Months: Newco closes two strategic accounts, the
largest being a $250,000 application development project
that will utilize the organization’s resources nearly
100% for the next 6-8 months.
o
Newco focuses on delivering high value to the clients
and begins to invest in building a quality brand and corporate
image to further differentiate itself from the convoluted
local services market and begins publishing white papers
and briefing to establish itself as a thought leader on
web services and SOA.
•
1.5 Years: Newco assigned the majority of its limited
resources to its 3 largest customers that produce over
85% of the organization's revenue. After realizing that
the market is immature and not adopting web services and
SOA as broadly as expected, the organization begins to
offer educational services augmenting the consulting and
professional services in hopes to help create awareness
and adoption within the region.
o
This maneuver positions Newco as a thought leader in the
region and enables the company to partner with a high
tech leader regionally and secure 5 new marquee accounts
- accounts that the organization had been previously unable
to penetrate; the branding and positioning are working.
•
2.2 Years: Newco secured many mid-size and major accounts
but discovered through market surveys and analysis that
the market is still slow to adopt this new technology.
80% of Newco’s revenue is still generated through
3-4 existing large accounts.
•
3 Years: Newco struggled with profitability, had significant
cash flow issues and struggled to identify a significant
amount of NEW large consulting and services engagements
to support the staff on hand but continued to project
and invest for double-digit growth.
Newco
Case Study Questions
•
Did the management team make a sound decision to start
a company specializing in this new technology with little
capital?
•
How does the lack of new technology standards, practices
and adoption, impact the company's revenue and growth
potential?
•
Can the organization accurately predict targeted account
penetration percentages in the current market / region?
•
Can the organization accurately forecast growth?
•
Can the organization survive by simply focusing on its
current region and services offering?
•
Does the organization have enough market intelligence
to create revenue projections for double-digit growth?
Copyright
© 2002 - 2005 The ROBB Group LLC. All rights reserved.
•
How does the organization create enough sizable new revenue
opportunities to fund growth and better balance its revenues
away from the 75% being generated from only 3 major accounts?
External
Lifecycle Factors that Influenced Newco Revenue Growth
The
below chart illustrates where Newco was in its lifecycle
during the first 2 years of existence compared to that
of the marketplace, the product / service being offered
and buyers within the market place.
*As
depicted in the above illustration, each lifecycle was
in a immature stage and the product was still emerging
and not mature.
The
Market’s Lifecycle
Additional market analysis gathered through sources such
as IDC and CIO.com reported that in the second year of
Newco’s lifecycle, web service project spending
within north American companies had fallen from 3rd to
6th in order of importance and the number of organizations
planning on hiring consultants for web services projects
had decreased by 50% as only 24% of organizations surveyed
reported to be seeking web services consultants. The majority
of organizations surveyed were attempting to learn web
services through pilots using internal personnel.
In
the second year of Newco’s lifecycle the organization
begins to offer web services education and custom training
based upon assumptions from the above market analysis
and revenue opportunities within their marketplace. Unfortunately
Newco did not reduce growth plans even when it was discovered
that only 1% of the largest organizations within its current
region reported documented standards and practices and
processes for developing with web services – a clear
signal that the market was still far too premature for
a business projecting to enter high growth but Newco continued
to invest in growth and personnel.
The
Buyer’s Lifecycle
The buyer’s lifecycle being immature inhibited Newco’s
awareness and campaigns and sales cycles. What was expected
to be a relatively quick consulting sales cycle of 30-120
days turned into an evangelical sale resulting in 120-360
+ sales cycles. This lifecycle factor was discussed
The
Product’s Lifecycle
At the time of Newco’s launch there were few true
web services development platforms on the market. The
standards for web services development were still being
developed and were evolving and not many organizations
except for early adopters and innovators had begun really
testing web services in their production environments.
The most advanced web services development platform and
tool set was Microsoft’s Visual Studio .NET which
was still in beta when Newco was formed. This lack of
maturity of the technology added to the slow development
of projects within the region and dramatically impacted
the sales cycle of Newco.
Comparing
Company and Product Lifecycles to Markets and Consumers
The
above case study featured a services organization but
similar issues can impact software and hardware manufacturers
when adequate lifecycle analysis and planning is not addressed.
Software
and hardware organizations typically have a higher profit
margin than do consulting firms, like our case above.
However, higher profit margins do not mitigate risk of
imbalance in revenue and company lifecycles.
Below
are graphs illustrating annual revenue percentages as
produced by clients as impacted by various lifecycle factors:
Description:
A startup organization’s revenue will be highly
dependent upon current clients when selling an immature
product to an immature market and to early adopters. While
in the first 12 calendar months, the firm’s number
of actual clients should increase (dependent upon the
sales cycle), after internal resources are diluted and
initial penetration of the immature product into the immature
market is completed, the majority of ongoing revenue will
most likely be created from those early adopter clients.
If the startup goes to market and begins to sell an already
established but evolving product to evolving markets and
buyers there will naturally be more opportunities within
the market and the dependency on receiving revenue from
client
Copyright
© 2002 - 2005 The ROBB Group LLC. All rights reserved.
sources
to help fuel growth diminishes as the product, market
and buyer lifecycle matures - illustrated in the above
graph:
Description:
An early stage organization’s revenue will be slightly
less dependent on current clients as compared to a start
up when selling an immature product to an immature market
and early adopter. If the early stage organization goes
to market with an evolved product selling to an evolved
market and consumer the early stage organization should
produce more revenue from new clients as compared to a
start up selling an immature product to an immature market.
An ideal situation for an early stage organization would
be to sell and market an evolved or mature product to
a market and buyer of the same lifecycle stage.
Description:
A high growth organization might introduce an immature
or new product
into its existing client base thus creating a dependency
on generating revenue from existing clients early during
the release cycle but then could rapidly begin to shift
revenue balance away from existing clients to new clients
as the product market and buyer lifecycle matures as illustrated
in the above graph. If the high growth organization were
to launch an evolving or mature product into a
Copyright
© 2002 - 2005 The ROBB Group LLC. All rights reserved.
marketplace
of similar lifecycle stage, the organization should realize
more balanced revenue generation if the appropriate messaging,
positioning and value is established.
Logic:
A mature organization will have some deterioration of
client base; the dependency of revenue generation through
a new immature product released to the client base will
be slightly lower than high growth. The percent of revenue
generated through newly acquired clients will not be as
rapid through a mature organization due to internal practices,
processes, legacy behaviors and heavier dependency on
existing client relationships supporting legacy products
/ services. This will impact the organization’s
profit and time to market but is often overlooked in hopes
to take the company back into high growth through new
product launches. If a mature organization announces a
new series of products that are mature or are declining
in lifecycle the organization might not realize the projected
growth forecasted due to existing marketplace perceptions
surrounding the company and mature / declining product.
Logic:
A declining stage organization will be highly dependent
upon existing clients because it has lost touch with the
marketplace, or has not introduced new products into the
marketplace for
Copyright
© 2002 - 2005 The ROBB Group LLC. All rights reserved.
an
extended duration. The marketplace most likely has created
a preconceived perception of the organization and its
products inhibiting the generation of new sales from outside
of the company’s client base. Restructuring, reposition,
re-branding or a re-launch of the company is often required
to break away from existing dependencies and marketplace
perception inhibiting new client acquisitions.
A
short quiz on lifecycle preparedness:
•
Have you documented and analyzed the various lifecycles
within your market segment?
•
Have you created growth and financial models for each
level of those lifecycles?
•
Have you identified what lifecycle stage(s) determines
high growth for your firm?
•
Have you created processes and disciplines around revenue
generation and marketing within your organization to ensure
lifecycle awareness and tracking?
•
Have you validated your go to market and performed a lifecycle
and revenue growth gap analysis to identify inhibitors
that might have not shown themselves yet?
Summary
Awareness,
demand and education is often required to pull prospective
clients to your organization but in order to produce effective
marketing materials, sales communication and approaches
within your go to market you must first understand the
lifecycle of your company in relation to the product,
market, and buyer.
Mastery
of balanced revenue growth and lifecycle alignment is
critical within executive levels of any organization.
This level of knowledge is not found in educational institutions
but through experience in building high performing marketing
and revenue generating organizations.
TRG
believes lack of experience and comprehension of revenue
balance and lifecycles has fueled the following statistics:
1.
Sales and Marketing turn over in the high tech marketplace
was over 72% in 2004
2.
In 2003 63% of Fortune 500 CEOs had been on the job less
than 1 year; some organizations estimated that since 1998
nearly two thirds of the worlds companies had replaced
their CEOs.
3.
CFO turn over has spiked between December 1st 2004 to
January 31st 2005 up nearly 200% from the same time last
year
4.
Hi Tech CEOs have some of the highest turn over rates
5.
Debt in businesses with less than 500 employees has grown
from $680 Billion to over $1.3 Trillion since 1998
*1.Culpepper
2.Fortune Magazine 3. Drake Beam Morn (DBM) 4. Booz Allen
Hamilton 5. SBA
Influencers
and inhibitors to revenue and value growth with various
lifecycle segments can be identified and addressed through
revenue and market place audits and analysis. TRG specializes
in providing Corporate Revenue Audits that identify revenue
and value growth inhibitors within a marketplace and organizational
strategy, structure and culture. TRG utilizes the data
gathered within the audit to produce a step-by-step guide
and easy to follow revenue growth roadmaps developed specifically
for the abilities and experience of you leadership team.
To learn more about how TRG can help prepare your organization
for high growth, merger or acquisition, visit: www.therobbgroup.com
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