Recognizing Lifecycles that Influence Growth of Revenue & Profit

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Recognizing Lifecycles that Influence Growth of Revenue & Profit

The ROBB Group LLC Executive Briefing

March, 2005

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

• 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

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?

• 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

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

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

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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