Take your firm to the next level

Written by ProfitGuide Staff

When Cryopak Industries Inc. hired Martin Carsky as CFO in mid-2003, it had recently acquired two companies in Vancouver and Montreal, and was overflowing with executives. It had a president and CEO at one branch, two more presidents at another and numerous other redundancies. “When you buy another business, you should have some savings in administrative and management costs,” says Carsky, a former consultant and merger and acquisitions executive who was named president and CEO in January 2004. “None of those were ever implemented.”

Cryopak’s situation wasn’t unique. As a manufacturer of temperature-control products such as hard gel packs and instant hot packs for sports injuries, it had great products. But like many scrappy companies, it had focused on growth to the detriment of sustainability. Although revenue had soared from $1 million in 1998 to $14 million by the time Carsky came on board, the company was headed for bankruptcy.

Indeed, the difficult transformation from fly-by-the-seat-of-the-pants enterprise into sustainable firm is faced by all growth companies. The people, processes and structures that work well at startup no longer work for diversified operations with multitudes of employees and customers. Then there’s the ever-popular cash crunch. “When you double your business, it’s not only the additional equipment you’re buying,” explains Dave Planques, president of Toronto-based restructuring boutique Prowis Inc. “It’s also all the additional working capital you’re funding, from inventory to accounts receivable.” The results range from stalled growth to shrinking sales—and a bottom line that looks more like a bottomless pit.

It doesn’t have to be that way. Hired guns such as Carsky and Planques have perfected the art of analyzing a business’s strengths and weaknesses, scalpelling costs and updating systems to relieve companies of their growing pains. PROFIT asked them and other corporate saviours to reveal how they’ve lifted struggling companies to the next level.

Hone your team

“When companies start out, everybody rolls up their sleeves and pitches in wherever needed,” says Betty Moore, founder of Ignition Point Inc., a marketing and management consultancy focused on technology companies. “But as you get larger, you need to start structuring and defining roles.”

That hadn’t occurred at Cryopak. Roles within the company were poorly delineated, there was no real command structure and both the Vancouver and Montreal branches operated as independent units. Carsky, who honed his skills at the now-defunct funeral-home operator Loewen Group Inc., says, “A lot of times it wasn’t clear what commitments had been made, whether they were followed through on and what repercussions there would be if they weren’t followed through on.”

The problem can spell disaster. “If you tried to run a baseball team where none of the players had been assigned a role, it would be chaos,” says Moore. “You need someone to mind first base; you need that person to know they’re minding first base; and you need everyone else to know they’re not minding first base.”

Given Cryopak’s financial troubles, Carsky’s first move was to pare the management team. With the help of his controller, Carsky drew an organizational chart detailing each employee’s role and salary, and began culling. “I went through the organizational chart, saying, ‘Okay, do we really need him? Do we really need her?'”, he says. Although it’s not science, “you’d be surprised at how quickly consensus is reached on who is in the right position and contributing, and who is not.”

Next, Carsky developed a detailed organizational chart for the remaining staff, outlining their function, whom they reported to and exactly what their job entailed. “We started with the president and CEO, followed by the heads of sales, finance and administration, operations and moving on down,” he says. Then each division met with Carsky to decide on the metrics by which their performance would be evaluated. “By the time we finished, each employee knew exactly what they were expected to do and what they were accountable for,” he says. “It’s pretty basic, and it should happen at every company.”

By the end of the process, Carsky had let go 13 out of 25 people, but hired as many to assume roles that he felt were missing at the company. He beefed up the quality-assurance function, for example, and put clerks in the manufacturing facility to relieve plant managers of some of their paperwork. The result: savings of $1 million and a streamlined management team that operates efficiently and with accountability.

Get your costs in line

When John Baumstark joined Toronto-based software developer DWL Inc. as president and CEO in 2001, he brought 20 years of technology management experience with him, including lessons from his most recent gig as senior vice-president at Ariba Inc., a purchasing software giant based in Sunnyvale, Calif. He was impressed with the reputation of DWL’s customer data-integration software. Its founders were considered experts in the field, and the company was well funded. But it was the end of the go-go ’90s. The economy was slowing down, and “managing your dollars and focussing on the financials and cash became key,” says Baumstark. His immediate observation of DWL: it was spending too much money.

Too often, growth companies have a high cost structure, which doesn’t hurt when times are good. But if new competitors arrive in the field or there’s an unexpected downturn in sales, ignoring costs courts disaster.

One of Baumstark’s first tasks was “getting value for all of the dollars we were spending.” He implemented a basic cost/benefit analysis for all the company’s expenditures. While DWL was spending a lot of money on research and development, Baumstark believed R&D contributed to its core competency. On the other hand, overspending on commodities was eating up salaries for potential new hires. “We thought of everything in terms of head count,” says Baumstark. “If you reduce telecom expenses by $60,000 a year, and you can hire one or two employees because of that, that’s very positive for the company.” He renegotiated DWL’s telecom spending, cut office space and travel costs, and paid close attention to professional fees for accountants and lawyers.

“We’d audit them to make sure that if we were being charged for 100 hours, we were really getting 100 hours of work done.” These initiatives yielded savings of 20% per year. Planques goes through a similar exercise when he’s called into troubled companies. Because busy entrepreneurs tend to distribute spending authority, he explains, “everybody who is running a piece of the business ends up buying what they need. The guys on the manufacturing floor buy stuff, the salespeople buy stuff and nobody wants to be out of anything, so they end up overbuying.” Inventory levels rise, the company misses out on bulk discounts and the net flow of cash is out the door.

If you’re in the same situation, Planques suggests requiring the CEO or CFO to sign off on all purchase orders over $50. “You have to hone in on the purchasing decisions and who has the ability to purchase,” he says. “You ask yourself, ‘Why are we buying this today?’ and ‘Do we really need this?'”

Once you have a handle on spending, you can loosen the reins and focus on consolidating purchasing to get better deals or negotiating longer credit terms to boost cash flow.

Focus, focus, focus

“It’s typical of young companies to do whatever they can to earn money,” says Baumstark. “And that’s not necessarily a bad thing. It helps them figure out what works and what adds the most value to the company.” But as time goes on, the practice becomes unsustainable. “Without focus, you can’t get enough scale in a given product area or market to become a significant player.”

Ultimately, you have to decide what you want to be when you grow up. DWL, for example, did consulting and custom programming, as well as producing a range of unrelated software products. “We had to step back and say, ‘What do we have that’s really unique?'” says Baumstark. The answer was DWL Customer, a cutting-edge customer relationship management software that generated higher margins than the firm’s custom consulting jobs.

Having identified DWL’s key strength, Baumstark reorganized the company around building, enhancing and marketing the product. Since custom programming was no longer a focus, “we really didn’t need 100 custom developers running around, so we reprioritized and shifted some of those resources into R&D functions.” Some products in development were dropped entirely. Baumstark also altered the compensation plan so sales staff were no longer rewarded for flogging consulting services. Instead, they were encouraged to refer clients in need of such services to some of DWL’s partners-companies such as IBM and Accenture that sell DWL Customer and its enhancements as part of a package. That led to better relationships with the partners, and took DWL out of competition with them.

Update your systems

Art Aylesworth joined Victoria-based Carmanah Technologies Inc. when it was a high-potential but fledgling firm employing 12. Sales of its solar-powered marine lights generated annual revenue of $1 million, recalls Aylesworth, despite the fact that “there wasn’t one person in the building who had the word ‘sales’ on his business card.” But the company was seriously lacking the infrastructure it needed to thrive long-term.

Aylesworth’s experience running three other firms, most recently Calgary-based Sharps Audio Visual Ltd., taught him the importance of strong systems. At Sharps, says Aylesworth, “Any day of the week I could say, ‘Give me an update on the performance of that element of our business, with these variables and these criteria,’ and it would be on my lap in minutes. [At Carmanah], it was a challenge just to make sure everyone got a cheque on payday.”

That’s no way to do business, but it’s prevalent among growing firms. “Day-to-day business during fast growth pressures you to ‘band-aid’ rather than plan longer-term,” says Aylesworth. “It’s ‘urgent’ fighting with ‘important’.” Moore adds that growing firms often dread the learning curve associated with adopting new software or systems that can provide them with valuable information.

Aylesworth’s first move was to hire the former controller of a public company to take financial matters in hand, organizing payroll and receivables. Next, he rolled out a sophisticated enterprise resource planning (ERP) system that can synthesize inventory, planning, engineering, manufacturing and even customer-service data into meaningful information.

Among other things, the program allows Carmanah to input projected sales, plus a list of materials for each of its design models, in order to keep a handle on the parts it needs to keep production flowing. “Basically, [the ERP system] spits out a report on a regular basis saying, ‘You’ve got some long lead times on these particular parts-you’d better order them or you’ll be out by mid-December’,” explains Aylesworth.

While the technology was “a big pill to swallow” for Carmanah—mainly because it required every employee in the company to input data correctly in order for it to work—within a year it delivered a smoother production process and more customer-oriented company overall. Does it represent the end of Aylesworth’s efforts to introduce a workable set of systems? Not a chance.

“Somebody once said to me, ‘When you’re heading a fast-growing company, the CEO’s job is a never-ending series of bottlenecks’,” explains Aylesworth. “‘As one process gets faster and smoother, it’s going to create pressure somewhere downstream, so you’ve got to just keep dealing with it’.”Next up for Aylesworth is ensuring that Carmanah’s infrastructure will support new operations in the U.S. and Europe.

Manage change wisely

Change occurs at lightspeed for most growth companies and, whether it’s personnel cuts or new software implementation, that makes employees nervous. “It’s strange,” says Carsky. “I’m a finance guy, but everything that’s making this company successful is about the people-how you treat them, how you motivate them and how you get the best out of them.” That’s why telling your staff what is driving the change and how it will affect them is so critical.

When Carsky had to fire one of the Montreal division’s founders, he faced the issue head-on. During a conference call with the Vancouver and Montreal offices, Carsky admitted that he knew staff would be disappointed with the dismissal, but asserted that the founder was not the right person for the job. “Over the past number of quarters, you’ve heard me say that this is our sales target,” he told them, “but we never got there. It wasn’t good enough. I think I made the right decision.” To ensure the conversation was two-way, Carsky opened the floor to questions.

Baumstark takes a similar approach, advising entrepreneurs to be up front about bad news and never to promise what you can’t deliver: “It’s dangerous to stand up and say, ‘There won’t be any more bloodletting.’ If you have to go back on your word later, you lose all credibility.” He suggests sending a message along the lines of: “We don’t want to cut any more, but we have to meet our goals and objectives.”

Also recognize what makes your company special in the eyes of its staff, employees, customers and suppliers, and try to preserve some of that. In examining DWL’s expenses, Baumstark came across “the fun fund,” a budget of $1,000 per year per employee to be spent on pleasurable pursuits of the employee’s choice. When he talked to a few staffers about slashing the fund, he learned that it was one of the things that made DWL a great place to work. “On a purely dollars-and-cents basis, it didn’t make sense,” he says. “But it went deep into the culture.”

Indeed, implementing change without considering the negatives will only give you more trouble. If the task sounds onerous, take a cue from Aylesworth: “I ask and probe—and I try not to shoot my mouth off too quickly.”

© 2005 Camilla Cornell

Originally appeared on PROFITguide.com