Technology Challenges II: Determining Value

In my last post, I discussed implementing and improving an IT strategy. I briefly overviewed the three parts of this strategy, which consist of obtaining:

1. A reliable hardware vendor with 24-hour onsite replacement extended warranties.
2. A good hardware specialist to handle hardware setup, wiring, and ongoing hardware issues.
3. A versatile software expert to resolve the wide range of software issues

Parts one and two are straightforward and not too difficult. Part three is a bear. It is difficult to find the right solution.

Entrepreneurs have spent thousands of dollars to resolve relatively simple software issues. The problem is that it is difficult to tell if an issue is simple or complex, since either can crash a system and create lingering problems.

The following story illustrates this concept:

An entrepreneur made an investment to install a state-of-the-art computer system, including the installation of a proprietary software program. After the system was implemented, it worked great--for two days. Then it crashed.

In a panic, he called the computer expert who had installed the system. He demanded that the technician get to the office immediately to get the system back up and running. Being down and offline was costing the business a lot of money.

The technician arrived in less than an hour. After walking into the office, he went straight to the computer department and walked around for a few minutes. He listened intently to the whir of the computers. He logged on to the network and checked the system configuration. Finally, he walked over to the server, listened to it and kicked it.

Immediately, the entire system jumped back to life.

Everything was working again. The entrepreneur thanked him and the computer technician left. Problem solved.

A few days later, the invoice came from the technician for services rendered. The detail for the service was as follows:

May 28, 2009

Description of Services:

Service call on computer network system $1,000.00

Payable on receipt.

When the entrepreneur reviewed the invoice, he was livid. He picked up the phone and called the computer expert and ranted, “What in the hell is going on here? You were at my office for five minutes and all you did was kick the server. I don’t think a kick is worth $1000!”

“Yes, you are right,” The technician replied. “The kick was $1.00. Knowing where to kick is $999.00.”

Often, when technicians repair or solve a problem, the issues may be relatively easy to resolve. However, because these technicians have more technical knowledge than you, it is difficult to know if you are getting value or being taken advantage of.

This is very much like an auto repair shop telling you that the noise is a $3,000 repair when in reality it is a minor part replacement. The mechanic says he can fix it for $2,000 now, but if you wait and it gets worse it will be $3,000 to replace the entire assembly. After you have paid the lesser fee, the noise is gone and you are grateful to have gotten off easy. Boy, are you glad to have a mechanic that is looking out for you! However, in reality, it was a $100 part and labor fix.

What do you do?

Recently, I had a software issue on my laptop. Having computer problems and trying to fix them yourself can be a waste of a lot of time and money. I had an $125 per hour ($45 per hour travel time) computer specialist on call. No question, he is good and has always resolved most (not all, as you will see) problems that I have had--for a price, and generally a big one.

In my next post, I will share with you how I got these issues resolved.

Technology Challenges

Every start up business has its share of technology challenges. Whether it is the selection of hardware, a database platform or a Customer Relationship Management System (CRM), the challenges are enormous and wrong decisions can be expensive. Just ask Jeff and Carol.

Once the hurdles of making IT decisions are resolved, there is an ongoing challenge to manage your IT infrastructure. As anyone that becomes dependent on their computer system knows, if the network (or even just a computer) goes down, the entire business can grind to a halt.

It is best to plan ahead in the event that there are network or computer problems. There are three levels of IT support to consider.

One is to select a reliable hardware vendor. Whether or not you select a major national brand such as Dell or HP, you need to acquire an extended warranty to cover hardware failures. Be sure to include an overnight, on-site replacement option.

The next step is having a good IT Hardware Professional in place. This specialist will assist you in setting up all hardware, including wiring the network (if you use a hardwired solution for your network).

Finally, you need a good software support solution to deal with a wide variety of software issues and problems. In another blog posting, I will share a few ideas on how to implement or improve on your existing IT strategy.

If you do not already have such a solution, it is best to think about it now so when the inevitable happens you will have someone to call that will get you back online as quickly as possible.

Don’t be like our friends below and have to go back to your manual systems.

The Power of Small Steps

In 1977, Debbi Fields (the founder of Mrs. Fields Cookies) opened her first store and set hourly goals. As Mrs. Fields’ cookie empire grew, she was an innovator that kept the focus on small hourly goals. She installed a POS software system to provide real-time data on what her managers need to do on an hourly basis. If the managers were in danger of not meeting their goals, there were suggestions on what they could do to achieve their 60 minute goal.

Is there a lesson here? What are your daily and weekly goals for new customer contacts, call backs, etc?

Daily small steps lead to achieving larger goals.

Federal Aviation Administration Combines its Drug and Alcohol Testing

At this time, the FAA is working on a major revision of its drug and alcohol testing regulations. The FAA is not making substantive changes to its regulations. In a new ruling, the FAA is "reorganizing" the requirements for testing into a single part to simplify locating specific provisions and/or changes to their provisions.Given the complexity of that revision and the time needed to complete the rule making process, the FAA has concluded that it makes sense to pull existing regulations together in one place.

Jeff found a reference to new FAA regulations and thought it might be an opportunity but nothing substantial is taking place. However, being aware of the change will put you miles ahead of the competition in being out front in your industry knowledge.

Generating Cash vs. Making Money

Cash flow is important. And, Yes, Cash is king. Several years ago I had a franchisee that was doing $100,000 a month in sales yet never seemed to have money to pay the bills. In a financial review, I sat down with him and asked some probing questions.

Q: Are you having problems collecting receivables?

A: No, we get the check or credit card at the end of the job.

Q; Do you have any bad checks or charge backs on credit cards?

A: No, it is rare that we have a problem with a bounced check or charge back. It happens but it is rare.

Q: How much staff are you running?

A: We run lean. I have a firm fix on overhead. I manage that very closely. The financial statements verified this because his over costs were in line with expectations.

Q: Do you have any inventory for jobs?

A: No, it is all cash and carry. We do not carry any inventory.

Q: Since you do not have any outstanding receivables, no bad debt, manage overhead and have not inventory, there is only one place that could lead to cash flow problems….weak gross margins.

Q: Tell me the process of bidding you jobs.

A: I figure out my costs and then double that price. We have a lot of competitors and we have to be competitive. We make money on the extras.

Q: Let’s take a typical job. Walk me through the process.

A: An average job is about $1000. Labor is ~$500. The formula is to bid the job at $1,000. We average about $200 on extras.

Q: What are you really making on this job, if you include all costs, including the load on payroll, credit card charges and an allocation for overhead? Go and figure this out and then let’s talk in a week.

When we go back together for the first time he figure out that his actual labor cost was not $500 but nearly $700 plus the 3% on credit card charges and with an allocation for overhead is actual gross margin was about $200. We discussed about raising a price in a competitive market and that it might not be possible to do this in every case but that if he continued to this pricing model it was only matter of time before he was out of business because he was not generating the cash necessary to cover costs.

After some work on the presentation and selling value vs. price he was able to get his margins to a respectable 45% from ~20%. While it is true he lost some business, his ability to upgrade some of his staffing and follow through and provide outstanding customer service put him on the growth trajectory to start expanding his business and working on the business not in it.

What are your gross margins?

CAMPA Website Project

Your web design development team has been getting great feedback on tweaks that need to be made to the website and suggestions on website content.

A question came up on the funding of this project. This is a classic example of the power of the CAMPA strategy. The region is able to stay ahead of our competition because we have the financial resources in reserve to tackle projects that impact everyone in the region. These are your CAMPA dollars at work!

I am confident once this new site is launched for each location that the return will be 10-20 times the cost in the first year.

From the Field

Jill Chioino in hiring temporary lab staff and was given this website from her CPA. It is a good resource website for useful legal forms. An attorney would provide the same type of forms for hundreds of dollars.

http://www.free-legal-document.com/temporary-employment-agreement.html

When information like this is shared, it gives us an advantage over our competition.