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Learning From Your Mistakes Canadas Fastest-Growing Companies learn from their worst mistakes. So can you "Success is a terrible teacher," says entrepreneur Mark Anthony. "If you have a great batting average in business, it just makes you think you are always going to succeed." Fortunately, mistakes, miscues and muck-ups are all part of building a business, even for Canada's Fastest-Growing Companies. Just ask Anthony, CEO of marketing-services firm True North Corp. in Mississauga, Ont. (No. 85 on the 2004 PROFIT 100). Founded eight years ago, True North is now a public company with sales of nearly $10 million. Much of that growth has come from acquiring other marketing firms a tricky strategy, given the conventional wisdom that half of all mergers and acquisitions fail. Anthony calculates he has negotiated six successful acquisitions and one bummer that cost his firm $700,000 and changed the way he works. "You learn more from failure than success," he says, "unfortunately." True North specializes in providing customized sales and marketing services, from contests and event planning to call-centre management, for big businesses such as Lexus, Home Depot and Novopharm. The business is hotly competitive, says Anthony. There are only so many corporations that can buy such services, and they tend to stay loyal to suppliers they like. That means one of the best ways for True North to acquire new clients is to buy firms with complementary capabilities and a loyal client base. Anthony thought he had learned all about acquisitions as he merged six independent entities into True North. You look at the work these companies do, he says, crunch the numbers and then analyze their corporate culture to make sure there's a fit. If the owner was intending to retire from the business, Anthony would make a straightforward offer based on the value of the business and its clients. If the owner preferred to stay and help grow the business within True North, Anthony would structure a more complex deal that offered some cash up front and a higher payout over time. The result: a string of deals and a growing client list. Then came acquisition No. 7, an advertising and promotion firm based in another province. "On paper, it was probably the best deal I'd ever seen," says Anthony. It was a profitable company with a 20-year history, it would bring new clients into the family, and it would mark True North's first venture outside Ontario. Two years ago, with his board of directors fully onside, Anthony signed the deal. Two problems soon emerged. The marketing industry slumped. And the new business, still run by its original management, suddenly lost its edge. Anthony blames himself. He now admits True North expanded out of province too soon; it didn't have the infrastructure to manage an office in another city. While he spent at least three months working closely with the new division, the effort needed a full year time he just couldn't spare. But there was another issue. The seller of the company, Anthony's new partner, had always been a hard-working, feet-to-the-fire entrepreneur. Once he traded his business for a chunk of cash plus a salary, says Anthony, the fire went out. "As a small-business owner, you don't have a regular paycheque," he notes. "That's a key driver for a lot of people. Once you start getting X dollars every two weeks, you become too comfortable. You become a manager instead of a hunter." As sales started to sag, Anthony worked harder to save the deal. But without strong local leadership, he realized, the division's future looked dim. Rather than invest more time and money in a flailing operation, True North closed the division. Between the loss of its investment and windup costs, Anthony pegs the firm's loss at $700,000. It was an expensive lesson, but an instructive one. "If you're going to move outside your service area, you really have to be prepared to put in the time to grow it," Anthony says. "You can't really depend on someone else to do it." The misstep also changed the way True North looks at acquisitions. "You need these failures and mistakes to shake you up," says Anthony. "We have a much different mindset going into deals now. We're much more objective." He now offers an incentive-based price formula that penalizes selling entrepreneurs if the combined businesses do worse than planned, but offers a bonus if the businesses exceed expectations. "We always tied price to performance," says Anthony, "but now we're looking for greater participation by the vendor." More to the point, True North is also pursuing safer alternatives to conventional acquisitions. Anthony is still looking for new capabilities and clients, but now prefers to reduce his risks by encouraging the selling entrepreneurs to wind down their businesses and then bring their employees and clients to True North as a startup. It's win-win, he says. The new partners benefit from True North's infrastructure and the opportunity to cross-sell to its existing clients. Plus, they can leave behind the day-to-day hassles of running the operation and concentrate on what they do best. Anthony's exit strategy is simple: if the new structure doesn't work out, the new partners can walk away, and take their long-time clients with them. True North has completed three such deals, and Anthony is delighted with the results. "It's less expensive to do," he says, "and a lot less risky." Sorry I hired you: A case study For many entrepreneurs, running a growth firm is a constant learning process. For Warren Brown, it has also been a matter of rediscovering what he already knew. A long-time systems consultant, Brown is now president of Procura, a Victoria software developer that sells point-of-care and back-office management systems for the health-care industry. With fiscal 2003 sales of $3 million, Procura has already signed up four of Canada's five largest national home-care providers, so it's no wonder the company is beefing up its sales team for a big push into the U.S. There's just one problem. When asked about his worst mistake since buying Procura in 1995, Brown responded, "Neglecting to put proper hiring processes in place" for sales people, "which resulted in hiring several people whom we subsequently fired." It was a long-standing and expensive mistake, he says, that's only just been rectified. In other areas of the company, such as software development, finance or quality assurance, Brown was quick to establish measurable systems and processes that focus Procura's staff on what they have to do, day to day, and how to do it. Having cut his teeth at Winnipeg-based financial services provider Investors Group, where systems and project management were practically a religion, setting standards came as naturally to Brown as breathing. But somehow, he says probably because of resistance from salespeople who told him that selling is a creative, unpredictable discipline apart from all the others Brown never established rigorous systems for Procura's sales efforts. "Marketing and sales attract people who aren't very good at process," he says. "When you talk to people who call themselves vice-presidents or directors of sales, you find that they don't have due process. They've been winging it all their lives, and can't tell you why they're successful." Lacking systematic processes that define how Procura sales staff should behave and perform, Brown found himself at a loss when it came to hiring sales reps and managers. He made a lot of mistakes, he says, tending to hire people based on their previous jobs or education rather than actual qualifications. "I was stupid," he says. "We weren't examining the skills and knowledge of the people we were hiring. We didn't have any criteria." He estimates that four out of five sales hires didn't work out which adds up to a huge problem. With Procura's software feature-laden, and the home-care market so specialized, sales reps require a year to learn to sell effectively. For each sales rep who didn't make the cut, Brown estimates the company waved goodbye to $100,000. Finally, a chat in the spring of 2003 with a Procura manager about his success in hiring people for his department helped Brown realize he had to stop winging it himself. He needed a system in sales. Brown launched into his own crash course in systematic selling, melding his past systems experience with lessons from such classic books as Neil Rackham's Spin Selling, Anthony Parinello's Selling to VITO, and Heiman and Miller's Strategic Selling. The result: a 20-page procedures manual for conducting and measuring sales efforts at Procura, as well as a guide for hiring salespeople. To create his "marketing toolkit", Brown developed principles and standards regarding prospecting, closing and sales cycles that turned sales and marketing into a disciplined and measurable sequence of behaviors. Adopting that more professional view of sales makes it much easier now to assess potential sales staff. Brown's guide sets out questions that help determine whether sales candidates follow disciplined, documented processes, or even understand the need for them. The questions start out easy, and get tough fast. "Do you know what a sales funnel is? What rule of thumb do you use to determine how many people should be at the top of the funnel in order for you to sell two units every month?" "We're asking a lot more 'how' than they're used to, that's for sure," says Brown. For instance, the questions "How long do you chase a prospect? What is your rule of thumb around that?" probe how well candidates manage their time and understand sales costs. Procura's new system doesn't just weed out unqualified salespeople quickly; it also boosts the motivation of the candidates who qualify. "The people we hire are pleasantly surprised," says Brown. "They say, 'Wow! Somebody recognizes that this sort of rigor is needed in sales and marketing.' They've never had anyone respect that side of them." It took Brown nearly a year to formalize his processes, so they have yet to prove themselves officially in the field. But early indications are promising. One of Brown's great frustrations in the past was discovering too late that in their effort to close a sale, reps had made extraordinary promises to clients that they then never mentioned to head office. He says Procura's new, more rigorous communications processes have already eliminated that problem. "The sales we are making are a lot better managed as we hand them off to the implementation team," he says. "I might be a little bit biased, but I think it's going to work." Management by fire Like many entrepreneurs, Chris Coldwell of Victoria was a reluctant company builder. As a developer of customized software for business, he started hiring employees only when he could no longer do all the work himself. And when he needed an accountant, he called on his next-door neighbor. The downside of this good-neighbor policy: as Coldwell's Mercurial Communications Inc. grew, he wasn't getting the professional advice he deserved. By 2001, two Internet companies based in the U.S. accounted for 60% of Mercurial's business. Coldwell knew that wasn't healthy, but wasn't sure what to do. "I was young and very naive," says Coldwell. "I just didn't have all the checks and balances in place." This despite having founded three prior businesses. Soon it was too late. In December 2001, in the aftermath of the dot-com meltdown and the September 11 attacks, Coldwell's two biggest clients failed. With them went $150,000 owed to Mercurial funds Coldwell needed to pay his suppliers and staff. For a small company like Mercurial, whose 2003 sales were just $1.9 million, the loss was traumatic. With more than half the business gone, Coldwell had to lay off employees and negotiate long-term repayment agreements with valued suppliers. Vowing to make good his debts, Coldwell rebuilt the firm, client by client. "It was very, very difficult," he says. "We were basically starting all over from zero. Except that we weren't at zero, we were at minus $150,000." This spring, Coldwell completed his quest. All the laid-off employees are back, and he just paid off the last of his debts. Coldwell credits the turnaround to hard work, an improving economy and to doing things right this time. When his two clients failed in 2001, he looked for help, and found a certified management accountant who understood the needs of growing companies. With the CMA's help, says Coldwell, "I discovered a wide world of support that I knew nothing about." The most important service he discovered was export credit insurance from Crown corporation Export Development Canada. Coldwell was delighted to discover that EDC would do credit checks on his foreign customers and would insure his sales to most of them. EDC even covers some domestic creditors. While Mercurial sometimes has to sacrifice margins to cover EDC's fees, Coldwell considers the service a godsend. Just recently, another U.S. client failed, owing Mercurial US$80,000. This time Coldwell just filed a claim, and EDC paid it off. As Mercurial's CEO, last month Coldwell hired the company's first president, Telus veteran Zig Hancyk, to bring more discipline to day-to-day operations. One of Coldwell's projects now will be to develop an office in London to pursue more opportunities in the U.K. "I'm a lot more conservative than I used to be, but I still believe that if you don't take risks in business, it's a lot less fun," says Coldwell. "Sometimes you have to roll the dice and go. But for the most part, we've got the downside covered." Crash course in breakneck growth Eric Boyko's story has a happy ending. But that result was hard to foresee in 1996 in the shadow of an ill-timed expansion. Boyko founded his company, now known as eFundraising.com Corp., in 1991 while a student at McGill University. There he developed a type of scratch card used by friends and family to raise small amounts of money for worthy causes such as schools and sports teams. His company went on to create fundraising products involving chocolate bars and magazine subscriptions, and even pioneered Internet fundraising. By 1996, eFundraising had offices in Montreal, Toronto and Ottawa, and $2 million in sales. Eager to grow, Boyko decided the company could do $4 million a year by going national. Over an eight-month period, driven mainly by gut instinct, he hired people to staff new offices in Vancouver, London, Ont., Quebec City and Halifax. Most entrepreneurs have a lot of respect for gut feel, but Boyko's instincts proved just plain wrong. "Our management wasn't strong enough" to support such expansion, he says now. "We grew faster than we could find good people." Boyko now realizes he didn't spend enough time in these cities to understand what was really going on. For a while, sheer sales growth masked the fact that Boyko's new teams were out of their depth. Finally, the company was undone by its own lack of experience. At the time, it had exceedingly lenient rules for returns; clients who couldn't sell all the merchandise they bought had six months to return unsold inventories. When Boyko found himself blindsided in late 1996 with an unexpected $300,000 worth of returns, he knew it was time for a change. Facing a financial nightmare, Boyko moved to Plan B: slashing costs by turning his firm into an Internet-based company. He closed every office but Montreal, rehiring the best salespeople as independents working from home. In all, he cut overhead from $100,000 a month to $20,000 a month. That still wasn't enough: eFundraising had overextended its credit line by $100,000, and the bank wanted its money back. Boyko kept the doors open only by negotiating a $100,000 capital injection from his family (particularly his father's RRSP) and friends. "We grew too quickly," Boyko says now. "We didn't have the right people, we didn't have the right hiring policy, we didn't have the right systems in place." Now, for instance, the company accepts returns of only 10% of a client's order. But we promised you a happy ending. The people who invested in the firm in its darkest hour made 30 times their money back when Boyko sold eFundraising.com three years later at the peak of the dot-com boom to ZapMe.com, a U.S. provider of technology and online educational content to schools, for a reported US$10.6 million. (When the struggling ZapMe was acquired six months later on the strength of its broadband network, Boyko bought the company back. He then sold it in 2001 to a unit of Reader's Digest.) Today, eFundraising.com is a $12-million firm that derives 90% of its revenue from magazine-subscription programs. Boyko has more capital behind him now, but he has never forgotten the lesson learned from his abortive bid to go national. "Only grow as much as you've got good people," he says. "If you can't get the right people in the right place, then don't grow." © 2008 Rick Spence Reprinted from PROFIT Magazine, June 2004 |
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