Life is rarely predictable. So why would business be any different? Paul Ryan and Jodie O’Keeffe square up to a meteor shower of corporate Kryptonite and figure out how to dodge commercial doom. Cyber-attack, idea theft, competitor outsourcing, cash-flow crises, disruptive innovation and fraud. Take a deep breath, assess risk, consider your options…and never turn your back on a clear blue sky.
Not quite six years ago, one of the world’s most profitable and prestigious newspapers was beginning another daily cycle. At 8.46am, editors and staff at Wall Street Journal (WSJ) headquarters, located in Manhattan’s World Financial Center, heard a peculiar whine followed by a thud, and ran to the window in time to catch the tail-end of a fireball rolling out from the middle floors of the World Trade Center’s North Tower – across the street, high above.
In its 112-year history, the Journal had never failed to produce a daily paper. But as managing editor Paul Steiger and staff watched on with mouths agape while papers fell toward the street “like some sort of bizarre ticker tape parade,” they could have been forgiven for thinking that this scenario was sufficiently extraordinary to warrant a day off. Soon, people began to hurl themselves from the infernal upper floors of the North Tower, and when a second hijacked airline scythed into the South Tower, it was definitely time to leave.
We all have contingency plans for life’s unpleasant surprises; a meeting place for when friends and family become separated at busy public events, fire extinguishers in case of electrical fires, insurance policies (and perhaps a baseball bat under the bed) in case of burglary. But we’re never really prepared, because you can never fully prepare for the infinite variations on disaster that lurk in that foggy abyss beyond our calculation. In business, as in life, the important thing is how you react to disasters; how you adapt your contingency plans to the new, pressing reality.
By the time the first World Trade Tower collapsed, a core team of WSJ editorial and production staff were disembarking from the last ferry across the Hudson River to New Jersey, on their way to an office owned by parent company Dow Jones, which had only weeks earlier been converted into a backup WSJ newsroom in case there was ever an emergency in downtown Manhattan. With reporters filing stories on the ground via phone, and another team of editors working from makeshift offices uptown, in Brooklyn and back in New Jersey, the paper delivered almost all of its usual 1.8 million copies on September 12.
As a business builder, you can spend long hours devising contingency plans for every eventuality, but sure enough a disaster will arrive on your doorstep. Preparation is not for the if but for the when. Fortunately, not every business disaster is terminal. In fact, most are commonplace and many are repeat offenders. They also come in all shapes and sizes – from forgetting to load the fax and missing that important booking order to placing your trust in that rogue accountant and watching your hard-earned dollars fritter away.
So next time that setback sucks the air from your lungs, next time that near-death experience knocks you to your knees, just remember: it’s not how you went down but how you get up that counts.
1. YOU RUN OUT OF MONEY…CASH-FLOW CRISIS!
To the naked eye, your business is booming. You’ve just picked up a vital new client following a long and involved courtship. They placed an insanely large order and you can finally hire new staff to ease the workload. To seal the deal, you offered generous credit terms. The lead-time between paying for raw materials and securing revenues is stretched to breaking point, but you’ll manage. Considering the profits you stand to gain, it’s worth it. But before long you’re having trouble paying the very staff you’re asking to work overtime. With the beauty of hindsight, you realise you were kidding yourself. Now what?
The late, great Kerry Packer had little sympathy for cash-flow negative businesses and, when son James’s pet project One.Tel went under, his reservations proved well-founded. But, aren’t there times when short term pain is required for long-term gain? Plenty, but the pain needn’t be the cash-flow negative variety, says Andrew McLellan, founder of business reconstruction specialists PPB Victoria.
“We regularly deal with ‘profitable’ businesses that are cash- flow negative. You may think it’s profitable because you have accounts to prove it. Analyse the accounts and you find it’s not,” he says.
A common scenario is the business run by someone talented in sales and marketing, but with weak back-end business management skills. Turnover is healthy, while debts and overheads run high. Cash gets tight and they make all the wrong moves.
“Instead of asking, ‘Why am I in a cash-flow crisis?’ they say, ‘I’ll fix it,’ and try to increase sales. In fact, selling more of a loss making product will make your cash-flow worse because you buy more product, and use more cash selling it. Increasing turnover to increase profitability exacerbates the problem,” says McLellan.
Sound familiar? Don’t fear, you have options. But, like those with chemical addictions, you must admit there is a fundamental problem. You need outside help. Speak to your accountant and, although money is tight, do not scrimp. The accountant needs enough time to do a detailed review.
If the business is not yet on the brink of insolvency, your accountant can recommend ways to improve cash-flow by chasing up debtors, discontinuing unprofitable product lines and cutting overheads.
According to Denis Stevens, Managing Director of Expense Reduction Analysts, cost cutting is often overlooked as a means to profitability. “People focus on revenue and then the costs creep up. If something goes wrong, say an inordinate amount of revenue comes from one or two clients, the business is vulnerable,” he says.
If your crisis persists, and insolvency is just another red-tinted bill away, call the insolvency experts. It sounds drastic, but it might lead to salvation.
“In most instances, we’ll reduce turnover by cutting back less profitable lines and reducing overheads. We end up with a smaller business, but it’s infinitely more profitable,” says McLellan.
Alternatively, an insolvent business can be sold as a going concern to a larger organisation, where it is absorbed into existing infrastructure, retaining clients and staff members, including the original owner.
It’s a highly emotional time for the owner and company directors, but a few days later, they feel a whole lot better.
“They ask, ‘Why did I torture myself to keep this going?’ Sometimes they’ve worked 100-hour weeks and their sanity is in question. But they’re not saving the business, they just bought extra time,” says McLellan. “And life is much more enjoyable when you don’t have to spend your days telling lies to creditors over the phone.”
2. YOUR IDEA GETS STOLEN
It was one of the most successful product launches in history. The Reynolds Rocket ballpoint pen went on sale at Gimbel’s department store in Manhattan on 29 October, 1945. With a 10,000-unit sell-out on day one at a price of US$12.50, or roughly $US130 in today’s currency, Chicago entrepreneur Milton Reynolds made a fortune from a design to which his claim as rightful owner was, at best, highly dubious. Six months earlier, pencil manufacturer Eversharp acquired the US rights to the Biro ballpoint pen. While Eversharp carefully planned its market entry, Reynolds stumbled across the pens in Argentina, retro-engineered them, slightly changing the ink delivery system, and the rest is idea-theft history.
Today, intellectual property (IP) protection is high on the agenda of every ambitious business, but how best to protect oneself and recover from a potentially crushing low blow? It’s a fine line between exercising your own rights and infringing those of others, hence the monumental court battles erupting from IP disputes. So, ending up in litigation is best considered a last resort – the first step is ensuring you actually have some rights, says Ross McFarlane, Partner with IP attorneys Phillips, Ormonde & Fitzpatrick.
“Don’t wait until someone steals your idea. It may be too late if you’ve done nothing else and suddenly your idea is in the marketplace, being manufactured by a competitor,” says McFarlane.
Like keeping receipts for tangible goods that are rightfully yours, you must be able to prove IP ownership via an IP register, detailing who created what and when, along with any agreements transferring ownership. The very existence of these documents has a dissuasive effect on business partners or employees tempted to run with an idea.
“Most IP theft arises from companies you do business with. You might deal with a distributor or manufacturer, and your idea finds its way into a product that goes out the back door of the factory. Choose your business partners well, but also have the appropriate agreements in place,” says McFarlane.
Once ownership has been established, you need to secure your rights with copyright, trade marks, designs and patents. Copyright ownership is bestowed automatically, but the other rights must be formally registered.
“There are associated costs,” says McFarlane, “so you’d ordinarily seek protection in your key markets or your competitors’ key manufacturing countries. It might depend on which is more cost-effective.”
With protection in place, your options in an IP crisis are maximised. You’re not immune to attack, as in the case of Eversharp and the Reynolds Rocket pen, but you’ll be ready to fight back and there are a number of ways to do so.
Start with a sternly-worded cease and desist letter. Often a business is unaware of infringement and, presented with evidence, will back off immediately. To prevent counterfeit copies of your product being imported, you can lodge a Notice of Objection with the Australian Customs Service, allowing them to seize infringing goods at the border. With counterfeiting seen as a revenue source for terrorist activities, these measures are increasingly effective.
If the infringing activity persists there are court-based mechanisms to pursue but, according to Karen Sinclair of Watermark Patent & Trade Mark Attorneys, this is an aggressive approach to IP crisis management.
“Sometimes the best thing is to get someone articulate and powerful on your side and negotiate a win-win outcome. You can guarantee if someone has stolen your idea, it’s because they think it’s good,” says Sinclair.
A win-win scenario might involve a licence agreement with royalties, or even a joint venture to develop the idea further. “Don’t assume that the best recourse is a court of law. There are avenues you can pursue where both parties win. Think positive and create a business opportunity out of it.”
The IP attorneys at Eversharp and Reynolds would have done well to heed this advice. The two firms eventually faltered under the weight of IP litigation, sub-standard products and price wars, leaving Bic to dominate the market. The moral of the story? In a messy IP crisis, always look for the silver lining.
3. YOU GET MIXED UP WITH FRAUDSTERS
You’re a growing, knowledge-economy company with significant international clients and a progressive mobile workforce. When you were in startup mode, you knew all the names of your employees’ partners (and even their pets), but now you have grown too big and rely on key personnel and evolving systems to guide company culture and productivity. When your accountant informs you of invoicing and payroll irregularities, your inclination is to dismiss it as administrative error. Don’t. Someone inside your company is committing fraud. It has the potential to bring you down, but any false accusations could poison the well of your once-unstoppable team. Tread carefully.
When most people think of fraud they recall high profile cases, such as Nick Leeson ripping off Barings Bank to the tune of £827m, sinking the company. However, the vast majority of fraud committed within companies is low-level.
It is a common scenario that a growing SME begins with a very small team, with each member knowing everything about one another’s activities and trusting each other implicitly. But as a business grows, rigorous systems are required to discourage employees from committing fraud and to ensure that when fraud is detected, it is dealt with in a fair, open and expeditious way.
The 2005 PricewaterhouseCoopers Global Economic Crime Survey revealed that fraud is on the rise in Australia, Asia- Pacific and around the globe. From 2003-2005, 63 percent of organisations in Australia experienced economic crime, with 100 percent of organisations with more than 5,000 employees and 33 percent of organisations with less than 200 employees reporting such incidents.
Malcolm Shackwell, Investigations and Forensics Services Leader at PricewaterhouseCoopers, says that most typical fraud involves the manipulation of the payment systems within organisations.
“What you tend to see, very commonly, is fraud occurring around an organisation’s electronic payment process. It usually involves the creation of a false vendor/supplier, who receives payment through false invoices. That is fraud 101. It still happens all the time. The only difference between now and 10 or 20 years ago is that the payments are now made electronically rather than ensuring that the cheque is signed by the appropriate person.”
The PwC survey indicates that the level of economic crime in Australia was 18 percent above the global average and 24 percent above the Asia-Pacifi c average. So should we all be looking at colleagues sideways? Shackwell indicates that this elevated figure is mainly due to the pervasive use of technology in Australia, which provides would-be economic criminals with more opportunities to commit fraud. Technology also enables a higher rate of detection than in less technologically-advanced countries.
So, you trust your team and your systems. There’s no need for any Big Brother-like overhaul, right? Well, the guiding philosophy should be ‘trust, but verify’.
“All organisations should take the very simple step of pre-employment screening to verify that their employees are actually who they say they are,” says Shackwell. “In my opinion, this is the number one defence for any organisation. You would be amazed at the correlation between people who have committed fraud and people who have lied on their CV.”
A company should have a robust fraud-control framework in place, involving prevention, detection and incident management components. It’s also important to cultivate a company culture that doesn’t tolerate fraud.
Of course, fraud is something that cannot be 100 percent prevented, so it’s important to have a plan in place to minimise the chance of making a false accusation. It’s also worth devising a contingency plan for how to handle the media in the event of a significant case of fraud. And, as a last resort, fidelity insurance (cover against fraud) is widely available and recommended.
4. YOU JUST GOT CYBER-ATTACKED
You’re no fool. You’ve heard horror stories of cyber vandalism that have crippled naïve businesses in the past. You have a network in place with a corporate firewall and antivirus scanning. But how much can your employees do within your organisation’s IT environment, and how much do they really know about the possible implications of their digital actions? You’re only as strong as your weakest link. And let’s face it, in this area, cyber criminals are usually far more cunning than your dimmest employee.
Just a few years ago, the only cyber threats were viruses, typically delivered as an email attachment and opened by curious recipients. Back in those simpler days, hackers created and disseminated viruses out of a desire for notoriety. (Remember the “I Love You” virus? The guy that created that was most certainly a villain, but to many in the hacker community he was also a hero.) Today, cyber crime is driven by the profit motive, and there is significant profit to be made by using the World Wide Web to steal money, information and anything of value from companies and consumers. As a result, once-lone hackers are beginning to resemble (and fraternise with) organised crime.
As corporate IT security organisations have attempted to minimise exposure to cyber attack, the threats have mutated and proliferated. In addition to viruses, we now we have adware, spyware, worms, keyloggers, rootkits, phishing, spy-fishing and vishing, to mention a few. An endless armada of bot-armies invade our inboxes and websites in the services of criminal organisations located beyond the reach of Western jurisdiction and colluding across borders to maximise the ever burgeoning booty.
According to Trend Micro’s 2006 Annual Threat Roundup and 2007 Forecast Report, the most notable trend last year was toward blended threats – email and web threats, and multiple pieces of malware working together. The goal is to infect and hide on a computer and communicate with other threat vectors to steal information for as long as possible.
“There’s a thriving black market out there, which provides the financial incentive to develop sophisticated attacks,” says Michael May, Trend Micro Australia’s Enterprise Director. “You don’t usually hear about cyber breaches from commercial competitors, because companies are understandably reluctant to share this information with the media. But there are many hundreds of millions of dollars involved now, and it’s growing dramatically.”
Adam Biviano, Trend Micro’s Premium Services Manager, analyses the reputation of URLs in order to produce accurate, up-to-date web ratings for clients. “One day a website might be in Russia, the next day it might be in Argentina, then China,” he says.
“The types of events that could shut a business down include having your entire customer data published on the website, or trade secrets released to the market,” says Biviano. “This can be crippling to businesses of all sizes.”
The key is really monitoring website access, not just in the office but mobile technology as well.
“The web is the email of today, in terms of viruses, worms and malware entering professional networks. Every link has the potential for trouble,” says Biviano.
5. YOUR COMPETITORS OUTSOURCE… OFFSHORE
You’re a prominent player with an impressive market share. But your competitors are beginning to undercut you on price – dramatically – and you can’t figure out how they’re doing it. Of course, they’re outsourcing labour to the developing world, and if you don’t do something fast they’re going to steal all your customers and send you under. Do you start sacking employees and outsourcing to China as well, or is there another way?
The terms ‘globalisation’ and ‘outsourcing’ go hand in hand. One only needs to look to the mass lay-offs in the ravaged manufacturing sectors of most developed Western nations to realise that tearing down barriers to international trade is never victimless.
Finding the cheapest service providers for each component of your business’s supply-chain is not new. It makes sober, bottom line sense. So why should the decision be any different when the cheapest quotes are coming from overseas?
Before you rush out, sack half your employees and jump on a plane to India in search of new, cheaper suppliers, it’s vital to analyse where the value lies in your company.
Mark Neely, CEO of business strategy consultancy Infolution, believes that outsourcing offshore should be actively embraced, but only after a comprehensive analysis of a company’s value-chain.
“Rule number one is: just because your competitor is cutting prices doesn’t mean that should be your automatic response,” says Neely. He points out that, while price is always a consideration in the purchasing decisions of consumers, they often take other factors into account. “You won’t always buy the cheapest car. You buy the car that you think has the best value, based on your needs and budget (warranty, safety, fuel-efficiency, second-hand resale value, etc.).”
The key to a successful outsourcing strategy is keeping firm hold of your baby while draining the bath water.
“The idea is to keep the thinking parts in-house, and outsource the low-tech manual labour components,” says Neely. “Focus on the things that make your company special, because they are almost always the hardest parts for someone else to replicate. That’s where your value lies.”
The best example of this is Nike, who came from nowhere in the late 80s and early 90s because they focused on what they were good at – marketing – and outsourced everything else. They realised that anyone can cut rubber. The hard, high-value-creating part is creating a brand and a marketing strategy so that people will aspire to wearing Nike shoes. That’s what allows them to sell 20 cents worth of rubber for $200.
“From the strategic perspective, you should never outsource to save money. You outsource to free up internal resources to invest in your high-value-creating activities,” says Neely. “Every $100,000 you save by outsourcing a plastic mould to Taiwan is $100,000 you have internally to invest in your brand or whatever it is that makes you stand out from the crowd. That’s how you increase your competitive advantage.”
For an example of a less-than-perfect outsourcing strategy, we need only look to most major telcos. Telcos realised that their major expense came from talking to their customers via call centres. So they decided to slash those costs by moving their call centres to India and other developing Asian countries. But in doing so, they alienated and lost many customers, which compelled them to increase spending on marketing to attract new ones.
The biggest mistake people make when outsourcing, according to Mark Neely, is to automatically go for the cheapest service provider in a foreign country.
“It can take up to three years to find the right company and nurture the right sort of relationship to actually bed down and see results. What differentiates you from your competitors are your people and your culture. It’s important to find a cost-effective supplier who understands your business and the way you do business.”
6. THE MARKET CHANGES… WITHOUT YOU
As the long-standing CEO of a highly successful technology business, you’ve recently presided over a drop of low-end market share from 90 to 30 percent. At first, you’re not too bothered as other indicators are looking good. Gross margins are increasing as you sell more high value products. Still, you don’t like being chased out of your own territory and one unsettling thought recurs: is the high-end market next?
This was the uncomfortable scenario facing Intel CEO Andy Grove in the late 1990s, as competitors crept into the low-cost personal computer market. Instead of designing superior products and further increasing margins, Grove famously – and counter-intuitively – stood his ground at the low-end, creating a cheaper, slower microprocessor: the Celeron. In an industry where faster means better, he structured the Intel corporate environment to foster such a monumental mindset change. Faced with the challenge of disruptive innovation, Grove could foresee how it would end: new life or a slow death.
Even the manager of the most successful business strives for it to be better. The temptation is to up the ante, to impress customers by giving them even more of what they have enjoyed to date. The notion that this will lead to failure is often too fundamental and too daunting to contemplate. These are the warning signs that your business is ripe for disruption, according to Pete Thomond, Innovation Consultant, Brisbane Graduate School of Business.
“Commonly, companies will over-supply their customers for performance. But they’ll never believe that’s what they’re doing, because that is what has given them success in the past. Ideally, a management team should celebrate their past, but not be bound by it,” says Thomond.
Instead of waiting for the hammer of disruption to fall, be proactive by keeping a keen eye on your investment in product innovation. With processes in place measuring innovation ROI, a smart company will notice these returns diminish, signalling a market over-supply.
“When you see that happening,” says Thomond, “ask yourself, ‘Well, could I suggest a slightly less sophisticated product for my less sophisticated customers?’ That’s what Intel did.”
Tempting customers away from your higher-end market with a low-margin offering is counter-intuitive in most corporate cultures, and strong leadership is required to change the mindset of an upwardly-mobile business.
“As well as being able to see this threat on the horizon, you need commitment from management to self-cannibalise if necessary. You’ve got a choice, self-cannibalise or watch someone else do it. If the new opportunity doesn’t fit the traditional strategy of the firm, create a spin-out organisation,” says Thomond. The ‘ambidextrous organisation’ is one that doesn’t need to create spin-offs, as dual process flows are created within the business. New concepts improving the existing products go through one pipeline and potentially disruptive innovations go through another. These companies can “aggressively improve what they already do, but the other hand stokes the fire of the next product launch,” says Thomond.
When a new technology hits the market, consumers are impressed by the performance and features of the product. As time goes on, reliability becomes the key demand driver, so the business with the reliable product disrupts the one offering more features. Next, convenience takes over from reliability and, finally, market share is decided on price. So, even if you have been taken unaware by a new technology, the shifts in consumer demand still offer an opportunity to play catch-up.
According to Thomond, the truly innovative firm knows that success is not a given and every product has a limited lifetime. Most importantly, it knows that when the fear of failure is removed, innovation thrives.