Strength in Numbers – Growth by Acquisition

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You can grow a consulting business such as LLP Group in two ways: through organic growth, or through acquisition. The first is a slow, but usually sure, process that can ordinarily be financed from profit, as long as the pace is not too fast. It’s a sure process because expansion need proceed no faster than the market will allow, and because each of the many steps you must take will be a small step that you can take when you’re ready, and not before. But organic growth is not without risk, the risk that others might move faster than you, seize a larger market share and leave you struggling along behind. Growth by acquisition is a far riskier process, and it’s much more difficult to finance, but it’s nearly always a quicker way of gaining market share. So, each process has its merits and its risks.

LLP Group has grown steadily over 24 years, usually through self-financed organic growth, but also through three acquisitions. The first, in Romania, involved the acquisition of a small competitor providing consulting around Microsoft Dynamics NAV. We thereby gained market share and brought into the company some of the best experts in the field. I would judge it a success, though it would be difficult to measure the financial benefit over a long period. When the financial crisis came we lost some customers and employees and we eventually sold our Microsoft Dynamics ERP division.

In Hungary we made a disastrous acquisition that I regret to this day, encouraged by a managing director of great charm and persuasiveness, but little sense of risk. Again, it was a company that was expert in Microsoft Dynamics NAV. We carried out limited due diligence and failed to spot a disastrous project that led to an expensive lawsuit against the company, which we eventually lost, and which finally led to the bankruptcy of the company.

In Slovakia we made a third, small, but successful acquisition to bolster the group’s capability around Microsoft Dynamics AX. This company was sold with LLP Group’s entire Dynamics division, but the acquisition made the division more attractive to potential buyers.

The risks of acquisition are many, particularly for a services company, where value lies mainly in employees and customers, partially in intellectual property, but almost never in saleable fixed assets:

  • Are the financial statements correct?
  • Are revenue projections plausible?
  • Is the sale pipeline plausible?
  • Are contracts with current customers secure?
  • Are relationships with employees good?
  • Are the company’s strategic aims consistent with the buyer’s?
  • Are the company’s culture and ethical standards compatible with the buyer’s?

Due diligence of various kinds and close observation can help you to decide some of these questions, but risk remains.

Sometimes there’s an opportunity that you can’t put aside, so this week we’re announcing the largest acquisition in our history, the acquisition by our Microsoft Dynamics CRM consultancy, LLP CRM, of Logic point, our main competitor in the Czech Republic. Together we will be the largest specialist provider of CRM (Customer Relationship Management) consulting and software in the region, with combined revenues of towards 3 Million EUR and around 45 staff.

‘Marry in haste, repent at leisure,’ the saying goes. This has been a fast-moving relationship, with talks only beginning a month ago. But we’re a good match, each of us bringing different technical skills and different sector knowledge to the table. Together we will be able to offer our customers a wider range of skills, with greater efficiency.

We’re starting close cooperation this week, and have agreed terms for our merger (LLP CRM will acquire 80% of Logic point) subject to due diligence. We expect to tie the legal knot in about three months’ time. Preliminary careful analysis, carried out with caution and scepticism, has thrown up no obstacles, or unexpected risks that cannot be mitigated, but it is the ‘unknown unknowns’ that we must be wary of.

In the meantime, we’re in for an exciting and hectic time, as LLP Group’s numbers in the Czech Republic grow to more than 80 for the first time in the group’s history. Fingers crossed for a long and happy marriage.

 

FPP – Estimating Fixed Price Projects

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I posted a blog a few days ago on Fixed Price Projects (FPP – A Frightening Acronym). FPPs frighten me because part of LLP Group (a part I’m happy to have sold) worked with the wonderfully open-ended Microsoft Dynamics business software products. We sold, scoped, estimated, and executed such projects poorly, to the extent that we made no margin at all, sometimes on hundreds of days of consulting, even whilst satisfying our customers. Our consultants and developers were no doubt excellent, but our sales processes and project management skills were insufficiently sophisticated and cautious.

Because of this I’m wary of FPPs, even if I know that they can be done well, can be controlled and can be profitable. To that end, I try to make sure that everyone in the company is aware of the risks and how they might be mitigated.

My last notes were about the Sales process. Here are some thoughts about Estimating.

estimating

Estimating

Estimating is a process that must involve both the sales and the consulting/development team.

It’s a time-consuming business. But FPPs get off to a bad start if we calculate estimates poorly on the basis of incompletely understood requirements, and half-baked solutions. Even ten free days up front might save hundreds of days later.

Of course, it’s the sales team that has to sell the project and who, in conjunction with management, must decide on price (for a defined scope), but our sales and management team MUST listen to what the consultants have to say. If they say they must know more about the client’s requirements, then the sales team must provide them with more. Never be tempted to think ‘Well, if I add another five days or so, that’s bound to be enough’. It isn’t.

And ALWAYS add contingency to your estimate. (And then more.)

In the end it is a commercial issue as to whether you knowingly ‘sell’ fewer days than you know that you need to execute the project. Whether that is commercially wise or foolish has nothing at all to do with the deadly sin of starting a project with inaccurate estimates of how much time the project will actually take you.

What if your estimate is insanely too low, and you discover that once you’ve started the project?

Well, it’s important when creating an estimate to make your assumptions explicit. This isn’t a slippery way of avoiding commitment, a trick that you’re playing on the customer. No, it’s an honest statement of the basis for your estimate. If it turns out that there are material facts that you’re unaware of, then you’ll be glad to be able to go back to the customer and ask for more time. And make sure that you make it clear that it isn’t your fault that you didn’t ask. You need to include a statement like this one in your proposal:

This estimate is based on materials provided by the customer and discussions with [named individuals]. Whilst we have built a certain level of contingency into our estimates to deal with the unexpected, the following assumptions are material, in that if they are incorrect our estimates may be materially wrong in either direction. These assumptions are [examples]:

  • In valuing your inventory you use only one method of valuation, weighted average valuation in local currency in conformity with statutory tax regulations
  • In valuing your inventory you value it only in one currency
  • You have no need for lot tracking of purchased, intermediate or final products
  • Etc’

 

And very importantly…

  • Your staff are motivated and committed to the process of implementation and will provide timely support as required
  • Your staff will be available for the time that we have estimated is required of them’

 

If possible you should build the estimation process as a first step of the project itself, or present this as a project stage where estimates and assumptions are confirmed. If necessary, give some free days to this, since your risk is greatly reduced by it, and you have a chance to demonstrate competence.

But if you do this it is also important that you build into your contracts an escape clause.so that both parties can terminate the contract or renegotiate it if the estimates or assumptions turn out to be incorrect.