Strength in Numbers – Growth by Acquisition

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

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 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.

Compare and Contrast – Microsoft and Google

Last weekend we held a company conference in Visegrad, Hungary. It was a mixture of instruction, inspiration, and a drink called Jagermeister.

We are not a large group (LLP Group) but we managed to assemble around 70 of our marketing, sales and consulting staff from seven of our European branches at a pleasant hotel in Visegrad on the Danube for two full days of talks and discussions. Most of our presentations were about ourselves and what we do, but we decided also to step back from the day to day and contemplate the future. So we invited Microsoft and Google to present their visions of how the world will look in two consecutive formal sessions. We were lucky, I suppose, that both took us seriously enough to send a representative.

Whilst the worlds of Microsoft and Google overlap in some areas (their interest in cloud computing, in desktop tools (spreadsheets, word processing, etc.), in mobile technology (Windows Mobile and Google Android), and in search tools (Bing and Google)), what was surprising about these two giants of the tech-world was how different they are, to some extent in substance, but enormously in style.

First to go was Microsoft. A man in a dark suit from Microsoft’s Dynamics business software division talked about the ‘cloud’. This wasn’t enormously interesting. The future of computing is the cloud, he said, and it sounded like a dull future. It was the usual business PowerPoint presentation, heavily branded with the Microsoft logo, corporate and unremarkable.

The young lady from Google, by contrast, started with a picture of herself and her family and went on to present her ideas (and perhaps also Google’s) in an engagingly idiosyncratic, and almost entirely ‘unbranded’ way. ‘No brand’, it appears, is the Google brand. Be personal, individual, unusual, and cool, is the theme. Bring your family to the ‘table’. Life and work are a continuum. It’s the same message, I suspect, for both internal and external consumption, but we shouldn’t be fooled into thinking it isn’t calculated.

She spoke about how the nature of IT is changing, how devices assail us (well, that’s probably an old-fashioned way of putting it!) in all sorts of ways all day, everyday and everywhere, but that predominantly it’s the mobile device that is determining the way we work and play. IT, even business IT, must live up the expectations of the new generation who spend their time on mobiles. If IT isn’t easy to use it will be forgotten.

I asked her afterwards how she thought this would affect the world of business software. It’s hard to see SAP or accounting systems on mobiles, I suggested. Maybe, she said, but young people don’t want to join corporations any more, they don’t want to be working with heavy-duty old-fashioned ERP, so business software must adapt. Young people have individual, creative, even ‘moral’ aspirations. Google the ‘anarchists’, it seems.

There’s a little truth in this, perhaps. The young are always idealistic. But the business software juggernaut will nevertheless roll on, adapting slowly and painfully to the easier-to-use styles of consumer software. The fact is that business systems become ever more complex, and will always take man-millennia to write and adapt. Complexity isn’t easy to fit into a mobile device.

You might as well say that literary authors must write novels of pamphlet length if they’re to be taken seriously by the next generations. Let’s make things easy, if that’s appropriate, but let’s not dumb down.

So the differences between Google and Microsoft are more about style than substance. Both are, in fact, highly organised and enormous business, juggernauts themselves. The first presents itself as anarchic and individualistic, the second as more sober and business-oriented. Both have been creative (occasionally) but neither can seriously pretend to be anything other than a large well-organised multi-national corporation, disciplined and deliberate.

And neither can Apple. All three of these are highly competitive and meticulously calculated in their moves, Microsoft perhaps driven more by business, Google more by the consumer, but both slaves to their respective markets. True, the consumer and the business worlds nowadays overlap, but there are still some things each company does that are unique. We’re tempted by Google’s cloud-based desktop tools, but they don’t yet have an answer to MS SQL.

When it comes to style, consumer-facing companies need a different image from business-facing companies and both must be careful when they need to face in both directions (note that Skype, largely consumer-facing, isn’t heavily branded by Microsoft as a Microsoft product). But I don’t strongly believe that the capacity of these companies for innovation is a function of their presentation style.

That said, during a separate presentation that I gave on our own systems@work products, I asked my colleagues what devices and what browsers they use. The majority use Android, and the majority use Chrome, so in that respect (and I was surprised), it’s 2-0 to Google. But then we all use Windows on our PCs, and SQL servers for our business applications, and Google doesn’t even compete with these.

“It is not enough to succeed, others must fail”

This splendidly waspish remark is attributed to the writer, Gore Vidal. He was, himself, immensely successful, though acclaimed more for his ‘unserious’ writing than for his political novels, which I find, frankly, quite indigestible. It was these thoughtful and interminable novels about politics that he wished to be remembered for (rather in the way Leonard Bernstein longed to be remembered for his vast symphonies instead of West Side Story, when most of us would have been glad merely to have written one good tune from the show).

Gore Vidal wrote screenplays too, mystery novels under the pseudonym Edgar Box, made a lot of money, and mixed in the Princess Margaret set. But, struggling, despite his success, with some crippling insecurities (I suppose) he suffered fools very gladly indeed, in that it gave him immense pleasure to be both socially and intellectually superior to almost everyone he met. In most cases he was certainly the latter, but I can’t help thinking that those who are conscious of the former have already failed miserably in some way.

Envy is also a sentiment of the young. When we are striving for success or recognition, other people’s talents and successes are an affront. We must grin or grimace determinedly when we hear news of some friend’s astonishing triumph, triumph of a kind that has, as yet, eluded us. But as we age, we begin to take genuine pleasure in others’ success. Success and failure are not the necessary and balancing outcomes of a zero-sum game.

On the way to Bucharest airport yesterday, my colleague, Ioana, and I popped in to see our former colleagues, those working for the company that LLP Group sold 19 months ago. It was LLP Dynamics then, and is Xapt Romania now. Not so successful then, but conspicuously, confidently successful now. Microsoft’s Dynamics suite of software was never my cup of tea, and certainly, under my direction (and others) the company hadn’t thrived. I knew I couldn’t solve the underlying problems, and by the middle of 2013 it was wearing me down, so selling it brought me some guilty relief (and some cash, too, of course, though nowhere near the amount we’d lost). Guilty, perhaps because I felt I might be putting my own interest before my colleagues’. I was the captain, and I was abandoning the ship.

But it wasn’t like that. The sum of human happiness has been greatly increased by the sale – my happiness I was sure of, but theirs too, as I could see yesterday. Now Xapt Romania is doing very well indeed. It’s the largest and best Dynamics AX reseller and consultancy in Romania. It’s profitable, it’s growing (now it employs nearly 50 staff), and it feels happy to me. Hats off to Mihai Madussi and his team.

It’s actually ok to fail, even if others succeed!

And, let’s face it, we haven’t failed everywhere. What’s left of LLP Group, (LLP Group, LLP CRM and systems@work) is still very much more my cup of tea, and it’s doing very well indeed.

Don’t Take the Source Code

The most difficult questions are the most open ones. What would you do if you were Prime Minister? Better to be asked specific questions: What would you do about school dinners, or Iraq, or capital punishment, or conscription, or food labelling or the railways? If the questions are more particular then you’ll probably have an opinion, or at least something to say.

I remember English composition lessons at school. Write a story, the teacher would say, and I wouldn’t know where to begin. Write a story about four-eyed Martians and I’d know where to start. Complete freedom is paralysing. When everything is possible, nothing comes to mind.

For somewhat different reasons, being able to do anything at all with business systems is also terrifying. Partly, perhaps, because you don’t know where to start, but ,mainly because you don’t know when to stop.

Although nothing falls entirely into one or the other category, you can roughly divide business systems into those where you get the source code, and which you can do anything with, and those where you don’t get the source code, where possibilities are constrained.

I like constraints. When there are constraints, possibilities are very many fewer, and there are clear choices to make. This is the better situation.

Of course, if you get the source code you can build something that does exactly what you want to do (well, what you want to do NOW), but it will take you forever and cost you an infinite sum. When you don’t get the source code you may get 90% of what you want at a reasonable price, and soon. Moreover, you will find upgrades immensely easier.

I worked years ago, as a consultant, with an oil company that decided to take one of the largest business systems in the world, adapt the source code and implement it globally. The project was immensely expensive, took far longer than planned, and when the system was ready it was already out of date and impossible to upgrade. The system was abandoned in favour of another even bigger one that needed less adaptation.

And at LLP Group, a software reseller, where I work, we had two divisions – one selling Microsoft’s modifiable Dynamics software, where our projects were often disastrous, and one selling Infor’s non-modifiable software, where our projects were manageable, satisfying and profitable.

Don’t touch the source code!

Adam Bager

Occasional thoughts on IT, Business and Other Matters

Tag Archives: microsoft dynamics