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Libey Incorporated
Economic Outlook
Secrets of the Catalog Master
Vol. MMV No. 2 March 2005
Advisors and Intermediaries To The Catalog Industry
Philadelphia, Pennsylvania
Donald R.
Libey, Editor
CEO In a Box
by Donald R. Libey
What does the Master CEO of a multi-channel direct marketing organization do every day? Here is a CEOs benchmark protocol that provides a start to answering that question. While many other responsibilities and functions exist for the contemporary CEO, if just these few, essential, foundation basics were covered we would have an industry filled with leadership and operational rainmakers. Here, then, is my protocol for evaluating a CEO 'out of the box.' For you who are CEOs, see how you are doing; for you who want to be CEOs, see what you have to know. For you who used to be CEOs, enjoy knowing what you don't have to do anymore and go play another 18 holes.
Finance
Big Picture. There is no doubt that finance has moved ahead of any other responsibility for today's CEO. This is reflected in the emerging consolidated ownership patterns, particularly where private equity groups and consolidation-driven corporations have taken ownership of direct marketing companies, such as the recent acquisition of Cornerstone Brands which was purchased by Home Shopping Network's parent company, IAC/Interactive Corp. Increasingly, these deals are driven by growth requirements rather than strategic need, as well as corporate valuations, and that is the realm of financial specialists who just happen to be working in the direct marketing arena. The fact that direct marketing continues to be attractive is, in great measure, because of the financial advantages multi-channel marketing has over other go-to-market strategies and the long-term projected growth for the direct, multi-channel industry. With better than average returns, the buzz globally revolves around the financial attractiveness of direct.
Financing Costs. Because of the demands of growth and rapid channel expansion, today's CEO is faced with a need for financing for many parts of the multi-channel business. The relationships with banks, private equity groups, investors, shareholders, and other sources of financing require significant concentration. More important, the future financing needs of the business often demand working two to three years in advance of the actual need. Managing the costs of market and channel expansion, facilities expansion, personnel expansion, systems expansion, inventory expansion, and other infrastructural demands becomes a top priority for CEOs. For those CEOs of public corporations, the demands are ever-greater. Not only must the financial source relationships be built and maintained, but those with securities analysts, news media, and related watch groups must be tended to regularly.
Cash Flow. High on the priorities list in finance is the management of cash flow. Cash flow is divided into three components:
- Operating cash flow. Also known as working capital, it is the cash flow generated from sales of the products or services of the company.
- 2. Investing cash flow. This is cash flow generated from non-operating activities and includes plant and equipment investments, non-recurring gains or losses, other sources or uses of cash outside of sales and normal operations.
- 3. Financing cash flow. This is the cash flow to and from lenders, investors, shareholders or other external sources.
The CEO's primary responsibility in cash flow management revolves around knowing when, where and how cash needs will occur; knowing the best alternatives for meeting those cash needs; and maintaining and strengthening relationships with bankers, investors and other sources of investing cash flow so that cash is available at an acceptable cost when it is needed. The tool for cash flow management is the cash flow projection, a short, intermediate and long-term chart of cash requirements to meet the strategic and operating objectives of the business. One of the most common misconceptions we, as advisors and investment bankers, encounter is that of the difference between profit and cash. A catalog's profits are of little significance if there is no positive net cash flow. Profits are not spent; only cash can be spent.
Attrition. The term attrition can apply to a variety of components. For most catalog and direct marketing CEOs, managing customer attrition is at the heart of financial management. Attrition involves both new customer acquisition (an investment) and retention of existing customers (maximization of lifetime value). If you think about it, these two metrics are the whole game. Everything else in the multi-channel direct marketing practice-products, merchandising, channel mix, people, quality, fulfillment, literally everything-comes home to roost in either customer acquisition or customer retention or attrition. Far too often, I encounter CEOs who do not know their current cost to acquire a customer, the historic cost and trend, the current and historical retention percentages in all segments of recency, or the other mundane and routine base measurements of attrition and retention.
Systems and analytics. Financial performance is directly influenced by the availability and use of superb analytics and the systems to drive those analyses. Where CEOs have invested time and resources into top-notch analytic tools, the companies tend to be above average; where they have not, the companies tend to sub-average. Every catalog sale that I have encountered having superior analytics has brought a higher multiple of earnings and greater valuation for the seller.
In a multi-channel environment with a plethora of new customer sources ranging from catalogs to paid search to affiliates to organic search to broadcast, analytics must be both comprehensive and concise. Today, CEOs who manage through a 'suite' of analytics that are uniform, relational, predictive and replicable are moving rapidly beyond those CEOs who are still attempting to gather data about events that occurred six months ago. No analysis that is six to twelve months old is of any strategic value. That is the key management challenge facing the multi-channel direct marketing CEO.
And, of course, my favorite area of financial focus for CEOs is the use of fully optimized recency, frequency and monetary value extended over customer segments, products, channels, positions and divisions. Financial, marketing and circulation management by this timeless and invaluable analytic tool brings the highest return for the CEOs attention of almost any other element of management. And, yet, so few have mastered this foundation tool.
Reserves management. One of the great subtleties of financial management of a direct marketing company is the management of adequate reserves. This aspect goes beyond a simple reserve for bad debt. The Master CEOs are routinely managing reserves for obsolete inventory, facilities expansion, analytic system replacement and enhancement, paper price increases, promotions, postal increases, paid search fee increases, search word valuation, product development and R & D, creative makeovers, and a variety of 'rainy day' reserve accounts.
Budgeting and accounting. Unlike Mr. Ebbers, the successful CEO knows everything about the books. There are no surprises. In our finance-driven management structures of direct marketing that have evolved in the post-MBA decades, it never ceases to amaze me how many big catalog and online companies out there don't do budgets. Without objectives and financial targets, financial chaos quickly descends. The Master CEO is constantly tweaking the budgets and the financial objectives, but does so in a positive maximization of the financial performance, not in a corrective manner. That only comes as a result of near-obsession with financial landmarks.
Accounts receivable. For our business-to-business CEOs with large accounts receivable totals, aging becomes one of the daily attention areas. Inter-related with cash flow management, the overlay of the AR aging chart on the cash flow projection is a fairly direct roadmap for the business. Remember Libey's Second Law: Cash now is better than cash later, in every instance. Reduction of AR aging by two, three or more days is positively rejuvenating for cash flow. Actively managing AR aging is a skill possesses by too few of the catalog CEOs. Consequently, it is left at the AR level and is not actively managed for optimal performance.
Credit and collections. The multi-channel CEO is faced with credit standards that may be different across different channels. A business-to-business credit threshold for a catalog customer may be very different from that of an organic search online customer. Collection policies may also be quite different. Equally important is the tight negotiation of credit card fees. Any reduction in the cost of credit for a business-to-business or consumer marketer drops directly to the earnings line. While a small percentage of the overall business, optimal financial performance in this are may add a point or so to earnings. Regardless, it is worthy of focus.
Product
I place product second in the hierarchy of CEO responsibility, second only to finance. While some say channel is king, product is still on the throne of direct marketing. The CEO has to be the primary champion and driver of product and needs to devote huge amounts of energy and attention to the following product strategy components.
Product selection and development. Product managers and merchandisers are important, but somebody has to be in charge. The best CEOs have a seemingly infallible understanding of their products and a laser-like focus on the customer's use and application of those products. You can give up much of the product sourcing and development responsibilities to product specialists, but the CEO is wholly responsible for the company's product soul. Product direction is a term that implies absolutism in product selection and development, and the CEO is the source of that absolute direction. The answer to the question, "Where do we want to go with our products?" is a question that ultimately must be decided by the CEO. Interestingly, the most successful owners and CEOs I have encountered in the catalog world have been product people, not financial people.
Market selection and development. In the same way, market managers are important, but somebody has to be in charge. Again, the best CEOs have an equally infallible understanding of the market or markets they take their products to and the customers that populate those markets. You may not do all of the contact planning or circulation planning, but the Master CEO can do it all if necessary. More important, because they can do it-and know it cold-they understand when the market selection, development and contact strategy is wrong. And that's why they are the CEOs. Think about this: How can you know product better than anything and not know about the market in which the product is sold? It's like being able to drive a car but not knowing how to go anywhere.
Competition. Something very interesting happens when I visit with CEOs, especially about acquisition targets. The CEOs of the very successful companies tell me all about what their competitors are doing; the CEOs of the not very successful companies ask me what their competitors are doing. The good ones have the whole product profile of their competitors in their heads; the mediocre ones have unanswered questions. Great CEOs study and master their competitors and learn to think like their competitors.
Profit margin. Among the product responsibilities is the genesis of product management for CEOs: In the beginning, there was margin. Every product has only one job: to create a profit. That only happens when someone imposes the requirement. I once worked for a not very good CEO who possessed few of the people or professional skills needed to be successful in the catalog business. But, he did know the precise margin of every single one of over 6,000 SKUs and he knew the precise margin at every quantity break for every product. He was a walking calculator. He managed the company by profit margin and profit margin alone. The company was very profitable. It wasn't a nice place to work, but it was profitable.
Product Value Comparison. The CEO has to be able to judge the perceived and actual value of all products and reconcile that judgment against competition, customer demand, customer retention, and pricing. For all products. In all markets. Across all channels. In short, the 'value proposition' is the domain of the CEO.
Product lifecycle. Today's CEO is faced with actively managing and optimizing the product lifecycle for all products. At any given time, there are products in different stages of development: R&D, introduction, growth, maturity, obsolescence. The question that must be asked and managed is, "What percent of all products are in each phase of the product lifecycle, what does this mean for individual product ROI, and what is the optimal management tactic for each product?" When the product lifecycle gets away, it is extremely difficult to get it back on track. When all of the products tip over into maturity, the prognosis is grave; when all the products tip over into obsolescence, the prognosis is death. I have in mind the ultimate specter I stumbled across several years ago while on an acquisition search: A catalog company doing $20 million with $14 million in inventory of which $12 million was obsolete. Valuation? Liquidation value only. Pennies on the dollar.
Not only lifecycle management is critical, but in a just-in-time environment where many products are being imported, managing inventory turns is, perhaps, management of the largest asset of the company. Today, there are huge multi-channel direct marketing companies managing for thirty-five turns a year and higher. With that degree of financial utility, the CEO is compelled to devote significant time and resources to supply chain performance.
Product sourcing. So many CEOs report they are spending one, two, three or more months a year overseas negotiating product sourcing contracts. What was once the responsibility of the 'purchasing agent' (a position that has all but disappeared), now the implications of 'Deep China' sourcing are so great that the CEO has had to accept responsibility for this major portion of profitability.
Logistics. Because of the importation of so much of the product line, the need for high turns, the need for improved profit margins, and the need for enhanced fulfillment due to channel migration and customer demand for speed, the CEO must focus on the in-and-out logistics of product management. Freight-in and freight-out has become highly specialized and contract-driven. Other aspects of logistics, such as systems requirements for drop-ship programs, stock purchase order management, automated order transmissions, order acknowledgements, advance shipment notifications (ASNs), invoicing and order changes, require a focus of technology such as VendorNet (www.vendornet.com), a web-based supply chain collaboration that removes the chaos of contact and paper management and replaces it with a web-based, automated, full supply chain coordination 'suite' of systems management. This is CEO-level stuff. And it saves tons of money.
Product-level concerns. The foregoing product responsibilities are quite 'Big Picture.' There exist a host of 'Little Picture' concerns for the CEO to manage regarding the individual products. Most of these are where the rubber meets the road: the customer level. As a result, they are equally important and may be even more of the 'soul' of the company.
Someone has to be looking at the overall packaging protocols and efficiencies for each product and for every product. This also entails shipping costs, packing materials, custom or stock boxes, and efficiencies of shippers. Someone also has to look at overall product ease of use, instructions, warranties, guarantees, breakage, returns, percentage shipped complete, backorders, restocking costs, refurbishing costs, clearance outlets, and on and on. By product. By line. By channel.
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