CEO in a Box
by Donald R. Libey

Published by
MeritDirect
Higher Ground

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.

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:

1. 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 LLC'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.

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