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Monthly Archives: May 2012

A good friend tells a story about a previous job in product development for a minicomputer manufacturer. He was given the task of leading the development a large business telephony switch, a PBX, using the company’s hardware and a new protocol, voice over IP protocol (VoIP). Nowadays VoIP is common and sits at the middle of national telecom provider networks – most of your calls will at some point be converted to VoIP and back again, even if delivered via the Plain Old Telephone Service at either end. At the time VoIP was new and not used commercially.

The development was a success. They took the product to British Telecom (BT), who installed it in a Very Large Bank as a trial. The bank was absolutely delighted with the equipment and wanted to buy it for its head office. BT, however, refused to sell it!

At the time telephone switches were big, proprietary devices that sold for anything from tens of thousands for a few lines up to about £5M for a call centre version. At the same time they were BT’s 3rd largest profit stream after calls & lines and private circuits. BT could sell the bank an old-style Nortel switch for several million, or the new VoIP switch for a couple of hundred thousand. It had a 60% market share of the UK PBX market. Given that the CEO would have to tell the shareholders he was cannibalising one of their biggest revenue streams in the name of progress, it was no contest.

So the minicomputer manufacturer decided there was no market for the product and cancelled it! VoIP is, of course, a disruptive technology. It disrupted the big switch manufacturers like Nortel or Marconi and their sales channels like BT. Those that survive make their profits other ways. BT makes its profits from the broadband services over which VoIP calls travel.

Nowadays VoIP is common and a whole range of new VOIP switch manufacturers and handset manufacturers have arrived. BT sells these switches but makes most of its revenue elsewhere. And the original mini manufacturer? It’s not in that market anywhere. It struggled along until it was bought.

The kindest thing we can say about the mini maker is that they were probably expecting immediate, high volume sales from the channel that owned most of the customers, so chose to focus on more profitable business. They wasted the money on the development – and switches are expensive to develop – by not understanding the motivation of their chosen sales channel. They could have chosen to sell in competition with BT, or found a channel that did not have a conflict (a lot of consultancies did very well out of the integration of VoIP telephony into business IT systems). By not doing so they gave up the opportunity to be a market leader in a completely new industry.

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Some new technologies just don’t easily fit into the business model of a single player in the existing market, either because they do something that hasn’t been done before or because the market has fragmented for efficiency. Waste technologies are an example of the first, while the mobile phone market  is an example of the second, where several companies make chips, other companies write the operating system, someone else assembles the phone, another player sells the phone and a service provider provides the service.

In my last blog, I mentioned that several of the waste technologies I have selected to sell create new products from the waste, like pallets. However, waste operators don’t understand the markets for the end-products and their existing customers don’t buy these products. The waste industry business model was (and to some extent still is) centred on land ownership, getting paid to collect waste and landfill it. Recent recycling legislation and new technologies are slowly changing their approach to one where they extract value from the waste by separating it and selling the sorted fractions, with the inseparable remains either going to waste incinerators as fuel or being landfilled. The waste operators would have to acquire new skills and new customers to adopt the waste-to-product technologies, so they are always going to be difficult to sell to.

We could try selling the technology to a product manufacturer selling the type of products, but these generally do not understand the waste industry either and would also have to acquire new skills and possibly new customers. The products may also disrupt their existing business model.

Waste is an industry which is restructuring to do something that had not been done before – making useful products from all sorts of waste. The new technologies don’t fit easily with any of the existing players. The new technologies could be disruptive, except for two key facts – the waste industry is being forced to change by legislation, so it is looking for new outlets for its separated waste streams, and the return on investment offered by a manufacturing plant can be very attractive. This means that it is possible to sell to existing waste operators, however the technology is not a natural fit into the existing market and carries significant risks, so most industry players will not be interested.

Many frustrated waste technology providers have raised money to build their own plant using their own technology – but they have had to learn new skills to do so too, and acquire the customers. New companies have set up to use these technologies, but this doesn’t entirely solve the problem – they have to raise the finance for the plant and, yet again, find the staff with the right skills and acquire customers.

With no stand-out potential targets for the technologies, the skill in selling these new technologies is in making the proposition as attractive as possible – demonstrating the potential high returns, doing the market research on the products to prove the market exists and reducing the risks associated with the areas of new skills. One way to do this is to broker a joint venture between a waste processor and a product company. Another way is to find or set up an agency to sell the products, and find product development organisations to outsource the product development to.

This is not just selling, it is real business development, creating a market where none exists. Those that succeed in solving the problem of restructuring the market around their technology will reap major rewards – waste is a worldwide problem and the market is huge. However many technology companies don’t understand these issues and will fail, however good their technology, because they lack the skills to develop the market in their favour.

Discounted Cash Flow

The most effective sales tool I use when selling big solutions is a spreadsheet. The spreadsheet gets me into the CxO level immediately and often gets me an immediate yes or no. It frees up discretionary CxO-level budgets. It tells me if I should even be selling the products I am asked to sell.

Complex solutions are difficult sales. They often affect more than one division of the business, which leads to a longer sales cycle. Selling to the people in the business that understand the solution itself means that we are relying on these people to represent us to the people that will free up the budget – and are they better salespeople than us? We might as well make the call to the CxO ourselves, control the whole sale and perhaps, free up budgets that would not be accessible any other way. The spreadsheet is essential here – it reduces the benefits to the customer to a common language to all businesses, that of finance. A CEO or CFO can quickly decide whether the project is worth looking into further,without having to know anything about the technology itself.

As an example, I have recently been selling new waste recycling technologies as an agent.  In the case of the waste technologies, the technologies I have selected create new products for markets that the waste operators have no understanding of, which makes my selling job doubly difficult. The operator doesn’t know how to develop products,  doesn’t have the customers for the products and doesn’t know how to value the market for the products.

Why did I select these products? I selected them because, when I investigated the market for the products, the waste supply and then built this into a conservative operating financial model of the plant in a spreadsheet, it showed a very attractive Internal Rate of Return (IRR). The IRR is a measure used by businesses to compare the profitability of investments. A project with an IRR higher than the business’s cost of capital (how much it costs to borrow the money to finance the project, or, if it doesn’t have to borrow, the rate at which investors would be better off having the money returned to them for investment elsewhere) is a potentially attractive investment. A typical large business will have multiple projects that it is considering, with different durations, capital requirements and risks. IRR is one tool used to select which of these projects will get the firms limited capital. If the product saves costs, then a payback model is appropriate – how many months before the project pays for itself in savings.

With every technology, the first waste operator that I discussed the project with, largely in financial terms, wanted the project. The rate of return, even on a conservative basis, is better than investing in other projects they were considering. I have reduced the uncertainty by thoroughly researching the markets for the end-products and opening discussions with interested customers.  There is still a long way to go on these projects, the operators must go through their due diligence, choose a site with planning permission and customer contracts must be agreed – but the operators have invested the resources to complete this as quickly as possible, and all because the respective CEOs liked the numbers.