In business, technology is ubiquitous. Information technology (IT) is everywhere because it has the ability to leverage capital – both human and financial, to cultivate intellectual property, and enhance enterprise value. But understanding how to use IT most effectively has been an elusive objective for the leadership of most growing organizations. If the capabilities of new and different forms of technology are understood and properly applied, companies can realize substantial operating improvements that will be reflected in the value of their companies.
Why Automate? – How do we get a better understanding of what IT can do? At Commenda, our suggestion is to start out by listing your goals and objectives. Operationally, what do you hope to achieve? What do you monitor and manage to do that? How precise does your analysis need to be? How quickly do you need an answer to make a decision? If your goal is to make the right decision, good IT can help you make that decision quickly. If you seek a “perfect” solution, it may take a bit longer. But you, as a manager, need to set the objectives and parameters within a reasonable time frame.
Measuring to Manage – The next step is to determine where and how you might get those answers. There is an old saying that says, “You can only manage what you measure”. So, YOU must decide what to measure. Top line revenue perhaps? Is it production costs? Marketing costs? Maybe its customer characteristics and unit growth? What drives unit sales? Technology can help you measure all of this information. And it can measure things over and over again and not get bored. Humans can’t. They get bored and they make mistakes. Machines don’t. So, for those types of repetitive tasks technology in general and IT specifically can be an ideal solution. But, despite what you’ve heard about Artificial Intelligence (AI) machines can’t think. People can. Marrying the task of measuring key metrics with prudent management of limited assets to achieve optimal performance is the job of entrepreneurs and managers.
You need a Plan – In order to harness the power of technology effectively, clearly defining and stating – in a written business plan – what you hope to achieve will help remove the mystery of which technology you need, what it will cost, what it will do vs. other alternatives and finally how to apply it strategically in everyday use. Setting your own real-world objectives – to avoid getting caught up in the technical jargon and the “buzz-word” proliferation of “nice to have” components – will save you time and money. You do not need to be a technical wizard to understand that automating repetitive processes with IT vs. a person can cut costs and improve productivity. After all, machines don’t take vacations or get paid benefits. People do. Most IT solutions are fast and efficient. Bottom line: Automation with IT saves time and money. Right? Well not always. It only saves time and money IF it is focused on doing the right stuff. As a manager, YOU are the only one who can make THAT decision. Management needs to focus on 1) the need being met, 2) the expected solution and end result (including the product or service), and 3) the benefits as well as the costs of using the proposed technology.
Change is Inevitable – Technology is changing constantly. Today’s ideal solution may be obsolete in just a few years. Remember the 8-Track tape player? Gone. Replaced by on-line streaming. How about a hard-wired network? Gone. Today everything is on Wi-Fi or in-the-cloud. Evaluating the capabilities of your IT is an on-going process. Just because you had “the latest and greatest” last year doesn’t mean it is the most effective IT solution today, despite the fact that it cost a fortune last year. What matters is what that IT can do for you today. The perceived benefits to you and your company determines what your information technology is worth – to you – today. If it can’t keep you ahead of the competition so you can provide your customers with higher quality or better service, it isn’t worth much. If it can, it’s priceless.
Fleeting Benefits – Often information technology provides a relatively short-term advantage in the market unless it is applied to a different product or service that can extend its use to new and different products or through new features, which make it more user-friendly. The rise, fall, and resurrection of enterprises have been based on staying current in order to serve customer needs. History is littered with stories of companies that allowed their technology to become obsolete. IT becomes obsolete when it quits meeting customer needs effectively or efficiently. Yes, that old IT still works, but a better “mouse trap” has come along that does the same thing faster or at a lower price. Bingo! Your IT is now obsolete. Industries such as retail sales, distribution, healthcare, and financial services are all going through massive transformations. These industries, and many others, are all faced with the need to keep up with the latest technology-based products: cloud services, social and medial marketing, real-time analysis, e-commerce, or “e-something”. They are constantly flooded with new information requirements just to keep current. Security is paramount along with the responsiveness of their technology, which is measured in hundreds of thousands of clicks per second, latency and response times etc. All of this customer/patient analysis results in massive amounts of data that must be sliced and diced and sorted and analyzed. IT does all of this IF it is scalable. At Commenda we work with young and growing companies that offer new technology to a particular industry with a very “glitzy” front end. It looks good on the screen and in single user presentations, so it presents well to customers and investors. However, we often learn very quickly that it isn’t scalable. It isn’t able to handle massive volumes of inquiries or data requests simultaneously. Advising these young tech companies on how to achieve scale and showing them how it will impact their ultimate value is where Commenda can add value. Of course, getting to a reliable and scalable IT solution usually requires capital too. We also provide that.
Capital – Whether it be in the form of human capital, cash, or other types of deployable assets, companies need capital to hire the creative minds and skilled technologists to build the IT. They also need capital to build distribution networks and hire an effective sales force to sell the new IT products. Without capital, the needed technology will probably never make it to market. Likewise, without effective technology, to help achieve a company’s stated objectives, capital is often deployed inefficiently or simply wasted. The reality of “limited capital” must be balanced with the capabilities of the technology. What’s worth more to you the new IT or having your cash in the bank? That is the question today’s high-tech entrepreneurs are constantly asking. One of the most efficient ways to do both: effectively deploy capital and while also leveraging your technology to gain a market advantage is to place your IT product/tool into a larger/partner company. In other words, contribute your IT for a “piece of the action”/future sales vs. making a cash investment with after-tax dollars. You might do this in the form of a joint-venture or joint marketing agreement. If your balance sheet permits, you might also consider acquisitions of smaller less efficient competitors. You can then install your proprietary technology in those companies to make them more efficient, adding value and expanding margins. Combined, your merged companies can retain the core business and expand the combined customer base with expanded product offerings. In doing so you can achieve scale economies and higher margins when you apply your known and effective IT to the newly acquired companies. So, whether it be organic growth or growth by acquisition, the combination of capital and technology can help you grow your business and improve profitability.
Intellectual Property – Another extension of technology is intellectual property (IP). Most managers and investors are very comfortable discussing tangible assets such as equipment and buildings, and land. However, IP – such as copyrights, patents, trade secrets, and trademarks – are not tangible. As a result, they seem vague, mystical, confusing and difficult to value, even though they may the most valuable asset of the company. Think Coca-Cola’s “secret recipe”. In this case Coke’s IP (a secret formula) has been used to protect its valuable brand for over 100 years, which is arguably its most valuable asset. A brand can be considered the nexus of communication between an enterprise and its customers and it can contribute significantly to a company’s long-term success. IP and branding are especially important when they contribute name identification, confidence credibility to a growing enterprise. A quality Brand name attracts customers. For example, it is estimated that 75% of Tiffany’s market value is based on its brand, while only 2% of Johnson & Johnson’s market value is based on its brand. IP and line extensions of a brand should be carefully reviewed, cultivated, and harnessed. It can be one of the best ways to use capital and enhance the value of the technology and enterprise. Microsoft has done this with its software MicrosoftWorks. How? By reminding everyone that their technology WORKS! The slogan says so, so it must be true. That’s the value of a Brand, even if it’s intangible and difficult to value.
Enterprise Value (EV), is the measure of an enterprise’s total value. It is determined by several factors and is heavily influenced by market forces and similar enterprise comparables. One of Commenda Capital’s founders, John Runningen, says that “There are three ways to increase the value of a business: 1) Higher unit sales, 2) higher margins, and 3) higher growth rates.” Collectively these can be referred to business value drivers. If your IP is unique, your technology adds value for your customers, and your brand is recognized, then a company’s business value drivers expand and the enterprise value grows. EV is important because capital usually finds its way into those businesses that can deliver the greatest enterprise value in relation to the amount of capital used (i.e. those that are most efficient). As a result, it is generally a good strategy to incorporate or expand the use technology, IP, and branding in an enterprise to create the highest Enterprise Value over time. A clearly defined business plan showing how you plan to grow enterprise value over time should attract the most capital at the lowest cost. The technology you choose to lever that growth will play a vital role in building your brand and optimizing your company’s ultimate value. Good luck!