SCAN STORE RETRIEVE INDEX INTEGRATE ARCHIVE
Does Your Organization Create Internal Toxic Assets?
We have heard the term “toxic asset” or maybe “toxic dollar” over the past few years. Most recently the term has been used to describe US currency from a global investment perspective. These terms refer to an asset that becomes illiquid (valueless) when its supporting market disappears. The term “toxic asset” was coined in the financial crisis of 2008/09, in regards to mortgage-backed securities, collateralized debt obligations and credit default swaps, all of which could not be sold after they exposed their holders to massive losses.
While this issue may not seem of direct concern to you, I would suggest that many businesses today deal in their own, internally created “toxic contracts”.
All too often, sales and revenue pressures push organizations into desperate sales activities. The problem with this is, contracts can be signed that, from the point of signature, become a “toxic contract” for that business.
When signing business contracts, you are committing your business, legally, to specific deliverables, milestones and monetary goals which could affect every department in your organization. Poorly, hastily executed contracts many times become “toxic contracts”.
To best describe this point, let’s use an example;
To meet quota, Chris the salesperson needs to close 500K more business before the end of the company’s fiscal year – 2 months away. Chris has been driving the sales process for a potentially large deal valued at over 600K. Chris’ manager is very aware of this project as well and they are going to close this deal!
However, the client requires project launch within 30 days of contract signing and there is just no way to meet that requirement. The Project Management department, Business Analyst Department and Operations Department calendars are all full for the next 90 days. The bottom line is, by signing this contract; the company’s entire internal operational infrastructure will be compromised thus creating a “toxic contract”.
But, because of a lack of internal or team review, the contract is allowed to be signed, the sales team is rewarded with commissions and accolades and the operations team has now been burdened with a “toxic contract”.
From the day of contract signing, the project is behind. Over the coming weeks and months, as the true complexity of the project begins to rear its ugly head, deliverables and milestones begin to fall behind.
As progress falls behind milestones are missed. Managers are pressured into still getting revenue recognition for this project. You can’t really bill for something that hasn’t been delivered, but you are investing a great deal of hours and costs. What do you do now? Now the project manager is pressured into creative milestone variation creation. You need to bill something, so come up with something to bill for! Eventually, because of continuously missed revenue goals, the accounting department is going to start asking questions about this project because they are being asked questions about this project from upper management.
Now the customer, not sure about what is going on agrees to sign-off on milestones with “variations” with the assurance that all is well and there is nothing to worry about.
Before long, practically every department is touched by this “toxic contract”. At some point, because of client complaints, upper management concern or all of the above, this project has to be “reprioritized” over several other projects.
You eventually get final sign-off for the project, primarily because the client is just plain tired of dealing with you and your lousy company. Obviously, you get no reference from this client, and other departments are scrambling to keep other clients happy while their projects fell behind to placate this “toxic contract”.
If such an example is just a single event, then maybe you’re okay. But as we saw from a national or even global perspective, too many toxic assets can practically bring down a global economy.
And let’s not forget about our dubious sales department – word of this project spreading makes the ongoing sales process very difficult. We all know the value of reference-able business.
What’s the solution? Establish a set of minimum contracting standards.
Minimum Standard No. 1 – A List of Core Functionality or Deliverables Must be Provided and Made a Part of the Contract. One of the most common disputes between business services providers and their customers arises out of miscommunications and misunderstandings about the functionality, capability and scalability of the service or product. To avoid this pitfall, these contracts should contain a list of core functionality and the list should be meaningful and not just consist of a brief list using provider terminology that would not convey to a reasonable person the characteristics of the feature or function.
Minimum Standard No. 2 – ELT Review. All contracts should be reviewed and approved by your ELT (Executive Leadership Team). Don’t let the size of your business be an excuse to not have an ELT. Even if it’s just you, your office manager and your delivery guy – get multiple eyes on everything. Besides, your office manager probably has a better prospective on billing and customer status than you do.
Minimum Standard No. 3 – Use Advanced Sales Tools. Put sales tools in place to help prevent “ad-hoc” selling. This sounds challenging, but these types of tools could positively affect your business to the level of up to and exceeding 20% of your revenues. This does not in any way reference a CRM. CRMs just tell you what has happened. You need proactive sales tools that control the pricing activities of your sales force while in the field. Finally, while sales drive a business, salespeople should not manage your business. The nature of the salesperson is to “close that deal, whatever it takes”. I am not “dissing” sales people here; I have been in sales most of my life. However, as Dr. Phil would say, “Get real people”, don’t let the wolves guard the hen-house.
Kevin Williams, CDIA+
SRIIA Technologies, Inc.