The Odyssey Arrow Integration Phases ◾ 67
The reason I ask about these three things is that a lot of times, people
say, “Well, we’re doing more volume than we’ve ever done in the past. Sales
are up!” what you tend to find however is OK, sales are trending up, but
usually in that scenario, payroll is going to trend up because you’re paying
out more commissions, you’re paying out more salaries. That’s why I need to
know gross margin. If sales are rising but gross margin is falling, you have a
problem.
So this prospect was in that situation. Sales and payroll were up, but
gross margin was down, and what’s more, it was trending down. It had gone
from 32% to 28% over the previous three years. If that trend continues in
that exact same way, that prospect is going out of business.
At this point, I also ask some specific questions: What are revenues? What
is payroll? What is margin today, and where do you feel it should be? How
do you compensate your executive team? How much? What percentage of
your overall payroll is tied up in executive salaries? Do you realize that is
X% of your overall spend? Do you feel you get full value on the expenditure
every year? Do you use gain share, profit sharing, or year-end bonus? How
is that decided on? How is it measured? Has it shown measurable differences
in the effectiveness of your payroll spend?
Once we have that kind of information, the questions change. You’re mov-
ing a person from emotion back to logic, you’re going back to the head from
the gut. You start asking questions like: How much is this situation costing
you? What are the ramifications if that continues? You’re now beginning to
monetize the situation with the client.
It turns out that this prospect has a $1 million per year problem. If he
doesn’t arrest the decline in his gross margin, he’ll lose $1 million this year,
$2 million next year, and so on.
At the end of the M1, I always say, “Thank you. It would be best for you
if I go away and think about what you’ve told me. I have seen things like
this before—not exactly your situation but certainly similar scenarios. I want
to think about it. I’m going to get my thoughts down on paper, and I will
send you back a letter.”
That’s the M1r, and in the response letter, you basically lay out some key
quotes, just to show you were listening.
I hardly ever have an M2, unless the client wants to ask me a specific
question. I’m going to suggest a BMR in the letter. Once the BMR is agreed,
an appropriate fee is set, just for that initial stage. Resist any daydreaming
with the client around what the actual fix will look like. Keep your powder