Two Wise Men

Creative HQ General Manager Steve O'Connor is a contributor to the Two Wise Men business advice column.

Protecting your IP

I have a world-first product that only has a limited market in New Zealand. I want to start exporting or get into licence agreements overseas and I'm worried about protecting my IP yet it's really expensive to get patents in lots of countries. What should I do?

I admire you for your drive to export your product, but too many startup businesses try going overseas too soon. Whilst you have recognised that the local market for your product is limited, going to market in New Zealand has its advantages.

But before going to market (selling your product) you will want to assess and consider protecting your IP. This may be your most valuable asset. Assess what IP you do have, and ensure that you get a plan in place to protect it in line with your commercialisation plan.

This can be an expensive exercise but it needn't be. Check out the Intellectual Property Office of New Zealand (IPONZ) website and use some of their tools for searching, and potentially applying.

Get a sense of what you can work on yourself. Finally, talk to a local patent attorney about your business plans and how they can best help you put in place appropriate IP protection aligned with your business plans.

Alongside capturing quick knowledge, going to market locally can provide your business with the cashflow to support wider IP protection. Sales to real customers demonstrate tangible demand for your product, helping you identify then negotiate better licensing deals overseas when the time comes.

Finally, with local customer feedback on your product you can better research where you should go overseas so you are clear on your target markets. This will further refine your IP activities from an international perspective.

Working from home

What do I need to consider if I want to set up a business from home?

Working from home is a good idea for some people and certain types of businesses. It can mean reduced overhead costs, cut travel time and provide flexibility to your work hours. But it can make things very challenging.

Think about the suitability of working from home for the type of business you are in. Do you need to have customers visiting you? Do you plan on growing and taking on staff and will they fit in your home? Will the credibility of your business be undermined by not having an office? Does your business need key infrastructure to operate that you can't get at home?

Then consider your personal circumstances. Are you the kind of person who thrives on being around other people in a wider shared office environment? Are there things at home you might find distract you from work?

If upon consideration you still think it is right for you and your business, then think about how you will set things up so that you can focus on and operate your business successfully. Try to create a work environment separate from your living environment.

And get in place the infrastructure you need and can expect in an office environment, such as internet connectivity. Talk to your accountant about how you can gain appropriate tax recognition for using your home as an office.

Recovering Customers

How do I recover lost customers or should I just focus on finding new ones?

Your existing customers will always be the best source of repeat business and your strongest advocates (as long as they are happy).

It costs 4-7 times more to sell to a new customer than to an existing one! Yet many businesses base all of their sales and marketing material around attracting new customers completely ignoring those people they have already sold to. Your customers have a lifetime value - it’s not just the first sale but all of the other purchases they make from now on.

The best strategies for existing customers are those that are anticipated, relevant and personal; direct/addressed mail, personalised emails, customer events that you organise, social media, personal contact (pick up the phone and give them a call). You still need strategies for attracting new customers but that shouldn’t be your sole focus. Good strategies for finding new customers include TV, radio, advertising (all channels), directory advertising, letterbox drops, billboards, signage, events (as participant) and so on.
I’m sure you have heard the adage – one unhappy customer will tell seven others. Keep your customers happy and they will be your advocates. Advocates are a truly powerful marketing channel.

Managing Underperformance I took on a salesperson on quite a high wage who is simply not performing. How do I get rid of her, because it seems so hard to fire people?

Getting rid of staff is complex, can be stressful, costly and disruptive and there are regulations that you must follow. Without knowing more about your situation – the short answer is get good advice from an expert.

You obviously saw something in this person when you hired them so is there anything you can do to impact and improve their performance? Do they have enough support, guidance? Are they aware of your expectations – the targets and the timeframe you expect results to happen within? Is there something in the way that you can address that will make a difference?

These are important considerations because they are factors that will speak to your performance as a manager and this may be part of the deliberations down the track.

If the answer is still no – the person isn’t working out get professional advice on what steps to take next (before you take any action). The Department of Labour has a suite of resources and if you are a member of the EMA they also can provide great support in this area.

Being a good recruiter and manager of staff doesn’t come easy to everyone. Think about what support you need to ensure you are hiring the right people and supporting them to be great additions to the team.

For the future, it is possible for you to have a probation or trial period built into an employment contract at the very start. For more on this refer to the Department of Labour website. For all employers check that you are compliant with the employment regulations that affect you and your business on a regular basis. It can save you a lot of time, money and heartache.

Business Sustainability

Everyone keeps talking about sustainability and business. What things do I need to consider to make my business sustainable?

At Creative HQ we have worked with a range of businesses in the sustainability area. Some are intrinsically sustainable such as SpectioNZ, a clean technology business looking to convert organic waste into usable products. Others have a strong sustainability commitment such as Hire Things – an online hire portal to promote the sharing of resources and Womama who have started using organic fabrics in their maternity lingerie. And others have introduced smaller steps to be more sustainable such as making sure they turn the lights off at the end of the day, drinking fair-trade coffee (Wellington People’s Coffee!) and reducing the amount of paper recycling.

The reasons for being more sustainable include the pull from the market where many consumers are seeking products from businesses with a commitment to the environment, fair trade etc. It is also due the personal commitment of the founders who want to incorporate sustainability practices into their activities. In whatever you choose to do be genuine - don’t make claims that you can’t substantiate. And be aware that incorporating sustainability principles into your business does not necessarily equate to being able to charge more and it can add more costs to your bottom line. Although that may not be your only consideration for becoming more sustainable.

Each business is different and a good source of information and advice is the Sustainable Business Network www.sustainable.org.nz. They have a range of tools and can advise you on what is best and workable for your business.

Apparel is an example of a sector that has many sustainable considerations along the value chain – from the large amounts of water required to harvest fibre to fair trade working conditions for factory workers. Yet apparently, the single biggest impact we can have is to wash our clothes less often. In your business – it could be a small, incremental change that can have a major impact. Even small actions can make a big difference.

Before you build your productI've been in business quite a while selling the same product for the last five years and doing pretty well. I have built up good reserves in the business and I've had an idea for a cool new product. But it's a totally different product for a different group of customers, which scares me. What can you suggest I do before jumping in?

Find out what your target customer wants before you build it and use that feedback to help shape the product. The book The 4 Hour Week has a great definition of market validation: "Ask five friends if they want to buy your product and they will probably say yes, now whip out your credit card machine and tell them you are taking advance orders - are they still saying yes?".

A bit of research up front will help you determine the size and shape of the market and whether you can bring the product to market and sell enough at a price that you will make money.

At Creative HQ we are involved in the Wellington Lean Startup movement. These principles originated in manufacturing and are now being applied to other sectors, particularly the web. The idea is to be agile - build a minimum product set, get customer feedback and incorporate that into building a product that the market wants.

The bigger consideration is whether it is appropriate to divert time and resources from your current business activities into a new venture. By applying the lean startup principles you can ring-fence the resources you apply to the development of the new product.

For more information on the Lean Startup go to theleanstartup.com and to contact the Wellington lean start up group go to meetup.com/Lean-Startup- Wellington/

Going into business with a friend

I want to go into business with a close friend of mine but other people tell me this could be a recipe for disaster. What are the pitfalls and what can I do to overcome them?

We have seen many different types of business partnerships within Creative HQ; Friends, family members, workmates and partnerships that develop when the business brings in capital or much needed skills. The majority are still operational and running successfully. The reason for this is that we proactively address business partnership issues very early in our programme and largely before there are any issues to address.

Trust, honesty and good communication are a good starting point for a business partnership. But a business will create a whole set of issues and decisions that will test even the strongest of bonds.

Think for yourself first. Then spend time discussing your expectations of the business together and be certain that you are aligned on what your vision is and the timeframe you are both working to. Two key areas to clarify are how much time and money each of you are committed to putting into the business.

Next put on your black hats and identify the areas where things can come unstuck and what your response would be. The key areas to think about are death, disability, distraction and poison.

You can formalise your response in a shareholders agreement drawn up by a lawyer. This can specify what happens if for instance – one of you dies and you want the shares to revert back to the company and not your estate (or vice versa), one of you is incapacitated for awhile and can’t contribute to the business, one of you decides to go off and pursue something else and commits less time to building the business and lastly if it all goes pear shaped and you fall out – how will you deal with shares? loans, IP etc.

Alongside this more formal document sits your values – which helps to guide the direction of the business, your respective job descriptions (who is responsible for what and who is the CEO?) and ideally an agreed decision making framework. This is your agreed way of deciding on things such as how much the other person can spend without approval, whether one of you can commit the business to a major contract through to who gets to choose the colour of the office sofa (never underestimate what is important to the other person).

But the most important thing of all is clear and consistent communication about the business and your friendship. Be prepared to tackle issues before they become a problem.

Business Plans I made a business plan when I started up my business but I would like to know how often I should update it and whether I have covered off everything I should have in it?

Too many SMEs fail to understand the importance and value gained from business planning irrespective of business age or size. If you can’t clearly articulate where you are headed and have some good thinking on how you will get there, then you’re much less likely to be successful in business.

Importantly, the value doesn’t arise from the plan in itself. It’s the process of gathering information, undertaking analysis, crystallizing your thinking, direction and decisions - that hold the value for your business. The business plan is your documented blueprint and roadmap for success and the guide for you and your team to successful execute and stay focused.

What needs to go into your plan is dependent on your business circumstances. The good news is that there is a pretty standard recipe for business planning and business plan templates available. NZTE has some great business planning templates and guides.

Many businesses hold to an annual cycle in line with their financial year. Typically younger businesses need to do planning more often. Without a huge history of operations, much of their early planning can be heavily assumption-based and they face a great deal of validation and discovery in short timeframes.

You should also plan more regularly if the market you are competing in is more dynamic or if you face strong external forces outside your direct control. And you should think in advance what events might trigger the decision to formally review your plans outside a normal cycle.

At the end of the day, get a planning cycle in place that feels right for your business. If you’re doing good business planning but finding little change in outcomes from this then you could consider extending your planning cycle so long as it’s not greater than annually. If you’re radically altering the plan for your business each planning cycle, then it’s possible you might need to increase your cycles so that your directional change is less severe.

Approaches from Offshore I had a call out of the blue from an Aussie guy who wants to sell my products in Australia. I've never sold anything overseas before. What tricks and tips do you have for taking on a distribution partner offshore?

More New Zealand businesses need to aspire to successfully export their products to overseas markets. The opportunity to sell smart kiwi products into markets much larger than our local market is an attractive one. But this opportunity needs to be realised after good consideration of the natural challenges of entering and succeeding in these foreign markets.

I’ve used the word foreign markets purposely. A pitfall for kiwi companies is the assumption that these markets are just the same as the NZ market. This leads to the assumption that you will do over there what you’ve always done here. The reality is that overseas markets are very rarely the same and you need to adjust accordingly.

Key market questions to ask yourself include:

• whether the market has real demand for your particular product
• what target customer characteristics might be different
• what different types and levels of competition you will face
• how the market is structured to deliver similar products to end customers?

So knowing that your product has potential customers and can successfully compete in the Australian market is important before progressing.

Often the best initial approach into new markets is to find an appropriate in-market partner that understands that market much better than you do, and also has the existing resources and relationships on the ground that can get your product successfully and profitably into the hands of customers. If you think about your existing business model and value-chain in NZ, you need to identify which elements of this you will remain responsible for and control, and which elements you will look for your partner to be responsible for. Understand also what commercial terms will allow you to continue to make a profit for what you will deliver.

The good news is that you already have someone in-market interested. So get a strong understanding of their market knowledge and actual in-market capabilities. Work first on whether they clearly understand the market and the demand for your product. Then think about how strong they will be in all aspects of getting your product to end customers. Finally, assess whether they are the best partner for you. Who else could be a partner and could they do a better job?

Exporting takes commitment, time and money. An approach from someone is good validation but it shouldn’t be the only thing you base your export strategy on.

I recommend spending some time upfront building your understanding, assessing the opportunity and getting support around you. This will improve your likelihood of success.
Check out NZTE’s website (www.nzte.govt.nz) which as a range of information, resources and network contacts that can help you successfully establish an export oriented business.

Finally, if you do decide to go ahead and partner, make sure you have good support and advice from a commercial lawyer. They can help reach an agreement that clearly outlines the responsibilities for each party, provide the right commercial incentives to reach agreed performance standards and provisions in case things don’t go to plan. At Creative HQ we use Morrison Kent who provide our businesses with exceptional support.

Selecting a Business Advisor How do I select a business advisor?

Creative HQ we provide our businesses with access to the best of breed business advisors. That starts with our in-house Business Strategists’ who are the main source of advice.

However, given the huge range of issues our businesses face we draw on external advisors with specialist technical, sector or market expertise as we need them.

This is likely to be the case for most businesses. While you may have one or two main advisors, you will need to draw on many sources of advice throughout your journey.

There are three key things our businesses look to in selecting an advisor. The first is real world experience; people who have walked the talk and are able to share their successes and their war stories. They want advisors who can look at the business from many angles not just the legal or accounting perspective, but the integration of all of the components that make-up a successful business.

Secondly, there needs to be a cultural fit. A good advisor understands the drivers for an entrepreneur and what it is like to be a start-up having to bootstrap your business while it grows. There are good things to learn from someone who has big corporate experience – but you need someone who can translate those experiences to where you are currently at.

Lastly, the selection of a business advisor is not just about content it is also about style. Businesses need advisors they get on with and trust and who challenge them to achieve their very best. They need advisors who are educated and informed, ask probing questions, are objective and honest, constructively critical, who show scepticism if it is warranted and act enthusiastic if they genuinely feel it.

Setting up a board When should I look at setting up a board for my company?

For any business with aspirations for the growth, then no business is too small to benefit from having either an Advisory Board or formal Board. These Boards are such a powerful management tool that no business going places should be without one.

Think about the last time you met with other business people and had an open discussion, sharing your ideas and concerns. A Board is a formal version of this process.

There is no set time to establish a Board but if you are starting to get lots of advice from different sources, see value in getting an external perspective and can commit the time and energy required to set up an effective Board, then there’s no time like the present.
Unlike a one-time or casual event, your Board is composed of people with key skill sets, a genuine interest in your business and a desire to see it do well. You can think of a Board as a management think tank. Your Board members will serve as a sounding board, a source of ideas and expertise - and give you honest advice. They will help establish the appropriate direction for your company then help keep you safe along the pathway.

More than anyone else, your Board will be on your side. They will be people with no axe to grind who want to listen to you and advise you. Above all, they want to contribute to your business's well-being.

Prepare to be on the lookout for Board members on a continuing basis. You cannot expect to find the best individual if you are rushing to select who you would like to ask to serve on your board. A good tip is to look in your newspaper for people who are in the news and successful in their profession.

Aim high. Choose people you admire that you think you will be able to develop a relationship of trust with. Don't be afraid to ask people who may seem to be out of your sphere to serve. There's no harm in asking, and you may be pleasantly surprised when they accept. At worst, they'll be flattered and say no.

It’s great that you are actively considering the establishment of a formal Board for your company. Its sounds like you are the owner and manager of your own business which is very common for many New Zealand companies. It can be a big and scary step for many owner operators. But a Board that includes some independent and experienced Directors can make a very big difference to what your business can achieve. They can bring a wider and deeper set of skills, experiences and networks that your business will benefit from. Being both the sole Director and manager of your own business can be a lonely place. A Board can be the cheerleaders and the challengers to keep you both energised and headed in the right direction. They bring fresh perspectives, new insights and can help steer your company where you want to take it.

When should you set up this Board? Most importantly, when you personally know that you want and need wider input on the direction of the company. Think hard on this. Without your commitment to listen to and be guided by others, a Board won’t function well nor deliver value. If you’re business has big aspirations or is already getting bigger and more complex, then it will naturally be facing new challenges and significant change. This is an ideal time to have a Board in place to help steer the company through these challenges. Boards are hugely valuable with key challenges such as starting to export overseas, seeking funding or investment, developing new products, or managing a bigger and wider spread team.

If this sounds like you then I recommend you get into planning your Board sooner than later. Think of this just as you do hiring new team members. What are the challenges you are trying to solve? What missing skills and experiences does your business need to go forward? What culture and style of working does your team have? Once you know your needs then you can start to draw up your ‘dream team’ Board in terms of numbers and make-up. Start networking to find the people that can do the job that you respect. Look for experienced Directors where possible so check with the IoD. Find the ideal independent person who you would entrust as your Chair. To attract the right team you should ensure you remunerate your Board well for the value they bring. Finally, talk to your lawyer to ensure your ‘house is in order’ regarding shareholders agreement and constitution.

Profitability My business turnover has been growing well for the past two years but my bottom line hasn't followed suit. How do I figure what's happening and what to do about it?

Congratulations on successfully growing your revenue and business. Businesses that continue to grow have refined and valuable products and services that are in demand by customers.

In the most simplest of terms, there are three key ways to grow your bottom line; vigilantly manage your costs, aim for as high a gross margin as you possibly can, and sell more. Most businesses focus almost exclusively on selling more. However, if your costs are creeping up or you aren’t gaining enough gross margin then selling more may result in no or low increases in your bottom line.

Assuming your profitability challenge doesn’t involve tax, depreciation or unusual accounting items, then I would recommend you start by identifying the profit drivers in your business. Somewhere in your last 2 years of trading you have likely changed something in your business that has impacted on your profitability as you have scaled.

This may have been a reduction in the price of your products or services (did this drive your growth in sales?). You may have faced an increase in your cost of goods sold that has impacted on your gross margin. Alternatively you may have added incremental costs into your operations that are over and above your rate of revenue growth.

In my experience the operational costs are often the area where they can increase in ‘lumps’ and, without good management, can quickly outrun your revenue growth. For example taking on an employee who is not focused directly on sales when you are relatively small can have a big impact on your profitability.

By understanding your profit drivers better and identifying what changes have occurred, you can quickly assess where your margin has been lost that has resulted in poor profit growth. Then you can start to take corrective steps. Focus on conscious decisions to maintain or improve your profitability in line with revenue growth, and manage this in future as you continue to successfully grow your business.