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The Cost of Financial Illiteracy Part I

December 22nd, 2008 | 5 Comments | Posted in Financial Literacy, Management, Product Management

This is the first in a series about how financial illiteracy is costing the typical technology company millions of dollars a year.  Check out the financial literacy test at the end of the post to see how financially literate your sales and marketing teams are.

Without a doubt it is a painful time to be in the technology business.  Revenues are down and layoffs are way way up.  TechCrunch’s layoff tracker reports that as of last Friday morning there had been at least 308 tech layoff ‘events’ since August impacting over 110,000 workers  The Financial Times reported today that many of Silicon Valley’s largest companies like Hewlett-Packard, Cisco Systems, Advanced Micro Devices, Texas Instruments, Dell, Adobe and CSC are implementing extended or mandatory holiday shutdowns.  If you really want to be depressed check out this Twitter real time search.

Almost all tech companies are reporting declining revenues and flat to revenue growth for 2009.  Hard times like these often mask underlying problems in sales and marketing teams.  How many times in the past quarter have you heard from your sales team that a prospect “just didn’t see the value” in acting now on your proposal.  How many times have you heard from your marketing team that “we’re surprised that the campaign generated such little interest – you’d think in these tough economic times any company would want to save money by using our solutions?”

One of the hidden problems most technology sales and marketing teams have is financial illiteracy.  Most team members have at best a superficial understanding of basic financial concepts.  While they may know a few of the terms, they generally can’t apply them in business situations to explain or justify the value of a specific product, service, or proposal.

A Case in Point

Here’s a simple case in point.  A service provider had a long standing relationship with a company where they provided a value added outsourced solution that cost over $1.5 million a year.  After a change in management, the customer decided to re-examine their investment in the outsourced solution.  A new executive wanted to bring the solution in house.  To do so, this company would need to invest over $750,000 in equipment and software, plus set up a group of employees to do the processing/value added services the service provider had been doing.  If they brought the business in house they believed they could save $500K a year.  The sales person on this deal was petrified that the customer was going to take the solution in house.  As a result he thought of offering to cut the monthly fees by 50% so that the customer would not even consider taking the solution in house.  Fortunately one of his team members did a little research on the customer.  Even though it was a large company with greater than $200 million in revenues, it had some serious financial challenges.  At the time they were ‘considering’ insourcing the solution the company only had $5 million in cash on their balance sheet and a limited revolving credit facility.  Once the sales team realized that the company would have to invest about 20% of their existing cash balance to make the project work, they came to the conclusion that they were not serious about insourcing.  Instead they were really looking to get a massive price reduction.  Armed with this knowledge they were able to structure a win-win deal for all parties that did not result in a 50% revenue reduction.  This is a classic example of how financial illiteracy can directly impact your top and bottom lines.

Financial Literacy Test

Use the following simple test to gauge the relative degree of your team’s financial literacy:

  1. Pick Your Test Subjects. Pick 5 people from your organization to participate in the test – two sales people, a sales manager, a product manager, and a product marketing manager.
  2. Pick 3 of Your Customers/Prospects That are Public Companies. We want to make this easy for your test subjects.
  3. Give Them 30 Minutes to Answer the Following Six Questions:
    1. For the last 3 fiscal years what have been the trends in Company A, B, & C’s total revenues?
    2. What was Company A’s Gross Margin for the past three quarters?
    3. How much Operating Profit has Company B generated so far this year?
    4. How much did Company C’s cash change so far this year? Are they building or burning cash?
    5. What are Company A, B, and C’s enterprise value?
    6. Bonus Question: Pick one of the company’s that is a customer of yours. Look at the last deal your firm did with that company. Ask your team members what percentage of the company’s year to date profits your solution contributed.
  4. Grade the Results in Private. The results will probably be ugly.

You should not be too shocked or surprised if your team does not do well on the test.  The good news is that with some basic education your team can dramatically improve their ability to position the value and differentiation of your solutions.  Stay tuned for more installments in this series which will be designed to help you close some of your team’s financial literacy knowledge gaps,

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5 Responses to “The Cost of Financial Illiteracy Part I”

  1. Susan Kishner Says:

    I found your site on Google and read a few of your other entires. Nice Stuff. I’m looking forward to reading more from you.

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