How I Buy – Ralf Riekers, CFO, Top Hat
Many of the most popular conversations in the #HowIBuy series have been with CFOs. Knowing how they think about investment is crucial to any buying process, and yet their thinking can seem mysterious to sales people and often, even sales management.
In today’s interview, I had the pleasure of chatting with Ralf Riekers, CFO of Top Hat (Top Hat provides easy-to-use tools to engage a classroom, adopt and author next generation interactive textbooks, create assignments on the fly and securely administer tests).
Ralf was able to clearly set out his thinking about the business, how he and his team weigh the value of investments, and what makes a good model of ROI. I hope you’ll enjoy the conversation as much as I did.
Here are Ralf’s insights:
As the CFO, let’s first talk about how you get involved in setting priorities for the business?
I have a holistic view of the business. My main objective is to see how you can unlock revenue and growth potential while not running out of cash. I look at a business essentially in what is perhaps a simplistic way, but quite useful: I see it as a manufacturing plant where your inputs are people, variable spend, and technology, and your output is revenue and EBITDA.
Then the challenge is understanding what is in this big black box that is the corporate value chain. People are around 60% of the P&L of any modern technology-oriented company. The rest, the other 40%, are there to make the people (or the collection of people) more efficient. Cheaper, faster, or more productive.
Let’s drill in a bit. How do you begin to think about the decision on where to invest?
On the spend side, if a decision impacts only one team, we can delegate that decision to the leader of that function, say the CMO. We might “rattle” the business case a bit and make sure that the assumptions make sense, but generally we’ll delegate that.
Some decisions, however, cross functions, like the purchase of a CRM system. I will usually insert myself in these cross-functional decisions. When there’s a business problem, you can solve it with people, with process, with technology. We have a fairly rigorous process where we score each option, narrow down to a short list, dig a bit deeper, and assess pros and cons in a way that gives us confidence in each decision.
Let’s dig in on that process in a second, but first, are the investments mainly “proactive”, ie, you know what problem you have and go looking for a solution, or mainly “reactive”, ie a functional team comes to you with an idea and you assess?
We know many of the problems that we’re trying to solve; some are big and some are small. For problems that are known, talked about, and understood, we will be quite proactive and spend effort to understand and evaluate our options. In other areas, often times in a conversation with peers, we’ll hear of an approach that they are using that might be applicable, and that spurs us to look more deeply into that opportunity in a more reactive manner.
How much do you try to understand about the unique problem sets within each functional department?
The finance team understands the business at a high level, but we don’t try to be the most knowledgeable about each challenge and decision within each functional group. The common evaluation process that we follow pushes the right rigor in the decision.
We dig into what options they looked at, how they thought about their decision criteria, how it maps to the objectives of the company, whether it fits within the budget, what the risks are, etc. If a decision has met that level of rigor, we know that the people with the deepest knowledge of that area of the business have gotten it to the point that it’s the best decision we could make.
What are some of the ways that your overall team learns?
We’re a VC-backed company, and the network is a huge aspect of our education. Within the portfolio, there are lots of events, a Slack channel, and numerous other ways of bringing us together. From that, we can almost always find someone who has tackled a problem similar to the one we are facing, or even a portfolio company with expertise in the area.
That will lead to a lot of ideas on technologies, approaches, or outsourced vendors that form a good first pass at our investigation. Many times, we will reach out to those vendors directly.
We will explicitly ask the community based on problems. If, for example, we were looking at budgeting software, we’ll post a question on the Slack channel that says “who is using what, do you like it, and why or why not?”. Before we reach out to the vendor we’ve usually got a pretty good sense of their strengths and weaknesses.
For newer solution categories, we will talk to our VCs as they spend a lot of time evaluating the market and see many of the newest solutions out there. What we’re trying to do at that phase is to get the universe of options. From there we will narrow down quickly based on cost, size, and basic capabilities. Often from that point we’ll reach out for a demo.
Do sales calls contribute to your learning in any way?
My phone, by default, goes to voicemail. I just don’t pick it up. Sometimes, if an idea that comes in by email is interesting and fits our challenges, I’ll visit the vendor’s website and see if there’s something to learn there. From that point, I’ll forward to one of my team to take a look at. They will be able to quickly assess if it’s something we’re looking to solve.
How do you know whether investment is needed within a functional team? Ie, how do you know if they are performing well compared to where they could or should be performing?
I look at ratios and levers. If you want to optimize something you need to have a constraint. We will either constrain cost or headcount. For example, if we see that efficiency per person in an area is too low, I’ll constrain headcount, but perhaps free up some spend, and challenge the exec to optimize against that constraint.
If you want to drive innovation, you need a constraint. I don’t know how to solve the problem, but I can push them in the right direction by using constraints as a lever. They know best how to solve the problem, whether through technology, outsourcing, or process. That’s up to them.
They get variables for a solution but not the answer for how to do it. They will come up with a recommendation which they then present.
These days, many point solutions can be used to solve a small problem for a minimal amount of spend. This frees up a team to have time and mental energy to solve the larger business problems.
How do you think about longer term, intangible investments like product quality, brand?
I look at things as a portfolio approach. From experience we know that lead generation without brand will, over time, drop in efficiency. So we will need air cover and awareness efforts. Whereas they might not be measurable efforts, if we know that we’re going to allocate X% of our marketing portfolio of efforts to brand, it gives us a metric to work from.
The ultimate goal is to connect revenue and EBITDA to the daily activities of each person. Obviously that’s a lofty goal, and not fully achievable, but it gives you a direction to head towards and way to think about the problem of what investments to make or not to make.
I’ll ask a lot of “why” questions, both for my own education, but also to push each executive to make sure they have applied the appropriate level of rigour to their own thought process.
Let’s dig into the decision process a bit further. What are you looking for in business cases that are brought forward by a team?
I look at the decision process. Every good decision has the same anatomy, and I want to see that from my team. First, define the objective. They need clarity on what they are actually trying to solve, and from that, how it relates to the core objectives of the business.
Second, find all the options available, regardless of whether they seem practical. Some will be technology, some will be outsourced services. It doesn’t matter as long as a reasonably complete list has been thought through.
Third, define your decision criteria. From there you can easily narrow down from a large set down to maybe ten options. That set of ten will help you refine decision criteria and get down to just a few options. From that point with just a few options, you can look more deeply at pros and cons and make a recommendation. This process is universal and the questions that any senior exec will ask usually align with the steps in this process.
If you follow the procedure, things can go really fast. If you don’t you’re going to run into problems. If there’s a company that you haven’t looked into, and it’s brought up, you now need to dig further and look into that company. Now you’ve wasted a week. What if you haven’t understood how easy it would be to pull out if it does not deliver? You’ll be back to doing research and more time will be wasted. Better to do it up front.
Do sales people get involved in this process? Do they help your employees think through and create the business case?
I think it’s excellent if a salesperson has helped our employee think through and build the business case. I view vendors as a partner who is helping to solve a problem. That means they need to understand our business, and think about the tough questions.
Salespeople will often position themselves to be adversaries. I don’t see them that way, and the best ones don’t let themselves go down that path. The best ones sell less and help us buy more. Understanding our business objectives, how we buy, and then how we think about our decision is the fastest path to having a contract.
Thanks for your insights on the buying process Ralf, they were tremendously valuable!