pivoting

Jerry Jao, CEO, Retention Science

You’ve heard it all before. Successful CEOs are driven, hardworking, thick-skinned. Starting a company requires the courage to take risks, and an aversion to backing down. Even Elon Musk came toe-to-toe with bankruptcy with both Tesla and SpaceX, living off loans from friends as he poured all his resources into keeping the companies alive. Determination and the will to push through adversity are celebrated as hallmarks of strong leadership.

Yet, the same qualities that drive CEOs to Elon Musk-level success can just as easily lead to disaster. Scrappy, tenacious leaders are often particularly ill equipped to deal with the flipside of starting a business: knowing when to walk away from it.

In the startup world, “pivots” are often described as “structural course corrections” that test new assumptions of your core business model or product. In my own experience, pivoting is how my co-founder and I course-corrected as entrepreneurs, walking away from two failed companies before starting our current company, Retention Science.

Of all my responsibilities as a CEO and the accompanying stress of wearing multiple hats, shutting down your own company has been the hardest. I’ve done it twice, and while I’m still learning, I feel more prepared when it comes to managing the ups and downs of growing a business, as well as facing the hard truth when needed.

Here’s what I’ve learned:

1. Above all, plan for failure

Planning ahead for failure isn’t bad luck or pessimistic thinking; it’s pragmatism. Being realistic about worst-case scenarios will make you braver, because you have acknowledged the risk involved and have decided to move forward anyway. What’s more, planning for failure will force you to look at every aspect of your business objectively, which means higher chances of discovering problem areas before they’re unfixable.

Actively preparing for failure will also provide you the perspective you need to stay rational. Passion is a crucial motivator, but it can also lead to rash decision-making. When you are faced with the unthinkable scenario, fall back on reason, not emotion.

2. Work hard to stay grounded

There is a fine line between confidence and arrogance, and staying grounded and self-aware is crucial to recognizing when you need to pivot. This applies to both your own skills as a leader and the company overall. Motivating your team to get through rough patches is good leadership, but doing so to the extent of ignoring warning signs and stretching your team too thin is reckless.

On a company level, staying grounded goes back to being realistic. Develop the strengths of your company, but acknowledge and address the weaknesses, too. Remember that it’s easier to fall than it is to rise, and be prepared to make changes, sometimes even drastic ones, to keep the momentum going.

3. Create a support system

It goes without saying that both starting and shuttering a company are incredibly difficult tasks. What’s more, the path as CEO is a lonely one. Your team relies on you, and your investors are betting on you. Admitting uncertainty or difficulty often doesn’t register as an option.

Having a partner, co-founder or mentors you can seek advice or support from is instrumental in making those tough decisions. Sometimes, it helps to just talk out the problem with another person. I’ve found it especially helpful to have a network of CEOs to share knowledge and experiences with. As fellow CEOs, they understand your perspective on your company’s issues because they’re often in the same boat.

As an entrepreneur, I can attest to the difficulty of walking away from your company. I’ve experienced the disappointment, even heartache, of realizing the business you’ve dedicated yourself to building is not going to work out.

But the key is realizing that walking away isn’t the same thing as giving up. The difference lies in the definition of the word itself. To pivot means to turn, to swivel, to face a new angle. It doesn’t mean to stop, and it doesn’t involve throwing away what you’ve already built.

Pivoting, then, is to change direction using the momentum of the initial movement. No matter how radically different that direction may be – from one business concept to a totally new one – you are still building on that first try. That experience and its hard-earned lessons are universally applicable. All those experiences put together, failures included, will contribute to your eventual success.

So entrepreneurs and CEOs: don’t react to failure by ignoring it or by pretending it’s not in your vocabulary. It absolutely should be. Instead, embrace it, learn from it and use it as a stepping-stone to your next venture.

About the Author

Jerry Jao is the co-founder and CEO of Retention Science, a retention marketing leader and innovator that helps retailers and brands understand, engage and retain their customers. He previously founded two other marketing software companies, and before that, held positions with Morgan Stanley, KPMG Advisory and Clear Channel Communications. He is a graduate of the University of California, Berkeley and Yale School of Management.

[Image Courtesy: Phil Whitehouse]

Mark Fagan, CPA, Managing Partner, Connecticut Office, Citrin Cooperman

Jack Welch, the highly quotable former chief executive of GE, once said, “Change has no constituency—and a perceived revolution has even less.” That’s a vital lesson for CEOs of companies that are going through a strategic pivot. It is fine for a CEO to mandate a change in direction and take the business model down a more promising path – as long as the rest of the company is willing to follow his or her lead.

There are a number of key actions CEOs must take to ensure that their teams are aligned around a strategic pivot. Before we consider how the CEO can create organizational buy-in for a pivot, it’s important to understand why the pivot occurs in the first place.

Why Businesses Pivot

Pivoting, basically a change in business strategy or business model, can come from different needs. Economic pressures often drive such changes; in the wake of the Great Recession of 2008-09, many firms suffered sharp revenue and profit declines. Companies were forced not only to downsize, but to take a hard look at how they made money and how they could return to growth and profitability going forward.

Technological disruption is probably the most talked-about force for change today, as entire industries are being up-ended by such factors as mobile, social, data analytics and cloud technologies. This is evident to anyone who has followed the trajectories of Blackberry or Blockbuster, as well as traditional media, entertainment, retail or financial services companies.

Internal forces also can trigger the need for a pivot, even in otherwise healthy economies and industries. For example, some companies experience a loss of growth momentum over time, often coupled with rising costs of salaries, raw materials, insurance, occupancy, etc., that may squeeze profits to the point of threatening the company’s existence.

Market pressures often necessitate a pivot. In my industry, CPA firms are increasingly seeking mergers to meet clients’ demands for expanded practice capabilities, broader geographic reach, or other evolving needs.

This is just a summary of some forces that may require businesses to pivot; a complete list would have to include such factors as global competition and regulatory shifts, to name but a few.

How CEOs Must Lead the Way

Regardless of which forces are compelling the pivot, it is the responsibility of the CEO to identify where the company needs to go, what it must do to get there, and how the entire organization must align with the new direction.

1. Create buy in from your management team. The entire organization needs to understand the CEO’s vision and why it is the right move for the company. In order to create buy-in, getting input from the management team is essential. Toward that end, the CEO needs to get the management team involved early on with the pivot decision. Bring along the executives who have the needed expertise to make the pivot work, listen to their ideas and concerns, and make sure those factors are reflected in the eventual decision. And once the pivot decision is made, communicate actively and frequently across the organization to ensure that the decision and its consequences are well-understood.

2. Don’t assume you know all the answers. The CEO typically knows “why” the company must pivot, but needs help with “how”. One of our firm’s clients, a manufacturer and distributor of equipment, faced challenges of stagnant growth and rising overhead. Worse, technological changes threatened to make its core products obsolete in a few years. This company’s pivot was to reinvent everything from its market strategy to its culture. In addition to an internal analysis, they used outside consultants to evaluate their product range versus customer needs. This led to a move from a “one-stop shopping” strategy based on a large product portfolio, to a focused portfolio that cut out peripheral products that did not contribute to profit. The consultants also guided management toward a marketing and distribution model, outsourcing manufacturing to free up facilities, reduce overhead, and create the flexibility to offer new technologies and products.

3. Create a culture of accountability. No matter how hard the CEO works to sell a pivot to the team, the rest of the organization doesn’t always buy the argument. Key individuals or teams that fail to accept the new reality, or do so half-heartedly, can create resistance. That’s why a culture of accountability is essential. In the case of the equipment company, they understood the need for change in the organization’s culture. A somewhat informal workplace had to become more structured and rigorous. Defined, measurable KPIs were established for all personnel, with monthly tracking of goals and follow-up.

4. Consider evolution as well as revolution. Often, it is better to take an existing business or asset and make it the basis for the new model, rather than pursue entirely new products, operations or markets. After all, one definition of “pivot” is to turn on one heel, rather than shift both feet in a new direction. It can be easier to align organizations (not to mention customers) around a familiar offering rather than a revolutionary change. One of our clients is a provider of sales commission software. Over many years, the company collected vast amounts of data on the factors impacting sales performance, commission rates, and related information which could be analyzed and sold to the sales industry. This led the company to pivot toward more of a subscription research model rather than software sales.

5. Make sure your processes support the pivot. Execution is the key to a successful pivot, and usually requires a company to rethink and reinvent core businesses processes, functions and systems to support its new direction. The clearest example of this is when companies merge. This is now happening in the CPA industry, as smaller firms combine with larger ones to broaden their practice areas and industry expertise, strengthen balance sheets to invest in growth, and attract larger clients and talented professionals. However, leaders of both firms and their teams must have a framework in place and operating to facilitate a successful merger and a stronger resulting business. Departments such as Administration, IT, Marketing, HR and others must be structured and organized to advance the implementation. Also, rather than defaulting to the acquiring firm’s processes, it’s important to consider the best elements of both parties’ systems, or even to go outside the merging organizations for new solutions. An added benefit of this approach is that it will not only lead to a more robust process, but also foster collaboration among new employees and management.

In addition to the above elements, the other assets that a CEO must have in order to successfully perform a pivot include:

• Strong lines of communication throughout the organization.
• Good corporate governance policies and procedures, so management can quickly assess how the pivot is affecting the company’s finances, its reputation with customers, etc.
• Systems of accountability.
• A team that is motivated to succeed and knows how success will be measured.
• A willingness to make – and learn from – the inevitable mistakes.

A pivot is by nature a complex task with an uncertain outcome. The CEO won’t know all the steps leading to the goal, because circumstances and plans will change and there will be mini-shifts along the way. The important part is to help the team see the potential opportunities and outcomes, and create processes that will align the organization.

About the Author

Mark L. Fagan, CPA, is the managing partner of Citrin Cooperman’s Connecticut office. With more than two decades of audit, tax and business advisory experience, Mark is an expert in business formation, profitability enhancement and mergers and acquisitions.  He counsels businesses and CEOs in a wide range of industries, including technology, financial services, private equity, manufacturing and construction. Mark is a frequent author and speaker and also serves as an instructor for training courses on topics such as leadership, technical accounting issues and financial statement presentation.  Mark is also a graduate of a Harvard Business School leadership program.