David Mead is brilliant.

I never thought reducing our customer base would increase our revenues and our profits. David Mead is a saint. He's a mentor and a friend. The world needs more people like David. --- Bill

EssentiaLink enjoys big growth by learning to choose customers wisely

ColoradoBiz August, 2007

Start-up was crippled by lack of capital early
By David Mead

EssentiaLink, headquartered in Broomfield, provides simple solutions to reduce a company’s procurement costs. EssentiaLink, led by CEO Bill Douglas, has enjoyed very nice growth over the past few years, receiving multiple growth company awards. They provide services to customers in over 20 states.

Mead: How did you decide to get into this business?

Douglas: I was in the manufacturer’s rep business focused on technical sales and our customers were complaining about problems in the procurement of low-end, inexpensive goods. Sourcing and finding these goods was time-consuming and diverted resources away from the procurement of core direct materials.

We started in June 2000. I sold my interest in the manufacturer’s rep firm to my partner to fund the start-up. Since the tech bubble had burst, venture capital firms were not funding start-ups like ours. After some time, we decided to sell directly, rather than going through channels, which forced us to focus on growing revenue rather than just acquiring large numbers of customers. More importantly, it was a necessity that we listened to our customers.

Mead: How do you differentiate your offering from your competitors?

Douglas: Flexibility - we are able to mirror the critical pieces of a customer’s processes. Many customers have some components of their systems that they must keep in place. We work with their "must keeps" - usually related to accounting or Sarbanes Oxley requirements. Everything else can be optimized via EssentiaLink’s systems and processes. Our competitors, on the other hand, force the customers to totally convert to their system.

We really are a "customer intimate" company. We solve their pain points and create the best solution to meet their needs. We like to work with customers that really understand the total cost of procurement, rather than focusing on the mere price of the goods.

Mead: Has growth always been smooth? What were some of the "bumps" in the road? What have been your biggest challenges?

Douglas: There were so many big bumps. We really bootstrapped. Getting access to capital - both working capital and growth capital - was tough. We worked hard to get to know the bankers very well and looked for strategic investors - corporations or high net worth individuals - who brought more to the table than just money. In addition, in the early days, we made some bad hires that really set us back. We have learned the importance of taking our time to make certain that we hire the right people. We are very methodical in our interviewing process and have learned that if it’s not a great fit, we don’t go there.

Mead: You had a major change in the company that sprung from taking a hard look at the NET profitability of each customer. Talk about the process.

Douglas: We discovered last year that our profitability was lagging. We were adding more customers and more revenue, but the profit just wasn’t there.
We developed a team to analyze the customer base, starting with the bottom half of the customers, based on revenue. We looked at the true cost of acquiring and servicing these customers. Then we looked at not only the potential, but also the "degree of difficulty" in dealing with each one.

Mead: What did the analysis show?

Douglas: We were very surprised that about 1/3 of our customers were unprofitable on a net profit basis.

Mead: What actions did you take?

Douglas: We visited the 15 largest unprofitable customers and presented our case. In most of the situations, these customers were not fully utilizing EssentiaLink, not embracing simplified solutions, or they were requiring excessively high levels of pre- and post-sale service. We indicated that unless we were able to correct the problem(s), we would not be able to remain their strategic vendor.

Mead: How did your customers react?

Douglas: One got upset and threw me out. A couple stepped up and helped to correct the problems. About a dozen apologized, explained why the relationship was not working, and we parted on good terms.

We then looked at the other 2/3 of our customers. We identified the points of "profit pain" from our company’s perspective - things that we provided but that the customer did not need. We increased our focus on the top tier of profitable customers.

Mead: What were the results?

Douglas: In the first full year, we cut almost a third of our customers, added only one and revenues increased by 51 percent and profits doubled.

Mead: Terrific results, Bill. What was the most difficult challenge with this process?

Douglas: I think our investors may have thought I’d lost my mind. They wanted to know why we were shutting down customers that had been so difficult to acquire. They told me that it had better show results in six months. If this had been a public company, I probably would have been fired because the changes did not show a positive impact on results after the first quarter. But, we really picked up momentum and after the full year, results were phenomenal. We’re continuing this focus to increase the volume of business we do with our best (most profitable) customers.

Mead: What were some of the old truths about customers that you found to be untrue?

Douglas: We learned that revenue growth does not always equal profit. We also learned that every customer is not necessarily a good customer. You really need to examine which customers are really the right customers for your company, so that you can make an acceptable profit with each customer.

Probably the most important thing we learned was that we have to be selective about how we identify new customers. We need to find those that appreciate the value that EssentiaLink can deliver. We now have three key qualifying questions that we that ask:
1. Do they know the total cost of procurement?
2. Do they value it?
3. Do they have decision-making authority to act on it?

Mead: You give your employees a lot of authority to make decisions.

Douglas: We relinquish decision-making authority to our employees as long as the decision is made according to our values. It’s OK to make mistakes as long as it meets our values. We say "solve the customer’s problem first; don’t worry about profit."

All employees are empowered to make decisions on behalf of EssentiaLink without further approval if the answer to all five of these questions is YES (relative to the issue or decision at hand):
1. Is it right for the customer?
2. Is it right for EssentiaLink?
3. Is it ethical?
4. Is it something for which you're willing to be accountable?
5. Is it consistent with EssentiaLink's basic beliefs and values?

Mead: Have you accomplished your growth internally or through M&A?

Douglas: To date, all has been internal, organic growth. We’re now beginning M&A to expand the service offering and to acquire market share.

Mead: What are some of the keys to your continued growth over the next 5-10 years?

Douglas: Expanding the sales force geographically across North America and performing strategic acquisitions. We know what works for our customers; we just need to reach more of the right customers. Also, finding the right people that will help us grow.

Mead: How have you maintained the culture while building the management team required to grow?

Douglas: We are slow to hire. We involve many of our folks - including non-executives - in the process. We take our time to be sure that it is the right fit.

Mead: Where do you find good leaders?

Douglas: We invest in training, do a lot of promoting from within, but also we learn of potential candidates by word-of-mouth - from investors, customers, etc.

Mead: EssentiaLink has really made some great progress.

Douglas: Our people did it! They accomplished last year’s 51 percent growth in revenue and doubling of profits. My job is to remove their barriers so that they can do their jobs. We certainly had some disagreements over the relationships with customers. I was challenging whether we should continue to serve the unprofitable customers and this seemed to some of our folks a conflict with our customer-intimate culture. Once the team embraced that the profitability of each customer was critical to our continued success, they really made it happen.

I am very excited about our future. We have a terrific team of committed and motivated people. I think we are well positioned to take advantage of the opportunities ahead.

David P. Mead is president of The Mead Consulting Group, Inc. an advisory services firm that helps middle market companies achieve exceptional value through strategy and execution. He is also chairman of ACG Denver. He can be reached at (303) 660-8135 or meaddp@meadconsultinggroup.com.