Rescission Proof IT: EBITDA Multiplier

Custom Bits, the key to longevity

How executives use technology to build business value

One of the problems with technology is,

“There are over 100 ways to do it wrong, but only about five ways to do it right.”

Choosing the right technology strategy is like picking the right vehicle. A sports car may be the fastest car on the road, but what’s the point of a sports car when driving on the freeway during rush hour. When hauling products, a pick-up truck can carry small loads, while an 18-wheeler is best for much larger loads shipped longer distances. It is easy to imagine situations where picking a sportscar may or may not be the right choice. It’s tempting to let the expert choose technology. The reality is that it takes a team. A team of both business and technology experts that is lead by the person with an understating of the organization and organizational business objectives.

Business Objectives of Technology Systems Explained

As a business owner, you know that all departments have business Company Stack OS to Bitprocesses. In a flow diagram business processes are called “Management Points.” All executives use Key Performance Indicators (KPI) to create a baseline to measure. When performance is below the KPI baseline, we see a cascade effect across the business. Fix the KPI, and the rest of the company comes around.

The same idea is used to manage a technology system. In this diagram, the management points are represented by the boxes. The arrows represent the flow of data in and out of each management point. The flow of data is where the system is measured and recorded as KPIs. When KPIs are set up correctly, even non-technical people can identify and sometimes fix a system problem.

Vocabulary:

  • Corporate Security Boundary – These include the doors, locks, windows, and technology that protects corporate people, resources and proprietary information.
  • Corporate Network – this represents the people and company technology inside the company’s security boundary.
  • Corporate Network Media – sometimes wired and sometimes wireless. This is the path data takes when it leaves or enters a management point.
  • Hardware – represents the container (often a computer) for all hardware components.
  • Operating System – this represents software that manages the communication between the software and the hardware
  • Application – This represents the software that processes data
  • Custom Bits – This is the configuration (settings, software code, etc.) that is unique to the organization and reflects the competitive advantage (Branding, Customer service, Market messaging, operational efficiencies, etc.).

Which process is the Most Important?

After looking at the diagram, this may seem like a complicated Company Stack invesmentquestion. A question with multiple answers depending on the companies tolerance for risk. For the technology Expert, the most important is the operating system. Without the operating system, the computer would not run. The executive’s perspective is different. Unlike the technology expert, the executive is not buying the computer for the operating system. For the executive the most crucial system is,

“… the system(s) that accomplishes the company’s business objective.”

Otherwise, why buy the computer in the first place. While the application is essential, the most important process is the custom bit process. In our article post, Recession Proof IT: Do more for less, the objective was to identify and automate 15-minute processes. The more 15-minute processes that were automated, the more productive the employees become. The “custom bits” include, but are not limited to, all the customization that automates these 15-minute processes.

By investing in the “custom bits,” the executive directly improves EBITDA and business value by,

  • Advancing the future scalability and longevity of the organization
  • Dramatically reduces costs through automation
  • Improves business decision making through unique company reporting
  • Improves company tuning by providing accurate and timely KPI information

By investing in the operating system, there is little, if any, an improvement on the bottom line. For example, replacing an old server system with a new server system is like replacing the tires on a vehicle. Replacing tires is essential to maintain the business. Still, tires, like new servers, are part of the cost of doing business. If trucks could run without tires, nobody would need to buy replacement tires. The same is true with a server system. If a server could run without the hardware or operating system, there would be no need to replace the server either. (Which starts the conversation for moving into the cloud, but let’s save that discussion for another blog article.)

Custom Bits

The business objective is in the custom bits and not in the application and operating system. From a technical perspective, meeting business objectives is not that important. The technical expert's focus is on maintaining the stability of the technology. This focus on system stability or lowered risk means that a great deal of Capex funding is spent on maintaining the present technology. Technology is moving so quickly, simply replacing capacity is like, “… doing less with more!” (The opposite of what you want during any recession.)

What we’ve found is that executives that thrive during both financial expansions and recessions, invest heavily in the “Custom bits.” While transitioning technical capex budget expenditures into operational expense budgets. In their planning, these executives depend on the automation, developed in “custom bit” projects, to reduce expenses associated with earnings. In this way, improving business value by improving EBITDA and the EBITA multiplier.

If you have questions about developing your custom bits or automating your business processes, we can probably answer your questions. We can even do a workshop with your team that will project the earnings improvements that would occur from “Custom Bit” development and business automation.

How Executive Outliers can help

• IT Due Diligence (pre and Post Sale, don't buy or sell lemons)
• Business planning (Identifying 30K income improvement projects)
• Incremental change execution (Add $1000 - $30K in BV, 1nce a month)

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Topics: IT Due Diligence EBITDA Mutliplier