7 - Russ Johnson - 23 TOCPA - USA - 21-22 March 2016

23rd International Conference of the
TOC Practitioners Alliance - TOCPA

www.tocpractice.com
21-22 March, 2016, Tennessee, USA
Transforming the Competitive

Bid Game:
A Sub-Contractors Mafia Offer
to a General Contractor
Dr. Russ Johnson, Associate Professor
Engineering and Technology Management
Washington State University
Unites States
March, 2016
Dr. Russell Johnson

Russ Johnson has been teaching and implementing
Theory of Constraints, Lean and Six-Sigma/Quality
Management tools and concepts in business and at
the university level since the mid-1980s. His roles
as a business owner, university professor and
consultant have allowed him to blend common
sense approaches that bridge the gap between
theory and application. He became a Certified
Associate of the Avraham Y. Goldratt Institute in
1991. He served as an instructor with the Goldratt
Schools and as a TOC Application Expert and
Project Leader on some of the first Viable Vision
Projects in the US from 2004-2008. He holds
numerous TOCICO certifications and currently
serves on their board of Directors. He is the proud
Grandpa of 5, under 5, grandchildren.
www.tocpractice.com
Email:
russ.johnson@wsu.edu
Phone: 970-581-0075
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Original Scenario
for the Mafia Offer:
Well established and respected millwork (high

end woodworking) company
Annual sales of $15mm-$17mm

Suffered $2.5mm loss
Bank line of credit maxed out $1.4mm
$1.6mm 120+days past due accounts payable
$1mm+ owed to bonding company
Retention being held $1mm+
Under contractor with broker to sell
controlling interest (obtain outside investor)
www.tocpractice.com
Challenges
No cash
Most suppliers who would supply were cash FOB or COD
Most work available to bid required bonding
Lack of materials killed gains from DBR, CCPM and full kit
Even if client won the bid with a GC, the GC still had to win
the overall bid for client to get job
Positives
Had one, local contract that was big enough to cover OE for
at least 6 months ($6mm+)
Some suppliers on another mafia offer tied to large
contract
www.tocpractice.com
Format of todays
presentation
Present the offer as it was presented to the
prospective General Contractor
Slide animation has been removed by replacing
with multiple slides
Supporting slides that had been linked from other
slides have been placed into presentation body
Followed by:
Discussion of GC reactions during and after the
presentation
Q and A including suggestions or changes needed
to use in other environments
www.tocpractice.com
XYZ
General
Contractor
Working Together:
Leveraging past success
To build a thriving future
Our shared frustration

Our hit rate on competitive bids is much less
than wanted
Increase bid staff
decrease bid staff
Its a hell of a lot of work to lose a job
especially if we lose by less than 2%
Bid more jobs
Switch to negotiated
contracts
Dont even talk to me about reliable financial
and operational plans
www.tocpractice.com
Quantifying the
value of a solution
Recalling battles lost
What was the approximate value of those lost
jobs?
What was the profit opportunity represented by
those lost jobs?
What would this have represented to you
personally?
www.tocpractice.com
The problem
Do we have agreement on the problem we want
to solve?
We want to win more work
Obstacle: Dropping our price by an additional
1-2% would win more bids but,
We have found no consistent way to do this
other than further trimming our margins and,
That is not acceptable or we would already
been doing it
www.tocpractice.com
Breaking the barrier
What if we provide the money?

ABC Millworks offers a discount on our base
bid sufficient to allow you to drop your total
bid, on selected projects, by 1-2%.
www.tocpractice.com
Expected impact
Benefits to XYZ:
Bring $200mm or more new business to your
company per year
Do this without endangering your margins on
those additional jobs
Minimal effort and little if any additional cost
How?
Treat the symptoms by treating the disease
www.tocpractice.com
Moving from symptoms

to a common cause
View A
View B
Two views of reality:
View A
View B
www.tocpractice.com
Moving from symptoms

to a common cause
View A
Two views of reality:
View B
View A
View B
What if view A actually resides within view B?
www.tocpractice.com
The bidding dilemma
Our existing
bidding staff is
pushed hard to
submit more bids
We need to double
the number of jobs
we win
We have no desirable and reliable

strategy to significantly increase our
hit rate
Our current competitive bid hit rate is
much less than desired:
We are winning 2-4 jobs for every 10 bid
Significantly improve our bottom line through the competitive bid process
www.tocpractice.com
The bidding dilemma

Our bid hit rate would
actually go down; we
would be working
proportionately
harder for the work
we won
The number of jobs won

would go down significantly
Our bid quality goes down
Our bidding capacity would

be quickly exhausted
Our existing bidding
staff is pushed
hard(er) to submit
more bids
We need to double
the number of jobs
we win

hit rate
www.tocpractice.com
The bidding dilemma

would be working
proportionately
harder for the work
we won


Our existing
bidding staff is
pushed hard(er) to
submit more bids
We need to double
the number of jobs
we win

hit rate
There is pressure to
reduce our bidding staff
We need to
improve the ROI on
our bidding staff
www.tocpractice.com
The bidding dilemma

would be working
proportionately
harder for the work
we won


Our existing
bidding staff is
pushed hard(er) to
submit more bids
We need to double
the number of jobs
we win

hit rate
Any cost
savings from
job cuts
would be
eclipsed by
reductions in
sales
There is (more and

more) pressure to
We need to
improve the ROI on
our bidding staff
www.tocpractice.com
The bidding dilemma

would be working
proportionately
harder for the work
we won


Our existing
bidding staff is
pushed hard(er) to
submit more bids
We need to double
the number of jobs
we win

hit rate
Any cost
savings from
job cuts
would be
eclipsed by
reductions in
sales
There is (more and

more) pressure to
We need to
improve the ROI on
our bidding staff
www.tocpractice.com
An injection into the

GCs current reality
We have a desirable and reliable

strategy that doubles our hit
rate without cutting our margin
www.tocpractice.com
Solving the bidding

dilemma

www.tocpractice.com
Solving the bidding

dilemma
We would be
working
proportionately
easier for the
work we won

would go up significantly
Our bid quality goes up

be quickly expanded
Our current bidding
staff would win 2X
more jobs
We would double
the number of jobs
we win

www.tocpractice.com
Solving the bidding

dilemma
We would be
working
proportionately
easier for the
work we won

Any cost savings

from job cuts would
be eclipsed by
increases in sales

be quickly expanded
Our current bidding
staff would win
2X(+) more jobs
We would (more than)

double the number of
jobs we win

Our ROI for our

bidding staff (more
than) doubles
There is less (and less)
pressure to reduce
our operations costs
www.tocpractice.com
Agenda
(for the offer meeting with the GC)
Come to a common understanding of the

problem
To determine the value of such a solution to
your organization
To present the details of the proposed
solution
To determine how we can work together
to make the proposal a reality.
www.tocpractice.com
Making the
missing link a reality
We have a desirable and reliable strategy that
doubles our hit rate without cutting our
margin
What does Desirable Mean?

What does Reliable Mean?
How can we claim to double your hit rate?
www.tocpractice.com
What does desirable

mean?
To make use of the strategy the GC doesnt
have to:
further erode their margins to get a job
do much, if any, additional work
Incur additional costs
www.tocpractice.com
What does reliable

mean?
In making use of the strategy, the results are
Predictable we have taken actions so we
have a high level of confidence that the
results we want will be the results we get
www.tocpractice.com
The outcomes of
several bids
Job 1
XYXX
Low
0
High
Y = Your company's bids
X = Competitors bids
www.tocpractice.com
The outcomes of
several bids
Job 1
Job 2
XYXX
X X YX X
Low

www.tocpractice.com
X
X
High
The outcomes of
several bids
Job 1
Job 2
Job 3
XYXX
X X YX X
Y X X X X
X
X
Low
www.tocpractice.com
X
X
High
The outcomes of
several bids
Job 1
Job 2
Job 3
Job 4
XYXX
X
X X YX X
X
Y X X X X
X
XYXXX
X
X
Low
0
High
www.tocpractice.com
The outcomes of
several bids
XYXX
X
X X YX X
X
X
Y X X X X
X
XYXXX
X
X
X X X Y X
X
Low
0
High
Job 1
Job 2
Job 3
Job 4
Job 5
www.tocpractice.com
The outcomes of
several bids
Job 1
Job 2
Job 3
Job 4
Job 5
X
X
X
Low
XYXX
X
X X YX X
X
Y X X X X
X
XYXXX
X
X
X X X Y X
0
High
X

Winning bids
www.tocpractice.com
The outcomes of
several bids
Job 1
Job 2
Job 3
Job 4
Job 5
X
X
X
Low
XYXX
X
X X YX X
X
Y X X X X
X
XYXXX
X
X X X Y X
X
0
High
X

Winning bids
Your hit rate 1:5 = 20%
www.tocpractice.com
The Reality of the

bidding world
Bid too high for consideration
X
Submitted
Bid Range
X
X
X
X
X
www.tocpractice.com
Bid too low; Owner is uneasy

Bidder wants to recall or
modify as they are concerned
something was missed
The Reality of the

bidding world
Bid too high for consideration
X
Submitted
Bid Range
X
X
X
X
X
www.tocpractice.com
Bids within range of

consideration. $ spread is
usually no more than
2-5% at the GC level
Bid too low; Owner is uneasy

Bidder wants to recall or
modify as they are concerned
something was missed
The Reality of the

bidding world
Bids still too high with little
chance of winning work based on
better quality, relationship, etc.
X
Submitted
Bid Range
X
X
X
X
X

consideration. $ spread
is usually no more than
www.tocpractice.com
The Reality of the

bidding world
Bids still too high with little
chance of winning work based on
better quality, relationship, etc.
X
Submitted
Bid Range
X
X
X
X
X
www.tocpractice.com

consideration. $ spread
is usually no more than
Bids in serious contention for job.
Second place has chance of winning
work based on better quality,
relationship, etc., but will likely be
pressured to match low bid price
The impact a small

change can make
Bids still too high with little chance of
winning work based on better quality,
relationship, etc.
X
Submitted
Bid Range
X
X
X
X
X
www.tocpractice.com
A
C
B
D
If bids are within 2% of

each other, the ability to
reduce your total bid by
just 1% would move you
from
A to B
or
C to D
Bids in serious contention for job. Second
place has chance of winning work based on
better quality, relationship, etc., but will
likely be pressured to match low bid price
The impact a small

change can make
Bids still too high with little chance of winning work
based on better quality, relationship, etc.
If bids are within 2% of each other
the ability to reduce your total bid
by just 1% would move you from
A to B
or
C to D
X
Submitted
Bid Range
Bids within
range of
consideration.
X
X
X
X
X
www.tocpractice.com
A
C
B
D
E
F
G
If bids are within 5% of each

other the ability to reduce your
bid by just 1% would move you
from
E to F or F to G
Bids in serious contention for job. Second place has

chance of winning work based on better quality,
relationship, etc., but will likely be pressured to
match low bid price
Doubling your hit rate

Impact of your results
if you could have lowered your bid by just 1%?
Job 1
Job 2
Job 3
Job 4
Job 5
YY XX
Y XYXX
X
X
X Y Y X X X X
X
YYXXX X
X
X Y X Y X
X
Low
0
High
Y = Your company's original bids
Y = Your company's adjusted bids
www.tocpractice.com

Impact of your results
if you could have lowered your bid by just 1%?
Job 1
Job 2
Job 3
Job 4
Job 5
YY XX
Y XYXX
X
X
X Y Y X X X X
X
YYXXX X
X
X
X Y X Y X
Low
0
High
Originally winning bids
www.tocpractice.com

Impact of your results if you could have lowered your bid by
1%?
Job 1
Job 2
Job 3
Job 4
Job 5
YYXX
Y XYXX
X
X
X Y Y X X X X
X
YYXXX X
X
X Y X Y X
X
Low
0
High
Original Winning bids
New winning bids
20% hit rate
Your improved hit rate 2-4:5 = 40%-80%
www.tocpractice.com
Criteria for a good solution
Solves a major partner problem while:

Making them their customers preferred supplier
Making it very difficult for their competition to
copy
Impacts a large enough market

We can sell it in the target market
Must not create real risk
Must not exhaust the organizations resources
www.tocpractice.com
Making the missing link

a reality
ABC provides the dollars needed to lower the total
bid by 1%-2%
How:
A significant price reduction, up to 20%, on the part
of our bid that is self performed
Excludes materials, buyouts, subcontracts, shipping
and like elements that are pass through dollars;
$ we collect for others
Puts the GCs bid in the green range
www.tocpractice.com
An example of the
impact of the offer
Qualifying portion
Discount applied
of ABC bid
10%
15%
20%
$4,000,000 $400,000 $600,000
$800,000
Base GC bid
Impact of discount on total GC job bid
$25,000,000
-1.60%
-2.40%
-3.20%
$50,000,000
-0.80%
-1.20%
-1.60%
$75,000,000
-0.53%
-0.80%
-1.07%
$100,000,000
-0.40%
-0.60%
-0.80%
$150,000,000
-0.27%
-0.40%
-0.53%
The larger our portion of the job, the larger the ability
of our discount to reduce the total job price
www.tocpractice.com
Are we meeting our

criteria
Makes the GC their customers preferred
supplier
Gets your bid into the green zone
Is very difficult for your competition to copy*

How much luck do you think your competitors
would have convincing a sub to drop their bid
by enough to lower the GCs job bid by 1%-2%?
*Difficult to copy assumes an exclusive

arrangement with a partner GC
www.tocpractice.com
A big enough Market?

Offer is best leveraged on jobs with high millwork to
total job content ratios: the higher the better
Discount Winning job bid ABC%
Aaaa
Bbbb
Cccc
Dddd
(R)
(R)
(N)
(N)
$190,000
$320,000
$660,000
$385,000
$ 35mm
$ 35mm
$ 180mm
$ 90mm
-.54%
-.91%
-.37%
-.43%
Hotel and resort owners remodel over new?

Small number of additional jobs = large amount of
additional work/dollars/profits
www.tocpractice.com
ABC program target

Add $10-20mm in extended hours self-performed work
If each job contains $2-4mm of self-performed millwork
then reaching our goal:
Would require winning 5-10 jobs through the program
If the program hit rate is 60-80% then this would
require bidding 8-15 jobs (versus up to 45 jobs)
If average discountable millwork content was 10% of
total GC job price this would equate to an additional
$100mm - $200mm+ to the GCs annual book of
business
Click here for an example of the financial opportunity/value of the offer
for the partner GC
www.tocpractice.com
Self-performed millwork as % of total job $

Qualifying portion
of ABC bid
$500,000
2%
5%
10%
15%
Equivalent GC total job price (ABC $ / % millwork of total job $)

$25,000,000
$10,000,000
$5,000,000
$3,333,333
GC net profit @ 2%
$500,000
$200,000
$100,000
$66,667
GC net profit @ 5%
$1,250,000
$500,000
$250,000
$166,667
$1,000,000
$50,000,000
$20,000,000
$10,000,000
$6,666,667
GC net profit @ 2%
$1,000,000
$400,000
$200,000
$133,333
GC net profit @ 5%
$2,500,000
$1,000,000
$500,000
$333,333
$1,500,000
$75,000,000
$30,000,000
$15,000,000
$10,000,000
GC net profit @ 2%
$1,500,000
$600,000
$300,000
$200,000
GC net profit @ 5%
$3,750,000
$1,500,000
$750,000
$500,000
$2,000,000
$100,000,000
$40,000,000
$20,000,000
$13,333,333
GC net profit @ 2%
$2,000,000
$800,000
$400,000
$266,667
GC net profit @ 5%
$5,000,000
$2,000,000
$1,000,000
$666,667

Qualifying portion
of ABC bid
$2,500,000
2%
5%
10%
15%
Equivalent GC total job price (ABC $ / % millwork of total job $)

$125,000,000
$50,000,000
$25,000,000
$16,666,667
GC net profit @ 2%
$2,500,000
$1,000,000
$500,000
$333,333
GC net profit @ 5%
$6,250,000
$2,500,000
$1,250,000
$833,333
$3,000,000
$150,000,000
$60,000,000
$30,000,000
$20,000,000
GC net profit @ 2%
$3,000,000
$1,200,000
$600,000
$400,000
GC net profit @ 5%
$7,500,000
$3,000,000
$1,500,000
$1,000,000
$4,000,000
$200,000,000
$80,000,000
$40,000,000
$26,666,667
GC net profit @ 2%
$4,000,000
$1,600,000
$800,000
$533,333
GC net profit @ 5%
$10,000,000
$4,000,000
$2,000,000
$1,333,333
$5,000,000
$250,000,000
$100,000,000
$50,000,000
$33,333,333
GC net profit @ 2%
$5,000,000
$2,000,000
$1,000,000
$666,667
GC net profit @ 5%
$12,500,000
$5,000,000
$2,500,000
$1,666,667
Can we sell it?

Target markets
High millwork $ to total job $ (Hotel/resort remodels)
Negotiated contract prospects
Use the offer:

Partner GC invited to bid
The partner GC prepares their best bid as normal
ABC prepares our best bid as normal
ABC prepares a separate sheet identifying the discount
available to be taken and any limitations/conditions
The partner GC deducts the desired amount of the
offered discount from their total bid price and submits
their bid
(What if ABCs bid is not the low bid?)
www.tocpractice.com
Thoughts so far
Could work
Good deal for the GC
Still have some questions ...
ABC holds risk so:
How does it work or make sense for us?
What do we expect in return from the GC making
use of the offer?
Does every GC have access or is it exclusive to XYZ?
www.tocpractice.com
How are we able to

offer this discount?
Our offer assumes that:
This work will be performed during extended
hours:
Weekends and/or 2nd/3rd shifts
This work does not have to support the fixed
components of our monthly operating expenses:
rent, insurance, loan payments, etc.
Theres enough volume to support added shift(s)
It is additional work relative to our historical annual
sales.
www.tocpractice.com
Financial source of the

discount
Converting fixed overhead to margin/profit (%s are conceptual)
20% discount on self
performed work
Margin and profit
120
100
80
60
5
15
10
20
10
10
10
30
30
30
30
30
30
Direct labor
10
10
10
Materials
Fixed overhead
Proportional overhead
40
20
0
Subs/buyouts
www.tocpractice.com

discount
performed work
Margin and profit
120
100
80
60
5
15
10
20
10
10GC
10ABC
30
30
30
30
30
30
Direct labor
10
10
10
Materials
Fixed overhead
40
20
0
Subs/buyouts
www.tocpractice.com

discount
120
100
80
60

performed work
Margin and profit
5
15
10
20
10
10
30
30
30
30
30
30
Direct labor
10
10
10
Materials
GC
ABC
10
Fixed overhead
40
20
0
Subs/buyouts
www.tocpractice.com
Minimizing real risk

How much discount does ABC offer?
How much discount does GC use?
Maximum discount must still be profitable
Cash flow risk still exists:
Retention
30-90 days or more invoice-payment gap
We are willing to exchange margin for cash flow
www.tocpractice.com
Thoughts so far
Its clearer but you still have questions.
As it stands right now the risk all seems to sit with
ABC so:
How does it work or make sense for us?
and
What do we expect in return from the GC

making use of the offer?
Does every GC have access to the offer or is it
exclusive?
www.tocpractice.com
GC using the offer must

If the GC uses the discount to get the job, ABC also
gets the job
ABC will not be asked to further lower their price
unless it is tied to a change in scope or similar issues
ABC will not be subject to retention
All payments for ABC related materials, subcontracts,
and buyouts will be via Joint Check or Direct
Payment by partner GC and will be in full, no
retention
Payment for ABCs portion of invoices will be made
within 15 days of submittal, all others within 30 days
www.tocpractice.com
Details needing
resolution
Playing games with pricing
Why partner GC wants other millworkers to
provide them with bids
Why partner GC wants ABC to submit bids to
other GCs bidding on the same job
www.tocpractice.com
Playing games with the

pricing
Why wouldnt ABC just raise our price and then discount
it?
This would negate the purpose of the offer
It would make our base bid non-competitive with the other
GCs bidding the job
Why wouldnt the partner GC keep their original bid and

just use the discount from ABC to increase their margin?
This also would negate the purpose of the offer
Neither of these actions would benefit the GC or ABC
www.tocpractice.com
Why you want other

millworkers to bid job
Some other millwork company may submit a bid that
would beat even ABCs discounted base bid
To judge if ABCs base bids are staying competitive
To maintain relationships with other millworkers
In case a job owner has a preferred millwork company
other than ABC
To keep ABCs discount offer in the background of the
bidding process
www.tocpractice.com
Why ABC should submit bids

to other GCs on the same job
ABCs desire is to significantly increase its volume of

sales
Submitting the same base bid to multiple GCs for a
specific job leverages our bidding capacity; one bid,
multiple submissions
Securing some work in this way provides volume at a
non-discounted, full margin price that fills our
standard day shift capacity allowing us to cover
fixed overhead and other costs
www.tocpractice.com
Why ABC should submit bids

to other GCs on the same job
Proposed solution: ABC submits its standard bid to all

GCs requesting a bid for a specific job and will submit the
same standard bid to our partner GC if they are bidding
the same job. The partner GC will be the only GC who
has the additional discount available. We do, however,
recognize that our best odds of winning the job will be
via our partner GC.
This allows ABC to stay in the running for the overall job
regardless of which general contractor wins the bid
Reduces the potential financial risk to ABC which allows
us the ability to offer the deep discount on the
extended hours work while maintaining some
profitability
www.tocpractice.com
The bidding dilemma

would be working
proportionately
harder for the work
we won


Our existing
bidding staff is
pushed hard(er) to
submit more bids
We need to double
the number of jobs
we win

hit rate
Any cost
savings from
job cuts
would be
eclipsed by
reductions in
sales
There is (more and

more) pressure to
We need to
improve the ROI on
our bidding staff
www.tocpractice.com
Solving the bidding

dilemma
We would be
working
proportionately
easier for the
work we won

Any cost savings

from job cuts would
be eclipsed by
increases in sales

be quickly expanded
Our current bidding
staff would win
2X(+) more jobs

jobs we win

Our ROI for our

bidding staff (more
than) doubles
pressure to reduce
www.tocpractice.com
Offer summary so far

Solve major problem
The solution
How solution works
How ABC can offer it
What is expected of the GC
Questions you have to this point
Moving on to Exclusivity
www.tocpractice.com
Exclusivity issues
Reasons why the GC would want the offer to be
exclusive to them
Reasons why ABC wouldnt want the offer to be

exclusive
What value can the GC provide in exchange for

exclusive use of the offer?
www.tocpractice.com
Why the GC wants

exclusivity
Offer has no value to any one GC if any other GC

has same deal
Two or more GCs with the same offer bidding
the same job just lowers the price bar for
everyone
www.tocpractice.com
Why ABC doesnt want

exclusivity
The more GCs that have the offer the greater the odds
ABC gets the job
In the current structure of the offer, the majority of the
risk still lies with ABC
Market opportunity is lost if not used enough or on the
right targets
Second market strategy is dependent upon operational
improvements that must be built and sustained
before the offer can go to market
www.tocpractice.com
Potential solutions:
All GCs bidding a specific job get the offer
Extend the offer to a Select Few GCs
Make the offer exclusive to one, and only one,
partner GC:
Gives GC what they want
What value can the GC offer in exchange?

Mitigate some of ABCs remaining risk concerns
Some type of commission, backend rebate?
Help us overcome an obstacle blocking the offer
www.tocpractice.com
A value proposition
Common solution might be a commission,
0.25 to 0.5% of GC total job bid price
for jobs won using the offer.
What would that look like?
www.tocpractice.com
Example commission
structure
ABC 20%
Qualifying portion
discount
of ABC bid
$100,000
$500,000
ABC Comm @0.5%
ABC Comm @0.25%
$200,000
$1,000,000
ABC bonus @0.5%
ABC bonus @0.25%
$300,000
$1,500,000
ABC bonus @0.5%
ABC bonus @0.25%
$400,000
$2,000,000
ABC bonus @0.5%
ABC bonus @0.25%
www.tocpractice.com
2%
5%
10%
15%
Total job price (ABC $ / % millwork of total job $)

$25,000,000 $10,000,000 $5,000,000
$3,333,333
$125,000
$50,000
$25,000
$16,667
$62,500
$25,000
$12,500
$8,333
$50,000,000 $20,000,000 $10,000,000 $6,666,667

$250,000
$100,000
$50,000
$33,333
$125,000
$50,000
$25,000
$16,667
$75,000,000 $30,000,000 $15,000,000 $10,000,000

$375,000
$150,000
$75,000
$50,000
$187,500
$75,000
$37,500
$25,000
$100,000,000 $40,000,000 $20,000,000 $13,333,333

$500,000
$200,000
$100,000
$66,667
$250,000
$100,000
$50,000
$33,333
Example commission
structure
ABC 20%
Qualifying portion
discount
of ABC bid
$500,000
$2,500,000
5%
10%
15%
Total job price (ABC $ / % millwork of total job $)

$125,000,000 $50,000,000
$25,000,000
$16,666,667
ABC bonus @0.5%
$625,000
$250,000
$125,000
$83,333
ABC bonus @0.25%
$312,500
$125,000
$62,500
$41,667
$600,000
$3,000,000
$150,000,000 $60,000,000
$30,000,000
$20,000,000
ABC bonus @0.5%
$750,000
$300,000
$150,000
$100,000
ABC bonus @0.25%
$375,000
$150,000
$75,000
$50,000
$800,000
$4,000,000
ABC bonus @0.5%
ABC bonus @0.25%
$1,000,000
2%
$5,000,000
ABC bonus @0.5%
ABC bonus @0.25%
www.tocpractice.com
$200,000,000 $80,000,000
$40,000,000
$26,666,667
$1,000,000
$400,000
$200,000
$133,333
$500,000
$200,000
$100,000
$66,667
$250,000,000 $100,000,000 $50,000,000 $33,333,333

$1,250,000
$500,000
$250,000
$166,667
$625,000
$250,000
$125,000
$83,333
A problem and an
opportunity
ABC has a significant obstacle that blocks us from
committing to the offer and no commission structure
alone would overcome this obstacle.
OBSTACLE: ABC is profitable (7.6% 1st ) but due to
current debt structure, we are not bondable.
Must consolidate debt to be bondable.

We are willing to trade our exclusivity
commission for removing the obstacle.
www.tocpractice.com
Balance sheet details

Debt load
Senior bank debt*
Equipment financing*
Bonding surety advance*
Accounts payable past due*
Shareholder related debt
Total outstanding debts
$ 1,370,000
$ 330,000
$ 750,000
$ 1,600,000
$ 450,000
$ 4,500,000
Collateralized assets
Accounts receivable
Retention and unbilled costs
Equipment (net book value)
Total
$
$
$
$
*Contribute to funding needed
2,250,000
1,050,000
1,850,000
5,150,000
Loan or equity partner

Securing funding through a traditional bank loan
is unlikely in our current financial condition
without outside financial support.
Without other financial support, we will sell a
controlling interest in ABC to an equity
partner.
The probability is a new equity partner will
prefer ABC seeks high margin jobs, and may
discourage, and more likely ignore, this offer.
www.tocpractice.com
Partner GC removes the

obstacle
Our partner GC can share the risk and

gain exclusivity of the offer by either
providing the needed financing directly or
supporting a bank loan in exchange for a
significant commission reduction.
The more favorable the loan terms, the
lower the commission.
www.tocpractice.com
Loan directly or support

a loan?
We believe it is in the best interest of our partner
GC to provide this loan directly as:
Offer cant be blocked by third party
Earns interest for their support.
Tie the exclusivity of the offer to the duration
of the loan.
www.tocpractice.com
Reducing risk of loan

The partner GC would be in a senior position for
collateral assets offered by ABC.
The partner GC can require dual checks and/or
third party payment control on all ABC jobs, not
just those with the partner GC
Creates an incentive for both parties
The GCs revenue from these jobs would
eclipse the loan amount
($5-10mm new profit per year)
www.tocpractice.com
Maximum financing
needed
Senior bank debt*#
Equipment financing*#
Bonding surety advance*#
Accounts payable past due*#
Operating funds**
Other nonshareholder debt***
Total outstanding debts#
$
$
$
$
$
$
$
1,370,000
330,000
750,000
1,600,000
1,000,000
250,000
5,300,000
* From Debt side of balance sheet

** Replaces line of credit for day-to-day operations
*** Bulk is contractual obligation to finance broker
#
May be lowered through negotiated payoffs
Solving the bidding

dilemma
We would be
working
proportionately
easier for the
work we won

Any cost savings

from job cuts would
be eclipsed by
increases in sales

be quickly expanded
Our current bidding
staff would win
2X(+) more jobs

jobs we win

Our ROI for our

bidding staff (more
than) doubles
pressure to reduce
www.tocpractice.com
Working Together:
Leveraging past success
To build a thriving future
83
www.tocpractice.com
Questions
(Last slide of the offer presentation)
Thank you for your time and attention.

Are there any questions?
Comments?
Where do we go from here?
www.tocpractice.com
Events during
presentation
The XYZ reps easily followed the concepts and agreed to
having a shared problem in terms of poor ROI on bidding
process efforts, confirmed they often lost jobs by small
percentage (1% or less), and that they were unwilling to
drop bid price any more resulting in hit rates of 10%-20%.
XYZ was intrigued by our super injection: We would reduce
our price enough (10%-20% ) to equate to 1%-2% of the
GCs total bid price.
XYZ agreed with the bidding conflict and resulting UDEs as
well as the FRT and its predicted results based on the
doubling bid hit rate injection.
www.tocpractice.com
Events during
presentation
The XYZ reps were given time to digest slide 31 GC using
the offer must and
Raised the predicted reservations (NBRs) regarding paying
ABCs suppliers directly within 30 days, no retention, and
paying ABC within 15 days
The reservations were operational, not with the ideas
themselves
XYZs personnel came up with the injections to trim all
No retention is not a problem as retentions purpose is to insure
suppliers are paid and work is being performed and to
expectations. They felt the proposal addressed both.
Impact of more frequent and faster payments was agreed to need
more specifics on their side but was not a deal blocker or breaker
www.tocpractice.com
Events during
presentation
The XYZ reps:
Agreed they would want exclusive access to the offer and
agreed that having that exclusivity required some form of
value in exchange for it.
Agreed they were very interested, understood and believed the
details of the offer.
Wanted to know if the offer could be applied to some jobs
currently being bid without resolution of the loan issue.
Identified that they were not in an approval/commitment
capacity so needed and wanted to take concept up the ladder
to the corporate management level that could approve and
would do so before weeks end.
Requested an executive summary and supporting
documentation to assist in presenting to higher powers
www.tocpractice.com
Events following
presentation
The requested documentation was provided the next day
(Tuesday) with an offer to assist with presenting the concept up
the ladder if needed/wanted. XYZ felt confident in taking the
message on.
The XYZ reps called that Friday with an update. Upper
management was very interested but had four major concerns:
1. They were unsure what the ramifications would be on their
ability to pursue specific jobs, especially government work, if
the loan created the reality, or even perception, of them
having an equity interest in ABC
2. They are employee owned and needed to be sure the loan
was good for the company and that they could convey this
to the employees.
www.tocpractice.com
Events following
presentation (continued)
The XYZ reps called that Friday with an update. Upper
management was very interested but had four major
concerns:
3. They didnt want to tie up company funds at a particular
interest rate and then have rates go up and not be able
to take advantage of the improved rates.
4. They didnt want to set a precedent that would lead to
other vendors wanting XYZ to become creditors with
them.
www.tocpractice.com
Final outcome
While the remaining obstacles were being overcome with
XYZ, ABC received an offer to purchase through its broker
that was accepted.
The buyer was able to negotiate a combined pay down with
the bank and bonding company to $500,000.
ABC officially ceased to exist leaving the other creditors, me
included, with no options but to eat the outstanding debt.
The new owners were deeply imbedded in traditional cost
accounting thinking and had their own plans for the
capacity they had purchased so they weren't even made
aware of the offer.
www.tocpractice.com
Questions from this

TOCPA group?
Thank you for your time and attention.
Are there any questions?
Comments?
Thoughts on how to change the offer for
other similar environments
www.tocpractice.com

7 - Russ Johnson - 23 TOCPA - USA - 21-22 March 2016

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23rd International Conference of the

TOC Practitioners Alliance - TOCPA

21-22 March, 2016, Tennessee, USA

Transforming the Competitive

Dr. Russell Johnson

23rd International Conference of the TOC Practitioners Alliance - TOCPA

Well established and respected millwork (high

Annual sales of $15mm-$17mm

23rd International Conference of the TOC Practitioners Alliance - TOCPA

23rd International Conference of the TOC Practitioners Alliance - TOCPA

23rd International Conference of the TOC Practitioners Alliance - TOCPA

To build a thriving future

Our shared frustration

23rd International Conference of the TOC Practitioners Alliance - TOCPA

23rd International Conference of the TOC Practitioners Alliance - TOCPA

23rd International Conference of the TOC Practitioners Alliance - TOCPA

Breaking the barrier

What if we provide the money?

23rd International Conference of the TOC Practitioners Alliance - TOCPA

23rd International Conference of the TOC Practitioners Alliance - TOCPA

Moving from symptoms

23rd International Conference of the TOC Practitioners Alliance - TOCPA

Moving from symptoms

Two views of reality:

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The bidding dilemma

We have no desirable and reliable

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The bidding dilemma

The number of jobs won

Our bidding capacity would

We have no desirable and reliable

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The bidding dilemma

The number of jobs won

Our bidding capacity would

We have no desirable and reliable

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The bidding dilemma

The number of jobs won

Our bidding capacity would

We have no desirable and reliable

There is (more and

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The bidding dilemma

The number of jobs won

Our bidding capacity would

We have no desirable and reliable

There is (more and

23rd International Conference of the TOC Practitioners Alliance - TOCPA

An injection into the

We have a desirable and reliable

23rd International Conference of the TOC Practitioners Alliance - TOCPA

Solving the bidding

We have a desirable and reliable

23rd International Conference of the TOC Practitioners Alliance - TOCPA

Solving the bidding

The number of jobs won

Our bidding capacity would