Inside Alliance private working groups, we hear with some regularity jaw-dropping events that land on the chief executive’s desk. Sometimes they are simply challenging opportunities, but often they are disasters that threaten the survival of the business.
From hundreds of incredible survival stories, we’ve chosen to reveal four of the most amazing. With special permission from each CEO, we’ve told the story of the adversity they had to overcome, how they survived, and what there is for all of us to learn from their experiences.
For those CEOs in the midst of a struggle right now, we hope that this article, just like an Alliance group, will offer some hope that you, too, can turn it around, and offer some ideas to help you get there. Several of these recoveries have full case studies written on them that dig much deeper, and you’ll see links to the Alliance website for further reading.
Dave Dutton, Mattson Technology
In January 2001, Dave Dutton (Group Q200), then COO at Mattson Technology (Nasdaq: MTSN) had been shoved aside from had opposed the integration plans of a merger that had just closed. As 2001 rolled forward, the firm reeled not only from the dot-com bust and a major downturn for semiconductor equipment makers, but from the $400 million in accumulated losses as a result of the acquisition.
As the firm hemorrhaged cash, the founder announced that he was going on sabbatical. By December of 2001, the firm appointed Dave as CEO in a desperate bid to save the company.
Burning $50 million in cash per quarter, with $60 million in the bank and $40 million in debt, Dave had no time to lose. The 2,300 employees in Germany and Fremont, California needed to be reduced to 600. “On my first trip to Germany as CEO, I actually feared for my safety,” he said.
The founder had never built a strong management team and the culture of the company was in shambles. The merger integration was broken, and they were in an expensive IP lawsuit fighting an infringer. In addition to raising a pipe of $40 million, laying off 1,700 employees, and selling half their revenue stream to raise cash, Dave began the real work of building lasting value by creating a functioning management team and a healthy culture.
(Read the case study, “Forged by Fire” that details the recovery and the lessons Dutton learned at http://www.allianceofceos.com/forum/leadership/2006/forged_by_fire.php)
Lisa Im, Performant
Taking full control of her company in early 2004 when a private equity firm executed a leveraged buyout of the founder, CEO Lisa Im (Group Q200) set right to work.
Performant had a five-year contract to work tens of thousands of non-performing government loans, such as student loans. Their job was to find and contact the borrowers and renegotiate those loans until they started performing again. They earn their fee after loans have performed for 12 months.
Lisa and her 750-strong staff cranked up throughput and efficiency by 25%. But by fall of 2004, with 18 months to react, they learned that when the Department of Education contract was renewed, the terms would be so much worse as to cut their EBITDA by about 40%.
With a 2005 top line breaking past $100 million, Performant placed a $6 million bet on one new division that seemed to have promise to replace much of the lost EBITDA in the nick of time. They placed a second $6 million bet on another new division. But by the time the spring of 2006 rolled around and their earnings dropped, one bet had failed completely, and the other was at break-even with no hope of accelerating enough to make any difference.
And when the new Department of Education terms were finally nailed down, EBITDA took a 60% hit, much worse than expected. In 2005 the firm’s borrowing was comfortably three times EBITDA, but with the earnings hit in 2006, it soared to an untenable 10 times EBITDA.
Lisa brought the board and the private equity group into the firefight, and they restructured to buy time with the bank. She slashed management labor costs by $5 million per year, but left the production teams unscathed. They still had lots of work to do. She refocused the team on the core business, gaining an increased share of customers, and also started to see the full benefits of the increased efficiency put into place in 2004.
By the end of 2007, Performant had increased EBITDA by 50% over the dismal 2006 number, a huge step forward. The year 2008 brought another 33% increase in earnings. Projections for 2009 suggest a new record for EBITDA, likely exceeding 2005 levels.
(The case study, “When A Pricing Haircut Hits Hard,” details how Lisa managed to recover from the trauma of 2006 at http://www.allianceofceos.com/forum/finance/2008/when_a_pricing_haircut_hits_ha.php)
Bob Schonefeld, Bridger Commercial
In the spring of 2007, every CEO would have been envious of Bob Schonefeld (Group 202), CEO of Bridger Commercial Funding, LLC. He was leading a company growing sales and profits at 50% per year, generating so much positive cash flow that he had cash enough to cover 18 months of expenses. He invested an additional $1 million that year into marketing and infrastructure to bulk up for the cyclical 10-year wave of commercial refinancing coming in 2008. They were on track to do $1.5 billion in loan fundings in 2007, and as usual, the company had about 4 months of loans in inventory, not yet securitized in the capital markets.
At the time, it didn’t seem that the residential subprime mess would affect them at all, since they are strictly commercial lenders. But the growing panic among the financial sector meant that the buyers for Bob’s inventory were only willing to buy for 3% less than they would have just a few months earlier. The unprecedented 3% swing on $600 million in loans was a big number, and took the loan portfolio deep underwater.
As the firm paid buyers to take the loans, 95% of the 18 months of operating cash vaporized. Bob slashed headcount from 95 to 25 as the struggle to survive played out. A potential suitor for the company dropped out, scared by the economy. But even as cash headed toward zero, Bob kept looking for someone that would value the loan machine that his team had built. And in the nick of time, he found it. The recapitalization brought $5 million in cash and reduced Bridger’s debt obligations, giving him time to ride out the economic storm to begin growing his operation again.
Mike Willis, Westaff
Seventeen years after founding his first staffing business, Mike Willis (Group Q100), CEO of Westaff (Nasdaq: WSTF), found himself starting another staffing firm in 1993. By 1995, Westaff went public, then became Metamor Worldwide Inc. Seeing a sizzling market for IT professionals as Y2K breathed down the world’s neck, he spun out the IT division (Comsys) and took it private in a leveraged buyout by a private equity firm, with a then comfortable five times debt ratio.
As one of the top IT staffing firms in the world, it looked great—until Y2K came and went as a non-event, followed by the dot-com bust of 2000. Revenue plunged from the $450 million range to around $350 million, EBITDA dropped from $40 million to $4 million, and all the bank covenants were busted wide open.
Mike quickly slashed the only real expense a service firm has—its people. The headcount dropped by 30%, all non-essential capital expenditures stopped, and new services were halted. But while the bleeding stopped, so had the forward momentum of the company. Four years later, in 2004, Mike executed a reverse merger back into a public company to take advantage of shared overhead.
That’s just four out of hundreds of harrowing experiences that Alliance CEOs have navigated through. Today we know that quite a few member CEOs are doing battle with adversity, and we’re glad that they have the guidance and support of their Alliance group, and so are they.
All CEOs going through adversity should remember how much resilience exists in most businesses. It always feels worse than it is, and an able leader, determined to win, usually is the difference between success and failure.
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With a 2005 top line breaking past 100 million, Performant placed a six million dollar bet on one new division that seemed to have promise to replace much of the lost EBITDA in the nick of time. They placed a second six million dollar bet on a second new division. But by the time the spring of 2006 rolled around and their earnings dropped, one bet had failed completely, and the other was at breakeven with no hope of accelerating enough to make any difference. And when the new Department of Education terms were finally nailed down, EBITDA took a 60% hit, much worse than expected.
When pro-active efforts to replace the expected top line drop off failed, there was no way to avoid the hit to the bottom line. Performant was still going to profitable--not even close to posting a net loss. The problem was that the new owners had fully leveraged the firm when it was purchased in 2004, and a recent recapitalization had kept the firm maximally leveraged. That’s a great strategy for pushing up ROI in good times, but will cause turmoil when earnings decline.
For example, a firm that is delivering a bottom line of 100 million (EBITDA) in a friendly lending environment could support borrowings of as much as 500 million. So if the business were bought for 700 million, the buyer would have to come up with 200 million in cash, borrow 500 million, and each year, if things continued, would earn a 50% ROI. But if EBITDA drops to 50 million, then the bank would find itself lending at ten times EBITDA, an untenable position. It would look for the company to reduce its debt level from 500 million to 250 million, a more realistic level. But somebody would have to come up with the cash, or the bank will pull the loan.
Smart Money is Critical
While in 2005 Performant’s borrowing was a comfortable 3 times EBITDA, with the earnings hit in 2006 it soared to an untenable 10 times EBITDA. Faced with an immediate breech of loan covenants, Lisa turned to her board and the private equity group that owned the company. While they weren’t happy about the turn of events, they stepped in, negotiated with the bank, and ultimately guaranteed some of the bank debt to reduce the lender’s risk and bought time to pull EBITDA back up.
All money sources are not alike, and seasoned CEOs know that being funded by “smart” money is far better, even if it might be a bit more difficult to get or costly. Smart money understands that business comes with ups and downs, and they will stay rational, even in difficult times. Smart money also knows that reputations are slow to create and quick to be destroyed. They also know that as bad as things might look when the disaster appears, good leadership and a patient hand often lead to a solid turnaround. Lisa’s PE firm valued their reputation in the financial community far too much to risk letting the bank take a hit. They also believed that the business still had considerable value and that Lisa and her team would guide it back toward being an excellent investment.
Slash Costs
Often, a big drop in revenue means there is less production work. But in Performant’s case, the effective price for their services is what collapsed, not the amount of services to be rendered. Their rank and file teams were as busy as ever. So Lisa slashed, in two RIFs (reduction in forces), management and indirect salaries. The indirect headcount and management team had grown as they tried new business units designed to replace lost sales. But those hadn’t worked, so those people weren’t needed. Everyone remaining would have to wear more hats and cover more bases.
It never ceases to amaze me how in nearly every circumstance, a case can be made that all staff members are busy, and that the company will be harmed if anyone is laid off. After all, everyone is working on good projects that were started for good reasons. But it’s not the good things that make a company grow, or turn a company around. It’s by focusing on the best ideas, and the most critical issues that progress is made. Good things are usually just a distraction. Adverse times are the perfect time to swing the axe, painful as it is, and to cut back to only your best people, who will identify the best most critical things to do and will ignore the rest. That’s just what Lisa did. She didn’t cut any of the line workers—they were needed to execute on the firm’s core mission.
Focus on Your Core
Having tried two new business units in an attempt to maintain scale, Lisa focused all the remaining team on building the core business. There was no longer any budget for experiments. No distractions allowed. They had good steady customers that weren’t giving all their business to Performant. They had prospects very similar to existing clients that they hadn’t yet closed. There were opportunities with existing clients to expand the scope of offerings to include parts of the collection process that clients often did themselves, but did poorly. Lisa created clarity throughout Performant about the renewed focus on the core business.
Go Sell Something
Nobody can sell like the CEO. While cost cutting can help somewhat, over the long term the only way to build EBITDA consistently is through sales growth. Lisa hit the road herself, often traveling 50%of the time. She insisted that others on her top team interfaced with the clients and prospects as well.
CEOs often feel that if they leave headquarters too much, operations can suffer and general leadership duties can be neglected. There is truth to this. A balance must be stuck as to where a CEO spends his time, but that balance shifts over time. Both in my own experience and in many conversations with CEOs, the allocation of chief executive’s time shifts as each department or business unit stumbles and appears in need of help. As capabilities are bolstered or leadership changes are made, the “weakest link” becomes another department or business unit, and so shifts the CEOs attention.
Ultimately, most CEO’s greatest contribution comes through being on the “outside” of the firm, knowing customers and competitors well and deeply understanding marketplace shifts. Great internal leaders – COOs, general managers and other second in commands are more easily found and hired to “keep the wheels on the bus”. In Performant’s case, there weren’t a lot of costs that could be cut beyond the RIFs already completed, so pushing revenues up clearly was the “weakest link” and was fully deserving of Lisa’s personal time and effort.
Rally the Team
Forget about secrets. Employees, spending 40 hours a week at work, smell fear and uncertainty. No matter how well a CEO or their top team put on a smile after a difficult meeting, the staff will feel the apprehension. Lisa didn’t wait for the fear to seep in. She told them the truth. She went on the road to their offices in Texas, Oregon and Lathrup, Ca and explained the dramatic change in the contract terms. She explained why so many heads rolled at corporate, and why no heads rolled in production. She asked for their help, and explained clearly how their efforts would help the company and set them all on the path back to prosperity. When she was on the road selling, her new HR executive was making the rounds internally, re-enforcing the message to the team.
She pointed out how the efforts to increase throughput in 2005—long before the current crunch—were already paying big dividends, and that continued progress would clearly move the needle. Even as the headcount grew toward 1000 to support the new contracts, the rank and file felt like they knew their CEO, that they had been treated with respect, that they had been kept aware of the situation, and that their efforts were contributing to the recovery.
By the end of 2007, Performant had increased EBITDA by 54% over the dismal 2006, a huge step forward. 2008 will bring another 35% increase in earnings. Projections for 2009 suggest a new record for EBITDA, likely exceeding 2005 levels.
All of us running companies work hard to avoid disasters. But disasters still arrive, despite our best efforts. CEO Lisa Im’s actions and experiences give us all some good guideposts when the disaster arrives at our door.
Key Takeaways:
1. If you’re going to run a company which uses significant leverage to increase ROI, make sure you have investors willing and able to step in if there is an EBITDA surprise.
2. Making the most of your core business and competencies is the best and first place to focus in order to produce short and mid-term results. New business units are always an experiment.
3. Over-communicate to employees during dark times so that they are a part of the recovery and follow your lead.
Company and Case Facts:
Company: Performant Financial Corporation
Person: Lisa Im, CEO
Alliance Member since: 2007
Business Founded: 1976; New ownership January 2004
Head Count: 1004
Services: Performant is focused on revenue optimization, defaulted portfolio solutions, and risk management. Written: October, 2008
Address: 333 North Canyons Parkway, Suite 100, Livermore, CA 94551
Web Site: http://www.performantcorp.com/
Phone: (925) 960-4771
E-Mail: lim@performantcorp.com
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By Robert Sher
We humans like to put everything in its place. Lawyers deal with the law, and behave seriously, like a judge. Doctors deal with medicine, and they do it seriously. After all, our life is at stake. And accountants deal with books and records, and they are quiet and serious, and care deeply about every penny.
But then there’s Alan Olsen, CEO of Greenstein, Rogoff, Olsen and Company, better known as Groco. He and his firm are quite competent, but are NOT serious all the time. Their marketing has caricatures of each team member all over it. They have accounting joke videos on their website, and homespun, humorous commercials that run on cable television.
What a risk! But the unusual strategy for a professional services firm is working. The firm for years has handled the accounting for some of the Bay Area’s top venture capitalists, and after Alan took over as CEO and began the new marketing campaign, sales have been growing at a 30% annual rate. Unusual tactics seem to be generating unusual results.
Too many companies follow the party line. If everyone else is sending e-newsletters, they follow along. If everyone else acts self-important, they follow along. But that’s a formula for keeping up with others, not surging ahead. One of the powerful benefits of being in a diversified peer learning group like the Alliance of Chief Executives is that you hear about tactics employed in other industries that might be completely new to your industry.
Alan became the CEO after one of the founding partners passed away unexpectedly. It was twelve years after he had joined the firm at 30 years of age, and he decided that unless something changed, the firm would continue shrinking slowly as it had in recent years. He realized that the reason quite a few mega-rich venture capitalists and entrepreneurs kept working with Groco year after year wasn’t because of the firm’s digs or the notion of formal, well dressed accountants working on their books, but because of their trust of Groco and their relationships with Alan and his highly skilled, team.
And Alan had never been a stuck-in-the-mud kind of guy. A wry sense of humor and quick wit has always been a part of him, and his personal clients knew it and appreciated it. So he decided to make that his differentiator. He would parade who he was for all to see. He had an artist draw caricatures of him and the staff, and he put that in his marketing materials in 2004. He started to personalize the marketing literature and web site with his own photo, and photos of his team.
People like to do business with other people, not with organizations. The first step is knowing who the people are, and photos are a great place to start. Not just of the big boss, but others too. Always try and avoid the corporate “we” whenever possible. The “we” language (“We work for the betterment of all our clients, employees, and the world”) just isn’t really believable nowadays. Once they know who the people are, the next goal is to get them to like you and your people. You’re likable if they feel like they know you, if you make them laugh, if you can poke fun at yourself. If they know you and like you, more often than not, they’ll talk to you, and you’ll have a chance to earn their trust.
So in 2005, long before You-Tube, Alan started making commercials. As we all know now (but most of us still don’t use it) video is a powerful communication medium. Viewers see your expressions, hear your voice, and get a much better feel for who you are than from seeing a print ad. Alan’s commercials certainly each have a point, but you can see that he’s himself, hamming it up, having fun. As the commercials and ads ran, prospective clients started calling. They learned the kind of high profile, complex clients Groco has been serving for years. They discussed their issues with Alan and his staff and found them well informed and professional. They began to trust them, at least enough to give them a chance.
Alan kept the commercials and newspaper ads running. Sure, it brought in some unwanted callers, but they were screened out. The ideal client for Groco has a personal net worth of 10 million and above, and in they came. Since Alan took over as CEO, the firm has grown by four times.
Think twice about letting the world pigeon hole you or your company. If you want your place to be at the front of the pack, you’ll need to figure out how to stand out from the crowd.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Takeaways
1. Your marketing should not be just like your competition. It should help you stand out from the crowd and catch your prospect’s eyes. Think about the message, the medium, and the style.
2. Marketing with your people up front is a great way of making your message more personal, and giving the prospect the feeling that you want to develop a person to person relationship.
3. Building a connection with a prospect takes time. First they have to know you, then they have to like you, and lastly, they have to come to trust you. Keep marketing running (with adjustments) over long periods of time.
Company and Case Facts:
Company: Groco
Person: Alan Olsen, CEO
Alliance Member since: 2007
Business Founded: 1964
Annual Sales Volume: 8 figures, in 2009.
Head Count: Approaching 100.
Service: Accounting services for high net worth individuals and their businesses.
Written: September, 2008
Address: 39159 Paseo Padre Parkway Ste 315, Fremont, CA 94538
Web Site: www.groco.com
Phone: 510-797-8661
E-Mail:info@groco.com
• Seek first to understand the new reality by talking with not only your customers, vendors, partners and investors, but CEOs in different industries.
• Make sure to attend your Alliance group meetings if at all possible (the collective wisdom is very powerful)
• Be candid with your fellow CEOs about what your business is experiencing and also what you are feeling and doing about it
• Prepare to put your biggest challenge on the table when you meet with your fellow CEOs
• Don’t hesitate to communicate with your fellow group members, your Alliance Director and/or myself to discuss your situation. There are very few situations that some other Alliance CEO has not dealt with before. If we can help in any way, please let us know.
A number of Alliance members have forwarded me their insights and I have attached links below to three documents which you might find interesting. When you reach our website, click on “Download PDF” to see the document. The recommendations in the Sequoia Capital document are quite controversial and clearly do not apply to every situation, but they are intended to make you think.
1. Sequoia Capital's advice to their portfolio CEOs; and
2. An article by Tatum LLC on the "Five Mistakes to Avoid in a Volatile Economy."
3. An article by Alliance Director Robert Sher titled “Outlasting Hard Times”.
Six months ago the Alliance brought CEOs together to discuss how they were preparing for an eventual downturn and they generated a lot of great ideas. We would be happy to coordinate another CEO Roundtable to enable you to discuss how other CEOs are dealing with the current economic conditions. Please let me know if you would like us to schedule such a meeting.
Although it is extremely important to focus on your core businesses and eliminate unnecessary expenses, experience has shown that the best companies find ways to take advantage of volatile markets. During these fast-changing market conditions, it is more important than ever to talk candidly about your current challenges with your fellow Alliance CEOs. Please let me know if you have any suggestions or if we can be of any assistance. By working together, we can all weather the storm and be positioned to prosper when the market recovers.
]]>By Robert Sher
Hard times can befall a business for many reasons, only one of which is the economy. As I write this, there is lots of negativity in the media and the stock market, so it's easy to start panicking and running a business too conservatively. Running a business too conservatively means that you'll miss opportunities to grow, you'll under spend in critical areas, and although you'll have less risk of a big crash, your business will slowly weaken and shrink.
But if you look objectively at the situation that you find your business in, and you find the environment in a temporary downturn, then your goal will be to outlast that downturn and have a strong company when good times return. That is the topic of this article. If you think that better times will never return, this article will only help you survive longer to give you a chance for an entirely new strategy for making a living. On the flip side, if you have a big war chest and are on an expansion plan during down times while your competition is weak (a good idea if you have money), this article isn't for you either.
Survival in a downturn requires the business leader to be tough, and to do unpopular things in order to want to survive. I'll write some things that sound harsh, like fire people fast, but survival is a harsh thing.
Although this may be too late for some readers, there are a few things you should be doing when conditions are good to put you in a strong position for survival when the inevitable downturn does come, and they always do.
1. Reduce your debt. Having to make debt payments is really hard in lean times. The survival rate of no-debt companies is much higher.
2. Get on the good side of the bank and increase and enlarge your credit line, but don't use it! For debt that you'll need for a long time, use long term loans, not your credit line. Banks won't give you loans when you're on the ropes -- so you must have them in place and set up BEFORE you really need them.
If you are concerned about an impending downturn, you probably want to:
1. Beef up key infrastructure items, like your computers, production equipment, phone systems, and the like while you still have enough money. They should be solid enough so that if you don't replace any of them for two years, they'll still be functional.
2. Stop marginal programs. These are the great ideas that turned out to not be very great. Stopping them and cutting back the expenses helps the bottom line and forces you to focus on the core business.
3. Protect your own personal net worth; separate it from the business risk. There is a lot you can do to shield your own assets from a business failure, but only if you get them accomplished more than a year before a bankruptcy filing. Some debt is also stickier than other debt -- some kinds of debt are so sticky that you can't even shake it in a bankruptcy filing. Work to pay that kind of debt down first.
When the downturn is upon you, you'll need to "hold your breath" until things pick up. The biggest piece of advice: Don't burn through cash! Cut as hard and as fast as you must in order to:
1. Stay profitable every month. Having losses will suck your business dry, and will act like a countdown toward execution.
2. Don't build up assets like inventory or fixed assets. At most allow for replenishment only.
3. Don't let liabilities grow, especially secured liabilities or those you can never shed. No running up the credit card, the line of credit, or even vendor debt if you can avoid it. Don't spend!
4. Sell off inventory and equipment you don't need. Work hard to collect receivables each month. This generates cash that was locked up in your business.
5. Layoff people sooner than you think you should. Fire those employees you don't love. As the work slows down, so do the people--they tend to stretch out their work, and will tell you "everyone we have is essential". Don't believe it. Keep your wages in line with your sales volume.
6. Pay rapt attention to customers, don't lose them, instead grow them. You need to try and keep the overall sales volume up, and finding new customers is really hard. If the volume falls too low, you'll have trouble covering your overhead.
7. Take limited risks to push sales up, not big gambles (unless you're well funded and your strategy is to grab market share). All cost cutting and no growth can lead to oblivion. But if you can try some product extensions or new promotions to certain customer groups and pick up some volume, you'll cover your overhead more easily. But please, no big bets.
Lastly, focus on the one thing you do that is special and that gets you new orders and customers -- spend resources on that, and ignore as much of the rest as you possibly can. Having run a business through several downturns, I can tell you that it's hard work-- much harder than writing, or reading this article. But there's no substitute to just getting down to the work. Dig in!
Takeaways:
• When times are good, invest wisely so that your infrastructure can coast through a downturn without eating up cash.
• Stay profitable at all times. You must emerge from the downturn strong.
• Spend money primarily on the core of your business – that one thing that gives you the greatest edge over your competition.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
]]>Below is an article by Tatum LLC on the “Five Mistakes CFOs Need to Avoid in a Volatile Economy.” These recommendations certainly apply to CEOs as well. The Alliance is committed to helping our members to be open and candid about how they are addressing the current market situation so that our CEOs can learn from each other and help each other make better and faster decisions about the right courses of action for their individual situations.
An overwhelming 91 percent of finance leaders agree that the economic crisis is not yet over, and in fact may just be beginning. This was the finding of Tatum’s October Survey of Business Conditions, based on responses from over 400 corporate leaders. The economy has reached a historic critical point, and business leaders face a daunting situation.
So how do CEOs and CFOs lead amid chaos? No one can predict the future right now, but Tatum’s national Restructuring Practice has helped hundreds of businesses emerge from distressed economic conditions and they offer practical advice for avoiding certain critical mistakes during this time of extreme pressure.
Mistake #1: Thinking this is just a normal downturn in the business cycle.
It is not. With the credit markets virtually frozen, with no commercial paper market, and with the value of bank assets unknown we are in one of the most serious credit crises of our lifetime. Resolution of the credit shut-down certainly will not come from our elected leaders! This cycle is going to take the collective brain power of the country’s financial and business leaders to solve. The Fed will be part of the solution, but it is going to take a long time for the consumer to get back into the market and begin spending again.
Mistake #2: not seeking objective advice
Remember the first point: this is not a normal cycle; now is the time to get objective advice rather than assume past tech¬niques will work when the rules of engagement have shifted. How long can you continue your current course with no exter¬nal funding? If the time line is short – you need to take action now! The ability of businesses to borrow for needs as simple as working capital is severely restricted. If you are planning to finance your inventory for the Christmas season – you will need to consider an alternate plan immediately. Proactively brainstorm with other business leaders and advisors with proven experience in tight situations, and be prepared to negotiate.
Mistake #3: Overreacting… or under-reacting
Don’t rush into major changes without projecting the implication on your business model. Conversely, this is not a time to think that because business cycles always turn around, that you can sit back and wait for the rebound. Challenge assumptions, create scenarios and think through the consequences.
Mistake #4: Postponing “collecting cash”
With no cash moving in the credit market, the ability of customers to pay bills is decreasing. If it hasn’t already, at some point this problem will reach your customers. The most important commodity is cash, and now is the time when you should be making sure that all accounts receivable are collected in a timely manner. Once a cus¬tomer gets behind, he will not be able to borrow money to catch up and you will effectively be providing goods and services for free.
Mistake #5: Thinking that your staff is not watching your every move
Your staff is looking for guidance from those they respect. The economic stress is heightened by the national stress of watching the increasingly negative performances on the national stage. Communicate with your organization and provide as much calming influence as possible through your words and actions. Constructive discussion will allay fears and help increase productivity. Don’t forget: the unknown creates stress and anxiety that leadership must attempt to minimize.
What next?
This is a time to demonstrate true leadership by learning from history and recognizing the need to adopt a new per¬spective. Tap into the intellectual capital of seasoned lead¬ers to be sure you understand dynamics and focus on the most important priorities.
About the author
Jerry Mozian is Tatum’s National Segment Leader for Restructuring and a Certified Turnaround Professional.
About tatum
Companies turn to Tatum when critical business challenges arise because we immediately deliver operational expertise to support the Office of the CFO. Our national restructuring practice leverages methodologies developed by certified turnaround and insolvency professionals. Tatum is the largest Executive Services firm in the U.S., and we understand the urgency of NOW. Our solutions accelerate results to create more value™.
For more information call 888.TATUM11 or visit www.TatumLLC.com.
]]>This event brought together CEOs that are running businesses whose core product or service helps our world be more sustainable. Over 50 CEOs signed up and filled the largest meeting room at Hanson Bridgett’s San Francisco headquarters.
The CEOs broke into four working groups and after brief introductions, began working on issues that the CEOs were facing in their own businesses. Discussions are confidential, but we're able to summarize some of the key issues discussed. Of course, there is no substitute for being there in person.
Issues:
With all the buzz about green, one firm was getting a steady flow of business without doing much sales or marketing. But the clients that were knocking on the door weren’t ideal. The group talked about the need to increase marketing and selling so that the CEO could pick only the best clients and still have plenty of new business to grow. The less than ideal clients would be turned away or referred to others.
Having grown significantly in the Bay Area, a firm talked of going national. Differences between the Bay Area market and the national market were discussed, along with strategies to be effective in other regions. "Green" isn't equally hot everywhere in the world.
Financing for green business expansion was discussed at several tables, and the difficulty of raising money at fair valuations at this time.
One manufacturer brought up the challenge of producing a green product in China. We discussed strategies about how to "walk the talk" when production will happen in an environment that is not eager for, or prepared for, using green manufacturing practices.
After growing an average of 75% per year for two years running, one CEO led an energetic discussion about managing high growth and "keeping the wheels on the bus".
One firm, large enough to get directly involved in legislation, talked about strategies to move legislation along that would support progress on the "green" front.
Another firm acquired a company and launched a "green" division – at the same time. A discussion ensued about how to integrate the new company and build the green division without losing focus on the core business.
Several tables discussed the difficulty of bringing a green product to market. One of the key difficulties is getting consumers to really believe that YOUR product is green, given the lack of labeling guidelines and the trend for all companies to claim they’re the “greenest.”
One CEO was concerned that his frequent public speaking and his willingness to disclose statistics and information was not only helping his own company, but was tipping off the competition as well. He feared this might be decreasing his competitive edge. The consensus of the group was that while he should erect some barriers (like creating a password protected area on his website), that the real strategy would be to keep coming up with new information and perspectives so that he stays the knowledge leader, making it very difficult for the competition to catch up.
]]>By Robert Sher
There we were, 11 CEOs sitting in a conference room in Marin County: All members of the Alliance of Chief Executives, bringing the business issues we'd been banging our heads, trying to sort out. That was the first time we got the taste of the extreme ‘sport’ of running a biotech business from Igor. You see, Igor Gonda, CEO, runs Aradigm Corporation, a life sciences company, and most life sciences companies function in the land of extremes -- extreme scientific research, extreme finance, and extreme partnering.
But all of us can learn a lot from observing and studying those CEOs like Igor that push it to the extreme. In life sciences, pushing to the extreme is required if we want new treatments. The norm is very high risk/high return for investors because of a very high probability of a negative outcome on the product (most don't pass FDA trials), and development time frames that easily stretch to 10 years or more. And there's not often a good fallback position, like a treatment or drug that kinda-sorta works, or downgrading expectations to a small stream of cash flow after getting say tens or hundreds of millions in investor money.
Aradigm's focus is on drug delivery to the lung, so that instead of getting injections or pills, drugs can be delivered through inhalers. Much of Aradigm's past research was focused on delivering insulin to the body via inhalation for the treatment of diabetes.
I saw Igor again at an Alliance life sciences CEO Round Table discussion and the challenge of creating good partnerships between businesses came up again. So I drove over to Aradigm's Hayward, Calif. headquarters and sat down with Igor to zoom in on the art of extreme partnering.
"I am lucky to have been a part of two successful drugs getting to market: Pulmozyme – recombinant human rhDNase enzyme that is given by inhalation for the treatment of cystic fibrosis; and Evamist, a transdermal spray for the prevention of the symptoms of menopause. But the life sciences world is so risky that many in the field never have that pleasure." Igor said, with his unusual accent that evolved through living in Czechoslovakia, England, Australia and the USA. He continued, "Partnering with a big pharmaceutical firm (“big pharma”) often appears to be the best way to reach our dreams--to bring a new life saving or life enriching drug to market. It is universally viewed as the enabler for a smaller company (“biotech”) to get access to that scarce and expensive commodity—cash and to gain access to marketing and sales know-how and distribution channels. All of this, at least in theory, should be appreciated by the financial markets so that the smaller biotech firm benefits from an increase in stock valuation that occurs when a big-name company shows “faith” in their product or technology. But often, this valuation uplift does not happen, and even when it does, this kind of happiness rarely lasts."
What had looked liked the perfect deal in 1998 to Aradigm was a partnership with Novo Nordisk to develop inhalable insulin. Aradigm had generated very attractive human data with its AERx inhalation delivery system for insulin; Novo Nordisk had the cash, was the global leader in the treatment of diabetes with insulin , and was one of the very few companies that had the capability to manufacture this drug economically on the enormous scale that was forecast for this needle-free form of insulin. After the deal was made, millions and millions of dollars flowed to Aradigm over a decade, allowing it to continue its research on inhaled insulin in collaboration with Novo Nordisk.
But as events unfolded, it turned out that Novo Nordisk had partnered with Aradigm only as a defensive strategy -- rival Pfizer had partnered with another firm to develop inhalable insulin and Novo Nordisk realized they'd be badly injured if Pfizer brought a new drug delivery system for insulin to market that would compete with Novo Nordisk’s injectable insulin business. The US giant in the insulin treatment of diabetes Eli Lilly took the same step as Novo Nordisk and partnered with another one of Aradigm’s competitors to develop inhalable insulin. But when Pfizer gave up on the effort in 2007, Novo Nordisk quickly cut its partnership with Aradigm loose – and Eli Lilly terminated its partnership, too. The dream of lucrative licensing revenue streams from inhalable insulin that would have sustained future product R&D and would have provided much awaited returns for investors in the companies who partnered their inhaled insulin technologies with big pharma, vanished. Indeed, the share prices in these companies plummeted.
But some partnerships work out well. In 1990 Roche and Genentech partnered in arguably the most successful biotech “marriage”, and today that partnership is still critical to the success of both companies, and has created a powerful and important line of cancer drugs that are saving lives every day. In fact, Roche views the partnership with Genentech to be so critically important for its business that it is trying to buy Genentech.
Jump from Alliance Newsletter: Newsletter Readers Start Here
As the afternoon wore on, Igor and I decided to pound out a list of keys to successful partnerships between companies right then and there.
At the top of the list, drawn from the Novo Nordisk experience, is that the partnership must be crucial to both firms, and in a sense, must make them mutually dependent. Real commitment to the ups and downs of partnerships, and in particular, a long process like drug development means there must be no easy out for either party. The strategic value must be an offensive play for both, not a defensive strategy like it was for Novo Nordisk. This strategic alignment will increase the odds that the partners goals must be aligned over the long term; a critical element.
If the partnership is between a smaller company and a giant, then there must be a strong advocate at the giant who is willing to risk a career over the partnership. Such dedication on the business front parallels the extreme devotion that the scientific advocates of biotech products display. A great example is Napoleone Ferrara at Genentech. He fought doggedly for his drug for 17 years until he got the breakthrough when Genentech and Roche rolled out the cancer blockbuster Avastin. Without a strong, entrenched champion, the giant can forget about the partnership, or change its mind easily. The champion must be emotionally motivated, not just some financial manager evaluating portfolio risk. The partnership needs to be their "baby", too. As development of biotech products is often marred with technical and clinical challenges on a time line similar to human maturation, changing “dirty diapers” in the early stages of partnerships and dealing with predictably unpredictable “teenage behavior” in product development requires “parents” who have more than just ROIs at stake.
The partner must be strong enough to bring in other resources as needed. At first, it looked like having Novo Nordisk's global experience in all aspects of insulin business was the key advantage for Aradigm that even the world’s most powerful pharma company, Pfizer, was missing. But Pfizer was committed enough to the inhaled insulin and strong enough that it bought at a very substantial cost, access to another source for insulin. And, while ultimately Pfizer gave up on inhaled insulin, they aggressively pursued its development to create a new, important market opportunity for themselves.
If the main reason for partnering is access to capital, don't look at cost of capital alone. After all, a partner may dump you after years of collaboration, just when you need to do a round of capital raising. That may be more “expensive” than no partner at all. While computing the value of a strategic partner is difficult, quantitative models can and should be created that help compare it to the more objective cost of capital. Above all, a great partner must bring strategic value to your company. However, it seems that the best guarantee of success is that you, too, bring such long term strategic value to the partner that they would never walk out—because they would take such a big strategic hit.
It goes without saying that the weaker you are on the "wedding day" the more likely you are to enter into a bad partnership. Develop relationships and position the firm for partnerships long before you absolutely must have them. Just like in a good marriage, passion is what starts the relationship but commitment, perseverance, mutual respect, sharing of values and key interests are the ingredients required for long term success.
After years of research and development, it’s hard to argue with the desire to have a big launch into the marketplace, and this desire drives many partnerships between developer and distributor. But sometimes it’s better to stay small and do it yourself at least a little longer. If the partner’s only contribution to your joint business is cash, then do the math to see if you won’t be better off borrowing the money or raising it through sale of equity. . Even if you have to “dilute yourself” a little upfront, it may be worth it if you have your destiny in your own hands. The moment you've proven that your product (or drug in this case) is viable, the interest in and desirability (and valuation of your company) often goes way up. If you have the R&D know-how and the financial resources, you may cross that finish line faster with a highly focused organization, and then, if needed, have your pick of great marketing partners. Too many firms go for the big launch scenario before the product is proven, and thus have to give up much of the product ownership to do so. Only have a partner if there is a compelling need for it.
Igor and I could have gone on and on about the multitude of challenges he's facing, as is typical in the world of the extreme CEO. Almost nothing impedes Igor’s attitude because he has a passion for healthcare products that can help humankind, and he can’t wait for that exhilarating feeling again when the new drug approval letter from FDA arrives. . But it was getting late, and Igor, peeking through the blinds in his office, saw his wife pull up to remind him that it was time to go home. The quest would have to wait for another day.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Key Takeaways
1. Partnerships often fail, so if you can get to market, even in a smaller fashion without partnering, consider it carefully. Once the product is to market and has proven viability, the valuation of your firm will jump nicely – even if the debut isn’t as grand as it could be. You’ll have more suitors wanting to partner, and you’ll have to give up less.
2. Partnerships that last are essential for both firms, not just the smaller firm. Look for situations that will create mutual dependence.
3. There needs to be someone in the bigger firm with power and authority that is willing to risk their career to make the partnership work over time. They have to be emotionally invested. If your partnership is just another portfolio bet, look out.
Company and Case Facts:
Company: Aradigm Corporation
Person: Igor Gonda Ph.D., President and CEO
Alliance Member since: 2006
Business Founded: 1991
Products: Inhalation drug delivery for the treatment of systemic diseases.
Written: September, 2008
Address: 3929 Point Eden Way, Hayward, CA 94545
Web Site: http://www.aradigm.com/
Phone: 510-265-9000
E-Mail: gondai@aradigm.com
That was precisely the case when Alliance member Bob Fahlman was brought in to run Paradigm, a 170 million in revenue healthcare firm headquartered in Concord, Ca. They specialize in getting the best medical results for people with complex medical needs. These are individuals with catastrophic injuries such as spinal cord injuries, traumatic brain injuries, multiple amputations and severe burns as well as complex conditions such as chronic pain. They have transformed the way results are achieved by introducing data and technology innovations that change the way things are done and provide results that are five times the industry average.
This was not a turnaround at all -- the firm had been growing steadily each year, and had been serving its owner and customers well for 15 years. But in 2006 the original investors sold the company to Sterling Partners, a private equity firm with the understanding that the objective would be significantly accelerated growth. They tapped Bob, who has grown four firms significantly, leading two of them through very successful IPOs.
Listen and Learn
Bob didn't meddle for the first 30 days. He soaked it all in, getting to know people, the culture, the clients and the processes. This is the classic on-boarding approach, but the usual goal is to fit in and become productive as soon as possible. In contrast, Bob's goal was to create his own 100 day and 180 day written plan of how to position himself and the team to quickly shift the company's growth into high gear.
Building Trust with Executives
After the first 30 days Bob saw that his executive team had real value and if at all possible, should be retained. The staff was also performing well and would be hard to replace. They were just accustomed to incremental, conservative growth and to a cost control approach to the bottom line, rather than a growth approach to increasing revenue.. Bob began to spend a lot of time with his top team, creating stronger and stronger relationships with each, while planting small seeds about growing the business. By the end of 90 days, he felt they were ready to stare at his vision of the future of the company.
The Shock of the New Vision
You just can't ask an executive team whose norm is incremental, conservative growth to come up with totally new and aggressive approach to the business. So Bob drafted a business plan that showed almost doubling the size of the business in three years. It was based on real information he had gleaned in the first 90 days and had enough specifics to show how it could be done. And on day 1000, he presented it to his team. They were shocked. By the end of the meeting, about 40% thought Bob was crazy and could destroy the company, 40% were excited about being a part of a revitalized, aggressive company, and 20% were on the bubble. There was work to be done.
Gaining Momentum toward the New Vision
Bob challenged the team to do their homework and create their own growth plan. They attacked Bob's "crazy" plan from the bottom up, adding up sales from new customers and segments, etc. The result of the bottom up approach: just about what Bob had proposed. But the process of their getting into the details, given a glimpse of Bob's vision, kicked open the doors to a future that started to seem possible. The executive opinion poll shifted by day 1200 to about 70% excited, 20% cautiously optimistic, and 10% unconvinced.
Internal Road Show
It was around day 1200 that Bob's key task shifted to adjusting the mind-set of the entire team. He dismissed only one person--a remote sales executive that had a history of non-performance. He and his top team began to present the plan to all departments and all employees, making sure that they saw the personal benefit. One critical group, for example, was the clinical group that works closely with each case. They were already overworked and were hard to hire. He made sure they understood that new streamlined systems would be put in place to ease their work load, and that additional staff would be hired and trained before the aggressive sales campaign was begun. It was about six months after Bob joined the firm that they were ready to start making the big changes.
The Quantitative Results
In the spirit of the Alliance, I'll give you the answers to the questions that any Alliance group would ask Bob at this point to get a measure of how effective Bob's mutual on-boarding approach was. It has now been one year since Bob joined Paradigm. The founder is still working there and is happy and productively focused in his area of passion and expertise. Sales are up 19% year over year through 2008. Profits are 166% of the YTD Goal. Personnel turnover continues to be at its historical low. The same top team is still in place (the President did retire), with the addition of over 50 new members. These are some impressive results.
Most CEOs never hesitate to act, and to jump in with both feet. But when the CEO is the new hire in to an existing company, he or she needs to be the architect of a well thought out plan to produce the best possible results. Bob Fahlman did just that.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Takeaways
1. Unless it’s a turnaround situation, make no immediate moves. Take 30-60 days to learn.
2. Develop a written plan for the first 1000 and 180 days detailing key objectives to be attained within that time frame.
3. Assess key executives in the first 90 days and get them to share and support the new vision for the company, then involve the whole company in the change process.
4. 4. Execute, execute, execute.
Company and Case Facts:
Company: Paradigm Corp
Person: Bob Fahlman, CEO
Alliance Member since: 2008
Business Founded: 1991
Annual Sales Volume: $1300 million in 2007 and 184 million in 2008
Head Count: 140
Service: ensuring the best results for people with complex medical needs..
Typical Customer: Insurance Carriers
Written: June, 2008
Address: 1001 Galaxy Way Suite 300, Concord, CA 94520
Web Site: http://www.paradigmcorp.com/
Phone: (925) 676-2300
E-Mail: bob.fahlman@paradigmcorp.com
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He's done it over and over again. Some services hit right on, some just rolled along, and some died quickly. He’s started 13 businesses. But his average has been quite rewarding: He sold 3 of his first 7 businesses and has never lost an investor a single dollar. In 2001 he started his seventh venture that has three stable business units in it, with a fourth business just now leaping off the starting blocks. It's called GoGrid, and it's all about cloud computing.
What's instructive is that as his company grows, John has to promote and stand resolutely by his philosophy about value creation, even to his own team.
Here’s the Keagy philosophy: It is founded on the assumption that the biggest risk in innovation is market acceptance. Too many entrepreneurs focus on execution, which is a controllable risk, where market acceptance is an uncontrollable risk that must be tested to be managed. You should not risk too many resources until you have an indication of market demand. This requires shortcuts. Keagy knows from experience (the hard kind) that most exciting ideas actually don’t get validated by the market. Keagy calls this “geeking out”. It’s where technical types build amazing products and services that no-one wants. It is all too common in technology startups. He resists those on his own team that want to make the first version richer. He fights anything that will slow down the first release, knowing that competitors are likely working on alternative solutions. He fights any spiraling of development costs for that first release, knowing that it could fail in the marketplace. He won't allow any long promotion and marketing preparations. Sometimes all the departments aren't as ready as they'd like to be for the beta launch.
But out it goes and the market decides. Life is too short and resources are too precious to get tied up into a business with less than screaming demand. If it is screaming, then resources pour in to the project, and upgrades, features, and systems are created to increase the robustness of the offering and to improve the customer experience. If the product doesn't find very strong marketplace interest, it disappears.
CEOs must understand their key advantage. This is a critical and essential step. Maybe it's quality. Maybe it's your ability to customize to your client's needs. Maybe it's your service. Most companies can only be amazing at one thing, and good at all the others. Make sure you're amazing at the one thing that will drive your business forward.
The high frequency but low cost experimentation with the marketplace is what allows Keagy more chances at bat while preserving enough resources to invest heavily in proven winners. Most new products are services aren't spot-on the first time. We learn a lot from having the market's reaction to our creativity. Don't spend too much on that first version, lest you not have enough money left to make the corrections and try again.
But sales and support will still cry for more training before launches, and engineering would love to have more time to polish the applications, and product development would want much more features in the initial launch. Accounting wants more involvement in the costing and billing systems before launch too, and marketing and PR would like at least 6 weeks to properly build up interest in the new offering. Keagy fights it all. You might find him flapping his arms like wings and gesticulating in front of his 100 plus team to drive the point home, or making chopping motions to indicate the reduction of expected budgets. And you might find him personally on the phone with customers apologizing for an oversight on a just-launched feature. But he sticks to his guns, insisting on being first -- on speed and agility over perfection and bureaucracy.
The CEO must be clear about the value creation strategy and stick with it, even in the face of resistance. He or she needs to be passionate about it, and communicate it passionately. It should be everywhere and should be a part of the culture of the organization.
Teams, especially as they get larger, want stability and order. But stability and order can be the enemies of creativity and newness. Maturing products and business units do need stability and process--the market entry rules don't always apply. In every organization there is push and pull. Just make sure that tug-of-war ends up with your unique value creation strategy at the forefront.
This marketplace entry strategy doesn't apply when a business unit isn't breaking new ground. As the units mature, the investment increases and the teams create processes and predictability for all involved. This has been true for Keagy's oldest business units, ColoServe and ServePath. The new business unit, GoGrid, is the biggest and most complex launch yet, but was fashioned from experience learned on two earlier minor launches.
The CEO must be able to differentiate between dilution of the company's momentum by pursuing several value creation strategies at once, versus resistance to the strategy because it just won't work. So while a CEO must stick to his or her guns and drive the value creation strategy, the CEO also has to be paranoid enough to realize that in some situations, too much stubbornness can be a bad thing.
So what’s your value-creation strategy? Are you sure? Yes? Then stick to it, and keep your team’s energy focused on it.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Takeaways
1. The CEO has to understand the key value creation strategy and keep the team focused on it.
2. Only being good (and not great) at secondary functions or product attributes will irritate many departments in the company, but starving those areas for resources is essential, so that they key value creation strategy is well funded and can tolerate a few mistakes.
3. Value Creation strategies are often very different that the strategies we use to broaden a stable business. Be sure to change strategies when the external environment demands it.
Company and Case Facts:
Company: ServePath LLC
Person: John Keagy, CEO
Alliance Member since: 2006
Business Founded: 2001
Annual Sales Volume: Over $20mm recurring revenue.
Head Count: 167
Service: Internet services for businesses with very high customer traffic.
Typical Customer: Fast growing Web 2.0 companies and enterprises with exciting internet business
Written: June, 2008
Address: 345 Spear St Ste 515, San Francisco, CA 94105-6156
Web Site: http://www.servepath.com.com/ and www.gogrid.com
Phone: (415) 869-7000
E-Mail: john@servepath.com
“Green is a very interesting aspect of the company,” says Zero Motorcycles CEO Gene Banman. “But the challenges are really traditional challenges.”
Other Alliance members who run “cleantech” businesses tell a similar story.
Sure, the industry is hot. High energy prices coupled with growing consciousness about global warming is making green choices popular with businesses and consumers. And venture capital continues to funnel toward companies whose focus is providing energy, transportation, shelter and medicine in more environmentally sensitive ways.
Yet for all the hype, running a green business carries its own set of challenges -- not the least of which is managing growth. Banman (Group 305) who joined the company last year, describes this challenge as the fine art of “blocking and tackling” that comes with starting up any manufacturing company.
As of June, Zero Motorcycles, based in Scotts Valley, was building and shipping 10 motorcycles a week, but had a backlog of about 60, Banman said. Pretty soon, the company will be moving its bike frame welding business to Asia, which should ease the production strain. But in the meantime, “we’re trying to catch up,” Banman said. “The orders keep coming in.”
Another challenge has to do with organic cash flow. Many green businesses would have trouble without financial investment or government incentives – and there’s no guarantee they’ll continue to get either.Until recently, there were no government subsidies to encourage the development of solar power, according to Paul Detering (Group 302), CEO of San Mateo-based Tioga Energy.
Today, companies like Tioga, which provides solar installations to commercial, government and nonprofit customers through long-term power agreements, benefit from a U.S. investment tax credit that’s due to expire at the end of the year. There’s no current plan to extend it.
“It impacts our business, and it impacts our whole industry,” Detering said. “I don’t think (businesses) should be subsidized in the long run … But subsidizing them at least initially is a good thing. It allows them to get off the ground.”
And here’s perhaps the biggest hurdle: Being green isn't enough. It must prove it can help its customers reduce costs or increase revenues, or both. That’s not always easy when the technology behind many green businesses could still use improvement, or is still under development. CEO Darron Brackenbury (Group 110) of AIC Labs, said his company has routinely had difficulty explaining its value proposition to businesses.
Alameda-based AIC Labs, is a research and development company that has developed new technologies for batteries, biofuels, sustainable mining and water treatment. “If you can show people that you can put dollars in their pockets or save them dollars … you’ll always get a hearing,” Brackenbury said. “The challenge is to develop, scale, and demonstrate the technology in a commercially viable form, in a reasonable period of time.” Fortunately, AIC Labs has gotten better at it.
When Brackenbury and his two co-founders started the business in the mid-90s, AIC Labs was a consulting firm, and its expertise was electric chemistry. The business has since grown into a public company with three spin-off businesses. The current green trend has definitely helped AIC.
“We’re fortunate to be in position to ride on that wave,” he said. “Clearly, smart, large corporations are looking to the future all the time to consider what they should and shouldn’t be involved in, from wind power to more efficient vehicles, or whatever.”
Aside from the specific challenges, there are plenty of reasons why it’s a great time to be green.
The easiest one is money. According to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, “cleantech” snagged $3 billion in investment dollars in 2007 and more than $600 million during the first quarter of 2008, in spite of a softening economy.
All those dollars have led to some great career opportunities for CEOs. Detering, a former telecom and data networking executive, began transitioning his career toward clean energy three years ago. He said it’s exciting to be part of what he calls the energy industry’s “renaissance.”
“They haven’t seen a lot of change, and right now, we’re at a period of dramatic change,” he said. “That’s a lot of fun.” Meanwhile, the technology driving many green businesses continues to improve.
For example, there’s been interest in electric vehicles for years, but the batteries just weren’t good enough. “When the lithium battery came out a few years ago, we could really build a motorcycle with a lot of range and power,” Banman said.
Of course, current gas prices aren’t hurting sales, either.
“No question,” he said. “Four dollars a gallon is wind at our back.”
Imagine that your company is seeking to merge or be acquired only to discover that the “change in control” provisions in your compensation agreements are scaring away potential suitors. Internal inconsistencies within your agreements (employment agreements, change in control agreements, severance plans, equity incentive plans, supplemental executive retirement plans, etc.) create substantial financial liabilities that you may not uncover until it is too late. Such unanticipated consequences can adversely impact or kill your deal.
So, summer is a great time to pull out that change in control language (admit it, you “borrowed” it from your last company) and make sure that it is current, competitive and compliant with state and federal laws. To get the juices flowing, here is a basic checklist of the kinds of change in control language to look for in a typical CEO employment agreement:
On a final note, remember that there are change in control provisions in other employee benefits documentation (e.g., SERPS and equity compensation plans) that may have different triggers and terms than those found in the employment agreement. It is important to understand why those differences exist and whether the differences create a conflict with other benefits documents. Getting an independent compensation consultant or attorney to audit your overall compensation plan is the best way to assure yourself that you are compliant and your documents are internally consistent.
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Kathryn Meier, Esq. is an employment attorney and the President and Managing Shareholder of the law firm of Hoge Fenton Jones & Appel in San Jose, California. Kathy is a frequent speaker on employment law issues for businesses.
]]>Among many of today's CEOs, there is growing uncertainty with the economy. Stocks are struggling, while gas prices and the U.S. home foreclosure rates are going through the roof.
American businesses are starting to cut travel budgets, according to member Michael Depatie (Group Q100), CEO and president of San Francisco-based Kimpton Hotels & Restaurants. “We’re starting to feel a little bit of deterioration,” Depatie says, adding the hotel industry generally lags three months behind the rest of the economy. “It’s like we caught the virus but we don’t know when we’re going to get sick.”
There is little Depatie—or any CEO—can do to control general economic trends. But there are plenty of things CEOs can do to offset the impact on their own company. Kimpton is offering “more aggressive” prices and Depatie got his team to help out. “I asked all my senior executives to go back and look at each of their businesses and take ten percent off,” he said.
Planning helps companies navigate through a downturn in the economy. John Rule (Group 108), president and CEO of Applied Aerospace Structures Corp., says funding for aerospace programs and services is being delayed. But AASC, having weathered down times before, continually looks for ways to limit costs and mitigate market risk.
A decision two years ago to self-insure its workers proved to be a money-saver. The company also worked to diversify its products and client base. In the early 1990s, Boeing represented 80 percent of AASC’s business, compared to only 8 percent today. “We will always reduce staff if it becomes necessary,” Rule said. “However, our last layoff was about four years ago. This is pretty good for our business, and I attribute (our) diversification efforts to minimizing layoffs.”
Diversification also helped San Ramon-based Carpenter/Robbins Commercial Real Estate, according to company principal John Carpenter (Group 105). Carpenter/Robbins’ client mix includes customers from both public and private sectors. And the financial health of government-run entities is more stable and often runs “counter-cyclical” to the overall economy. “That stability allows us to respond to more private sector clients when they have needs,” Carpenter said. Because private industry is most heavily impacted by the downturn, he said, “we’re actually staffing up” to help clients in that sector.
Wait a sec. Hiring? With a recession looming?
That’s right. And Carpenter is not alone. In fact, Doug Dolton (Group 271), CEO at peer-to-peer lending company Zopa, is also growing his team. Turns out the credit crunch brought on by last year’s subprime mortgage mess eliminated many of Zopa’s competitors. “It’s nice to be in a position to hire people when other people are letting them go,” Dolton said. “We’re actively recruiting now with that in mind.”
Even companies like Zopa are not cloaked from economic storms. Yet most CEOs interviewed for this story saw just as many opportunities in a challenging economy as they saw obstacles. For example, Kimpton Hotels & Restaurants just acquired $250 million in funding with the intention of buying hotel properties and increasing market share, Depatie said. “We’re in an awfully good position,” Depatie said. “I’m trying to figure out what to wish for here.”
Other companies, such as San Francisco-based electronic direct mail firm Vertical Response, are looking at ways to capitalize on the economy by weaving the business climate into marketing. “We’re looking at opportunities to get in front of small businesses and say, ‘Hey, we have a solution for you in this downturn, and it’s not going to cost you as much money,” said Vertical Response, CEO, president and co-founder, Janine Popick (Group 202).
After seven years of mostly online advertising, Vertical Response is beginning to take its marketing dollars offline. It’s spreading word of its value proposition on buses and even through a street team. “I would never go so far to say we’re recession proof,” Popick said. “There may be a lessening of demand … but we’re not going to stop.”
Takeaways:
• Planning ahead eases the impact of an economic downturn on your business.
• A slowdown in the economy often brings opportunities to increase market share.
• If a poor business climate makes your company the best choice in your market, say so!
Yet two weeks later, they walked away from the opportunity, which was quickly snapped up by the competition. What happened?
After the first moments of exhilaration, Ms. Arum’s intuition began to slow her enthusiasm. “I listen to my intuition, and it’s rarely wrong”, says Arum. She worried about being asked to do too much too fast. The relationship that paved the way for the opportunity was built on excellent performance, and the expectation would be no less in this case. The founders engaged in a deep debate about what to do.
As much as this client preferred that ProTrials do this work, the fact that this client already accounted for 50% of their total revenues meant that any failure-to-please on this new contract could have big consequences for the firm. Even if they succeeded, the concentration risk and dependency on this large client would be even greater. While the ProTrials team had the knowledge on board to do the job well, it would still require quickly doubling the staff of specialized medical personnel spread throughout the country, a daunting task.
By saying yes, they would be risking their relationship with the client. But they were certain that they would not be “punished” by saying no up front. Reputations in marketplaces and relationships with clients are usually built slowly over a period of years. But relationships can be quickly destroyed with a few bad decisions. The fundamental question is this: If a company takes on a big challenge and the project is more difficult than expected, how much spare capacity and resources do they have to throw at the project?
Founded in 1996, the two founders had an excellent working relationship with each other. Ms. Andrews was the “outside” partner charged with business development, and Ms. Arum was the inside operations partner. Andrews had learned to appreciate Arum’s intuition and conservative nature and Arum had seen the benefits of growth stemming from Andrews’ charge-ahead, action orientation. But they’d never had an opportunity so large that it threatened to polarize them. They took it slow, and discussed the decision in a series of conversations, collecting data and sharing their thoughts. “There is something special about being business partners who are women. We communicate well, not only in objective facts and data, but about our feelings and intuition”, says Ms. Andrews.
Most partnerships don’t work well. One of the fundamental pitfalls is when the personal objectives of the partners diverge. Big opportunities often make partners aware that the potential of the business is different than the original plan, and it can pull partners apart. While partners can and do often choose to go their own ways, doing so in the middle of a stressful and difficult-to-execute opportunity often destroys value for everybody. They enjoyed working as a team. But the team went well beyond Arum and Andrews.
Their company had already been growing at a 25-30% annual growth rate. Given the short time frame for execution, there was no time to add and properly onboard upper level executive talent that would run the new operation to their expectation of quality and customer service. It would be up to the existing team.
Top teams and employees in general can stretch and go into hyper-drive, but only for short durations. Their energy and attitude will begin to erode without proper rest and mental rejuvenation. The leaders of any firm must know when the team can run hard, and when they need a recharge.
The founders of ProTrials wanted to grow the business, but not at the expense of their management team and their still-young families. Arum had embarked on building new home, and had a terminally ill mother-in-law. Andrews was busy balancing work and family. Each had two children in preschool and elementary school.
They looked at it all, and decided against doubling down. The relationships they had built—with clients, employees, each other and with their families were too important. They said no.
While they believe they could have made a good run at it, the competitor that said yes failed in their efforts, and no longer has any business dealings with the client. Their relationship was ruined.
ProTrials doubled their size anyway, but at a slower pace that supported all the critical relationships in their lives. Today, that client is still among their best, but is well balanced by a broad book of business from other clients. That whoo-hoo day has become a sustainable, relationship-driven woo-hoo ride for twelve years now.
Robert Sher is author of The Feel of the Deal; How I Built a Business through Acquisitions, speaker and consultant, and long-time CEO. He may be contacted at robert@ceotoceo.biz. .Web: www.ceotoceo.biz
Takeaways:
1. Listen to your intuition when these large opportunities arise.
2. The goal isn't growth: It is either building long-term value or keeping the lifestyle you enjoy. Quick growth is usually hard, and done poorly can decrease the value of a company.
3. Think about all the important relationships in your life, and how they could be affected by saying yes.
Company and Case Facts:
Company: ProTrials Research, Inc.
Person: Jodi Andrews, CEO
Alliance Member since: 2007?
Business Founded: 1996
Service: Clinical Operations Management Teams
Headcount: 75
Typical Customer: Pharmaceutical, biotechnology, biopharmaceutical and medical device firms
Written: April, 2008
Address: 444 Castro Street, Suite 900, Mountain View, CA 94041
Website: www.protrials.com
Phone: (650) 864-9180
E-mail: jandrews@protrials.com