Growing through acquisition is an enticing prospect for many mid-market companies. Indeed, about 5,300 transactions among businesses valued between $5M to $1B took place in 2010, according to Dealogic and Robert W. Baird & Co., with the vast majority of involving deals valued at less than $100 million. Sadly, though, many of these deals fail to fulfill expectations. In fact, most evidence suggests that mergers can boast a mere 50 percent success rate – and even that figure may be generous.
Among members of the Alliance, CEOs who run mid-market companies seem to fare slightly better when measured by M&A success. A recent survey of Alliance of CEOs members found that nearly 60 percent reported completing deals which achieved their non-financial objectives. Still, those are not great odds, considering that 40 percent of respondents did not. The matter becomes even more serious when you consider the increasing importance of M&A activity as a path to growth. In the same survey, more than half of Alliance CEOs rated acquisitions as “important,” “very important” or of “prime importance” to their company’s success over this decade. With so much at stake, it is critical that we do deals right – and the truth is we can.
Mark Iwanowski, an Alliance alumni and now Managing Director at Trident Capital, a private equity and venture firm, has been on both sides of the M&A scenario. Iwanowski once worked as COO for a consulting services firm which stood at the top end of the middle market. Acquisitions accounted for 25 percent of the company’s growth rate, as the firm acquired businesses and integrated them or operated them as stand-alone business units.
When approaching these deals, Iwanowski said, his company’s goal was to set expectations with the seller’s management team early – no surprises. “In the case of a stand-alone business unit bringing new technology, new offerings and new capabilities, the context of the discussion was around working within the corporate culture,” Iwanowski said. “The one thing we did ahead of time is cross-check the cultures, set expectations, so that everyone’s eyes were wide open going in.”
Once they truly understood what it would be like to work in his firm’s culture and to execute the new business plan, 20% to 30% of target firms actually walked away from the deal. But Iwanowski’s company was happy about that, since the talent would have walked away after the deal closed anyway. More importantly, perhaps, is that his company had an acquisition failure rate of between 10 and 20 percent. We should all be so fortunate. But the truth is that doing deals right involves allocating enough real resources to make them work.
Alliance Member Laura Stark’s firm, Rambus (NASDAQ: RMBS, Rev $320M), one of the world's premier technology licensing companies, has done several business acquisitions (in addition to over a dozen asset acquisitions) over the past three years. Rambus examined acquisitions in two phases – tactical onboarding and integration followed by strategic integration. Altogether, the process takes a very involved and intense 90 days. However, Rambus has a corporate development team of five people who report to Laura (SVP Corporate Development), who only do corporate development work, nothing else. She also has two dedicated M&A team members – one in the corporate legal organization, and one in the company’s licensing division. Plus Rambus has a project management office (PMO) that is currently hiring a manager to focus specifically on managing integrations. “Basically, it will help us develop our playbook a little bit better for integrations,” says Stark. “This person will be involved with helping on the diligence side, but then will be a resource specifically on the integration side to help pull together best practices for us.”
This is a lesson to us all that regardless of our scale, we must be generous with our resources if we want a higher success rate. While it is true that many mid-market firms do not have a corporate development team or even staff whose primary focus is M&A activity, there are still ways to increase the likelihood of acquisition success by making conditions just right. In other words, they must “prepare the soil for the planting of the acquisition.” Here’s how:
1. Aggressively gather market intelligence. We must step up our competitive intelligence, marketplace awareness, and scouting for candidates to acquire. This will help us make better, faster decisions – and it will give us options, so we will be better able to walk away from bad deals.
2. Build management ranks. Build up your management bandwidth, so that when crunch time comes, you’re able to focus on the acquisition – due diligence and integration – while not neglecting your core business.
3. Employ project management resources. Someone with project management expertise and know-how can be used across the organization, but can be specifically directed to focus on M&A integration.
4. Grow cash reserves. Companies need money beyond the financing of the deal to outsource due diligence and other services as needed. They must both pay for the acquisition and adequately fund the integration – which has costs of its own.
5. Stay aligned and committed. For any company seeking to grow through acquisitions, all M&A activity must align with and serve the company’s overall strategy. Both buyer and seller management teams must be committed to the same goals. The overall strategy itself has to be clear. All deals that do not meet these basic requirements must be avoided.
Companies that put in the work and investment to prepare the acquisition soil will find the harvest exciting. Just ask Alliance Director Ken Ansin. Ansin bought a $15M portable toilet firm, Handy House, and within his start-up United Site Services, grew it to a $120M business through a series of approximately 30 acquisitions. He “thickened” middle management to help integrate the smaller, mom-and-pop type businesses it began buying in one local area after another. Once United Site Services had enough business in one metro area, it used the same management bandwidth to move onto a new area. “It was much easier to sprinkle middle management into the contiguous market as we grew,” Ansin says.
United Site Services had properly conditioned its “soil” and suitably prepared for acquisition growth. When companies do this, they have the capacity to do the following:
Perform thorough due diligence and deal sourcing. Having extra bandwidth to do proper due diligence means your managers won’t be pulled away from regular tasks and core operations will not be neglected. Keep in mind, however, that you can outsource legal and accounting due diligence, but you can’t really outsource operations, culture and people due diligence. These critical tasks must be done by your team.
Plan the integration. Integration planning runs concurrently with due diligence before the deal closes, so it will be an extra drain on resources. It also continues for 30 to 90 days after the deal closes. It is at this stage that project management expertise is critical, since complex action must be coordinated throughout both buyer and seller teams
Execute the integration. Although it is a gargantuan task in most cases, many CEOs who look back at past integrations wish that they had pushed the pace more aggressively. Don’t be afraid of going faster! Putting in extra time and resources can help your organization get past attending only to the urgent work, to doing the important work like building relationships between people. Allocation of sufficient resources also makes it easier to measure progress and adjust course, if necessary.
To insure that a new acquisition takes root quickly, consider keeping post-close some of the outside resources that helped with due diligence. Says Iwanowski: “What tends to happen is you bring those teams in, they do the due diligence, they help get things done, and then it’s basically thrown over the fence to the organic operational team to figure out now how to move the process through to completion.”
Some more food for thought when it comes to finding “seeds” for planting deals: Kiss a lot of frogs. Alliance Member & Director Marty Reed, who serves as a Principal of The Roda Group, a venture capital and private equity firm, encourages companies to “be incredibly open” to acquisition opportunities. Reed recalls one acquisition opportunity during his time as Director of Finance with Ask Jeeves, a fast-growing search engine, that did not look interesting on the surface, but by opening up the conversation, “it got a little interesting, then it got a little more interesting, and we did the deal. Two years later it was, in some ways, the smartest deal we could have possibly done.” The deal would not have happened if Reed had not left open the door to the possibility.
While bandwidth is often the toughest challenge for mid-market firms, having enough of it is absolutely critical to getting deals done, because a lack of bandwidth usually leads to a lack of due diligence. Consider the fact that more than half of all Alliance members surveyed with experience in acquisitions, when asked if they would do anything differently to prepare for their last acquisition, said they would have done more due diligence around the people, culture, customers and integration planning. And Alliance members named “excellent due diligence” the number one factor in making a successful acquisition – followed by post-close execution/integration.
Here’s one example of how due diligence can save time and effort. Sabine Castagnet is COO of Data Physics Corporation, a provider of high performance solutions in signal processing to the noise and vibration community. Her company acquired a French company in 2000, but it took a whopping ten years to fully unite the teams. Why? "There were two founding owners in France, and the teams didn’t fully bond until after they retired,” she says. “I guess 'rivalry' is the right word. Between the U.S. team and the French engineering team, they could never say 'we' -- it was always a 'they' and 'us' type of orientation. It didn't stop us from having good products and getting sales and profits, but it was painful internally, unfortunately.”
The truth is that doing deals right requires the CEO to ensure that these five uncommon elements are in place: market intelligence to deeply understand the target company, management bandwidth, project managers to orchestrate the integration, a cash reserve beyond just the financing to buy the company, and management teams on both sides who are committed to the same goals. There are no shortcuts, and no second chances once the trigger is pulled. When it comes to M&A, better bandwidth equals better results.
Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.
]]>Construction company, Webcor Builders, proved its competency in the building industry long before the computer became such a powerful force in business. But Alliance member and Webcor President Andy Ball always had the gut feeling that technology held great promise for his industry. For years he pushed his firm to be an early adopter. Today he has invested millions in supporting and developing software that allows him to reduce building costs by as much as 10% and shave an average of 30% off the time to complete a building. He developed a second core competency that helped fuel the firm’s growth from $400M in 2005 to $1.4B in 2008.
Andy has loved computers since his college days in the early ‘80s. He was the first one with a laptop on a job site in Irvine, California, and was quick to write macros for Lotus 123 to process project data and streamline workflow. He even bought a technology support company in the late ‘90s to increase Webcor’s internal capabilities.
As the new century started, Andy grew impatient with the limited features that building industry software firms were providing. AutoCAD had automated drafting, but the lines on the screen were as “dumb” as those on paper. Working two-dimensionally was still the norm, and the 3D programs that were available didn’t integrate with other programs. The Building Information Management (BIM) concept as a discipline was in its early stages.
Too often, Andy’s teams—and thousands of other teams like them globally—came to a crashing halt on a jobsite when following their 2D drawings led to an impossibility, like a beam running through a stairway. The architect was called out while crews would stand by. The delay could be days or weeks, and too often re-work was involved. How often have you passed a construction project with no activity—for days or weeks? Andy kept thinking about how the Empire State Building was built in only 13 months, well before Webcor’s time and the advent of computers. Today it would take 10 years to design and build the Empire State building, with seven years to get approvals, and three years for construction. He felt using computing technology to avoid all the delays had the potential to make building projects dramatically faster.
It wasn’t just a case of avoiding construction problems. Although manufacturers could access programs that included bills of materials, standard costs and Just in Time logistics, nothing close to that existed for the building industry. The process, especially for large projects, was inefficient and hard to manage closely against planned timelines and budgets.
It is all too easy to grow comfortable with wasteful practices if they are normal in your industry. If you don’t have an evangelist like Andy with a vision for move-the-needle change, make sure you carve out time as part of your annual strategic planning process to think outside-the-box. Spend enough time to entertain all the ideas, no matter how novel they may seem. For those suggestions where a positive outcome could really change your ability to compete, ask yourselves how you might validate the concept without breaking the bank.
In 2005, Andy decided to invest his time and share his vision. He teamed up with the Center for Integrated Facility Engineering (CIFE) at Stanford to create software that would allow builders to pre-construct a building virtually, one step at a time. The virtual builders could see the building in 3D, observe and manage the passage of time, and track the materials and labor costs at each step.
Webcor also joined CIFE and pays annual dues as well as being actively involved in the creation of the tool, now known as Vico Constructor. It didn’t work at first, but step by step, the commercial applications became clear. In 2007, Webcor went all in, investing millions in learning to use the system, and in building a “parts” database, with materials, subassemblies, productivity costs, and other data that would make the system usable and would make building more cost effective. Webcor’s intimate knowledge of the program put the company years ahead of their competition. Its investment in the database created a barrier that competitors would have to hurdle to leverage the Vico Constructor in the most powerful manner.
In 2002, Webcor formulated a proposal for the new California Academy of Sciences, promising to complete it in 24 months versus the next fastest competitor at 36 months. The Academy didn’t believe the company could deliver on its promise, but after Webcor showed them the step by step sequencing of the construction process, it was selected and completed it on schedule.
Webcor also leveraged CIFE to keep early development costs down. The work at CIFE was available to the entire industry, but Webcor was willing to give up exclusivity to reduce development risk. The stunning success on the Academy of Sciences project was the company’s beta test. It became clear that there would be a race over the next ten years to implement this complex technology, and that the winner could emerge well ahead of the pack. Staged development of a new core competency with planned de-risking makes good business sense.
Webcor created a Virtual Building Group as a service function within the organization to continue to build expertise. They staffed up, often hiring people out of the CIFE project team at graduation. The changes to workflow were massive. Not only were projects pre-built virtually, but the actual construction was tightly managed, with budget and timeline developed by the Virtual Building Group. For example, a construction team would be told that they have three men and 90 minutes per column assembly. Responding to a call to action from Andy, the firm continued using the application as it was developed, and a string of high profile successes rolled on.
Webcor won and is in the process of building the $750M San Francisco General Hospital. It won and is building the $1B Transbay Terminal project. It won and is rebuilding the California Memorial Stadium at U.C. Berkeley—on a very tight, one-season time frame.
Over the past 10 years, Webcor has consistently ranked in the top 50 of U.S. building contractors. Yet none of its competitors have fully embraced virtual building to the same degree. They might claim to use building information management, and may well think that they are leveraging technology. But since none of them have been part of the development and evolution of Vico Constructor, they don’t quite know what they are missing. Additionally, the cost to build their own database of materials and processes may appear daunting.
On the other hand, the fact that virtual building is not an industry standard or recognized best practice means that it is harder for Webcor to convince its prospects of its value. The company’s sales process has been modified accordingly. In the end, lower prices and quicker builds speak for themselves, so the track record of Webcor’s Vico successes is growing.
Another challenge Webcor faces is getting the internal organization to adopt all the changes in workflow and process that the new Virtual Building Group brings. It has required strong leadership from the top to support the pace of change. Younger team members seem the most eager to jump right in. With pressure from above, and eagerness on the front lines, the middle of the organization has followed suit.
Even though the Virtual Building Group has begun to sell its services to other builders and is becoming a profit center of its own, making money from software was never a goal. Because Webcor focused on a strategic competency rather than making a direct profit, they stayed focused on essential features that could be applied in the field, rather than “flashy” features that would sell to the broader marketplace. This focus on functionality rather than marketability minimized the costs and maximized the results. A venture-backed startup may well have failed to succeed.
I asked Andy what this might mean for Webcor’s growth or ranking in his industry. Instead of a concern with rankings, he said the company stays focused on the main goal—continual improvement of their construction process—all in keeping with its vision of delivering exceptional value through innovation.
Maybe Webcor will innovate its way to constructing the equivalent of the Empire State Building in 13 months.
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 two books, Defeating Corporate Distraction and The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
]]>He dropped the cold, hard fact on the table between us. 90% of global urbanization—the building of new cities—is happening in developing countries. Not in the U.S., and not in Europe.
David Gensler leads Gensler, a 3,000-person global architecture and design firm that was once primarily domestic. In the late 1980’s, Gensler’s global customers began building abroad, and they asked the firm to support them there. Gensler said yes, and then began the odyssey of learning to build thriving, high performing offices in China and other developing countries. Today the firm has secured its position as a truly global organization and is poised to benefit from the shift toward urban development in developing countries.
Gensler’s first step into the developing world was China, and it was a difficult beginning. Its first attempt in-country was the ex-pat solution, sending over Americans steeped in the firm’s corporate culture and processes. That got the firm started, but the ex-pats didn’t have local relationships and couldn’t develop new relationships to the level that was required. They tried joint ventures with local firms and hiring veteran architects already in the country. But they found this seriously eroded the cultural cohesion and created as many problems as it solved. Ten years later, the office had only 30 people in total and was still led by ex-pats. Given that real estate is fundamentally local and Gensler’s ex-pat team was not, it became obvious a fresh approach was needed.
Meanwhile, as Gensler expanded domestically, it was experiencing a growing base of foreign-born employees who had come to the U.S. to study and live. One such man was Jun Xia, who had graduated from one of China’s most prestigious architecture schools. He started his architecture career in China, moved to the U.S. and began working at Gensler, and had been with the firm for 14 years. Jun was a utility player who could lead, design and sell. After working on several projects in China (from the U.S.) he eventually put his hand up to return to China and take a leadership role in the Shanghai office in 2004. That one change began a dramatic shift in Gensler’s practice.
Jun took with him the organizational values, systems and practices that maintained the firm’s culture, but enabled a Chinese personality. He allowed the office to feel and think Chinese and to connect with its customers and suppliers in a distinctly Chinese manner, which helped establish a level of comfort and trust. He worked to reestablish contacts and relationships in the area, many of which stemmed from his university days and early work colleagues who had risen in Chinese government and industry over the intervening years.
The Gensler secret to growing offices abroad began to take shape. To start a new office in a new region in a developing country, it needed:
1. Existing customers — having active clients with projects in country is a strong kick-start.
2. Leadership born and raised in that country.
3. Leaders with the cultural DNA of the firm and employees who understand the inherent company culture.
4. Utility players with strong knowledge/expertise, emotional intelligence, and the ability to lead and build relationships in the country.
5. A willingness and desire to live in the country again.
Over time, additional Gensler staff—some China born, others just willing to commit for longer durations—moved to the Shanghai office. The firm kept hiring locally as well, slowly building a foundation of culturally aligned professionals in the office. This process is what David calls the “wealth-building phase” of a new office. During this period, the office grows leaders and a team that increasingly becomes self-sustaining. It wasn’t until 2008 that the office entered the “wealth distribution phase,” in which had sufficient management bandwidth to consider exporting leadership to Beijing, the next office to open in the region.
David estimates that building a mature, self-sustaining professional service office in a new region takes ten years. Ten years! Given the pace at which urbanization is happening, the firm’s customers can’t wait ten years. When Gensler decided to enter the Indian market in 2008 through a joint venture, the firm reached out to their 35 Indian nationals employed domestically, but there was not overwhelming interest amongst the group in moving back. Now, as the Indian market continues to mature, many are showing signs of interest. Likewise, Gensler has steadily been building awareness and relationships in the Indian market and expects to open an office in the coming months.
In an effort to expedite the office-growing process, Gensler is taking the following steps:
1. It invests in lots of physical meetings to enhance the network of relationships that holds the firm together.
2. It shares profits company-wide, incenting people across offices to collaborate and support each other because they understand their common destiny.
3. It invests in growing key regional offices, accelerating their development and trying to speed them from the “wealth-building phase” to the “wealth-distribution phase,” which allows the start and support of additional offices.
4. It has cultural orientation programs in place.
5. It has strong oversight and metrics so it can quickly tell if an office is thriving or languishing.
David Gensler is not claiming victory. While the firm has a process that works, it is still not fast enough to keep up, and success is far from automatic. But the team at Gensler is dedicated to growing the firm. That means they keep pushing the limits, and keep innovating new solutions.
Nine of the firm’s 38 locations are in developing countries today. Given that 90% of the urbanization is in developing countries, they have their work cut out for them. So many new offices abroad to start and grow.
Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.
]]>We all know that “being the boss” doesn’t really mean we get what we want. Some companies have a simple ownership structure with clarity on who has the last word. But Alliance member Jim Harrison, CEO of MLSListings Inc. (Group 310), has multiple overlapping constituencies which blend ownership, industry associations, governance, sales channels and customers.
Multiple listings service (MLS) companies provide a service all real estate agents must use to telegraph to the world that real property is available for purchase. Jim Harrison’s firm, one of 70 geographically bounded MLS companies in California, covers the South Bay down to Monterey, the Peninsula and parts of the Central Valley. MLSListings is owned by eight real estate associations (“the shareholders”) whose members include brokerage firms and agents. It is governed by a board of 15 directors, who are chosen by a nominating committee consisting of five members from the current board and four members elected by the eight associations who are shareholders. (Confused yet?)
Jim’s typical board consists of brokers, real estate company owners and corporate officers of real estate brokerages, many of whom are in the leadership ranks of their own associations (both shareholder and non-shareholder associations), and all of whom are subscribers and users of MLSListings services. The brokerage firms make the decisions about which MLS listing service their agents must use, but the agents pay the $50 monthly dues. The seven MLS companies in the greater San Francisco Bay Area have arrangements with each other, which provide for the sharing of listings data. In southern California, another seven large MLS entities have a similar reciprocal arrangement.
The 70 California-based MLSs are primarily owned by their local real estate associations, which are very dependent on them for survival. This has been especially true during the recent economic downturn, during which the number of REALTORS has dropped nearly 40%. Consequently, MLSs are experiencing a decline in subscriber memberships, so their revenues are lower as well.
After Jim Harrison had successfully turned around a multiple listings service in Dallas, Texas, he was hired in May of 2005 at MLSListings (formerly RE InfoLink). The firm had been without a CEO for a year, and their online service had recently crashed and stayed off-line for three weeks, causing chaos in the industry. With no leadership, the many different interests of the shareholders made them feel at odds with one another, so decision-making was impaired. Into the fire stepped Jim Harrison.
He didn’t sit around in his office. He hit the road, spending 60% of his time visiting brokers, shareholders, agents, and association leaders. He established a task force and educated them on how other successful MLS companies worked.
In all situations, but especially complex ones, people work well with people they like, those with whom they feel they have a relationship. Jim’s dedication to creating all those relationships was a most critical piece of effective leadership. Astute leaders connect widely and listen carefully to really understand those around them. They are generous, whether it’s giving out a nice bottle of wine, some free advice, a round of golf, or treating you to a fine dinner. When you remember something about the people you meet, it makes them feel special, and giving tokens of appreciation creates the desire to reciprocate. Making these kinds of connections long before you need to call upon them is crucial.
Jim knew what was required. The shareholders of the best multiple listings services had long since given up control, instead sharing governance with strong regional brokers. They even gave the users – the agents – a role in governance.
When he arrived, the board was elected by the shareholders directly. Getting them to vote to dilute their own power seemed an impossible task. But Jim didn’t try to impose it. Instead, he worked with the task force to help them come to this conclusion in their own time. He met with leadership of the shareholder associations, slowly helping them understand. At the same time, he began talks with six adjacent multiple listings services concerning mergers.
The bigger the group, the more variation there will be in how people react to change. The patient leader listens to everyone, never reacts impulsively, and works in the interest of building consensus.
He or she keeps everyone at the table talking. Progress is made incrementally, but knows that with each small step, the ultimate goal comes closer.
Six months later, in November of 2005, the shareholders had reached an agreement that change in governance was necessary, and that control of MLSListings would have to be shared. But it took another two years to complete the process. During that time, four of the adjacent regions chose not to merge, but a Central Valley multiple listings firm did agree. In October of 2007 the new governance was official.
Two and a half years might seem like a long time, but MLSListings lives in the tightly woven real estate industry. Acting in a fair manner is critical since everyone in the community is interdependent, and keeping a good reputation is essential. Yes, there are situations which require pressure to achieve important objectives, but that pressure is best turned up incrementally, to insure full support for these changes. In addition, it’s always much easier if there is social pressure to make the change—not just one versus one. Building a majority consensus of people who want change can make all the difference.
Nothing is for sure with such big, broad constituencies. Jim never gambled his whole position. He knew that it’s a marathon and he’d most likely succeed if he stayed in the game over the long term, moving the ball forward as he could, but never risking it all. He lost four of the regional multiple listing companies in his effort to merge, but everyone is still friendly and willing to talk.
If you’re used to a command and control environment, or accustomed to the basic dysfunctional board full of investors, you may want to think twice about stepping into a CEO role like Jim’s, with multiple, overlapping, intermingled constituencies. Patience is mandatory, and a large part of the CEO’s skill set is necessarily political. But if you enjoy being the conductor of a complicated symphony of personalities and agendas, it can be quite gratifying to help so many different people find value in your organization.
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.
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The company Dennis founded and built, Omega Corporate Security, was one of many suppliers to Apple Computer in Cupertino. He assumed that his sales VP had been staying close to Apple, which was a young company at the time. When a multi-million dollar opportunity arose, however, Dennis’ firm was rebuffed, in large part because of the company’s poor attentiveness to Apple in the past. When told by Apple that the opportunity was going to three other bidders, who had stayed close to Apple all these years, all seemed lost. Dennis decided to go over the head of the buyer and managed to get a 30-minute Saturday appointment with his boss. He found a senior buyer who was openly hostile, and who was firing shots even before Dennis could get his laptop PC open. He even berated Dennis for bringing a PC to a meeting with Apple! Things were not getting better.
Having nothing to lose, Dennis stopped trying to make his sales presentation, and asked the buyer why he had even been invited down on a Saturday when there were three other proposals already on the table. Only then did the truth come out: None of the three proposals were even close to Apple’s budget. On the spot, Dennis innovated a very different solution that might solve the problem within Apple’s budget. By listening to the needs and issues of the customer, he closed a multi-million dollar deal that added 60% to his top line that next year.
Most CEOs have confidence that is palpable, that comes across the table. Prospects and customers appreciate this presence. But that confidence is also critical to staying cool under fire. It means upset customers can vent openly without panicking the CEO, which then leaves two executives in an ideal position to develop go-forward solutions. And while sales executives can and should be empowered to satisfy the customer, CEOs have the ultimate authority, and can salvage really difficult situations.
Another big factor that helps CEOs make such a powerful difference is that they are generalists, and often have the broadest overview of the business and the marketplace. This gives them a unique capability to spot innovative solutions.
A few years later, Dennis’ firm was a security system subcontractor working on a Wells Fargo Bank facility. His firm was on time and on budget, but overall, the construction project was out of control. At wit’s end, the executive at Wells froze all payments to everyone on the project until he got to the bottom of the problems, which were anticipated to take two to three months to resolve. Holding Omega’s money was equal to two months income and cash. On December 23rd, that prompted Dennis’ CFO to recommend filing for bankruptcy, given the size of the hole created in their working capital. But Dennis wasn’t ready to file. Instead, he demanded a meeting with the Wells Fargo executive, who granted it late on December 24th.
The meeting was held on Christmas Eve, in Wells Fargo’s offices, with the exec’s child on his lap. Everyone else was busy having drinks and exchanging gifts. Dennis explained the gravity of the situation for his firm, which had no effect, then shut up and started listening. He dug into the pain this executive was feeling. As he listened to the mess the project was in, a resolution developed in his mind. He agreed to personally act as the on-site project manager, five days a week at no additional cost, and to get things back on track—if only his payment would be released immediately. The men struck a deal, and Dennis’ company survived. Four months later, the grateful Wells executive—whose own job was secure again—let Dennis bid on another security project that was even bigger. His company’s performance on the first project helped Wells to choose him for the second.
There is no substitute for being face to face. I repeat, there is no substitute for being face to face. Trust is built most rapidly face to face. The amount of information exchanged between two humans when face to face is enormous, and little of it is in the words. When the stakes are high, face to face is the only option. Having a CEO pleading for the survival of his company in front of you and your child speaks volumes. The ability to tease out of the Wells Fargo executive his real problem came only because they were face to face.
Dennis’ actions in both situations also underscores that listening is the most powerful sales tool. This is true for all sales situations. But CEOs should be able to listen to business problems and understand them at a deeper level. CEOs understand business problems of all types. Dennis understood the problem from the customer’s side and solved it, asking in return for something that the executive could easily give (that one small sub-contractor be paid immediately).
At Mace Security, his current company, Dennis continues to keep a hand in key account activities, making sure each key decision maker knows and meets Dennis, so that when his presence is needed, a relationship already exists. Recently one of their larger buyers was challenged by her superiors about the value proposition that Mace represented. Because of the close communication, the buyer felt comfortable being transparent about the situation with Dennis, and worked collaboratively to better understand Mace’s value and how Mace stacked up against alternatives. Dennis’ team gave the customer the facts and tools to present the value proposition as it should be done, as if Mace was in the room with the upper management. The customer was saved, and the relationship continues to grow.
Playing the role of salesperson superhero sounds fun, but it’s always high risk. It’s much preferable to have a constant presence and involvement in critical relationships so that emergencies are avoided.
While CEOs aren’t typically in charge of the entire sales effort, they have a critical role to play. The best senior sales executives will deploy their CEO strategically to assist in landing and retaining critical customers. CEOs who find themselves distanced from big customers must take steps to increase face time and make their presence felt.
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.
Company and Case Facts:
Company: Mace Security International (OTCQB: MACE)
Person: Dennis Raefield, CEO
Written: January, 2011
Address: 1535 N. Main Street, Suite 230, Walnut Creek, CA 94596
Web Site: http://www.mace.com
Phone: (925) 478-4488
Two companies merge to gain economies of scale and to create an industry leader. How many times have we heard this story only to be disappointed by the results? Where 2+2 equaled 3?
But not so with Oclaro (NASDAQ: OCLR), formed when CEO Alain Couder merged $300M Bookham (NASDAQ:BKHM) with $200M Avanex (NASDAQ: AVNX) in April of 2009. Today, the combined company’s stock price is up nearly four times from April of last year. Adjusted EBITDA is at 10.5%, growth is at 35% and the company is focused on a goal of hitting the $1 billion revenue mark within two years. So what did Alain and his executive team do differently to make this merger work so well?
As always, it starts with strategy. The optical components industry (think fiber optic transmission of data) has long suffered from over-fragmentation, with most players struggling for profitability over the past ten years. This created an industry-wide culture of adversity and of feeling “beaten.” The business is capital intensive; all significant players own fabs (optical integrated circuit and laser fabrication factories) and require heavy R&D spend to keep up with the pace of technology.
The fundamental question, long before any M&A activity starts, is what will/should the company look like in three to five years to optimally exploit the market opportunity? Should it be bigger? Should it own more of the underlying technology? Should its R&D and new products be contributing to a bigger share of future revenues? Should its distribution/channel strategy be fundamentally different? Should the firm vertically integrate?
When Alain took the helm of Bookham in August of 2007, it was bleeding cash. Strategically, the company needed scale and product breadth to prosper. He began planting the seeds for a Bookham-Avanex merger.
By January 2009 the deal became public. Both parties had already agreed on the messaging, and key executives from both sides were committed to the company. As they worked to close the deal, the groundwork for the integration was quietly built. The new company would have a fresh start with a new name, rather than have one “losing team” whose company name was dumped. The management team and the board would be selected from the best of both companies through a transparent process. And the company values would be inviolate: respectful, ready to help, and inventive.
All this advanced preparation could have been a big waste of time if the deal had not been approved. Surely, all the executives were really busy with their “day jobs” even before all of this merger preparation. But integration planning is too complex and takes too long to start after the deal closes. Investing time and energy early and heavily – knowing the risk of the deal falling through – is one of the fundamental requirements to make an integration work well. Rushing to close a deal might seem like a good idea to minimize the uncertainty that every passing week can bring.
But the goal, frankly, is not closing the deal. The goal is having a deal deliver on its economic promise, and that requires the kind of serious pre-close integration planning that Alain and his executive team did. Better to have a deal blow up just before a delayed close than to have it fail or grossly underperform in the integration phase. (Do realize that this perspective will give your investment banker heartburn. Most of them really just want to close the deal.)
Before the deal closed, Alain and his team put together and clarified four strategic pillars that support the success of the new company.
· Ease of Doing Business. They were determined to be an easy company to do business with. No high barriers; no tiresome processes for customers to navigate.
· Innovation. They had to have products that truly fulfilled the need of the customers, and they had to out–innovate the competition on a regular basis, and applying innovation at every level and in every function of the company.
· Architectural Clairvoyance. Oclaro needed to know the direction of the industry in advance, so that the right platforms and products could be built, with enough time to build them well.
· Integration. They knew that they had to focus on the tactical issues that integrating two companies always requires, but often gets short-shrift. One of the key tenets of the integration was that it would have zero impact on customers. In addition, Oclaro now had all the major building blocks from chips to sub-systems. This vertical integration would allow Oclaro to innovate at every level – with world class photonic integration capabilities bringing multiple lasers onto a single die; to innovation in modules and subsystems that give customers a faster time to market. In addition, having the system-level expertise meant that Oclaro could be first to market with chip level innovation as well – and across every component of the system.
Careful planning and work was put into a communication plan for the announcement day and the months that followed. It was decided that every employee would know their fate on the first day of the new company so that decisions that could be made ahead of time – and they were. Imagine the planning and execution requirements for this one task alone, given 15 locations and about 2,600 employees. But it was accomplished.
Few things are as distracting and disconcerting to employees as M&A. Employees will burn up hours by the dozen wondering what will happen to them. They lose motivation thinking that their work is for naught. Once they know they have a job going forward (if they believe it) they can then become confused about new methods and ideas coming in from the other company. In my own M&A experience as an acquiring CEO, I was always amazed at how throughput dropped for a long time as people adapted and memorized new part numbers, new customers, and new processes. Communication and training, often over and over again, are two of the best tools for creating a smooth integration.
Communicating to employees was not all that was needed. Even though the combined company was a tier one supplier and #2 in the industry, it was only approaching a 30% market share. Oclaro had to reassure customers that everything would be fine to stave off the competitive attacks that would (and did) come. In the month after the announcement, Alain visited every one of the company’s facilities as well as all the key customers personally. Likening himself to a broken record, he repeated and repeated the four key strategic pillars and the company values.
In short order, costs were reduced by over 7%, as a percentage of revenues at the time, partly by in-sourcing key components which led to better fab utilization. With a rationalized cost base, Oclaro was able to fully fund R&D to execute on its architectural clairvoyance, resulting in more innovation. Most importantly, the profits and cash flow from a bigger, more efficient company meant that the culture shifted from “survival” to a “thrive” mindset, where the team believed they could win and could be the clear leader in their sector. Alain says, “You don’t succeed using the whip. You succeed with a vision that excites.” The winner’s attitude prevailed, and Oclaro began planning for and working toward success, rather than survival.
Today Oclaro is hiring as fast as it can find talented people; the challenge is keeping up with orders. The company just raised $77 million in a secondary offering. The team, just five months after the merger, selected a BHAG (big hairy audacious goal) of hitting $1 billion in revenues within two years. Yes, 2 + 2 can equal 5.
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.
Company and Case Facts:
Company: Oclaro (NASDAQ: OCLR)
Person: Alain Couder, CEO
Business Founded: April 2009 from a merger of two other firms.
Head Count: ~2,900
Products: Optical communications and laser components, modules and subsystems for a broad range of diverse markets, including telecommunications, industrial, scientific, consumer electronics, and medical.
Written: September, 2010
Address: 2584 Junction Avenue, San Jose, CA 95134
Web Site: http://www.oclaro.com
Phone: (408) 919-6067
Eric McAfee, CEO of AE Biofuels, had been waiting for more than a year for his business to get funding from a grant program that had already been passed by the State Legislature and signed into law by Governor Schwarzenegger. The alternative energy bill had provided $120 million per year for ten years in grants to advance renewable energy technology and encourage innovation by aiding green energy companies. Many Californians, delighted that the bill was passed, assumed the funds had been dispersed and were being used to make the world a greener place. But the funds were not being deployed by the agency in charge of the program. As a direct result, investors were also being stalled because they were waiting for funds to be delivered before they could determine the amount of additional funding required to complete projects.
In California, Eric’s team had already been interacting with the government at lower levels, explaining their project plans, educating them about his firm and encouraging action. But for all that effort, it was unclear if they had crept any closer to a tangible result. It was time to change tactics. AE Biofuels launched a campaign designed to get California to deliver the legislated funding. Imagine the bureaucracy as a ten-story pyramid. Here’s a breakdown of the strategy:
Step 1: Lay the Ground Floor. At this stage, all the standard forms, letters, explanations and documentation must be submitted and reviewed with the intake-level bureaucrats. Most everyone does this as a starting point, and AE Biofuels did as well. But this step is much more than just sending in forms. It includes face to face visits with lower level bureaucrats, confirming not only that the bureaucrats had received the documents, but that they understood them as well. This step is complete when you know they understand and they tell you the matter has been passed upstairs.
Step 2: Persuade Middle Level Bureaucrats. You must next build awareness of your situation on floors 2-6 of the ten-story pyramid. Even though the ground floor people have told you they passed your documents on, the truth is those documents are sitting in a long queue of other matters the bureaucrats on floors 2-6 are dealing with. They may not notice your issue for months—unless of course, you reach out to them. This requires some working knowledge of the organizational structure of the bureaucracy.
AE Biofuels hired two firms that help with government relationships and then invested management time into the effort to make these middle levels aware of the need to take action. These meetings help the agency become comfortable that your request is in the public interest, and is prudent. The first thing that will happen is that they will ask the intake-level bureaucrats if everything is in order, and if they are satisfied. If they say no, your progress is halted. That’s why step one is so critical. However, once the persuasion of levels 2-6 is accomplished, more than likely, nothing will happen. For a bureaucrat, making a decision is all risk, and no reward.
AE Biofuels spent over four months on steps one and two. Over that time, the lower and mid-level bureaucracy was educated and persuaded that giving a grant to AE Biofuels was a good idea. But one more push was needed.
Step 3: Bring in the High Level Emissary. For Eric, this step began long before the other steps. For years, he’s been politically active, supporting causes and candidates that he believed in. It was more than just financial support—he worked shoulder to shoulder with influential political figures on charitable boards and political campaigns.
Eric happened to support the same charitable organization as a particular former top U.S. government official. After a dinner event, the sponsor of the event had arranged for the former official and his security attaché to fly home on Eric's plane. During the flight, the two men talked about government policy and AE Biofuels’ projects. The former official agreed to assist Eric by bringing attention to the value of immediately implementing the policies and grant funding. A week later, the former official wrote a cover letter, attached Eric’s four-page brief describing the projects and the programs, and provided the document to key state officials.
The top floors of the pyramid took notice and asked the middle levels for support. The middle levels responded that they already knew about AE Biofuels and gave positive feedback. In fact, they suggested “they were already about to move forward.” The bureaucracy was spurred to action and the grant program moved to its final phase of issuance. Both grant programs were announced within two weeks, after more than a year of delays.
This three-step process to spurring the government to action is not unlike persuading any large organization to take a risk. It involves commitment to laying a foundation at several lower levels, then grabbing the attention of top level decision makers to act as a catalyst. AE Biofuels is now employing the same strategy in India to get local tax laws to match tax laws at the federal level.
Finding a way to reach people at the top requires time and planning, and is one of the most important roles for a CEO. Whether the connections you need are political or corporate, invest time and money in building your network so that when the time comes to ask for favors in high places, you know how to find them and who to ask.
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.
]]>But what if there are no suppliers or customers yet? If the supply chain hasn’t been formed? If the flow of transactions has not yet begun? Then you’d have to create the entire supply chain. Not unlike starting a new business, special conditions would need to exist, and a wide variety of players and processes would need to start at the same time to have a sustainable, ongoing system. CEO Neal Gutterson of Mendel Biotechnology (Group 110) is building a new supply chain by cross-linking three existing supply chains in new and unique ways. And what fun it is!
Here’s the three existing supply chains:
Neal Gutterson would tell you that the farming supply chain begins with the development of better seeds that produce a higher and more reliable yield per acre. Since 1997, Neal’s PhD scientists worked in the lab, supplying companies like Monsanto with optimized seeds that help feed a hungry world.
Then, in 2007, British Petroleum (BP) called. Yes, the global fuel company. They foresaw the need to grow fuel. Not ordinary corn, but a crop optimized for sustainably produced energy. BP had made some strides in understanding the refining of this type of biomass. But their big worry was that no supply chain would exist to produce and deliver biomass when they needed it in the future. The best crops had not yet been identified. No optimized seed had been developed. No farmer had grown them. No equipment to harvest or transport the resulting biomass had been built. No one knew what it might cost. But BP knew that when it needed to add sustainably produced biofuels to their fossil fuel-based products, an entirely new supply chain had to be in place.
In mid-2007, BP made a sizeable equity investment in Mendel Biotechnology and funded a five-year program to develop dedicated energy crop varieties, initiate supply chain development, and formulate a plan for the following five years to commercialize the growing of feedstock and create an ecosystem of suppliers. Mendel had been an R&D company, but would now build out an entirely different business unit, Mendel BioEnergy Seeds, focused not just on seed biology, but on creating a feedstock-producing supply chain. Not just an ambitious goal, but a “Big Hairy Audacious Goal”: Cross-linking the food supply chain with fuel or power supply chains.
My first reaction when small companies talk about pioneering is the old phrase, “You can tell a pioneer by the arrows in their backs.” Pioneering is high risk work, and most efforts fail. Too many such efforts are based on a dream, not on a well-founded forecast of future demand, nor on a realistic appraisal of the challenges, nor on a strategy for crossing the large chasm to a profitable enterprise. In Mendel Biotechnology’s case, the trend away from fossil fuels and government support for renewable power were strong arguments in favor of future demand. Neal ensured that strategic mapping was an initial focus, led by new hires getting help from experts in the agriculture and energy industries. And Mendel was smart to not try and go it alone. They had a big, well-heeled partner willing to fund much of the effort.
To start, they had to envision what a functioning supply chain would look like. The first surprise came when market indicators suggested that the first viable market for bio-feedstock would be coal burning power plants supplying electricity, rather than biorefineries. It appeared that the seed, farming and harvesting processes for fuel conversion or power generation supply would be largely identical. But the processing of the plant material would surely be different, as would some of the transportation issues.
It was fortunate that in this case, there were two ways to win, and two potential markets: Conversion of the feedstock to fuel, or to electricity. Within 18 months, the original market—fuel—had become more distant and less attractive. Fortunately the power generation market took its place. So in addition to having a big partner and a forecast of good demand, having multiple opportunities to succeed further mitigated the risk.
Mendel already had plenty of PhDs to work on seed genetics, and the selection of Miscanthus—a type of grass—as the ideal crop was determined back in 2007-08. The pace of research quickened immediately. Neal’s first hire was a VP of business development to begin defining the company’s strategy and its most critical business objectives. Then came a general counsel, a VP of human resources, a high level CFO, and finally a senior VP of Seeds – a farming-savvy, operations-focused executive. The needs of the new business unit were much greater and more dynamic than those of a pure research company.
Creating the right team for the effort is critical. Pioneers have different personalities than settlers. Both face challenges, but pioneers are comfortable with failure, surging ahead with imperfect information, and experimenting real-time. Most members of the top team at Mendel who were ideal for the original business were not suited for the company going forward. Additionally, the new team needed to understand the supply chains they would be working with. Neal was very clear about his criteria for hiring the new team.
Mendel decided that it would have to be the facilitator-architect of the entire value chain, and began by opening up conversations with everyone from the power plants and biorefiners down to the farmer. They quickly planted very small plots of land with a range of initial potential product lines in collaboration with university scientists, and then larger plots of land with advanced candidate product lines with a few key growers to start to prove out the process. The farmer was guaranteed a fair return on the acreage employed. The resulting quantity of Miscanthus is being used to test all the assumptions and to help answer questions about the subsequent processes. Would the yield per acre on marginal farmland be acceptable? How could these grasses be harvested – particularly since they can grow up to 13 feet tall? Would processing them into pellets for power plants to burn be the best course of action? Would they produce an appropriate amount of energy, and would they burn properly?
The first trial growing and harvesting yielded many lessons and validated the premise that Miscanthus could be an excellent feedstock for the production of electricity. The progress of refiners (for fuel) in building commercial scale operations was much slower. They weren’t able yet to do their part to complete the full supply chain from feedstock to fuel. Mendel focused on where the demand was stronger.
But comparing Mendel Biotechnology with Hewlett Packard—or Leland Stanford and the Big Four who built an empire as the railway grew in the West—would not be fair. Those innovators were building an entirely new industry and supply chain. In this case, Mendel is building upon three pre-existing supply chains. Most of the participants will be existing companies in those supply chains. This meant less risk, more incremental growth, and a better chance of success.
With success at a small scale in hand, the team at Mendel has begun to romance all the partners they would need to scale up. Some come from the agricultural supply chain and others from the power generation supply chain, such as from the supply of woody biomass (e.g., trees). Larger tracts of land are now being planted to better study the effects of weather and to hone growing techniques. The availability of increased amounts of planted acres offered harvesting equipment manufacturers an opportunity to test their current machines and to adapt them for harvesting Miscanthus. Collaboration with processors began as well. And the industrial customer—power plants—were drawn in to stoke the fires of demand. Neal intentionally reduced risk by scaling up in several trials.
The battle was on to:
Then and only then would BP’s vision be realized – a healthy supply chain ready and in place to supply a new source of energy. Mendel’s vision is to be embedded in that value chain, earning a share for themselves at each step as their seed turns into energy, first stored in the form of plant biomass and then converted into more useful, everyday forms such as electricity or transportation fuel. Their return for their seed development work is one thing, but the return for their entrepreneurship in shepherding the development of a new supply chain is additive. The specifics of cost, pricing and profits are still being determined, since the economics of production are still being discovered.
At present, nearly 200 acres of Miscanthus have been planted, and several power companies have agreed to do a mid-sized trial of the pelletized feedstock. The plan is to mix coal and Miscanthus (co-firing), with a first test already done, and others to occur later this year. By 2013, Neal forecasts that the supply chain will be fully defined, that Mendel’s royalties/income stream from the effort will be clear, and the foundation will have been laid to meet renewable electricity mandates from biomass that could displace perhaps 25% of coal power generation in the next couple of decades, a titanic shift in energy sources.
I can see the discussions happen in board rooms and Alliance of Chief Executives groups. Leaders taking stock of all the adjacent supply chains and mapping out all trends, new needs and opportunities where cross linking supply chains could create added value. What an opportunity to be the first company in your domain to envision a new supply chain, to decide how much of it you can own, to discover how much you can dominate, and to do what it takes to bring it to life. Tuning up operating companies is essential work, but think of the fun you could have cross-linking supply chains – if the required special conditions are present.
Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.
]]>Many CEOs will take a deep breath before even thinking about putting down a permanent footprint overseas. For years, global operations have been the province of the large firm, but this is changing. Alliance member Raju Reddy, CEO of Sierra Atlantic, stepped into China in August of 2007 without any major hiccups, and in two years has doubled the size of his China team, supporting global sales. Moreover, he is generating significant revenues from sales within China. Sierra Atlantic was only a $56 million revenue firm at that time.
Sierra Atlantic is a software development firm that in 1994 partnered with Oracle on integration work. Having a footprint in India was a prerequisite for growth, and by 1999 they had operations in India. As Oracle’s go-to partner for integration, their work was global by nature.
Selection Criteria for the Region
Starting in 2002, Raju began looking for ways to enter China. There were two key strategic reasons. First, China had both supply side and demand side opportunities. China has many talented engineers and software developers, and a development center there would help staff an ever increasing number of projects, helping him keep up with demand. In addition, Raju saw the growth in opportunity within China to execute projects for Chinese companies. Second, as more and more of the integrations for Western-headquartered firms were taking place in China, Sierra Atlantic was expected to have a presence there as well.
Rather than start from scratch, Raju thought an acquisition might be the best route. He diligently reviewed opportunities, but kept his standards high. His firm made acquisitions in 2004 and 2006, both in Western countries. Having two under his belt, he knew what he was looking for.
A Global Culture
The firm to be acquired must have a global culture. That meant that Raju was not interested in a firm with all locally born, raised, and trained people. The clash in practices, outlooks, values and more, not to mention the lack of comfort with foreigners, was too risky. Instead, he looked for firms that were already doing business in the developed world, with some management that had been trained in the U.S., and a mix of nationalities within the firm. This mix, and the tolerance and openness it required, was a much better match for Sierra Atlantic. At Sierra Atlantic, it was the norm to have five nationalities sitting around the table and a few more nationalities on conference screens. Cultural differences between people were automatically accepted at his firm, and any acquired company had to fit right in.
Scale proves Competence
Raju also wanted to find a firm that had grown to a certain scale, with Western, reference able customers. This was proof that they were doing something right, and that the business was sustainable. Acquisition targets in the home country are difficult to assess and to be confident in the “story”, but it is many times more difficult when the firm is overseas, and still harder in emerging countries. But if they were good enough to sell and satisfy a reputable Western company, confidence in the firm’s management and its future would be enhanced. If they’ve done it enough times to build a sizeable firm, their success in the future is much more likely.
In Raju’s case, most of his customers were based in U.S. or Europe. So he was particularly interested in a firm with a predominance of Western clientele. This would assure that a development center would more seamlessly be able to serve Sierra Atlantic customers, and would understand the West’s expectations of support and quality. Another criteria was that the acquired firm’s capabilities would either deepen the skill sets in the highest demand, or add adjacencies to the service offerings.
Lastly, he looked for a strong in-country management team. They would know the strengths and weaknesses of the team, and would be on-site, providing continuity and local management.
Five years after initial exploration, he found ArrAy Inc. The company was headquartered in Boston, but all of its development work done in Guangzhou and Shanghai. While they were just 12% of the size of Sierra Atlantic as a whole, they were equal in size to Sierra Atlantic’s outsourced product development unit. They fit all the desired characteristics, and having a U.S.-based headquarters meant that the communication patterns between the Chinese development center and headquarters were already in place.
It became clear that ArrAy had a good management team and their president was excellent, and within four months, the president was given responsibility for both firm’s outsourced product development business units. His Sierra Atlantic counterpart was reassigned. After a year of settling in, production volume began rising, and the in-China sales initiative began to bear fruit. This past year, sales to emerging countries are up 55%, with China in the lead. Sierra Atlantic is closing in on the $100 million revenue mark.
Sierra Atlantic’s entry into China was well chosen and well executed. But it must be noted that Raju’s firm was already multi-national, and had developed a culture and management team that understood how to manage a global operation. He had a head start over many firms of equal size, but purely domestic.
Small and mid-sized companies don’t need to become multi-national all on their own. Increasingly, there are service firms that small to mid-sized firms can turn to for support and guidance. Alliance member Kaushal Chokshi, Chairman of Quickstart Global says, “The era of the micro-multinational has begun.” His firm caters to companies from startups to Fortune 1000 firms, helping companies get a cost-effective footprint in ten different locations outside the U.S.
It will always be wise to take a deep breath and think deeply before expanding abroad. But Sierra Atlantic’s experience shows that given the right circumstances and criteria, going global, even for a small firm, can become a strong driver for growth.
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 www.ceotoceo.biz
]]>By Warren Lutz
Sam Allen is always thinking about how fast they should be going, but more often than usual these days.
“In the economic environment we’ve got today, it’s kind of a Catch-22,” said Allen (308), CEO of Burlingame-based ScanCafe, a photo scanning service. “Business is down, so to get it back up you need to invest – and then if you spiral downward, it scares you off.”
The question nagging Allen is the same that nags most CEOs. Whether it’s increasing your market expenditures, launching new products, considering an acquisition, or growing your team, everyone wants to know: When is it time to step on the accelerator?
Fortunately, the business signs that Allen relies on are crystal clear. Being an entirely online business allows the company to instantly gauge the results of its marketing efforts.
“I can track every order, and everything about every order, down to the customer,” Allen said. “I can cut the data any way I want. We basically manage the business on a week-to-week basis.”
“We’re a very metrics-driven business, he says. ”When you know your metrics pretty well, you know what kind of bang you’re getting for your buck.”
“It’s a matter of what switches you turn on,” Allen said. “We can look at what has been most profitable in the past, and focus on that, right out of the gate.”
On the other end of the spectrum—in the offline, manufacturing world—the signs aren’t as easy as calculating hit rates on a website.
Bentek, an electronic manufacturing services company that builds very complex electronic devices and equipment, began to see its business “start to tank” about two years ago, then fall off the table one year ago, said CEO Mitch Schoch (302).
“We were facing eminent death,” Schoch said. “It wasn’t just like a little slowdown; it was a complete shut down.”
The company headed into “lifeboat strategy,” Schoch added, reducing its headcount and cutting costs. But it also did something strange. Instead of hitting the gas, it found another road leading to growth: solar products.
“A year ago we began to look at designing our own products, private labeled, for the solar industry,” Schoch said. “We started building solar combiners, which makes electricity from solar arrays, and that business started to grow rapidly.”
Bentek found a partner interested in carrying its new product exclusively. Recently, the company shipped eight combiners. With its new business taking off, Bentek is seeing its old business pick up again, too. Orders have jumped between three to five fold.
But it’s stepping on the old accelerator slowly.
“We’re starting to look at bringing people in as contractors,” Schoch said. “Nobody’s really sure yet if this is a pick up in the economy, or if it’s a dead cat bounce.”
But even an upturn, he said, comes with challenges. “It’s the second worst environment,” Schoch said. “The worst is when we have no orders. The second worse is when we have an upturn. Our customers wait until the very last minute, and then they want it instantly.”
The question of when to step on the accelerator is a highly relative one. Some CEOs are already stepping on the gas. But in the recession’s wake, they are doing so with care.
Jim Finch (307), CEO of Los Gatos-based Amalfi Semiconductors, is at an enviable place. Amalfi’s revenues are growing fast, so Finch’s foot is on the accelerator. Just not all the way.
But what Finch sees in 2010—in particular, a growing demand for headset equipment, especially from China— leaves him optimistic.
“We are hiring at a slightly higher clip, but not aggressively,” Finch said. “We’re doing critical hires, but we’re not significantly growing or accelerating the head count.”
The company launched new products in the third quarter that “just had huge customer demand,” Finch said. “It just sort of went through the roof.”
Millie Olson (210), CEO of San Francisco- based Amazon Advertising, is also moving at full speed – and her attitude is also cautious.
“For us, the work has never slowed down,” Olson said. “We’re not doing huge advertising things, but we’re doing small things.”
Yet her business is very closely tied to the nerves of its clients, which have been shaky due to the economy. But like most CEOs, Olson is not prepared to fully accelerate until the overall climate improves.
In her words: “You don’t want to lose control of the boat.”
Don Massaro (Q100), CEO of Send- Mail, doesn’t place a lot of stock in economic indicators. “You can read all these statistics that the government has, and they usually go in reverse the next month,” he said.
Based in Emeryville, SendMail provides appliance-based products, applications and services that enable enterprises and government agencies to modernize their messaging infrastructures.
When the economy began to slow, Massaro began clamping down and went with a “flat” business plan—one that centered on no growth. The company has since made its first quarter, struggled in the second, and now looks to make the third.
But making a quarter isn’t automatic, even when planning for a flat year. To Massaro, that means that it’s not yet time to ramp things up.
“We’re going to be on the bottom for some time,” he said. “When it’s easier to close a quarter, then I think we’ll see more opportunities.”
On the other hand, Barry Karlin (Q100), CEO of Cupertino-based CRC Health Corporation, believes in keeping a “watchful eye” on certain indicators for signs of improvement in the economy.
When the economy fell, Karlin saw an immediate decline in private payers seeking treatment. “To the extent that they could defer treatment, they’d rather not spend any money,” he said. When that trend turns around, it may be a sign to hit the gas, he said.
Timing is everything, Karlin added. “If it’s too soon, you could be making investments that don’t bear any fruit,” he said. “If your timing is reasonable, at the moment you’re doing it, it looks a bit odd. But of course, six months later, when the market starts to turn around, you’re in a really great place to capitalize.”
Warren Lutz is Editor of the Alliance of Chief Executives newsletter. He may be contacted at wlutz@allianceofceos.com.
]]>Belinda Tsao-Nivaggioli, CEO of Avicena Group Inc. (OTCBB: AVGO) had a bad feeling about a certain someone, but when the stock started going in the wrong direction, she was convinced she had a rat on her hands.
The wrong direction, in this case, meant the stock skyrocketed on bad news, and plummeted on good news. It first happened, of course, at the worst of times. The company had only gone public a few months earlier, in March of 2005, at the same time that Belinda was promoted from COO to CEO. Through introductions, the Rat had become trusted by the board the year prior, and had persuaded them to go public at an unusually early stage. He had acted as an unpaid investment banker, and their IPO raised just $3.5 million. All but $600K of it had been used up on fees, costs, and retiring old debt. Belinda’s first task as CEO was another capital raise.
The timing was poor; disappointing clinical results had just been announced. Yet the stock price went up. The analysts asked why, and Belinda had no logical explanation. But her board wasn’t worried.
As with many late-stage life sciences firms, Avicena was burning through cash. They developed two key compounds involving cellular energy, aimed at curing Lou Gehrig’s, Huntington’s, and Parkinson’s diseases and related ailments. One was in Phase II, and the other was in Phase III. The cost of running clinical trials was staggering, but the capital raise was barely enough for core salaries and overhead. Belinda was unwilling to see the drug development stall. In years past, she had turned to the National Institute of Health (NIH) for non-dilutive grant money, and she worked the NIH in 2005 more heavily than over, earning $20 million in grants. The NIH money was only for running the clinical trials, paying the principal investigators, the sites and project management. Such grant money never covers drug costs, non-clinical studies or research, salaries or any other regulatory support.
By April of 2006 the cash from the IPO was gone, and the Rat issued a line of credit to the company. After the first draw, he refused further advances until the firm was desperate, effectively controlling Avicena’s liquidity. In May, the price rose from $0.50 per share to $6.00 per share the moment it began trading. Since he controlled all of the public float, there was no mistaking where the volatility stemmed from, but no proof either. He had transferred all of the float to electronic shares, which are hard to trace. As new financing neared, he was able to scuttle it with the support of two hand-picked associates he’d placed on the board at the IPO. In September of 2006, he introduced a new “friend," who bought 2.5 MM of the Series A stock at $6.00.
Determined to keep the trials running and on schedule for a second drug, Belinda continued her work at NIH and brought in another $6 million in 2006.
In the first quarter of 2007, the Rat brought in a new capital source who invested another $2 million in the Series B. But the company was still running on fumes to pay salaries and overhead. Belinda went on the road for a Series C and connected with a NY firm for a $15M PIPE (Private Investment in Public Entity) in May of 2007. The new money would replace the Rat-picked board members and wrest control from the Rat. At the pivotal board meeting, Belinda made her case. Surprisingly, an hour into the meeting, a fax arrived from the Rat, who had been tipped off to all the board level discussions, stating that he would wire $2 million the following day to alleviate the cash strain, and arguing that the board should vote against the PIPE and the CEO. Belinda lost that particular match and was voted down. Of course, the $2 million never arrived. The board asked Belinda to revive the PIPE, but the Rat was “inexplicably” kept appraised of her every move, and just before the negotiations finalized, the stock price plummeted and the PIPE collapsed.
Belinda marched on with the Series C work, unwilling to yield. Through the efforts of a West Coast banker she secured $3.2 million, and an associate of the Rat’s committed another $10 million. But just as the Series C closed, the Rat’s associate backed out.
Over 80 percent of Belinda’s time had been absorbed with fund raising (NIH and in the public markets), and managing her board and keeping the company from being pinned down by the Rat was draining her energy.
Despite the good news of having raised some new money from the Series C, the stock price, immediately after the close, began plummeting. No new scientific news had been announced (or was even known), yet in one week, in September/October 2007, the price fell from $3.35 to $1.80. By the end of the year, the stock had dropped to $0.21 on no news, but the public suspected an insider had advance knowledge of bad results from the clinical trial. The reality was that the clinicals had not even ended, and were being funded by another $60 million in NIH grants that had been raised in 2007.
Belinda’s legal counsel, inherited from her predecessor and endorsed by the board, had been advised of events as they went along. They felt they did not have enough hard evidence against the Rat to go to the SEC. Review of the transfer agent reports and NOBO reports yielded little. Discussion with market makers gave no insights. This Rat was smart, and he had apparently decided that the coming year, 2008, was to be the Year of the Rat.
He began his efforts to take control of the company. He started with buying preferred shares and started putting together a highly dilutive Series D. Repeatedly he pushed the firm up against the wall, starving Avicena for liquidity, then jumping in to “save” management at a high cost. By April 2008, Belinda and her entire team of employees had been unpaid for five months. Their passion for their life-saving work was so great that they kept on. When auditors demanded that the employees be paid, the Rat reluctantly advanced some money on their line, but only after being paid a placement fee, and demanding that the conversion price be dropped to 15 cents.
As April unfolded, Avicena’s chairman had enough and resigned, leaving Belinda and a loyal board member deadlocked against the two Rat-picked board members.
In June of 2008 they learned that the Rat’s trading activities had racked up margin losses of over $20 million, and had caused the failure of a broker dealer in the Bahamas four months earlier. That news precipitated the resignation of one of the Rat-picked board members.
Again, Belinda and her team worked without pay from May 2008 to September 2008. The Rat’s demands for a self-serving and illegal structure of the Series D offering meant delays, and he punished Belinda’s resistance by withholding cash advances on the line.
In August of 2008, he demanded Belinda’s resignation, proposing that his one remaining Rat-picked board member take the CEO position. Belinda refused and stood her ground. Too much promising scientific work had been completed to be lost to the Rat.
By September 2008 he advanced $300K and signed the paperwork for the Series D. The $6 million he had committed to in the Series D never arrived. Despite all the drama, Belinda brought in another $20 million of NIH grant money in 2008 to keep the clinical trials on track. She became the largest grant recipient for clinical trials the NIH has ever funded.
Then the Rat stopped interfering. In fact, he stopped responding to calls and e-mails. It was as though he fell off the end of the Earth. But he didn’t. He had fallen into the Department of Justice’s (DOJ) hands and had been arrested on charges for illegal activities with two unrelated Canadian companies. The DOJ requested and received Avicena’s full support, and charges against the Rat grew to include his activity with Avicena as well as a fourth firm. The SEC joined in a parallel suit. After the DOJ subpoenaed the trading records, the pattern became clear. They told Belinda that the Rat had erected a very sophisticated system of smokescreens, cutouts, and middlemen to protect himself and obscure his activities. Indicted in February of 2009, he remains under house arrest. His trial is set to begin in January of 2010.
Between September 2008 and January 2009, Belinda became Chairman and CEO, and rebuilt the entire board with seasoned investors. She formed three new private companies with new high level investors with strong track records in this space. Each company focuses on a different area (CNS, Creatine Transporter Defect and Dermatology), and licenses IP from Avicena, which is now a royalty trust. Belinda, now free to concentrate on running the business, continued bringing in more NIH money, as well new opportunities. Most recently, she has been wrapping up a joint development deal with the South Center of Innovative Pharmaceuticals in Guangzhou, China for development of a diagnostic and drug therapy for Creatine Transporter Defect, a condition that Avicena discovered that affects autistic children. In exchange for the Chinese government’s funding of the work, China will get a share of the profits from the Chinese market.
What a nightmare to endure for any CEO! How can a CEO avoid such problems, or mitigate the damages when the match is already on? Here are five ideas that can help.
Demand Transparency. Fraud and illegal activity is more common that most of us like to think. When you think you smell a rat, you might really have a rat. Be as proactive as you can be to investigate and find facts. This requires the willingness to be skeptical of the trust you or your board may have built for someone. It is difficult to keep such skepticism at a level that is healthy for the relationship, but typically people that are honest and up front will understand your need for transparency.
Surround yourself with great advisors. CEOs need vetted advisors and mentors that have earned their trust and actively support them in areas that are new to them. Once trouble hits, it is often difficult to switch. Don’t settle for advisors just because they are the incumbent. Never hesitate to get a second opinion, especially when the advice you are getting seems ineffective or contra-intuitive.
All board members must follow the rules. Board quality and integrity are huge factors. There should be no tolerance for board leaks, or other self-serving behavior. Board members not only should oversee the CEO, but they should assist the CEO with their networks and business acumen.
Understand where the money comes from. Vet investors carefully, and know how and where the money is coming from. Big money can feel like a gift, but illegal money will bring big headaches. Most investors act in normal roles, and follow a normal path. If your money source (or the connections that bring you money source) is too far afield in his or her behavior, look out.
Run for the hills. Does it need to be your wrestling match? Bad boards don’t deserve great CEOs. In many cases, as with this one, a sitting board brings in the CEO. Once you’ve realized that your work as CEO will be hindered by the board, start looking for other opportunities. Belinda had a very hard four-year wrestling match with the Rat that wasn’t fun, and frankly, hurt her performance. While we admire her fortitude and are thankful that her drugs are still on track to help us all, she paid a high price for her passion for Avicena.
It is gratifying to know that the Rat will be the big loser of this four-year wrestling match, and will be pinned in the penitentiary for some time to come. Thanks to Belinda and the DOJ, we have one less two-legged rat preying on our companies. Better still is that the promise of Avicena’s drugs is healthy and heading toward pharmacy counters worldwide.
Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.
]]>As the U.S. economy continues to struggle, today’s CEOs are faced with a growing presence in today’s business landscape: Uncle Sam. And perhaps no industry has been as affected by recent government involvement than the financial industry – and by extension, the real estate business.
There are so many new programs targeting the housing market “it’s hard to keep up with them,” says Pat Lashinsky (Group Q100), CEO of Emeryville, CA-based ZipRealty, a full-service residential real estate brokerage firm.
The effects of government programs have been both positive and negative, Lashinsky says. TARP funds aimed at bolstering banks actually led them to tighten credit, which hurt the housing market. But there are also new tax credits for homebuyers as well as a California New Homebuyer Program that Lashinsky says is putting many people into new homes.
ZipRealty educates its agents on all government housing initiatives, as its agents are often the first point of contact for buyers and sellers. “We just work hard to know what’s going on out there,” Lashinsky says. “A regular part of our communication and training is making sure (agents) know about all the programs.”
Today there are more federal economic recovery initiatives than most Americans have seen in their lifetime, while other government actions are changing the business landscape. The reaction from CEOs ranges from excitement to frustration — and most of all, uncertainty.
Denise Thompson is thrilled about a new federal program that could make the future of her solar company, Novato-based SPG Solar, so much brighter. She just wishes she knew more.
“It’s constantly evolving,” Thompson (Group 271) says of an as-yet unleashed federal grant program that could provide alternative energy firms with $3 billion in grants. “People are waiting to see what will happen.”
In the case of SPG Solar, a leading developer of solar photovoltaic (PV) systems, it has partnered with an investment banking firm that provides updates on the federal grant program, giving the best chance to prepare.
“You need somebody like them on your team,” Thompson says. “Success is largely based on how many good resources you can get your hands on.”
For some CEOs, there is not yet much impact from the new presidential administration. But there has been plenty of optimism.
Keller Strother (Group 308), CEO and cofounder of MST Services and Evidence-Based Associates, is tracking the progress of the Youth Promise Act, a bill being considered by Congress that would give money to communities for violence prevention programs. MST is a research group pursuing treatments for youth with serious clinical problems, and Evidence-Based Associates helps state and local agencies implement projects for youth in the juvenile justice system.
“We view the Obama Administration as being much more friendly to our area of work – youth and family services, specifically at-risk youth involved with the juvenile justice system,” Strother says.
A recent White House blog laying out a policy of prioritizing education and treatment programs that produce results speaks strongly to his firm’s treatment approach.
“For us, opportunities include increased grant funding available to organizations that use our treatment model,” Strother says. “Additionally, there may be federal legislation that directs new funding for research-based programs like ours.”
Strother’s firms may hire a lobbyist next year, a strategy already being pursued by Oakland-based Arcadian Management Solutions, which provides value-oriented Medicare health plan options to Medicare beneficiaries who reside in small to medium-sized communities.
Arcadian CEO Bob Fahlman (Group Q200) says discussions in Washington on healthcare reform and Medicare will impact Arcadian, so the firm is getting involved through its own lobbying efforts and through its trade association American Health Insurance Plans.
“We’re working with members of the Senate and House and Chief of Staff to make sure they have the facts and the data they need,” Fahlman said.
With the outcome unknown, however, Arcadian plans to continue streamlining operations and develop new, cost-effective products for next year.
“I’m cautiously optimistic,” Fahlman said. “There are going to be some tough times, short term. But the low cost producer that is offering true value will survive... and we are a low cost producer right now.”
For other firms, federal initiatives can be more disruptive. Eve Hinman (Group 212), CEO of San Francisco-based Hinman Consulting Engineers, says the American Recovery and Investment Act of 2009 has dramatically boosted her structural engineering business with federal work.
The Fed was already one of the firm’s biggest clients. But it’s also a demanding client, requesting in-person meetings on short notice yet expecting contractors to be “shovel ready” on projects.
“We have to be responsive,” Hinman said. “We can’t drop any balls.”
Hinman’s firm has dealt with the frenzy by holding longer operations and management meetings. “It’s really the only quality time we have together as a group,” she said. “Also we have made it a priority to maintain status meetings with staff regardless of where we are to make sure no balls are dropped.” Plus they’ve hired a marketing director to keep up with proposals.
Although Hinman says the increased pressure can be “unnerving,” she considers her firm fortunate. But changes in Washington do not bode well for all.
Oakland-based ELM Resources, which provides technology services to the student loan industry, faced a major dilemma. The Obama Administration plans to overhaul a student loan program that accounts for the bulk of ELM’s business by essentially taking over the program.
“Basically, we have government nationalization of an industry,” says Jeffrey Connors (Group 110), former CEO of ELM. Particularly because ELM reached record profits last year, “this comes as a shocker,” Connors said.
ELM is now taking inventory of its assets. The firm is relatively lucky – it has an established brand, a distribution channel, and cash. But Connors is no longer with the firm.
“The world does change, and it changes when you least expect it,” Connors said. “So don’t get too damn comfortable.”
]]>Why risk cash and time on innovating from scratch when you can find ready-to-go innovations in another industry? The fact that diverse groups of people can result in greater innovation was studied in Keith Sawyer’s book, “Group Genius.” He wrote, “In 2003 the consulting firm Accenture studied innovation in forty global companies in five industries and found that, on average, 45% of the innovation came from external sources.”
Paul Dijkstra, CEO of InterHealth Nutraceuticals, Inc. and James Herwatt, CEO of Cork Supply USA, have both brought out of the industry (but not out of the box) innovation to their companies. While new thinking and bleeding edge innovation has a sexy allure, the risks related to innovation can be reduced if the ideas have been tested and perfected in another industry.
Paul’s firm is a part of the dietary supplements industry, which is loosely regulated, and where little proof of effectiveness is required by law. Most producers have some claim of efficacy and market their products without clinical research to back up their claims.
InterHealth Nutraceuticals is an ingredients supplier, selling to supplement manufacturers and finished product formulators. Paul saw big opportunities to expand from supplying the pill-based supplement companies to makers of functional (nutrient added) foods and beverages, where product volumes were high and demand was growing rapidly. But the biggest hitters in this arena were heavily branded mega-firms who were wary of putting untested ingredients into their products. Paul understood this objection, and with his background in pharmaceuticals, he was able to bring the discipline of proving efficacy to InterHealth Nutraceuticals. In fact, the level of proof the big brands wanted was nothing compared to what he had done in the past to get buy-in for new dietary supplement ingredients.
CEOs should consider stepping into new lines of business, where their prior experiences become new innovation. Or hire in top leadership talent from outside your industry. Paul Dijkstra was a life sciences CEO before he stepped into the supplements business. Spending a lifetime in the same business can create myopia.
James Herwatt’s firm has been supplying most of the high end wineries with corks for years. Their cork manufacturing is very controlled and quality testing on each batch of corks is part of the process. With deep connections in the high end wine industry, Cork Supply USA looked to expand to oak barrel manufacturing (coopering), and first looked to acquire some competitors in this fragmented industry. Rather than buy into the industry and adopt the artisan like processes that are industry norms, he built his own facility, hired Master Cooper Jason Butler and his three coopers, and is differentiating himself through careful testing and quality assurance systems similar to those that helped him grow his high end cork business.
Buying a business or starting a new one and blending known best practices from your core business and the new business is a great way to bring fresh thinking to bear.
Both CEOs are innovating, but they're doing it by bringing into their business best practices from a related industry. This can be a low-risk, fast, and cost efficient way to steal the march on the competition.
Paul invested about 70% of his firm’s net profits into the development effort. He took a known base compound and tested how it behaved when it was heated or otherwise processed, as it would have to be purchased by functional food and beverage companies. Since he had a clear set of target customers and products in mind, he knew exactly what they'd need to know to move forward: That the active ingredient would remain effective when it was consumed.
In Paul’s case, he brought the market analysis and market sizing common to life sciences into play in a way that was beyond the norm for the supplements industry. He also brought the disciplined approach to drug development and the incremental development process of known substances, avoiding wild intuitive leaps of faith. He also brought a deeper level of thinking about partner needs that is common in life sciences businesses.
James understood that winemakers are at the mercy of many variables over the years as they try to make their wines match their expectations and keep them consistent over the years. The fewer variables they have, the more likely they are to achieve that goal. One big uncontrolled variable has been the oak barrels in which wine ages. Factors include where the oak is grown, how it is dried and seasoned, and how it is toasted. Toasting is when the inside of a new barrel is exposed to an open, wood burning flame to caramelize the sugars in the oak. Despite the critical nature of the barrel, wineries still rely up artisan craftsmen and their cooperage’s reputations for consistent production over the years. It doesn’t always work well.
Cork Supply USA already had an internal testing laboratory which managed cork quality and the effect of corks on the flavor of wine for years after bottling. There was no doubt that this approach to cork production paid off, and was an accepted norm for being a high value player in the cork business. James took this norm and practice and is applying it to the cooperage (named Tonnellerie O). His lab team uses a Gas Chromatography Mass spectrometry machine to quantify the levels of the nine main volatile compounds that most greatly influence the flavor in wine. Winemakers test oak barrels for two years before committing to pull production. James’ lab fingerprints those test barrels, so when the big order comes in two years later, the production barrels will have the same exact chemical characteristics. Tonnellerie O will be the first to be able to offer and verify such strict quality and consistency specifications.
Study other industries looking for applicable innovations. A few study hints:
• Pick related industries, perhaps broad industry categories or different business product categories in your industry. Spend time immersing yourself in those businesses, getting to know what they do, how they do it, and why it works.
• Look for companies, in any industry, with a similar value chain/process. For example, long and complex sales cycles (if that’s you), or R&D driven, or repair and service firms with brick and mortar presence.
• Look for businesses that are much smaller than yours, or much larger. Or much newer, or much older. How do they succeed?
• Look for CEOs whose experience is deep or varied, regardless of their current business. What is normal for them may be revolutionary to you. The Alliance of Chief Executives does this in carefully crafted group settings. Have deep discussions with fellow CEOs, even outside your group meetings, and spend the time to really drill down. A great technique practiced in Alliance groups to flush out new thinking is to ask the other CEO what they would do if they were running your business. The first thing they'll do is to reference the norms by which they run their current business, and try to apply them to yours. Just listen carefully.
Innovation is required to keep our top line and bottom line growing over time. There will surely be times when we have to place big bets on new discoveries. But plenty of proven ideas and techniques already exist, hidden from your current industry but waiting for you to discover them, if you’ll take the time to seek them out.
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.
]]>The Warning Signs
Today’s borrowers face unprecedented obstacles that include slow receivables and diminishing collateral values. Banks have less tolerance for borrowers with issues, and loan renewals are by no means automatic. A debt covenant waiver or an over-advance can prove fatal; the cost of waivers has sky rocketed from the price of lunch to an increase in several points, assuming your existing lenders will even work with you. Take nothing for granted. Until you have a closed deal and truly available dollars you have nothing. What you experienced 30 days ago is different than reality today. The lending market is extremely volatile and unfortunately, none of the volatility has worked in the borrower’s favor.
Lenders in Turmoil
Remember that borrowers are not the only entities in turmoil. Many lenders are facing their own liquidity management issues. Adding to the volatility is the significant number of bank mergers in the recent past.
With impaired balance sheets and less available total credit, lenders are concerned about their future, both professionally and personally. Moving an account to work out, increasing reserves on their portfolio is substantially riskier today for a loan officer than it has been in the past. And because the TARP was not targeted to commercial lending, commercial lenders are getting no relief.
If your lender is in turmoil, the decision process may no longer be in the hands of your loan officer or relationship manager. Your credit may well be controlled by the risk officer and credit committee. If you have an issue, their response may not be consistent with past behaviors.
a neW approach To LiquidiTy proTecTion
Both banks and borrowers have a stake in avoiding covenant waivers. Now is the time to be aggressive about protecting liquidity.
Stay Alert and Forecast Potential Problems Now
First, remain alert to situations that indicate the need to act quickly. Ensure the key drivers of the business are understood and monitored on a very timely basis. The ability to forecast and plan is keen. As difficult as it is to do in this market, forecasting and planning needs to be a core competency across the organization. Involve all critical disciplines, not just finance. A foundation of objective information and rigorous forecasting practices is imperative for you to anticipate problems and devise solutions. Fact-based, forward-looking analysis and projections based on real data rather than optimistic estimates must be your starting point.
Project operations at least four quarters ahead using run rates as much as possible. Next, carefully assess your base case projections – do they exceed liquidity/compliance minimums? Are there potential debt covenant issues? If so, ask yourself what has to change to preserve working capital without crippling your business.
It’s also critical to understand your worst case scenario, including the impact of lower asset appraisals and the reduced availability of credit. Document your assumptions and estimates so you can challenge them as circumstances change. This analysis is time sensitive and needs to be based on a hard look at market conditions, including the impact of these conditions on your customer base. Consider bringing in external help to assist what is likely to be an overextended financial team. A third party perspective helps bring the organization real time market data and objectivity.
Remember: Cash is King
Not only is cash king, it now reigns supreme. Be sure your financial team is focused on cash and working capital. Understanding your current cash position and where it is going over the next several quarters is critical. Financing options are limited and costly.
Until the credit crunch abates, preserving and improving liquidity must take precedence over earnings. Given the uncertainty of credit, survival may depend on self-generated cash.
Strengthen Your Core
Find the profitable, cash flow-positive core of your business and cut away at everything else. That means analyzing your business in detail in order to understand the real drivers of profit. If you can’t do this quickly and accurately, it makes sense to bring in outside resources. Be sure that you understand your cost structure and profitability so that you can make informed decisions in a timely manner.
Once you determine your core business, there are usually several options. Close unprofitable units, liquidate slow-moving inventory, and monitor accounts receivable closely. Shrink your costs to activities that customers will pay for and that ultimately generate cash. Identify and cut unprofitable customers.
Be Strategic
This is not a time when cutting costs will lead to survival. Be strategic in addressing short and long term liquidity needs and be sure your team is appropriately focused on these initiatives.
Obtain Value From Past Investments
Reschedule or cut new projects unless the ROI aligns to your liquidity needs. Focus instead on trying to realize some incremental value from the dollars you have already spent. For example, many companies can realize incremental value from their existing technology without investing significant dollars, if any. Be sure you have fixed any unsound IT governance and management practices before additional dollars are spent.
Find “Hidden” Liquidity
Scour balance sheet for assets you can sell or liabilities you can extend. To identify these opportunities, utilize benchmarks that identify the most efficient businesses in your industry and compare them with your performance. To contribute to working capital, every balance sheet dollar has to be turned over faster. Maximize cash flow by matching inventories to sales, collecting from customers faster and negotiating favorable terms with your suppliers. Review in depth the components of your cash to cash cycle, realizing the impact on liquidity of even small improvements.
Communication is Key
Intensify communication with your stakeholders, e.g. your employees, Board members, lenders, shareholders and auditors. Ensure they understand how you are responding to the market and why. When you offer an honest assessment of where the company stands, you build stakeholder confidence.
Also, communicate early and often with your lenders, particularly prior to approaching renewals or requesting waivers or modifications. Give them information and business plans that instill confidence that you can address your working capital needs. Include credible forecasts, actions and contingency plans in every discussion, and use an independent third party to lead this process. It adds to your credibility, as lenders may significantly discount management projections.
Look For Alternative Financing Now
Don’t wait until you need it – assume you will. Searching for alternatives now enables your organization to negotiate from a position of strength. There is still money out there, but it takes time and persistence to find appropriate sources.
Avoid believing that you can raise more capital to “get over the hump;” the odds of that happening are probably limited. Ensure you understand the cause-and-effect that drives your business model. The ability to forecast and plan is paramount. Look at the process behind the numbers, question assumptions and model what-if scenarios and alternative business strategies.
As you undertake the above steps, remember the process may be painful, but it will generate results. It can be difficult for Board members and CEOs to admit that the company has a looming liquidity issue. But you must be decisive. Create a sense of urgency as to how illiquidity can spiral out of control if not contained early.
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