Robyn Davis Sekula
Joe Crafton says alliances can make a company stronger because a great alliance can provide a product or service that’s missing in the marketplace. Even a good alliance can provide referrals for new business and a cooperative spirit that bolsters both businesses involved.
But alliances are tricky to form and time-intensive to manage. Crafton was president of strategic alliances for CROSSMARK from 2003 to 2008 and recently moved up to president of the sales and marketing services company. Headquartered in Plano, CROSS-MARK has 18,000 employees, and last year, it had more than $500 million in revenue.
Since his position was created in 2003, Crafton has spent the past five years looking for other companies to partner with to help each other reach customers. The best of these strategic alliances is with Nielsen, the company responsible for measuring consumer interest in products.
“The synergy that comes from two companies that are dedicated to helping fulfill each other’s core businesses is very powerful,” Crafton said.
He says research indicates that more than half of alliances fail. “But that’s still ahead of the fact that about 75 percent of new ventures fail,” Crafton said. “Alliances are still ahead of new ventures.”
Here’s how Crafton creates alliances that work.
Find a partner
What helped make an alliance with Nielsen possible was the fact that Crafton and John Lewis, president and CEO of Nielsen Consumer North America, had the same mentor, who said they had a lot in common and should meet. They took the opportunity at a conference to do so — and discussed what might be possible if they built a business relationship. Crafton said that personal recommendation helped because it came from someone they both knew and admired.
“We had a common vision, and we could be helpful to each other,” Crafton said. “It was a nice cultural fit.”
Crafton gets plenty of calls from other people who want to create strategic alliances with CROSSMARK, but he doesn’t even return the call unless he knows the person calling him. Alliances take time and energy, and he doesn’t have enough to go around to talk to everyone who might like to align themselves with CROSS-MARK.
“I get these calls from all over the world saying, ‘We want to have an alliance with you,’” Crafton says. “Honestly, I don’t return most of the calls because where do I start with credibility? If a friend refers a person, I will give them an audience. But with just a cold call, it’s like dating on the Internet.”
A successful alliance can be a formal, jointly owned subsidiary of both companies that is governed by a contract and operating policies. It can also be a looser relationship that involves referring business to each other’s companies and payment of a referral fee.
Alliances can also be with competitors. FedEx and UPS, for example, put packages on each other’s trucks for delivery to rural areas to avoid expensive trips for just a few packages.
“We see that there are some strengths of our competitors that we don’t need to fight,” Crafton said. “Let’s trade my weak spots for your weak spots and see if we can’t as an industry avoid waste.”
For an alliance to succeed, the companies involved must have compatible goals, mutual gains and symmetry. Both companies must gain equally from the alliance. The companies’ leadership has to trust each other, keep information flowing from one company to the other and make decisions jointly.
How does a business leader know when to make a deal? First, look at the fundamentals.
“There has to be a clear and present business opportunity,” Crafton says. “If there is no tangible and clear win for both parties, then it is more of a parasitic relationship than it is a symbiotic relationship. Right up there along with that is culture.”
Crafton has met company leaders who he simply wouldn’t go forward with.
“We had one guy who told us that he used to have a building, and he burned it down and took the insurance money,” Crafton says. “That’s not a business partner you want to have.”
In other instances, he has had conversations with executives who indicated their sole focus was on enriching their own bank account, and they’ve had little regard for how they wanted to treat the other managers in their company after the alliance is complete.
“It tells you that at the very core of their business, they’ve treated these employees in such a way that they may not be productive in our culture,” Crafton says.
Third, check the level of enthusiasm. You shouldn’t have to sell a partner on the business concept. The partner must be just as excited as you are to embrace the new concept.
Otherwise, Crafton says: “You’re going to be taking two steps forward and dragging your partner. If they are equally as enthusiastic about the business opportunity and the market opportunity, then you’ve got a good start.”
Buy-in must occur within the ownership of the partner organization.
“You create these documents, and it goes up the flagpole, and everybody in the corporate office doesn’t get it, and it doesn’t happen,” Crafton says. “As an owner of this company, I can speak for the company. You have to evaluate if the person you’re speaking with has the authority and the power to execute plans that you’ve developed.”
More than anything, a partnership can expand a company’s offerings to allow better service to customers. The alliance with Nielsen was an ideal fit, because both firms work with the same sets of clients but do not offer the same services.
“For them, they saw (CROSSMARK as) a company with over 1,000 clients, and a field force of 15,000 people who could execute
marketing objectives in the field, and for us, we saw a company that was more tapped into the marketing departments of companies,” Crafton said. “We were able to help each other with relationships and business opportunities.”
Move forward together
Crafton and Lewis treat the alliance as they would any business. The alliance has a mission statement, milestones to meet and a group of people from both companies who meet regularly to discuss the alliance. Crafton and Lewis even hired an alliance coach to discuss the needs of each company.
“Our goals were to innovate and create new offerings to the industry that would not be possible if we operate independently, and bring out new-to-the-world concepts that would benefit our clients,” Crafton said.
Executing a strategic alliance requires dedicating staff members to the alliance. Those staff members are charged with updating the company leadership with the progress of the effort and with treating any problems that may arise.
The alliance also has two managers, one at each company, and each are incentivized on the success of the alliance — not on the health of either company. Top-down commitment is also critical to the execution of the alliance. At least four times a year, Crafton and Lewis meet and discuss business.
Getting two CEOs who know and trust each other to believe in an alliance is one thing. Getting buy-in from the sales force and others involved in executing the alliance is quite another. Crafton says hunting for, and celebrating, success early is crucial.
“If you can communicate something tangible where it’s making their life better or making people feel better about our offering to our clients, then they have to see some base hits,” he says. “They don’t have to see a grand slam right out of the gate. They start to say, ‘Well, I can see that. It’s not just a press release. This has some early wins and early benefit to me and to my client whom I am trying to serve.’ Don’t wait two years before you have your first prototype. Get some points on the board early.”
The victory has to be seen and felt by the people working in the trenches of the company. It’s not enough for just those at the top to believe in it.
“In a privately held company, I can just tell people to feel great about it because I said it,” he says. “But that doesn’t mean you have the hearts and minds of your rank and file. They have to have confidence that you have a track record of doing things that are good for our client.”
Creating excitement from clients is also key to bolstering the success of an alliance. CROSSMARK has a client advisory board, composed of representatives from the company’s largest clients, who meet periodically with CROSSMARK executives and give feedback on new initiatives.
“We socialize ideas with them to see how good response will be before we go into the general market,” Crafton says. “If you have buy-in from five of your top clients and you’re wrong, at least you weren’t deaf, dumb and blind to your clients before you went forward. We were all wrong together, including your clients.”
Failure isn’t daunting to Crafton. The first product offering to come from CROSSMARK’s strategic alliance with Nielsen flopped, according to Crafton.
“It was either ahead of its time or the economics didn’t work,” he says.
But Crafton and Lewis still believed in the relationship and still wanted to do business together. He says this was possible because of the contract the two companies executed together before the collaboration began, which allowed either company to get out of the business offering if it didn’t work. Also, neither party did anything for which it was ashamed.
“It didn’t taint the relationship,” Crafton says. “That’s where most of them fail. If something goes bad, everybody wants to start pointing the finger and blaming.”
The fact that the two organizations endured failure together, and it didn’t hurt the relationship, made the partnership that much stronger.
“We were able to jointly design the next program with confidence that my partner will not take advantage of me because the best indication of what they will do in the future is what they’ve done in the past, and in the past, they did not take advantage of me,” he says.
Besides Nielsen, CROSSMARK had another strategic alliance with an advertising agency. Crafton called the alliance successful, but it was dissolved when the agency was bought out and changed directions.
“It was mutually beneficial, and then we dissolved that relationship,” Crafton said. “We’re currently looking for another advertising agency partner. It doesn’t have to last forever to be beneficial.”
He also looked at an alliance with Dallas-based EDS. It involved data collection, but it wasn’t sustainable because the offering could not achieve its target price. Low-cost competitors underbid the joint offering.
But Crafton still sees the partnership as valuable for both companies.
“From that, we made some introductions, and we have relationships today where they are a vendor,” Crafton said. “They provide services for us. We have made introductions for them in a vertical they would like to grow in, which is consumer goods. We’ve opened some doors for them. We’ve maintained a healthy relationship even though our venture did not survive.”
While some are successful and some fail, there are benefits and lessons to be learned from every alliance, and as a whole, the alliances have created a winning situation for CROSSMARK.
“It has heightened our awareness that we don’t have to do everything ourselves,” Crafton said. “There are powerful partners who can accelerate our growth without tremendous capital expenditure on our part. It’s leveraging our underleveraged assets and maximizing those to find a partner who values those assets. ... American culture has always been that every gain of every share point comes from one of my competitors. It doesn’t have to be that way.”
HOW TO REACH: CROSSMARK, (469) 814-1000 or www.crossmark.com
Mike Keebaugh says growth should be the top priority for any company or any business leader.
If you’re not growing, you’re well on your way toward personal and professional stagnation.
“It’s very important for the organization to be a growing company,” says Keebaugh, president of Garland-based Raytheon Intelligence and Information Systems, a $2.7 billion unit of Raytheon Co. “Your stakeholders and shareholders expect it, and your employees deserve it. There are two models for how you get promoted. One is your boss dies. The other one is that you grow as a company and create more opportunity and get promoted into that. I don’t subscribe to the former.”
Keebaugh challenged Raytheon IIS’ 9,000 employees to new growth targets when he became president in 2002. As he saw it, the business wasn’t growing as much as he thought it could be. The company had a solid reputation with its legacy customers those being the intelligence community and the Department of Defense. The long-standing customers were regularly sending Raytheon business, but, most of the time, that was because Raytheon was the only company that could supply what they needed. But Raytheon was beginning to see more competition in some of its niche areas.
Keebaugh wanted the company to aim for high single-digit growth, ratcheting it up from about 5 percent a year to about 9 percent. But the only way to do it was to sell the employees on the idea first.
From Keebaugh’s first day on the job, he began discussing the new growth targets with employees.
“We had to explain to everybody, ‘This is why it’s important that we change our mode,’” Keebaugh says. “‘We can go on and on in our legacy business, but the markets in that legacy and sole-source (in which Raytheon is the only source for a certain product) are not going to grow to the level we want to grow as a company, and here is our strategy for accomplishing this.’ There was an education part to it.”
Reaching all of the employees was challenging because Keebaugh has associates spread across 14 different locations. But he made a point of personally visiting each location and continues to do so once a year in what’s called a road show.
“We discuss, ‘Here is our strategy; here’s what we need to do to implement the strategy,’” Keebaugh says. “We talk about the markets in addition to our strategy. Then we follow that up with a question-and-answer period.”
Also, quarterly, he holds a town-hall teleconference that reports on performance for the past quarter, and then branches into topics of general interest to all employees. Each employee can view the town hall on his or her desktop computer and can e-mail questions directly to the host of the session, who poses them to Keebaugh.
The company also uses a newsletter and an internal Web site that is updated daily with company news and information, all in an effort to keep in touch with employees and to make sure the dialogue can flow both ways.
“The idea is to get this down and personalized so that their goals and objectives are totally aligned with where the business is headed,” Keebaugh says.
Reporting back on how the company is doing is key to keeping employees engaged and focused.
“They take pride in the fact that they are contributing to that, when we report back to them here’s how we did,” Keebaugh says. “We do a lot that personalizes it with specific projects and recognizing individual performance.”
All nonunion employees participate in profit-sharing, and the company also has a bonus system, which further ensures that employees are truly invested in the company’s growth, Keebaugh says.
“They have some skin in the game,” he says.
Match talent to the challenge
Squeezing a few percentage points of growth out of the company meant that there needed to be some changes, both in the current employee mindset as well as the type of person that was recruited in the future.
A growth culture and mindset didn’t exist within his business at Raytheon, so Keebaugh turned to other businesses in the company that had the culture he wanted to emulate and asked for their help. He also hired outside consultants to infuse fresh ideas.
“We had to develop the processes that were best practices,” Keebaugh says. “We had to get the discipline so that we pursue the opportunities in a structured way to take advantage of the lessons learned not only from what we’ve learned from our pursuits but other businesses in Raytheon.”
He also hired retirees from some of Raytheon’s key customers to come in to the company and help them look for opportunities. The new hires had inside knowledge of the customers’ future directions and also what problems the customers had that were constant pains that Raytheon could perhaps solve.
“These are people who had been essentially systems engineers and program managers of our customer set, who understood not only what the customer’s current problems were but what the hot buttons and focus areas for the future are,” Keebaugh says. “Then, we could tailor our solutions to where the customer was headed and be able to show them a path forward.”
The other challenge was making sure there were enough talented recruits to fill openings created by growth. Raytheon developed an executive liaison program that pairs executives with particular colleges and universities. The executives spend time on campus in social settings, speaking in classes, representing the company at job fairs and keeping an eye out for the next recruits. Keebaugh himself is the executive liaison to Penn State University, his alma mater. The company has about 50 relationships with schools, particularly with those that are strong in engineering and supply chain management.
“Our business recruited slightly under 200 college people last year,” Keebaugh says. “We also recruit at the experienced level.”
To recruit more senior leaders, Raytheon encourages its employees to refer friends and family for jobs at Raytheon. Employees are paid a bonus if the person they recommend is hired.
“If you are working here, you know the kind of people we want to bring on board,” Keebaugh says. “That pays off.”
The success rate is higher for referrals than for people who just send in an application off the street.
You also have to make sure pay rates are keeping up with the local competition, something Raytheon does at a local level.
“The thing you have to make sure with surveys is that they are local,” Keebaugh says. “Recruiting for California is different than recruiting for Dallas, Texas.”
To attract the best available talent, the company also uses a flexible work schedule, including an option at some sites for employees to work what’s called a 9/80, which means they work nine hours a day for nine days, and take off on the 10th day, which is every other Friday.
Grow your talent
To be a high-growth company, you can never stand still. You always have to be getting better, and that includes improving not just your bottom line but your people, as well.
“One of the things we have as a best practice is our human resources review process,” Keebaugh says. “It’s sitting down with individuals and frankly discussing performance as well as developing needs. If there are areas where an individual is not performing, what can we collectively do about it?”
No matter how senior, all of Keebaugh’s employees are expected to continue to learn throughout their tenure. One way he’s incorporated that philosophy into the company is by creating core competencies for every job in IIS.
“Every one of our career paths, we define competency models at the various levels of the organization,” Keebaugh says. “That is defined and documented. The supervisor and the individual sit down and look at the next step for them, where their interests are and what the development needs are for gaining those competencies. There is a lot of work done on career planning.”
Ethics is a particular point of emphasis, as growth won’t matter unless it’s done properly.
Every employee is required to complete ethics courses. The training is not just a one-time affair but an ongoing way of life for employees to make sure they understand the importance of ethical conduct and that they have concrete examples of what ethical conduct looks like. Some classes are computer-based and others are held in classrooms.
“We do it with examples of cases, so you see practical examples of things like conflicts of interest and things like that,” Keebaugh says. “It’s very important to us, so we train, and we continually monitor against this.”
Keebaugh says companies that don’t have ethical practices won’t grow because customers can’t count on them. Ethics are also vital to creating a staff that you can trust to do good work.
“It all comes down to surrounding yourself with the best talent you can find,” Keebaugh says. “Trust is an important part of it. It is also important that you have a culture where, I won’t say you welcome bad news, but you are open to the bad news. The worst thing you can do is not solve problems when they come up, and think, ‘Well, they will go away.’ They don’t go away. The earlier you can address problems, the less it’s going to cost you, and the more successful you will be. ... The worst decision is no decision.”
HOW TO REACH: Raytheon Intelligence and Information Systems, www.raytheon.com
The term “organic growth” means different things to different people.
But to Daniel P. Son, president and co-founder of Dallas-based Penson Worldwide Inc., it’s a term that deftly describes Penson’s growth strategy.
In Penson’s case, organic growth means the company has successfully taken market share from competitors and helped its own customers grow their business, and therefore, do more business with Penson. That organic growth has been responsible for much of the security services firm’s growth from its founding in 1995 until today.
The company provides technology-based processing solutions for the execution, clearing, custody and settlement of securities transactions. It also provides brokerage services to hedge funds and other institutional investors.
Since Penson went public in May 2006, the company now has an additional tool in its arsenal of growth weapons: acquisitions. With ready capital and stock at its disposal, acquisitions have helped lift the company to the next level. In 2006, the company had $287 million in revenue and now has 900 employees a long way from the nine people who started the company more than 10 years ago.
Son’s secret: “Stay focused and do what’s right, even if, at times, you forego some immediate profit in the business enterprise,” he says. “Whatever you do, do it the right way.”
Here’s how Son has led Penson from its humble beginnings to its high-profile status in just over a decade.
Customer service and technology
Son says most of the company’s success can be traced to two key things: great customer service and strong technology.
“We just recently hired two key sales and marketing executives ... to head up our entire U.S. sales effort,” Son says. “One of those gentlemen was with a competitor in the early days of Penson. After we had come to terms and he had agreed to work for us, he told us that in the early days of Penson, he would call on our clients. ‘Those guys love you,’ he told us. ‘We couldn’t get them to leave and come with us.’ When you drill down into why that is, we have a group of team members who really care about what they do and provide exemplary service, and we provide very good technology.”
Luring new customers is about providing great customer service. It doesn’t have as much to do with price as being responsive to customer questions and concerns, particularly solving problems.
Son says the best way to provide great customer service is to keep it in-house so the company can train the customer service representatives appropriately and keep close tabs on how customer service issues are being handled. Penson pays its employees more than the industry average and hires the very best people it can find to help the company manage customer concerns.
Son says the list of what the company expects from its customer service representatives is simple.
“Answer the phone professionally,” Son says.
“Listen carefully. Understand the problem, and resolve it quickly. Communicate with the customer what you’re doing every step of the way.”
Also, customer service representatives do not have voice mail.
“A real, live person answers the phone,” Son says.
Flexibility has also helped his company grab market share from competitors. Penson doesn’t dictate to customers how information must be submitted to them. Penson also makes sure the company has the latest and best technology to help its clients.
“Regulation dictates how you do certain things,” Son says. “But other than that, it ought to be free form. We need to help our customer and find out what they need and adapt our system to their needs. We’ve done that, and by having a flexible offering, it empowers our customers and makes it a better situation for everyone.”
Penson employs a professional training director who operates its “University of Penson,” which offers a variety of training options to continue to educate its employees. Classes are offered almost every day.
“Some aspects are industry-specific,” Son says. “... But a lot of it is how do you answer the phone, how do you be professional, how do you answer the question quickly, how do you answer the question right? It’s a procedure that eliminates a problem from reoccurring.”
Providing strong technology keeps Penson’s clients happy. From Penson’s inception, the company has always had technology staff in-house to create and support applications that ease the flow of information between Penson and its clients. Today, those applications are Web-based. About 40 percent of the company’s employees work in technology. Much like keeping customer service employees in-house, having technology-related employees under its roof keeps Penson in control of projects and helps solve any technology-related problems quicker than an outsourced firm could.
Son says the company does outsource an occasional project, but it’s selective and tightly managed.
“I believe it’s important to have people who take ownership of a project or an issue,” he says. “That’s impossible to achieve with outsourcing.”
Every growing company will eventually reach a point where it needs outside help to keep the momentum going.
“We reached the point when we said we couldn’t grow any more without outside capital,” Son says.
The management team decided that going public was the best way to raise capital to continue to fuel the company’s growth.
When Penson went public in May 2006, it was able to raise $110 million from its initial public offering of stock on the NASDAQ. It also gave the company another tool in its box when it was approaching an acquisition. The company could use both cash and stock to help leverage a buyout.
The public offering also made the company better known. “When people think about needing the kind of service we provide, whether it’s in Asia, Europe, Canada or the U.S., the fact that we are a known quantity, they would tend to think of us more than they would have in the early days,” Son says.
The only drawback is the regulations imposed by being public. Complying with the requirements of Sarbanes-Oxley is time-consuming, but Son says the benefits of being public outweigh the burdens. Hiring the right staff to handle the paperwork requirements is key.
“We have more lawyers on staff than we did in the early days,” Son says. “We pay more in accounting fees than we used to. But other than that, it’s just a little more of what was already required.”
Going public enabled the company to ramp up its growth, as it now had the cash to buy out other companies. It also gave the company a chance to celebrate its success and reward its employees for their hard work. Employees were given stock and options at the time of the public offering.
“We certainly believe that was the right thing to do,” Son says. “The feedback I get from employees is that it is really appreciated, and they feel like they are owners.”
In the past two years, Penson has had the ready cash to buy out companies within its industry to help bolster the company’s growth. Son says his company is also fortunate to have companies that are looking to sell approach Penson themselves. Bankers and investment managers also call with offers.
One of the best deals for Penson came from networking. A friend of Son’s wanted Son to have lunch with a friend of his who owned a similar company, suggesting that the two might work together. Merger discussions went on for two years before Penson ended up buying one part of the other company’s business, nearly doubling Penson’s volume.
“We did not know the people at all,” Son says. “We got to know them. We spent a good deal of time in their facility, and they spent a good deal of time in ours. At a very senior level, we had very many meetings, including semisocial meetings to get a feel for who they were.”
After Son and other company leaders got a feel for the other company’s executives, they sent a team of experts from their own staff into the company to dig through its records. Then, they negotiated, and that’s what took awhile. Son says Penson had to evaluate whether or not it wanted to give in on the sticking points, and eventually, both sides compromised to make the deal happen.
Son looks for several qualifications for a potential acquisition. Ethical concerns are a deal-killer for Penson. Since his industry is highly regulated, it’s easy to see if the company Penson is looking at has run afoul of any of the various regulating bodies that govern the industry. Son and others on the company’s staff also pay careful attention to what others in their industry say about the company. Reputation is very important as that’s part of what you buy when you purchase a company.
“I’ve been in this industry for over 30 years,” Son says. “You know people. You know their reputation. If you hear something negative about their reputation, you check it out. If there are a lot of negatives involved in their reputation, we don’t even pursue the next step.”
Son pays careful attention to whom the people who run the company truly are because Penson typically keeps them.
“This is a relationship business and the relationships that managers or owners have with their employees and with their customers are very important to us,” Son says. “We aren’t just buying a book of business to fold into ours.”
The company also has to be profitable. “We will not buy a company that does not have a demonstrated ability to earn a fair return for our investment,” Son says. “There may be some circumstances in which we would acquire a company that has struggled a bit, perhaps because of inadequate capitalization or inefficiencies because they don’t have scale. We analyze those situations, and we have a very disciplined approach to that analysis.”
Son particularly likes companies that offer a service that Penson does not but is something that’s related to what Penson does and might be a service to its clients. Those opportunities help Penson retain clients and bring in new ones.
As Son sees it, Penson is positioned to continue to grow and rapidly at that. The company has operations around the world, and Son says the opportunities are boundless.
“We are a successful worldwide organization,” Son says. “We are on the verge of some exciting things. Our goal is to become the best execution and clearing company in the world. ... It’s ambitious, but we can do it.”
HOW TO REACH: Penson Worldwide Inc., (214) 765-1100, www.penson.com
When Kelcy Warren and his partner, Ray Davis, started Energy Transfer Partners LP, a Dallas-based natural pipeline business in 1995, they were fortunate to not know what they were getting into.
“If we had known what we were tackling, we would have been completely intimidated by it and probably would not have been successful,” says Warren, the company’s chairman and CEO. “We attacked it with energy because we didn’t realize it was a mountain that few had ever climbed before. I’m very pleased with that. Our naive approach to business has been quite a strength for us.”
Energy Transfer, which reported revenue of $7.9 billion in fiscal 2006, was one of many energy companies that benefited from the collapse of energy giant Enron in 2002. Energy Transfer had a great team and was happily small but began to see great opportunity in 2002.
“When we began to see these wonderful assets flood into the market because of these financial failures ... we were able to seize upon that, and I’m very proud of what we’ve done,” Warren says.
Little did he know at the time just how big the company would become by gobbling up similar companies and combining their assets with Energy Transfer’s own to fuel its growth. Since 1995, Warren has been involved in six major acquisitions, helping build Energy Transfer into the company it is today.
Here’s how Warren navigated his way through the challenges that acquisitions can bring.
Finding the right target
Energy Transfer is constantly in acquisition mode, and it has a staff of four people who look for those opportunities. That staff networks within the industry and looks for leads from banks and sometimes competitors about what businesses could be on the market. Additional staff, which includes engineers and financial analysts, is often asked to look at a potential acquisition when Energy Transfer gets fairly far into the process.
Warren says the first things he wants to know about any company up for sale are summed up in three questions: “How are they operating today? How much of the capacity is being utilized today? And what are they charging for that service?”
In other words, what’s the untapped potential?
As an example, Warren cites the company’s purchase of a pipeline built to supply TXU Fuel Co.’s power plant.
“We looked at it and said, ‘Here’s a pipeline built to transport natural gas and charge maximum rates,’” he says. “‘We don’t care if it goes to a power plant or a brick manufacturer.’ We began to analyze that asset and realized there was a tremendous amount of unused potential.”
After Energy Transfer has determined that a company has potential, Warren examines the culture of the company he wants to acquire. Energy Transfer’s culture is dress-down, jeans-to-the-office casual, but the employees work hard.
“We have a definite social environment here, and we have merged several cultures,” Warren says. “I’ve had some concerns that some would not be adaptable, and we’ve been pretty lucky here. Most have adjusted to the way we do business.”
Part of what’s helped smooth those transitions is a move the company makes every time it acquires another company. Energy Transfer sends one of its top employees to help the company it bought through its early transition stages. For one recent acquisition of an interstate pipeline business, Warren sent someone who had worked with him for 30 years, even though he didn’t have interstate pipeline experience. That executive is running the acquired business from its Houston office.
“He’s completely loyal to me, and understands the way I think and what is important to me,” says Warren.
Acquisitions can be a quick route to scaling up, but Warren says executives who want to make acquisitions need to make sure they’re doing them for the right reasons.
“No. 1, be patient,” Warren says. “No. 2, exercise discipline. Don’t let your emotions take over. Don’t feel like because you lost the last three you need to be more aggressive. Remain disciplined in your approach. ... We routinely come in third, fourth, fifth and sixth in contests for assets we really want, but we preach this every day to our M&A department, ‘Don’t make mistakes. These assets will, in fact, come back to us.’ We think some of them will, anyway, because we believe mistakes are being made in our sector right now.”
Davis, who served as co-CEO along with Warren until Davis’ recent retirement, says acquisitions at Energy Transfer have been carefully planned and targeted. One acquisition took 12 years to complete, and another took five years.
“Every acquisition we’ve made has been a very strategic, targeted acquisition,” Davis says. “We’ve always tried to make acquisitions when one and one would make three or four. We weren’t just making acquisitions to grow. It had to have a strategic fit into our business plan.”
Unifying the team
Because Energy Transfer was built with acquisitions, the company now has a lot of offices in cities far away from Dallas. Davis says communicating to all employees is important, especially those in remote locations.
Energy Transfer’s management has periodic meetings in which the management staff from the remote offices comes to one location, and they talk about the company’s goals and issues, and the company’s management accepts questions from those location managers at the meetings.
“If you don’t have a chance to get answers to your questions directly, if you feel like they’re being filtered, you’ll think the worst,” Davis says. “If you can look at the people who are making the decisions in the eye and ask them questions and get a response, it’s a lot more meaningful.”
Davis says great management is crucial to managing remote locations. Energy Transfer has two offices, one in Cincinnati and one in Jacksonville, Fla., that he has never visited. But he saw the managers often. His hands-off approach is to keep an eye on what the offices are doing, to be available for questions, but, for the most part, to let the managers do their jobs. Watching the numbers coming out of the offices tells Davis and Warren much of what they need to know about the offices’ performance.
To get to the point Energy Transfer is at today a large company that grew quickly Warren and Davis had to do some reckoning back in 2002. Both realized quickly that the company would have to be willing to take on some debt to take advantage of the opportunities in front of them. Both were the company’s sole owners, and they decided that in the interest of growth, that could no longer be true. First, they brought in investors, and then they went public.
“We had to suffer some dilution to play in bigger leagues,” Warren says. “We brought in some financial partners, and that’s been very rewarding for them and for us. ... I own between 17 and 18 percent of the company today, and at one time, I owned 50 percent.”
Energy Transfer went public in 2004. That has forced the company to refocus its energy on the financial principles that kept the company in good standing with organizations that create investment ratings, such as Standard & Poor’s.
“It’s important for us to have investment-grade credit ratings,” Warren says.
According to Warren, going public is “horrifying” because of the amount of regulation it introduces into the business. Sarbanes-Oxley, the 2002 legislation governing the conduct of publicly held companies, is a complicated piece of legislation that has made it much more difficult for companies to be publicly traded.
“That’s swinging a sledgehammer to kill a gnat,” Warren says. “But it is what it is, and at the same time, we must be in compliance. The cost to companies like us and the distractions to companies like us are amazing. The way I tend to handle it is I surround myself with good people and say, ‘Handle it.’ I end up delegating the things I don’t enjoy.”
Warren says that also leaves him free to do the work he needs to do within the company. He says he is fortunate to have people working around him who are loyal and whom he trusts, which is vital to any company’s survival.
“I realize where my strength lies, and I’ve taken the burden off of me, and it allows me to go do what I do well,” Warren says.
Besides providing a much-needed infusion of capital, becoming publicly traded is a great reward for employees, especially those who have been with the company a long time. When a company is privately held, stock can be given to employees, but it’s tough to sell. Public stock is much easier.
“Going public is wonderful for the people who have believed in the plan for so long because now they can call their stockbroker, and they can begin to see the benefits of all of their hard work,” Warren says.
Energy Transfer, though, isn’t the highest-paying company around, Warren says, and that’s on purpose.
“If anything, we underpay our people, but we greatly reward them with equity,” Warren says. “The way our plan works, we compare ourselves against our peer group, which is our competitors. If we perform at a high ranking against our peer group, then we issue new units to our employees. It’s been a good plan. It’s worked quite well.”
Ultimately, employees who are invested in the company financially tend to stay, Warren says.
“You vest over a period of time,” Warren says. “It’s very punitive financially if you walk away from that vesting. ... I would expect that our turnover rate, for a company our size, is the lowest in our industry.”
Warren says that with its strong staff and available capital, Energy Transfer is in the perfect position to grow.
“I love our future,” Warren says. “(Our industry) has gone back to fundamentals. I am really, really excited. For this nation to address its energy needs, we need to lay a lot of pipeline in the future. We intend to be a major player in that arena.”
HOW TO REACH: Energy Transfer Partners LP, www.energytransfer.com
Davis, president and CEO of Crosstex Energy, saw a company that was growing, and the potential was in place for its enormous upswing to continue. Crosstex, which transports natural gas via pipelines from the well head to the burner tip, would likely benefit from the collapse of energy giant Enron. The company had also just completed a financial deal with Yorktown Energy Partners, a New York-based equity fund, that would give it access to the capital it needed to grow.
Davis could see business booming in the near future, but he wanted to make sure the company didn’t lose the key thing that made it really click: its culture. The company’s employees liked coming to work every day. They worked well together and had created a great camaraderie. Davis felt that was key to the company’s success.
“If you start with a successful culture, the most important thing is to maintain that culture as you grow, not to become someone you were not in the beginning and then become confused about who you really were,” Davis says. “At Crosstex, we identified early on that was going to be one of the challenges we faced.”
In an off-site meeting, Davis and other key executives, along with consultant Lee Colan, strategized about how, exactly, to preserve Crosstex’s culture. How could employees continue to love what they did every day and give the company their best work while being asked to do more, reach higher and build a bigger, better company?
Davis and his team did two things: They put their values on paper and they created a committee to help them find ways to preserve those values, and the culture that went along with it. The values they put on paper were dubbed the E4 values: excellence, employee focus, ethics and enthusiasm.
The Crosstex culture committee was charged with keeping those values throughout the company to keep the feel of Crosstex the same - friendly, caring, family-oriented - and helping spread the message of the E4 values, all while the company continued to grow.
“The central point of our mission statement is to improve the quality of life for our employees,” Davis said. “We’ve shortened that to become our saying of ‘More Life.’ We believe people do what they do not because of the paycheck, not because of the work they’re doing, but the life they are experiencing with the people they work with.”
Davis was right in his growth predictions. Every year since 2000, the company has increased the number of employees in its Dallas headquarters, reaching 230 today; companywide, it has 622. Revenue, too, has continued to climb, with the company reporting more than $3.1 billion in 2006 revenue, up nearly tenfold from $390 million in 2001.
Protecting your identity
Preserving culture starts with how employees are brought into the company, both through acquisitions and through new hires. Most of Crosstex’s growth has come through acquisitions at the pace of a few companies a year, so Davis has had to make sure the culture he wants preserved is translated throughout all of the company’s operations.
Davis says bringing new employees into the fold and getting them to buy in to the Crosstex culture is challenging.
“Throughout the acquisition process, we are consistently communicating with people about who we are before they ever sign on,” Davis says. “We also are evaluating who the people are we’d potentially be partnering with to be sure that they fit. It’s not a given that they are a fit for us, or we are a fit for them. ... We treat every person in an acquisition the same as if it was a one-onone hiring opportunity off the street.”
Crosstex spends time with the new company’s employees before the acquisition, during the acquisition and especially after it to make sure they understand the culture. They rely on stories of successes from other employees to communicate how their culture works.
New hires are also carefully evaluated on the basis of culture.
“There is nothing more important than the people we hire,” Davis says.
To make sure the right people join Crosstex, each position has a list of critical success factors that must be met. At the top of that list is cultural fit. For the company’s executive positions, Davis follows what he calls the “3 by 3 by 3” rule. That means at least three candidates will be evaluated by at least three Crosstex employees in three different settings. Davis picked up that tip from Colan, who specializes in culture and managing high-growth companies.
“It works,” Davis says. “I’ve seen it work for us. ... If you have the first interview being a screening interview, the second over lunch and the third being out of the office at a ballgame or over a game of golf or something like that, you will see the real person come out as you go through the different settings.”
Culture by committee
Once an employee is on board, that’s when the culture committee comes in.
“They lead our activities in a large number of initiatives,” Davis says. “They lead the all-company meetings on a quarterly basis, which is a great place for us to reinforce the culture. They lead our new-employee orientation. A big part of the new-employee orientation is to introduce people to the culture and help them understand who we are and how we do things. They also lead a number of special events we have throughout the year.”
Davis uses these events to encourage employees to get to know each other.
“We believe employee engagement is a critical component of continuing our success and growth,” Davis says. “We believe people are more engaged when they like the place and the behavior and culture of the organization they are associated with. We believe that better culture results in better engagement, and better engagement results in continuing to grow and be successful.”
To that end, Crosstex stages special events throughout the year that help employees become and stay engaged. Among the events is a family Halloween party, which includes face-painting and treats, and an opportunity for employees to get to know each other’s families.
The committee also has a new-hire breakfast, which celebrates the arrival of new employees with a short introduction each month. It also periodically holds what Davis calls “brownie breaks.” “These are short connecting points over brownies and milk,” Davis says.
And Davis is there at each and every event.
“It’s more in a participative way,” Davis says. “I’m not there as the key communicator. I’m there as a participant. In fact, we emphasize senior management’s participation in all of these things. We think we have to model the behavior we want to have throughout the organization.”
To help employees create time to talk about their personal lives, on the walls outside of each office are what Crosstex calls
“More Life” boards. These are magnetic boards on which employees are encouraged to post photos and mementos from significant events, especially those outside of work. Davis says it helps employees connect to each other in more personal ways.
“You walk up to someone’s door, and it’s as if their life story is outside their door or cubicle,” Davis says.
Staying in the same building throughout the company’s rapid growth has helped Crosstex build upon its culture. The company has taken nearly every space in its building as other tenants left and bought out some leases to allow it to continue to expand. Davis says that’s been key to maintaining the culture, because Crosstex has customized the building to meet its needs.
“If you look at where we are located, it’s very comfortable for us,” Davis says. “We have built out the building to fit our culture. We started in 2000 serving lunch every day to all employees” at no cost.
“We built out a lunchroom for our employees. We literally sit with our people and talk about our lives and family. There is no greater place to do that than around the lunch table.”
It has a bonus of being healthy, too, as a hot lunch is provided two days a week, and sandwich fixings and fruit are provided the other three days. A small workout room is also provided on-site for employees.
Going forward, Davis sees the company growing through more acquisitions and by organic growth building more pipelines where it deems necessary. As Crosstex continues to swell, the company will continue to ensure its employees are happy and thriving. Davis says if that happens, the company will continue to grow.
“Our biggest challenge culturally will be to continue to preserve a great culture,” Davis says. “Fortunately, we don’t have to fix a bad culture, which I think puts us at least a step ahead, if not several steps ahead, of most companies. We have the people and systems in place. We respect the culture enough in order to continue to allocate the resources required.
“Most importantly, it is who we are at the top. We model it, we believe it, we’re committed to it, and that gives us the chance to continue to do well.”
HOW TO REACH: Crosstex Energy Services Inc., (214) 953-9500 or www.crosstexenergy.com
Elliott, president of Toni&Guy USA, worked her way up from the bottom, starting as a hair dresser in the first U.S. Toni&Guy salon in Dallas in 1985. By April 2005, she was at the helm of the company, overseeing its 56 salons and 1,560 employees.
That intimate knowledge of the company, though, was somewhat of a handicap. After working for the same company for 20 years, she decided it was time to hire outside consultants to do something she couldn’t: Evaluate the company objectively. “The 20-year mark ... made us look at things,” Elliott says. “You don’t want to do things the way you’ve always done it. We realized that it was time to reinvent, even if it’s just a slightly new direction. The salon business was successful, but we wanted to look at how the salon business operates.”
Elliott wanted the company to maintain its same cutting-edge image with both customers and hairstylists, so it was important not to grow too fast. Toni&Guy had already spun off its product division, the successful TIGI family of hair care products, and it had successful academies training the next generation of stylists.
There wasn’t anything really obvious about the salons’ operations that needed changing, because most were successful. But Elliott believed they could be more profitable, and that with some outside help to identify weaknesses, she could chart a path for the company’s future growth.
A fresh perspective
One of the most surprising recommendations the consultants offered was to consider the retail aspects of Toni&Guy salons, which the company hadn’t really considered. But once Elliott mulled it over, she thought it made perfect sense. “One of our strengths is that we carry the TIGI products Catwalk and Bedhead which is a globally recognized brand,” Elliott says. “But the salons looked more like a salon and not like a retail environment. ... The consultants helped us to look at our business differently, because they are fresh coming in and experts in their field but are outside of the salon area.”
The consultants recommended the front of the salon be reworked to appeal more to retail customers, so the company changed out fixtures and positioned merchandise in different ways. Elliott says an important part of the process was considering how customers purchase merchandise. “It had been merchandised more in a regimented way, categorized by type of product and by brand,” Elliott says. “What we did was merchandise them in a promotional aspect.”
That meant grouping items together how customers might purchase them, with shampoo, a coordinating conditioner, styling product and hairspray all together. “We want to help our clients recreate their look at home,” Elliott says. “When they leave the salon, they leave with the tools they need to recreate the look. We operate in regional, enclosed malls, which are a retail business to start with.”
Elliott says the changes have brought more customers into the salon just to shop, and some stay for hairstyling, making the salons more profitable.
This also dovetailed with a longstanding Toni & Guy philosophy: Keep the salons looking fresh. Because malls require stores to renew their looks when they re-sign a lease, it provides a good opportunity for Toni&Guy to examine the look of each salon as its lease comes up and redecorate, or even reconfigure it.
The company doesn’t rely on a set plan to accomplish this. Instead, it evaluates each salon as its lease expires and decides what look to choose. Elliott says being flexible with the design of the salons allows them to stay as updated and current as possible, which makes a big difference in how customers perceive them. Periodically reviewing the look of a business is something she would recommend to any business that needs a fresh, updated image and has multiple locations. “Just like hairstyles change, salon design images need to change to keep it fresh,” Elliott says.
Sometimes the change can be extreme, such as relocating a salon to better match its customer demographic.
Elliott says the company starts with the finances of the salon, then examines demographics of the mall and the area around it, almost as if it were looking at a new store. “We’ve had to close a few salons due to the mall completely changing and the tenant mix changing inside the mall,” Elliott says. “Our pricing is more moderate to high, so if the mall goes downhill and the tenant mix changes, our customers won’t shop at that mall. It keeps away the high traffic, which is the whole reason that we’ve chosen to do business inside a mall.”
For new locations, the company does the same research, looking at demographics of particular areas in large cities. Elliott says Toni & Guy opens about four salons a year; more than that might dilute the quality of the salons and its stylists, a lesson learned from experience.
From 1997 to 2002, the company opened eight to 10 salons a year, a tough pace for corporate headquarters to keep up with, both from a management perspective and a financial one. The company was reinvesting all of its profits back into opening more salons, and Elliott says it needed to pull back and stockpile cash for a few years so that existing salons could be refurbished and other projects could be accomplished. “We want to make sure we aren’t growing too fast,” Elliott says. “We have a term that we use called ‘controlled growth.’ Because our business is so service-oriented and people-intensive, we didn’t want to expand so fast that we lost the culture and vision and philosophy of what we were doing. “It is very important you maintain your quality. We realized we had planted so many trees so fast, we want to take some time to tweak and make sure they were strong and representing us as they should in all of those different cities.”
Training pays off
It’s not just the salons themselves that lure people and keep them coming back it’s the stylists, and the continual training they receive. Toni&Guy’s philosophy has been that education can become dated unless it is constantly refreshed, which is true in any industry but especially true in the hair industry, in which styles are constantly changing.
It starts with hiring people who are open to training and education. To make sure the stylists are a good fit, the company looks for people who are willing to go through training.
Elliott personally hires all of the stylists for the 14 salons in the Dallas-Fort Worth area. In addition to cosmetology education, she looks for a positive attitude, good communication skills and a willingness to learn. Elliott interviews them one-on-one, and the first interview is to check for the right attitude, which she looks for when she explains what the company has to offer. “It’s all about their facial expressions,” Elliott says. “Do they smile during the interview? Do they respond positively to the training opportunities? I lay out everything in detail and explain it to them on paper what they will be required to do.”
The second interview involves cutting and styling or chemically treating a model’s hair. Elliott wants the prospective employee to work with the model inside the actual salon where they might work to make sure they will like the environment.
If hired, the person spends about three months as an intern, then begins to build a book of clients. Training continues after they begin working, with what Toni&Guy calls “model nights,” when models are brought in and new techniques demonstrated.
Elliott says the training pays off.
“Because our staff is so well-trained, a walk-in turns into a repeat client right away,” Elliott says. “We turn a new client into a repeat client because of the quality of the work.”
Another effort Elliott put in place to fuel salon growth is a nationwide branding campaign. Elliott says the company has a strong brand in cities that have Toni&Guy salons, but she wants to grow the company’s name recognition and association with cutting-edge style across the country.
So the company is spending some major energy and money on a national marketing campaign that includes advertising in W and Harper’s Bazaar magazines. The company’s leaders chose those magazines because the demographics of the readers are similar to those of the customer that Toni & Guy typically attracts. “If we start going into Chicago or Seattle or other cities like that, the branding will have already occurred,” Elliott says. “Our clients are more that level of client. Our prices are medium to high. We are not a budget chain.”
For the campaign, the company created the ads in-house, in part because having creative talent in-house is less expensive than hiring an outside firm, and in part because Toni&Guy knows the look it wants for its advertising and simply doesn’t need outside assistance. “We feel like we know our business, and we know our target audience, so we know what images we want to put out there,” Elliott says. “So we didn’t go out there and hire that. We have a creative side.”
The company is on its fifth redesign of its Web site and is planning yet another one. Elliott says it’s another example of how the company constantly reinvents itself.
Toni&Guy also builds its brand by working with companies looking to provide perks to their employees.
It hosts small seminars on hair, makeup and fashions for corporate groups, which helps the company introduce itself in a new market. The seminars offer free, instant makeovers to participants to help build the company’s brand awareness.
“It breaks down all the barriers of them being leery of trying a new place,” Elliott says. “That’s where we’ve found we get the biggest return on investment because it’s just time and people. There is no money involved, but it has a huge impact. ... Once they try it, they’re hooked.”
HOW TO REACH: Toni&Guy USA, (972) 931-1567 or www.toniguy.com
Sam Caster says growth comes from one thing: providing something people need. If you do it, and do it ethically, your company will grow.
“My personal work philosophy is based on two concepts stewardship and servanthood,” says Caster, chairman and CEO of Mannatech Incorporated. “Being a success is directly equated to your ability to serve others and their needs. Those are the opportunities I look for. That’s the way I look to manage the business, and that’s the way that I look to grow the business. Fulfill people’s needs in the most ethical way, and your business tends to grow.”
Caster founded Mannatech in 1993, taking advantage of a consumer base with increasing concerns about health, and a new law called the Dietary Supplement Health and Education Act, which allowed the nutritional supplements industry to distribute educational materials discussing specific benefits or ingredients in their supplements.
Caster believed Mannatech could be the way to help people find ways to improve their health through natural supplements.
It’s working. Mannatech’s sales have grown from $191 million in 2003 to $389 million in 2005.
“We looked at the opportunity of developing technologies that had good science, again to meet the needs of what we felt was a massive movement in health care toward the concept of wellness,” Caster says. “There are millions of people looking for answers and solutions to not only protecting their quality of life but improving their quality of life if their health was challenged.” Caster has built his company through three key factors staying focused on what will provide the greatest benefit to the company, finding the right people and expanding internationally.
Focusing on what matters most
Caster knew he needed solid science to back his nutritional supplements, but initially, Mannatech was a small company and couldn’t afford a large research and development team.
In addition to a small in-house scientific team, the company contracted with outside firms to do research for it. As it turns out, that’s been a boon as it’s allowed Mannatech to get the research results it needs while allowing it to stay focused on selling.
Caster recommends contracting out for research and development for firms that need a lot of scientific skill, because no one can afford to hire away the best researchers from clinical organizations around the world. Outside research also lends credibility to the company’s claims about its products. “You are contracting with people who have enormous experience in certain fields,” Caster says. “Secondly, they have staffs of people who already understand how to do protocols. Thirdly, their reputation is necessary from a standpoint of validating the legitimacy of the science behind it. You also get a more independent view. When you do it yourself, sometimes people think, ‘Well, you did your own research,’” and they are suspicious of it.
Outsourcing its manufacturing has also allowed Caster to stay focused on his products rather than on production issues.
“Good, quality manufacturing is not that hard to find,” Caster says. “What we have to determine is our use of funds. Is it more important for us to get into the business of manufacturing when other people do it just as good as you could do it, or is it more important for us to put our funding into research and development and try to find components that no one else has? If we are investing in what will create the leading edge for our company, it’s not in manufacturing.”
Customers obviously approve of the company’s methods, because 74 percent of them are signed up to automatically receive refills of their chosen products.
Finding the right people
Mannatech started with an executive team Caster hand-chose to help him build the business. But he has made some key changes in that team in the past two years and brought in more experienced people who can take the company to the next level.
Five people in senior positions have been changed out in the last two years, and other positions have either been created or changed to reflect the company’s new size.
Making sure you always have the right people in place is key to successful growth.
“Some of it is actually that we’ve crossed that threshold of being a small company, heading toward that half-billion to billion-dollar threshold,” Caster says. “In some cases, we needed people with a higher level of experience in the beginning. Part of that is that we honestly didn’t have the ability to hire that quality of individual, nor could we have attracted them because we didn’t have the track record to.
“In some cases, people can grow into those positions. In other cases, people find their skills are better-suited to smaller-company life.”
Caster used a combination of an executive search firm and word-of-mouth to find his new executives.
Screening those people was key. In terms of experience, he wanted executives who had worked for companies of a similar size and in similar situations.
“It’s the same as finding good people in every part of a business,” Caster says. “The very first thing is character, even over experience, I think. You have to find people who are congruent with your company’s philosophy. Interviewing people in any department for character issues is No. 1 with me.”
Caster says he likes to ask “why” questions of people he’s considering hiring to get information about their character. Beyond where they worked, he wants to know why they worked there and what motivates them to work.
For example, in interviewing attorneys for an in-house counsel, he wants to know not only what kind of cases they’ve handled but how they felt about the outcome of the case and the decisions they made.
With scientists, he wants to make sure they are open to outside opinions and expertise. Caster says he wants people who aren’t driven by their own ego or money. Those who are driven by ego or money usually won’t look out for the best interests of the consumer, which is ultimately what Caster wants to ensure the company’s growth.
He also likes to talk to a candidate about his or her volunteer experience. People with significant community volunteer activities have looked beyond themselves to better the world around them, and those are probably people who will be strong employees.
One of the best screening mechanisms Caster often uses is a surprising one: He asks his wife.
“If it is a real key position, I try to have them have either a meeting or a dinner with my wife,” Caster says. “She has incredible discernment about people. It’s not in their skill set, and it’s not their resume, it’s who they are. We can have dinner and have a discussion about our children, what they do, whatever it is, and she has great insight and discernment about quality of people.”
Caster says his own feelings about people are usually eternally optimistic, and his wife’s views help him figure out the best hire for the organization. He recommends that any CEO consider finding someone with strong discernment about character to help them make that call, even if they aren’t really in a hiring role, and even if they aren’t part of your company. “I like everybody I meet,” Caster says. “It’s hard for me to discern character. I want to believe the best in everybody I see or meet. That could be my biggest asset but also my biggest liability when trying to build the team around me.”
From the beginning, Caster has had his eye on international markets as key to Mannatech’s growth. He says large companies rely on international markets to reach the billion-dollar mark, and it’s not as tricky as you might think. “In the health care environment, it’s the same issues all over the world,” Caster says. “People in every continent and every country are looking for a better quality of life. It’s universal.”
What’s tricky are the more subjective aspects of the product, such as packaging. Caster says the company has to make sure the colors of the packaging and the way the product is packaged work for consumers in different countries, and has to vary the packaging according to the country.
Mannatech contracts with companies located in the country its targeting to help them navigate those cultural differences. The company also spends time researching online what the best-selling competitive products are in the country it is considering, and how those products are packaged and sold.
Some of the things Caster considers are whether Mannatech’s price point can be cheaper than the most expensive product on the market, and what sizes are popular.
The product itself is often tested on people who live in the United States but are from the country in question, more for cultural issues than anything else. Do they like the smell, look and feel of the product? Did they like the results?
International is also a good fit for Mannatech because it sells its products through home-based distributors, who sell the products directly to customers. In other countries, home-based selling is more widely accepted than in the United States.
And that brings it back to passion: Caster passes his passion for natural products to the associates who sell it, who, in turn, have convinced a wide swath of consumers that the product needs to be a part of their life. Caster sees almost no limit to the applications of good science to dietary science, skin care and other related areas. “The people who have been the most successful are the people who have the most passion for what we’re doing,” Caster says. “There are some segments of not only our industry but other industries in which trying to generate a high-dollar income is the priority. Honestly, what we find is that the most successful associates are the ones who have a passion for it, and as a byproduct of that, their income grows.”
HOW TO REACH: Mannatech Inc., (972) 471-7400 or www.mannatech.com
In the airline industry, just running a company in the black is an accomplishment. But somehow, Colleen Barrett, president of Southwest Airlines Co., has found a way not only to operate in the black but to expand the airline’s reach and grow, as other airlines are filing bankruptcy, cutting service and even folding. Barrett and the company’s two other top managers, Herbert D. Kelleher, chairman of the board, and Gary C. Kelly, CEO, have done this by building a culture of employee warriors who help them look out for the company’s best interests. “We tell our employees over and over and over that if they want to continue to enjoy job security, which is very rare in our business, and if they want to increase their personal welfare from a financial standpoint, the only way we can continue to do those things is if we make more money,” Barrett says.
Southwest’s legendary warrior spirit started in the early days of the airline’s epic fight for the right to fly planes. The company spent three-and-a-half years in court fighting just for the right to put a plane in the air.
From those early days, everyone has been ready for a fight, always understanding that the airline’s very survival was at stake, every single day, with every single customer. With that attitude, employees have helped build the airline into a company that brings customers back, time and again, because it has taken flights beyond functional to fun.
Since its founding in 1971, Southwest has grown to 32,000 employees and reported $7.6 billion in revenue in 2005. Drawn to the airline by low fares and high customer satisfaction ratings, some 88.4 million people flew Southwest in 2005.
Since 1987, the airline has maintained the fewest overall customer complaints as published in the Department of Transportation’s Air Travel Consumer Report, according to Southwest.com, the company’s Web site. In 2005, Southwest ranked first in customer satisfaction. In 1973, the airline adopted the first profit-sharing plan in the U.S. airline industry. Through this plan and others, employees own at least 10 percent of the company stock, increasing the employees’ ownership mindset.
Barrett says that early fight was the basis for how the company thinks and operates today.
“The competition and the arrogance of people who didn’t think we should be there caused us to want to be there even more,” Barrett says. “I’ve often thought that if they had just left us alone, we probably would have been out of business in a year or two. Every step we took, they tried to block, and that built up a fire in the belly, and a ‘By God, nobody is going to do this to us’ sort of mentality that I think created what we now call our warrior spirit.”
So how exactly do you engage your employees in helping grow your company? Barrett says it starts with hiring the right people.
Southwest has defined what kind of personality matches nearly every type of job within the airline. For a customer service representative, the company looks for proactive extroverts who won’t be afraid to lean toward customers when talking to them. “We have learned over many years how to talk to people,” Barrett says. “It doesn’t matter what the subject. When they answer us, words that they use in their answers will give us certain kinds of personality characteristics that will be a good fit for each job that we have profiled. We have profiled almost all jobs at Southwest.”
Conducting interviews in a group setting is one way Southwest both culls applicants at a quicker pace and sees how applicants deal with people they don’t know. Some 50 to 60 people are interviewed at one time for similar jobs. “In a group setting, we are really looking for the superstars,” Barrett says.
The main interviewer has the participants play a few games to warm the group up and tells them they are expected to be respectful of each other. The interviewer then asks individuals to answer questions in the midst of the group and watches not only how they answer but how others in the room react to them. Are they looking at the person who is speaking? Do they laugh when the person says something funny?
Barrett says the company also sometimes watches how applicants act when they go to lunch in the Southwest cafeteria. Do they talk to others while they are in line? Do they sit in a group with people they don’t know and converse easily? Or do they find a quiet corner and sit alone, hoping to be unnoticed? The better fit for Southwest, in most cases, is the natural extrovert.
In the book “Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success” by Kevin and Jackie Freiberg, the authors tell the story of a pilot being interviewed for a job at Southwest who is rejected because he is rude to several employees during his trip to the interview location. His credentials were sterling, but his personality was all wrong, so he was not hired. “If you are not a warm-spirited, touchy-feely person, you are going to feel so out of your element that you are not going to be happy here,” Barrett says, which is even true for the company’s managers. Barrett recalls one comptroller whom she helped find a new job after he confessed he didn’t like the warm-and-fuzzy culture.
After employees are hired, Southwest has to deprogram them. At most traditional companies, employees strive to be professional, which is often interpreted as suppressing humor and personality. “That’s the craziest thing I ever heard,” Barrett says. “One of the most important and significant freedoms we allow our employees is the freedom to be an individual. I have to stress, particularly with new hires, and particularly with pilots, do not spend your first year as you would at any other company not wanting to be known and just being low-key until you get off of probation. If you do that, you are wasting the very first year of your life at Southwest Airlines. “Good grief, we hired you because of who you are. We didn’t hire you because you filled a mold.”
Southwest has handbooks and guidelines that employees are given to help them handle tricky situations with customers. But those are only guidelines. Barrett wants employees to make their own judgments on how to best handle a customer. “I can’t sit here in Dallas, Texas, and write a scenario for every single thing our employees will run into, so they have to use some common sense,” Barrett says. “I don’t want people using rule books as reasons not to help customers, or each other.”
Southwest encourages its employees to have fun. The airline has a book of games that circulates among flight attendants that gives them ideas for how to keep customers entertained. Southwest employees contribute their own ideas to it, and the book is changed about once a year so the games don’t get old.
Among the games flight attendants have used is one that gives a prize to the person on board with the oldest penny. The prizes aren’t usually anything special — it’s whatever they can find on the plane, including luggage tags and extra snacks. But it’s basic psychology, again, that aids Southwest: People love to win. “People will do anything to compete,” Barrett says. “It doesn’t matter how silly the prize. ... It’s unbelievable what you can get grown adults to do.”
And Barrett trusts that Southwest is hiring people who know how to judge when it’s the right time to play a game.
“You have to know your audience,” Barrett says. “A bunch of businessmen taking a 6:30 a.m. flight from Dallas to Houston reading The Wall Street Journal, they don’t want you playing games with them. But on Friday afternoon, when it is the end of a long week and they are loosening their ties and having a cold beer and they are on their way home, then it is probably OK. You learn that sort of thing from your peers, and you learn it from their body language.”
Barrett also applauds efforts to diffuse difficult customer service situations with humor. For example, a ticket agent in Houston was faced with an upset customer claiming he was a big shot and entitled to special treatment. “He really was all over her about, ‘Don’t you know who I am?’” says Barrett. “So she got on the speaker and said, ‘Ladies and gentlemen, I have a problem. Maybe you can help. This gentlemen in the blue suit and green tie, he doesn’t know who he is. Can anybody help him?’ Eventually he was falling down laughing at it. You have to know if you can pull it off.”
And what if the customer doesn’t laugh? Barrett says she might visit with the employee and talk about what went wrong. But she is careful not to scold unless it is warranted, because she wants her employees to take chances. “I’m OK with failure as long as they learn from their mistakes,” Barrett says.
Not only does Southwest trust the employees’ judgment on the best ways to handle customers, Southwest considers those employees experts on how to save money. Its pilots know the shortest routes that save the most jet fuel. And, also recounted in the book “Nuts!,” a flight attendant once suggested the company stop buying special trash bags imprinted with the company logo for collecting trash at the end of a flight; use regular garbage bags instead. It saved Southwest thousands of dollars. And a computer technician told the airline he could build the computers it needed much more inexpensively than it could buy them, so the airline took him up on his offer.
Little things matter
What keeps employees wanting to work so hard for their employer is, in part, self-interest in keeping Southwest in business so that they can reap the rewards of ownership. But Southwest also works hard to take care of its employees, creating the kind of place they want to stay.
Barrett has a seven-employee internal customer care team that keeps track of every single employee’s birthday, significant anniversaries, the birth of children and other important events, and makes sure that cards go out for nearly every occasion. Barrett’s office sends out about 75,000 cards annually, and she knows it is meaningful to employees because she hears from them if she misses something.
“You really have to be good about it,” Barrett says.
What may be the key for Southwest is sincerity. Barrett says no company can sell employees on a fun family culture if it isn’t practiced, and believed in, from the very top down. The message from management has to be the same for both employees and customers, and it has to be honest and sincere. “We’ve always underpromised and overdelivered, and we’ve always kept it simple,” Barrett says. “We do not purport to be all things to all people, and we don’t make any bones about who we are and what we stand for. We talk openly, both internally and externally, from the same mouth, if you will. We don’t worry a lot about inconsistent messages because we don’t use them. Sometimes we’ve been ridiculed, and we’ve been the butt of many jokes, but it works for us.”
HOW TO REACH: Southwest Airlines Co., www.southwest.com
The battery brand was well-known, at least in part because of a 15-year deal with NASCAR that promotes its products. Customers often wrote letters to the company praising its batteries and bragging about how long they last. And Sepulveda felt good about the company’s staff.
“We had a very successful history of five decades of unparalleled service in the marketplace that we function in,” Sepulveda says. “Interstate batteries have a tremendous reputation, and that emanates from the quality of the product and the quality of the service that surrounds that product to keep it fresh, fully charged and guaranteed power. That was our tremendous foundational strength.”
Interstate Battery began in Dallas in 1952 as a distributor of batteries, and today buys its batteries from other manufacturers and distributes them throughout the country. There are some 200,000 Interstate Battery dealers in the United States, Canada and the Caribbean, and the majority of the company’s products are automotive and commercial equipment batteries.
But to take the company to the next level, Sepulveda saw that a few things needed to change.
For the last two years, Sepulveda has worked on changing the structure of the company, defining a clear vision for how things would be done and taking the company into new territory to promote growth.
Changing for the better
Sepulveda was one of two executive vice presidents before taking the president and CEO position, and the way the company was set up, five vice presidents reported to each executive vice president.
He saw an easier way to keep better tabs on the organization.
“For the sake of promoting agility and nimbleness, and also for the cost benefits, I eliminated that EVP level, so the 10 vice presidents report to me,” Sepulveda says. “I would say that was a pretty big organizational structure change.”
And even though eliminating those two positions complicated his life, it was necessary for the good of the organization.
“I did that out of a commitment to success, not to my personal comfort,” Sepulveda says. “I would say as a result, the ability for the leadership team to interact and have discussions and act proactively or react has been increased, and the time frame for that compressed.”
Sepulveda strives to give the vice presidents autonomy. He holds a once-a-week meeting on Monday afternoons with them as a group. The rest of the week he stays out of their way, acting as a resource or coach whenever needed, even if that means responding to an e-mail late at night.
He also ended some internal debate that he says was taking away from the time and energy employees should have been spending bolstering the company in the marketplace.
The company largely sells car batteries through independent distributorships, and occasionally, it has to take over a troubled distributorship to get it profitable and functioning again. After that, the company typically hangs on to the distributorship, and Sepulveda says some employees have debated whether this is a good idea. About 80 percent of the company’s distributorships are owned by independent distributors; the other 20 percent are owned by the company.
Sepulveda believes owning distributorships is a plus for the company, as it gives it experience at turning around a distributorship which, in turn, can help company leaders model for distributors how to run their operations better. Sepulveda spent some time demonstrating to his employees why he thought this was a good idea and settled the debate, and he’s no longer interested in discussing the issue.
“We wanted to hone our focus on the marketplace,” Sepulveda says. “This sounds like an oxymoron, but we wanted to force collaboration internally so that a minimum of resources get siphoned off in potential friction or potential differing perspectives between areas of the battery company.”
He also changed the warranty program on the company’s car batteries to differentiate the products better in the marketplace. Interstate sells three grades of batteries, and when Sepulveda took over, the free replacement period for a failed battery was 18 months. For its top-rated batteries, the replacement period was increased to 30 months; for the middle-grade battery, the warranty was increased to 24 months, and the bottom-grade battery kept its 18-month warranty.
“It put our free replacement warranty on par with our known quality in the marketplace,” Sepulveda says.
He says the longer warranty will help the company sell more batteries and grow its share of the battery business.
“It’s not without risk, but we believe the benefit far outweighs that,” Sepulveda says.
Sepulveda has worked to position Interstate Battery to take advantage of power-hungry devices used today and new technologies that will be used tomorrow.
One way he is building the company outside of its traditional car battery business is through retail stores, called All Battery. Currently, there are 56 All Battery stores in 24 states and Puerto Rico, with 38 of those franchised and the other 18 owned by the company. Within two to three years, Sepulveda wants to have 100 franchised All Battery stores.
He says this is a market ripe for the picking because many new and popular pieces of technology need highly specialized batteries to operate. The stores can either sell a consumer the battery they need, acquire it for them or make it on site.
“The real potential is that the market for what I’m referring to now as the All Battery market is highly segmented, and it’s a spectrum ranging from very basic batteries that are available everywhere to very specialized batteries that are available nowhere,” Sepulveda says. “(For) rare batteries, such as for a cordless drill or other handheld tool, those batteries die. Generally, what people do is contact the manufacturer, and if they can get one, it will be very expensive. What they can do is bring their old battery and that tool to us, and we can fabricate a new battery for them that we guarantee for a year. It’s very economical and doesn’t obsolete what is a worthwhile tool for them.
“As portability becomes more important and our society becomes more mobile, that’s only going to amplify the opportunity. We want to be positioned to provide value to the marketplace.”
Sepulveda also wants to build the e-commerce business. The company cannot sell automotive batteries on the Internet because of post office regulations against shipping hazardous chemicals, and even if it could, the batteries are heavy and the postage costs would rule out that option for most consumers. The Web site instead offers a search engine where consumers can punch in their ZIP code and find the nearest dealer for automotive batteries. All other consumer batteries, such as those sold through the All Battery stores, are available through the Web site.
“We do have substantial growth in our e-commerce site,” Sepulveda says. “We are projecting a little over 100 percent growth in top-line revenue for that site next year. ... We have not done a lot to promote that site, but we see a lot of repeat business.”
Sepulveda is also trying to diversify through the Power Care business segment, which provides critical power and motive power to businesses. As he explains it, the critical power segment provides giant back-up batteries that fuel oil refineries, technology centers, telephone switching stations and other places that need continuous power.
“What the power does is provide you the opportunity to go through an orderly protocol of shutting down so that when power is restored, you don’t have any damage,” Sepulveda says.
The company also sells batteries that are used in forklifts and other warehouse applications, which is the motive power of the Power Care business segment. It is in the beginning stages of both types of Power Care businesses and has high hopes for growing it.
“It’s an incubator and growing,” Sepulveda says. “We are positioned in Florida, in Texas and also the north to see what we can do relative to understanding that business, demonstrating success and then considering the merits of expanding it.”
Sepulveda’s changes are working. Interstate’s revenue has grown from $625 million in 2004 to a projected $750 million in 2006. During that same period, he has reduced the number of employees at the Dallas headquarters from just under 500 to about 460 people.
To accomplish his long-term goals, Sepulveda knows he needs the right team in place. He encourages employees to have an entrepreneurial mindset, to seek opportunities throughout the company that suit their talents and even to suggest colleagues for new positions if their talents match another job.
Sepulveda also speaks about the company and his philosophy on leadership and business at colleges and universities, and as a result, he’s generated some interest among young, talented graduates seeking a job in the business world.
Keeping the Interstate Battery team strong and ready for new opportunities is his among his chief goals.
“People are not Interstate’s greatest asset,” Sepulveda says. “The right people are Interstate’s greatest asset. Develop the athletes and deal with any who are not in the game.”
How to reach: Interstate Battery System of America Inc., www.ibsa.com
Frank was COO at the successful Steak and Ale restaurant chain and had to think carefully about the job offer.
He started with research, and what he found ultimately led him to become chairman of the board and CEO of CEC Entertainment Inc., the new parent company that today operates Chuck E. Cheese restaurants. Among Frank’s first decisions was to drop the less popular ShowBiz Pizza name, which the company had operated under previously, and continue the business under the name Chuck E. Cheese, which he believed had more recognition in the marketplace.
“The reason I finally decided to come was that I just started going out to a bunch of ShowBizes and Chuck E. Cheeses as I traveled,” Frank says. “Even though the stores were really run down and the employees not doing that great of a job, I still saw a bunch of little kids running around with smiles on their faces. They still loved the concept. They still loved Chuck E. Cheese, loved the characters and animation, and I thought, ‘There has to be something to this.’
“If they love this experience, and it’s not even very good, just think of what this could be if someone could really do something with it in a more quality way.”
While on these visits, he experienced the restaurants as their customers did. He ate the pizza and thought it wasn’t good. He examined the dcor and found it dingy, dirty and dated. He even took a hard look at the restaurants’ customers. They were a mix of toddlers who loved the place, parents who hated it but came with their kids, and teens, many of whom smoked, played video games and intimidated the parents. It wasn’t a happy mix.
His first order of business was to stop the bottom-line bleeding.
“We weren’t paying most of our rent,” Frank says. “We weren’t paying our debt at all. We were focused on making our payroll and paying our purveyors that were supplying us with the products we needed to operate. That was about it.”
When he took over, there were 300 stores. He closed the 100 least profitable ones, then sought out help in the financial sector.
An investment firm worked with the company to renegotiate its debt with 96 percent of its creditors, a move that staved off bankruptcy. That reduced the company’s debt from $110 million to $30 million, and Frank and other executives then raised enough money to pay off the $30 million.
“That gave us a chance to survive,” Frank says. “It was still a very difficult position we were in, because same-store sales at that time had been declining for a good six or seven years, almost since the beginning of both businesses, and many of those years, it was double-digit declines. You can restructure the debt, but if you don’t get the sales turned around, you’ll be right back at bankruptcy.”
Bringing back the moms
By the summer of 1986, the restructuring was complete, and it was time for the chain’s makeover.
“To the degree that kids loved us, parents disliked us almost as intensely,” Frank says. “The service wasn’t any good, and the stores were dirty. ... We had to make sure that kids still loved to come to Chuck E. Cheese but do it in a manner that was more acceptable to parents.”
To help accomplish that, Frank made a decision that alienated some of its customers: It banned from the stores all children under 18 who were not accompanied by an adult, and it deep-sixed all but the most popular video games. That meant that the teens who had spent their afternoons hanging out at Chuck E. Cheese were gone.
Those video games were replaced with games of skill, such as Whack-A-Mole and ball tosses, where kids and even parents could win prizes as they played. Frank also added a salad bar, all the rage in the 1980s, to lure in parents, and upgraded the restaurants’ pizza. And, to make sure the public knew about the changes, he brought in a new marketing executive, Dick Huston, who is still with CEC today, to get the word out. Television ads in larger markets helped tell the story.
“Without a doubt, that was the most important thing I did in the first year of the company,” Frank says.
And slowly but surely, CEC began to show signs of life. By early 1986, same-store sales had stabilized, and by 1987, the stores “got off to the races,” Frank says, with increases in same-store sales becoming the norm.
In 1989, Dallas-based Brock Hotel Corp., the parent company of CEC, spun CEC off into its own publicly traded company.
“That was a key point for our company,” Frank says. “When Bob Brock founded Brock Hotel Corp. and got into the ShowBiz business, I think he believed there were a lot of synergies or potential synergies between the hotel business, and ShowBiz and Chuck E. Cheese. The reality is that when he got into the business, there really weren’t. The businesses were so different that, in my opinion, they needed separate staffs and separate people focused on the hotels and restaurants. We needed to be more autonomous, and the hotel division needed to do likewise.”
One of Frank’s biggest challenges was getting employees invested in their jobs again. At the time he came to the company, employees spent more energy worrying about whether they would have jobs the next day than doing their jobs, much less thinking of ways to improve operations. Frank made appreciating employees and keeping them a priority, and that’s still reflected in the company’s philosophy today.
Keeping those employees happy is important to CEC’s bottom line.
“There is no doubt,” Frank says. “You can just look at single locations, and where we have a quality general manager who has been there a long time, the earnings and sales and profits at that location just continue to grow. If you have a store where you are constantly turning over management, you’ve got a store where sales will be, at best, volatile, at worst, declining. Stability is everything.”
CEC keeps managers on the job by compensating them appropriately, Frank says, as well as making sure they have autonomy to do their jobs well and even have fun.
Today, Chuck E. Cheese has 474 locations, with just 44 f those as franchises.
“We are not selling any franchises in the U.S., and we are a buyer of our franchise locations from time to time,” Frank says. “We probably average buying three to four locations a year.”
Some franchisees have been in the business for more than two decades, he says, and they want to either grow the business or move on to something else. Since Chuck E. Cheese isn’t selling any new franchises, most owners simply want out, and those buyouts help the company to grow.
“We are the logical buyer there because there are efficiencies there for us,” Frank says. “A well-run Chuck E. is greater in its ability to generate earnings if it is company-owned than if we are just collecting royalties off of a franchisee.”
The company is also branching into Canada. Frank says it has to change its model very little to make the restaurants work in Canada, so it makes sense to take advantage of that opportunity.
“The concept seems to work there,” Frank says. “We think it’s an opportunity to grow Chuck E. up there in the next three to five years.”
There are a few franchised locations in other countries, including Saudi Arabia and Guatemala, but the company doesn’t plan to move into more foreign markets, preferring instead to focus its growth efforts in North America. In 2006, Chuck E. Cheese wants to have about 26 to 30 more stores, either by opening new ones or by buying back stores from franchisees. Frank says the company wants to continue that brisk pace for at least the next several years.
CEC’s criteria for new store locations help keep the company profitable. Frank hunts for places with dense population counts rich with children up to about age 12. The company also studies median income.
“The higher the kid count, the lower we can go in terms of average or median income in the area,” Frank says. “If the kid count is lower and the median income is higher, you can make the case that the frequency might be higher.”
CEC likes to have locations in freestanding buildings, preferably on major traffic ways. When possible, it buy lands but will lease if need be.
“What we’re focused on is getting the best piece of real estate,” Frank says.
Keeping restaurants fresh-looking is also a top priority that keeps customers coming back. CEC has targeted 140 to 150 locations for remodeling in 2006, with about 100 of those getting a new game and ride package that costs about $100,000 per restaurant. The other 40 to 50 stores also get the new games and rides, but in addition, they will undergo a major remodeling project at a cost of about $450,000 per store, Frank says.
CEC uses Dallas-based Parkway Construction to do its remodeling. All of the work is done at night, and stores are not closed while the remodeling is going on. Frank believes keeping the stores current is essential to the company’s continued growth.
“It’s critical,” Frank says. “If we didn’t do it, we’d have sales issues very quickly.”
As a comparison, the loss of 117 operating days chainwide because of hurricane damage in 2005 negatively affected comparable store sales by 0.5 percent.
Another significant goal for the company is addressing value, Frank says. Gas prices have sucked funds out of the budgets of young families, so the company is battling back by offering more coupons to customers. With the restaurants now serving better pizza and with a fresh look, it’s important to make sure customers still think the place is a bargain.
“We think that a key part of our plan in 2006 is increasing the distribution of coupons in the marketplace but also combining the increased number we’re putting out with increased offers,” Frank says.
The company will offer coupons 16 times this year instead of 13, with a greater variety of offers. There’s also a free-token promotion for guests under 12, and TV spots are being increased to 30 seconds from 15 to better communicate the company’s message.
The bottom line is that Frank wants to make sure the company continues its strong growth. In 1990, it posted net income of $8.5 million on revenue of $182 million. Last year, it posted net income of $73 million on $726 million in revenue. Frank says continued growth is possible, in 2006 and beyond.
“We believe that there are still a fair amount of growth opportunities here in North America,” Frank says. “We want to continue to stay focused on what we do best, which is grow Chuck E. Cheese in a quality way.”
How to reach: CEC Entertainment, www.chuckecheese.com