Does the current lending climate preclude entrepreneurs from starting a new business or expanding one? Not if CEOs do their homework. Funding vehicles exist that will help CEOs achieve their dreams; it’s just a matter of knowing what’s available and making sure that your company can service the debt.
“Big companies have greater resources because they have large infrastructures. Therefore, they tend to find a greater number of financing solutions in a tight lending market,” says Brian Lamb, CFO of Fifth Third Bank (Tampa Bay). “CEOs of smaller organizations or start-up operations must rely on external resources to source loans and to understand how to make their business attractive to a lender, given the increased credit scrutiny in today’s lending environment.”
Smart Business spoke with Lamb about how CEOs of small companies can finance expansion, given the current lending climate.
What should CEOs know about the current lending climate before seeking funding?
Be sure that your company has adequate cash flow to service the debt and enough cash flow in reserve to continue making payments, in the event the economy slows and your company’s sales decrease. In this particular market, lenders are scrutinizing financial statements and a company’s financial situation more closely, and one of the things they will review is the value of any collateralized assets used to secure the loan. For example, if you’ve collateralized the loan through real estate, the lender will be looking at the property closely to make certain that the value of the real estate and the equity in the property are secure. Lenders want to see a better balance between debt and equity as part of their tighter lending standards.
What are some of the available funding options?
There are products in the market that offer quarterly payments, which helps with debt service through more advantageous cash flow. Some loans will let you make interest-onl payments in the beginning, which will help expanding companies grow into the debt service. When you inquire about these funding options, be sure to ask about the covenants that are part of these loan agreements. Those covenants usually require companies to maintain certain financial ratios as part of the agreement. CEOs should not be afraid of the covenants; just think your decision through and be sure to run projections that will help you understand how your business will perform under a variety of economic scenarios and how those covenants may affect payments. Fully understand what the loan is actually going to cost in terms of interest and repayment under every possible set of circumstances.
Can some of these loans be refinanced down the road?
Yes, some loans offer CEOs the opportunity to refinance the terms, or the product may offer tiered pricing based upon certain criteria, so be sure to inquire about that before securing the funding because it’s not an automatic feature. The refinancing or tiered pricing feature is usually tied to hitting certain thresholds or debt service coverage ratios and, while not every company can qualify for this option, it’s definitely worth pursuing. Also, in 36 months the market could be completely different, so it may be advantageous to leave options open to refinance to more favorable terms.
How can I improve my company’s ability to service debt?
Look at some of the treasury management services your bank provides as a way to gain efficiencies and lower operating costs. For example, there are ways to reduce manual accounting processes by taking advantage of online wire transfers and a reduction in the need to cut manual checks. Now can actually be an opportune time for CEOs to explore all options that will reduce overhead and increase their company’s ability to service debt.
What external resources are available to help CEOs?
There are resources available for CEOs of entrepreneurial firms, so no one should have to go it alone. Ask your banker what type of training he or she can provide around lending products and cash flow management techniques. Given the current climate, CEOs will need a more proactive approach to securing financing because it may take some time to prepare the company’s financial statements and align your business model to meet the debt service. Knowing your options well in advance of the need is one of the best techniques to keep your business growing in today’s lending climate.
BRIAN LAMB is the CFO for Fifth Third Bank (Tampa Bay). Reach him at (813) 306-2491 or Brian.Lamb@53.com.
On the surface, there are many compelling reasons for CEOs to expand their business operations into Mexico.
A plentiful labor supply and lower operating costs are among the most frequently mentioned advantages. But doing business in Mexico can be frustrating, confusing and, at times, impossible for the foreign business person. Most importantly, without adequate preplanning and knowledge of the specific laws that will impact a Mexican business operation, CEOs may find that their rate of return doesn’t measure up to their expectations.
“Before you decide to expand your business operation into Mexico, think about your exit strategy. For example, think how are you going to repatriate your earnings, the corresponding tax implications and the rate of return you expect to receive from your business investment,” says Enrique Hernández, partner with the International Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. “The way the business is initially set up determines many of the variables that affect profitability. Your rate of return can be substantially less than you anticipated if your Mexican expansion is not planned properly from the outset.”
Smart Business spoke with Hernández about what CEOs should know before launching a business in Mexico.
How does the type of business entity affect the U.S. tax rates?
Many CEOs mistakenly think that the tax treaty between the U.S. and Mexico eliminates double taxation. That is only a partially true statement if you structure the venture properly. Mexico has a similar tax system to the U.S. and businesses are taxed at a fixed rate of 28 percent on net earnings. However, when you transfer the profits back to the U.S., now Uncle Sam wants to tax it again. The combined worldwide effective tax rate will differ depending upon whether earnings are transferred back to the U.S. as partnership distributions or as dividends.
Here’s an example: If the Mexican company is operating under an S.A. structure and the U.S. parent company is structured as a partnership, you’ll currently pay U.S. federal taxes on any dividend income you bring into the U.S., on top of and after paying Mexican business taxes. If the Mexican company has been effectively structured as a pass-through entity and you repatriate Mexican profits, you’ll pay income taxes in the U.S. at the applicable U.S. federal rate, but you will likely be able to apply the paid Mexican income tax as a foreign tax credit, thus effectively avoiding a double-tax scenario. CEOs need to estimate how much money they’ll be repatriating, look at the tax rates and see which structure is most advantageous.
The choice of Mexican business entity will largely depend on the desired U.S. tax result. The proper choice of cross-border tax structure may reduce the combined amount of taxes paid on the Mexican-sourced earnings.
How are labor laws affected by the Mexican business entity?
Mexican labor laws are very protective of employees; for example, there’s a mandatory profit-sharing law requiring employers to share 10 percent of corporate profits with employees. Setting up one entity that acts as a service company for the employees that generates minimal profits, another company to hold the company’s assets and a third operating company, which generates all the profits, will help reduce the amount of profits that are subject to the employee profit-sharing statute. Anticipating how much money the company will make and how large the operation will become is vital to structuring the Mexican entity properly in order to manage employee profit-sharing expenditures.
How does the Mexican legal system differ from that in the U.S.?
Mexico’s legal system operates under a civil law system as opposed to the common law system, which is the basis for our legal system here in the U.S. That foundational difference has an impact on everyday business protocol. For example, in the U.S., facsimile copies of signed contracts are generally considered legally binding. In Mexico, a facsimile copy of a contract is not sufficient evidence that the contract exists. You always need to execute contracts with an original signature and retain them, in case you need to go to court to enforce any of the terms and conditions. There are a number of other differences as well, so CEOs should educate themselves before launching the operation.
How can CEOs obtain the proper advice to plan for an expansion to Mexico?
The best way to avoid surprises as a result of a Mexican business expansion is to plan ahead and get competent advice on both sides of the border. It’s important to have your U.S. and Mexican attorneys communicate with each other because they should collaborate using their knowledge of each country’s laws to ensure that the result is seamless. There are tax considerations that drive the business decisions, so one of the keys to success is knowledge of the tax laws and proactive planning. CEOs need to become knowledgeable in this area in order to avoid ROI disappointment.
ENRIQUE HERNÁNDEZ is an attorney licensed to practice in Mexico and in California and is a partner with the International Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at (619) 515-3240 or email@example.com.
Bergeron, the chairman and CEO of VeriFone Holdings Inc., a provider of secure electronic payment technology and services, isn’t fazed by the comparison. He’s not reckless; he’s just intentionally decisive and swift in his actions, something he sees as a necessity when a company is in trouble.
“There’s never been a time where I think that I made a mistake as a result of moving too quickly,” he says. “In the situations that I’ve studied, there were more instances of risk being associated with CEOs moving too slowly as opposed to moving too quickly.”
Bergeron spearheaded the buyout of VeriFone in July 2001, then a division of Hewlett-Packard. What he took over was a company that had a lot of problems to solve. VeriFone had a fiscal 2001 net loss of $63.8 million and was dysfunctional in more ways than one.
The culture was inefficient and wasn’t driving innovation. The centralized command structure was cumbersome and slow, and the staff was not performance driven. As part of behemoth HP, the company wasn’t acting like the nimble tech firm it needed to be to survive.
Bergeron was quoted at the time as saying: “They gummed it up with HP bureaucracy and sucked the entrepreneurial oxygen out of it.”
And if it took a bull in a china shop to fix it, Bergeron was willing to break a few things to put VeriFone back on the path to profitability.
Make quick decisions
During the four-month financial due diligence period preceding the acquisition, Bergeron made his assessment of VeriFone, its staff and its culture, forming his own opinions as to the reasons behind its poor financial performance. The assessment period allowed Bergeron to get a jump start on the turnaround when he fired 550 people on the second day following the buyout, launching a cultural shift in the organization and immediately improving the bottom line through cost reduction.
“People were absolutely paralyzed,” Bergeron says. “Having a meeting was a placebo for taking action. Everybody had an opinion, and everything was a community decision. The staff spent most of their time building consensus and little time taking action. The impression that I got was that all staff members were equal because everybody sat in a cube and there wasn’t a leader of anything. It was a socialistic approach to the marketplace, characterized by a lack of product innovation and excess costs.”
VeriFone had 1,350 people on staff at the time of the acquisition, which not only represented more overhead than the firm’s revenue could support, the large staff was contributing to the organization’s process-driven business style, which yielded slow decisions and killed innovation.
“Turnarounds require fast and immediate action,” Bergeron says. “You have to accept the fact that you may not be 100 percent correct about the quick decisions that you make regarding which people to keep but not taking action on poor performers will lead to true mediocrity. Sometimes leaders, particularly in North America, think that they are better off with the devil they know versus the devil they don’t know, so they’re afraid to take action or worse yet, they move poor performers into other positions. The employees are witness to your tolerance for poor performance and soon the entire organization slows down.”
Bergeron initially asked all of VeriFone’s existing managers to evaluate their teams and supply him with a list of proposed staff reductions. To complete his staff assessments, Bergeron interviewed the key managers in the existing organization and came to the conclusion that the entire senior leadership team needed to be replaced.
“While I did a lot of interviews during the first four months, the decision was clear once I completed my assessment of the senior managers and asked them for their lists of employees who should be terminated,” Bergeron says. “If you were a loser on a loser’s list, I really didn’t need to dig any further to find the answer as to who should be released.
“I know that some people may characterize my position as uncaring and dismissive, but the fact is that in order to move forward, you have to make your cuts swiftly. By the third day after the acquisition, it was all behind us, and we were ready to go forward. Making quick decisive cuts is the difference between trying to orchestrate a revolution as a CEO and a shift.”
After the initial personnel reduction, Bergeron says that he reorganized the company into smaller, more manageable business entities and dispersed those business units around the globe. Bergeron’s reasoning for the move is that he believes in driving the business from the field, not from the headquarters. VeriFone’s numbers not only reflect his philosophy, but they also validate its effectiveness. Two-thirds of VeriFone’s employees are located outside the U.S in field-based business units that allow the staff to work directly with the firm’s global customers. The firm increased its revenue in 2006 by 22 percent in Europe and 57 percent in Latin America compared to 2005.
“I reorganized the organization into smaller, more manageable entities run by a local manager,” Bergeron says. “I give that P&L owner full control, and I don’t get in their way. I hire very strong managers to run the business, but I don’t own the responsibility, they do. I’m always coaching and sharing with them, but we’ll never get to be a $2 billion organization unless the managers around the globe own the responsibility for the results and perform.”
Bergeron acknowledges that companies need some processes and infrastructure, such as IT, human resources and back-office accounting functions, in order to sustain growth. But he characterizes those as the support functions for the organization not the units that drive the business. Only 50 employees are housed in the firm’s headquarters in San Jose, which includes the executive staff and leaders who oversee a dispersed group of employees who perform support functions but those support employees are embedded in each business unit. Besides fostering growth, having a lean headquarters staff keeps bureaucracy and slow decision-making from creeping back into the company’s culture.
In addition to frequent e-mails and weekly conference calls, Bergeron keeps his arms around the operation by holding meetings on a quarterly basis that include regional sales managers and key senior management attendees from critical organizations, such as engineering, supply chain, finance, marketing and HR. Status on business initiatives and sales results are typically discussed along with longer-term project needs.
“The key to managing strong people who are dispersed globally is frequent communications,” Bergeron says. “I spend a fair amount of time reviewing data, and I’m always talking to the top influencers in the company. The key is consistently communicating the strategy so everyone’s on the same page.”
Bergeron says that creating a high-performance culture attracts high-achieving employees. In the Silicon Valley’s ultracompetitive recruiting market, Bergeron says that VeriFone hasn’t had to steal top performers from other firms. He says that top performers have been attracted to VeriFone because it’s a fun place to work. Since making his staff cuts early on, VeriFone has grown both organically and through acquisitions increasing its employees to 2,500. He augments the environment through above-average pay and internal growth opportunities.
“Our total compensation is in the top 25th percentile for our industry group,” Bergeron says. “We have a feel-good environment, and most people work remotely so it’s nice to not wake up to an alarm clock every day. The prior CEO was always flying around closing deals, and the idea of hitting a sales quota was merely a suggestion. Top achievers want to be in an environment where they can accomplish and be recognized for those accomplishments. When people know that they’re being measured and what they’re being measured on, they’ll perform. If people don’t perform, you have to get rid of them.”
Bergeron says that the feel-good work environment at VeriFone not only attracts employees who seek accountability for results, it retains them. The company averages a voluntary turnover rate of less than 15 percent annually, which is among one of the best rates for a Silicon Valley tech firm.
With so much recent success, the company has created its own positive vibes in the recruiting marketplace. About half of the company’s work force receives stock options, and with the escalation in the stock price, those employees have received substantial financial rewards for their contributions. In addition, Bergeron favors promoting employees from within the organization.
“People want to feel that their contributions are valued, so we always look first to make promotions from within the organization,” Bergeron says. “You have to think about what kind of message you’re sending as the CEO if you don’t consider your own employees first for any new opportunities.”
Given Bergeron’s disdain for processes, there’s no formal structure for engendering internal promotions at VeriFone. However, Bergeron has demonstrated his beliefs through example by promoting more than nine senior executives from within the ranks, including the chief information officer, three general mangers and four vice presidents.
The results leave no doubt that Bergeron has accomplished a great deal since taking over VeriFone. In the six years since the acquisition, the company has become the leader in the secure electronic payment technology and services industry. Its net revenue was $581 million in 2006, and it posted a net income of $59.5 million. Along the way, both company profits and the stock price have soared, generating a huge payback for all investors, including Bergeron and many of the company’s key employees.
Bergeron points to innovation and new product development as well as several strategic acquisitions that have been byproducts of the corporate culture and significant contributors to the company’s market leadership position. But overall, it’s his energy and rapid decision-making that’s given velocity to the business growth.
“We’ve grown so fast so quickly, it’s important that employees across the globe hear the same consistency in our message and our strategy so you have to be out in front of people,” Bergeron says. “CEOs often shirk that responsibility, but it’s important to demonstrate a level of competent caring and an energy level for the direction of the organization, the only way to do that is by getting out in front of the employees.”
As the company moved from turnaround mode to growth mode, he has stuck to the same basic principles to move VeriFone forward.
“Our first acquisition was ourselves, and since then, we’ve made three more,” Bergeron says. “It’s really added to our earnings per share because we’ve looked for acquisitions that have complementary distribution channels or technology that we need, and it makes sense to make the acquisition because we don’t want to take two years playing catch-up by developing the technology capability in house.”
Bergeron says that he looks for similarities in culture between VeriFone and the firm he’s considering acquiring, and if he doesn’t find the acquisition to be merely plug-and-play, he’s likely to discount the price knowing that he’ll be facing restaffing costs.
“First of all, the acquisition needs to be priced well or else it just doesn’t make sense,” Bergeron says. “Then you have to integrate the two companies immediately. You can’t soft pedal around it, so just go ahead and do it. You can’t really finesse the changes that you need to make because it’s not like you can put the acquisition through the sausage machine and it’s going to become a different firm.
“I would tell CEOs that if you have to replace everyone, do it. It eliminates the push back from those who are resistant, and life’s too short to put everyone through that especially those who can’t tolerate change. In the long run, you’re doing those people a favor and, hopefully, they’ll land on their feet.”
HOW TO REACH: VeriFone Holdings Inc., www.VeriFone.com
When the door to competitive energy sales swung open in the most populous state in the union, there was every reason to believe that a company focused on selling electricity to consumers and businesses in the Golden State would succeed.
Commerce Energy Group Inc. was conceived and founded in 1997 following the passage of California’s energy deregulation plan, but the door of opportunity slammed shut following the energy crisis of 2000, the subsequent Enron debacle and when California’s energy deregulation policy was abruptly placed on hold.
Commerce Energy floundered for several years until Steven Boss joined the company in July 2005. As the new CEO, Boss was charged with repositioning the firm and finding the open windows to new business and new markets outside of California.
“The company was in a large state of disarray for a couple of years,” Boss says. “Without leadership, there was turmoil in the executive suite, and there was conflict between older and newer management in the firm. The employee base had become divided between the two management camps, and they were loyal to their hiring managers. The problem was really not hard to spot. Fortunately, there were many capable people on board they just suffered from a lack of direction.”
Unable to capitalize on the original opportunities afforded by the California marketplace, the firm was losing money. Boss would need to find new sources of revenue to produce a profit. However, increased sales alone would not fix all of Commerce Energy’s problems.
In order to get new business, he would need to make certain that in-house conditions would be conducive to attracting and nurturing customers and that he had a unified team behind him, ready to succeed with the challenges of building the business. While he worked on repositioning the firm’s sales and marketing efforts, Boss simultaneously worked on eliminating internal barriers to growth and replacing the current climate with a more open and customer-focused culture.
Achieving a unified culture
Getting his house in order didn’t require a lot of assessment as to what the root of the problem was.
“It was very clear to me that we had two individuals in control of the organization that were taking things in the wrong direction,” Boss says. “The problem was also acknowledged by the board. We needed to develop a new direction as an organization and a corporate culture designed around achieving maximum performance.”
Boss says that the employees were divided, and there was little communication or teamwork going on between the two groups. To alleviate the problem of divergent managerial direction in the organization, Boss says he terminated the two senior employees who represented the newer management camp.
“I prefer an environment where there’s a more open culture and a greater flow of information,” Boss says. “In order to achieve success, I think that you need to have more cooperation between the various functions. People had built silos around their functions, and as CEO, breaking down those barriers is very important because, otherwise, there’s no ownership, and people point fingers when something goes wrong.”
Boss says that the firm’s business was negatively impacted from management operating in silos. For example, at Commerce Energy, if the customer billing function runs in isolation without information supplied by the commercial sales unit, the knowledge transfer of customer-specific billing requirements won’t happen. That results in incorrect billing formats on customer invoices and late payments from large users.
For Commerce Energy, eliminating delayed customer payments is vital because under its business model, the firm purchases most of its energy 12 months in advance on the open market after a customer signs a contract for service. Then the customer is billed in monthly increments based upon their consumption. Because the firm finances the cost of the initial energy purchase, any delay in payment increases their finance costs and decreases margins.
Following the exit of the two senior managers, Boss says that his efforts to change the culture were actually enhanced by greater-than-anticipated staff turnover.
“In the year that followed, we had a considerable amount of staff turnover, around 50 percent, which was a positive thing in this case,” Boss says. “The people who stayed wanted a more open environment, greater cooperation and a free flow of information within the organization. Those that stayed were supportive of the environment we were trying to achieve.”
Setting the tone
As he continued his pursuit of a cultural shift, Boss says that he demonstrated the importance of making changes to the staff by setting the tone from the top of the organization and leading by example.
For instance, Boss initiated and maintains an open-door policy where anyone can offer feedback to him. While many CEOs give lip service to having an open door and an open ear to comments and new ideas, Boss says that he uses technology to open up the communication between himself and a wide array of constituents as a demonstration of his commitment to accessibility.
“We’ve developed an investor chat room that allows the investors to send e-mails to our board, and those communications are also shared with me, and it is monitored by the SEC, as well,” Boss says, “I can answer their questions, or they can also get feedback directly from the board.”
He also wants to hear comments from his customers. Boss says that at one time during an extended power outage in his own neighborhood, he attempted to phone the electric company to relay his frustrations over the situation to the utility’s management. To his amazement, he was advised that it wasn’t possible to get a message about service concerns to the company’s CEO. Now that he’s the CEO of an energy supplier, Boss develops his philosophies about CEO responsiveness from his own experiences as a customer.
“We’ve included a link on our Web site that allows anyone to send me a comment whether it’s a complaint or an ‘atta boy,’ and I read all of those,” Boss says.
As further validation that he has been successful in achieving a cultural shift within the organization, Boss says that a receptionist in the Dallas office recently identified a problem with an outsourced sales channel and brought the issue to the attention of the sales and marketing department. The situation was addressed, and, according to Boss, that’s exactly the way it should be.
“It’s important that individuals at any level in the organization can express a concern to management or to the CEO, so you need to be accessible,” Boss says. “I always think that a person can learn something from everyone, and you can’t learn unless you are listening.”
Boss says that when he arrived, the firm was still struggling to finish digesting a recent acquisition. But despite that recent influx of new business, the firm still had excess capacity that would allow for new customer acquisition without increasing infrastructure and costs.
His financial analysis further showed that Commerce Energy was close to breaking even, given the current overhead and revenue, so rather than reducing head count, which would leave the firm unable to handle additional organic and acquisition-based growth, he decided to focus on adding new customers.
In keeping with his open culture, he launched sales and marketing efforts to entice new business based on customer input, and then he developed superior customer service that would entice new customers to stay once they became users of the service.
“Our excess capacity makes it feasible for acquisitions, but inorganic growth is somewhat serendipitous, and you have to be careful not to overpay when you acquire new customers, especially when you are brokering a commodity,” Boss says. “When I do the analysis on some deals, I find that I could add a comparable number of new customers organically within six months, so doing that analysis is part of the litmus test when it comes to deciding if the acquisition makes sense.”
Boss uses demographic feedback for each marketing campaign to validate his build-or-buy decisions and to achieve cost-effectiveness with organic growth. He also uses the data to further hone his customer acquisition messages, tailoring radio campaigns to each individual market based upon customer feedback.
“One of the metrics that we monitor is our new customer acquisition cost, and we further break down the costs by each marketing campaign we run,” Boss says. “We constantly take surveys within our tele-sales group to see who’s paying attention to our ads. As a result of customer feedback, we decided to offer a line of green energy. At the end of the day, customers vote with their pocketbooks, and our survey information indicated that customers were open to paying more for green. We want to listen to our customers and give them as many choices as possible because that’s what differentiates us in the marketplace.”
Boss says that retaining customers is more cost-effective than constantly seeking new ones and customer churn is too expensive for a firm struggling to get their total customer count up to a level that will make Commerce Energy profitable.
He has also instituted new customer service metrics and processes to reduce customer loss. He measures service metrics such as the wait time before customers are able to speak with an agent, and he also believes in investing in customer service training for his agents. Boss says that agent responsiveness often dictates whether the customer will continue to purchase the service from Commerce Energy or move to a competitor, which is always a possibility, now that consumers have a choice about where they can buy their gas or electricity.
“We billed 164,000 customers last year, and we become profitable when we bill around 200,000 customers,” Boss says. “So it’s important that we strive to keep customer churn down as low as we can. We’ve invested in a new phone system for customer service as well as training for all of our agents, and we monitor all of our service metrics so we can be more responsive. Every organization I’ve ever been associated with has been customer-centric, and so for me, it’s just intuitive that it should be that way.”
The firm added 100,000 new customers last year, with a 10 percent increase in new customers coming during the fourth quarter. Fiscal 2006 net revenue for Commerce Energy was $247 million, and although the company’s bottom line for the full year was in the red, the firm earned a profit in the fourth quarter showing that things were headed in the right direction.
Boss says that effectively managing growth is still a challenge some days, and despite the improvements in the company, Commerce Energy is still a work in progress.
“It’s impossible for one individual in the organization to have complete control of everything,” Boss says. “You have to develop a culture and an ethic in the organization where the employees believe in the mission and want to accomplish it for you. As the CEO, you have to be a leader first and remember that every individual in the organization helps you in achieving your goals.”
HOW TO REACH: Commerce Energy, www.commerceenergy.com
Unfortunately, energy deregulation didn’t turn out the way everyone thought it would.
As the firm’s chief financial officer at the time, Schmale had to help the company navigate through the California energy crisis of 2000.
Sempra was originally formed by the merger of the parent companies of two of Southern California’s oldest and largest utility companies, San Diego Gas & Electric and the Southern California Gas Co. At the time of its inception, there was every reason to believe that deregulation would spawn huge growth opportunities for the newly created $300 million firm. When the energy crisis of 2000 began, California’s deregulation opportunity started to look like a wolf in sheep’s clothing, but thanks to Schmale’s conservative strategies, the company survived.
“Sempra was one of the three major investor-owned California utility companies to survive the energy crisis of 2000,” Schmale says. “We have always had a conservative financial structure and a keen awareness that the commodity markets can be extremely volatile. We’ve grown our business in this unregulated market during a time period when most of our competitors have been stumbling. The plan has always been to expand the company given the unregulated business platform. My job was to make sure we had enough money to do it and to exercise prudent risk management and the appropriate corporate governance along the way.”
Since assuming his present role as president and chief operating officer in February 2006, Schmale has continued to rely on his thorough risk-evaluation style to help grow Sempra Energy to $11.8 billion in operating revenue, compared to $9.2 billion in 2004.
Here’s how he’s conquered some of the challenges of growth along the way.
Taking risks is part of growing a company. The difference between high-growth companies and no-growth companies often comes down to an understanding of risk.
“The first thing you have to ask yourself when you’re evaluating risk is: Based on the assumptions, if this opportunity fails, will this hurt the company a little bit or a great deal?” Schmale says.
He says that it’s important for executives to understand how the risk they are evaluating can potentially affect the entire company’s financial stature. Make no mistake about it, Schmale has taken risk and lots of it during his 18-month tenure as president of the firm. But he says that it’s easier to undertake expansion opportunities when he knows that if the investment happens to fail, that it won’t serve as the fatal blow to the company.
“The next step in evaluating risk is to thoroughly review the economic models, and to do that effectively, you really have to scrub the assumptions,” Schmale says. “You have to understand that all of the numbers presented in the model have some sensitivity to variation, and you have to know what those variations are to understand how the projections may change.
“I recommend digging at the model until you understand what all of the key drivers are that went into the model and where the pitfalls might be. For example, one of the assumptions might be that the model builder may have assumed that prices will grow at a certain rate every year. Well, that’s unrealistic, but it’s a common mistake. Somewhere along the timeline, you are likely to hit a year where prices don’t increase and you have to know how that will affect your projections.”
Schmale also points out that he believes every situation and every risk is unique. So he doesn’t use a cookie-cutter evaluation methodology for every deal. Rather, he relies on obtaining a thorough understanding of the situation behind every aspect of every deal before he agrees to move forward.
“You can’t look at everything, so look at the big things that are supposed to drive the economics of the deal to make sure you’re comfortable with how those have been represented,” Schmale says.
Test your assumptions
“We’ve always had a tendency here at Sempra to express risk in terms of probability and consequences,” Schmale says. “If you’re wrong 1 percent of the time, you only cause the company a small amount of financial distress. The more frequently it happens, the harder it is to overcome the consequences.”
Schmale says that he requires his staff to run numerous tests of the financial assumptions to understand the best-case and worst-case scenarios surrounding each investment opportunity. His review of various financial what-if scenarios is conducted with members of his senior leadership team. The composition of the review team varies according to the opportunity, but all team members must demonstrate a thorough understanding of the numbers and present possible alternatives for downsizing or exit strategies should it become necessary to do so.
“I ask the senior leaders who have been involved in evaluating the risk why they think certain things are going to happen before I reach judgment over a range of likely scenarios that they present to me about how they think the investment is going to play out,” Schmale says. “I like those scenarios to include some worst-case alternatives, such as, ‘What happens if we invest in a new production plant and then we find we have overcapacity? Can we sell a portion of the plant off?’ I like to get everybody on the team on board with the strategy and the thinking behind it, and I can be pretty contrarian and pretty skeptical sometimes.”
Once you’ve evaluated all the possibilities, it’s time to make the decision.
“Finally, if it feels right, then go ahead and do it,” Schmale says. “You can never be 100 percent assured that the investment will be a good one, but I think if you’ve played out everything that can go wrong and are comfortable that you know what can happen and you’ve knowingly decided to assume those risks, you’re ready to move forward. Most risk can be managed effectively, you just have to know where the risks lie.”
As an example, Schmale says that prices in the commodities business can be very volatile. To manage those uncertain costs, he enters into long-term contracts whenever possible that allow him to purchase or sell energy at set prices.
By precontracting energy sales at set prices prior to a new power plant expansion, Schmale locks in most of the deal’s variables and hedges his risk by guaranteeing a set return before new plant construction begins.
He says that he leaves the door slightly ajar to sell some of the energy at higher prices on the open market by precontracting for only about 70 to 75 percent of the plant’s total output capacity. Under his philosophy, he says the firm initially might make a slightly smaller profit, but it takes on less risk, and then when the contracts expire, he has the ability to raise rates and increase profits if the market is conducive to it.
“We certainly haven’t built things on spec, but nonetheless, in the early days, the investors were brutal when we were taking a lot of risk through expansion moves,” Schmale says. “We had to earn their respect by demonstrating results for our expansion decisions.”
Create the right environment for growth
Given the scrutiny that he employs when reviewing assumption models, Schmale naturally says that he favors team members who are self-confident and have a great deal of strength in their convictions. In addition, he says that having the right internal environment is vital to achieving growth.
“I think that to foster growth, you have to have an environment that fosters diversity of opinion, openness and one where people aren’t afraid to be innovative,” Schmale says.
He relies on his listening abilities to work through detailed risk-evaluation meetings with his senior leadership team, getting the information that he needs to evaluate the risk while still encouraging the team members to express their diverse opinions.
“First of all, you have to listen to everyone and try to hold back your comments as the team presents their opinions on the topic or opportunity,” Schmale says. “It’s hard to do sometimes. But even the smallest comment by the leader can cause the meeting participants to read into what you’ve said as some indication that that’s the direction for the decision, and they may withhold their comments. Everybody has their own style, and you have to appreciate that and listen in order to bring out the variety of opinions.
“I favor using the Socratic method to elicit a dialogue within the group, and I find that people with strong personalities will stick to their guns and take a stand on the issue. Of course, if new information comes to light through the process, you have to be prepared as the leader to change your mind. I always try to live by the advice of John Maynard Keynes who said, ‘When the facts change, I change my mind.’”
He says that as the leader, you want to surround yourself with people who are strong and have diverse opinions.
“The notion that one person in the organization should make all of the decisions is usually the person that ends up running the ship aground,” Schmale says.
With close to 14,000 employees, Sempra Energy has a great deal of diversity in its ranks, which Schmale says is also one of the company’s key strengths. He favors diversity within the executive leadership team as another way to benefit from a variety of opinions and backgrounds because he says that each team member may view expansion opportunities differently based upon his or her previous experiences.
“It’s important for the leader to set the tone,” Schmale says. “We’re a large organization, but periodically, I’ll go out and spend time talking to a drilling foreman because they have valuable opinions and insights that I can learn from. The company’s environment is really heterogeneous, and I think you’re a more effective leader when you have that type of diversity in your ranks.
“Business executives really play the role of coach and general manager, not the quarterback. You can’t run the team when you’re out on the field driving the offense. Leaders should set the tone, establish the strategy and then get the right people in place to execute it.”
HOW TO REACH: Sempra Energy, www.sempra.com
Following a landmark decision in 1998 by the Federal Circuit Court of Appeals, the business method patent was officially born. As its name suggests, a business method patent grants its holder exclusive rights to a particular way of doing business. Since inception, however, there has been an on-going debate as to the extent such patents should be granted especially when the solution doesn’t involve the use of technology.
It can take as long as 54 months to go through the business method patent approval process and, at one point, the U.S. Patent and Trademark Office (USPTO) was only approving 11 percent of the applications it received, says Richard E. Campbell, partner and head of the Patent Prosecution and Counseling Group at Procopio, Cory, Hargreaves & Savitch LLP. While the current business method patent approval rate is now up to 20 percent, CEOs still need to be judicious about what types of business processes they submit for approval.
Complicating matters further is the fact that so many businesses today operate, or plan to operate, globally, so protecting the output that results from your firm’s intellectual prowess on a worldwide basis will take substantial investments of time and resources. However, if successful, patents absolutely equate to increased company value.
“The term ‘business method patent’ is more misleading than helpful,” says Campbell. “From a patent standpoint, companies should focus on what their employees are creating and whether it is cost effective to obtain patent protection for those innovations.”
Smart Business spoke with Campbell about what CEOs should consider before applying for a business method patent.
What business methods are patentable?
Businesses that employ creative people who are designing solutions to problems should consider business method patent protection for their unique ideas and innovations. Companies that hire engineers, information technologists or other technical professionals should conduct regular reviews of newly created solutions to make certain they aren’t overlooking a valuable competitive advantage that they don’t want to make available to competing firms. Sometimes the term ‘invention’ causes people to think that patenting is only applicable to inventions such as Thomas Edison’s light bulb, which simply isn’t true. To uncover all of the potential patentable business processes in your company, ask yourself: What problem has my team solved and what competitive advantages has it created?
For example, Amazon.com devised a method for expediting online orders, known as the ‘One-Click’ system. The method allows a repeat customer to bypass address and credit card data entry forms, and they were granted a patent for this process in 1999. That system solved the customer problem of repeating data entry and created a competitive advantage by delivering a better shopping experience.
What evaluation criteria should CEOs use to decide if applying for a business method patent makes sense?
You should definitely do a cost-benefit analysis and you should consider how valuable the solution is to your business. Going through the patenting process can be expensive and the cost goes up depending upon the complexity of the application and the number of countries where you’ll need to apply. Filing the patent application should be completed before rights are lost through public disclosures or sales activity. Ask yourself how damaging it would be if your competitor had the same process. Ask yourself how much better off you are if you have exclusive rights to the process or system. Keep in mind that having patents and patent applications definitely adds value to your company, and early stage firms often garner higher valuations because they have patents and patent applications on file.
Must technology always be a factor?
Generally speaking, yes. The process or business methods that have been patented, particularly outside of the U.S., have been driven by technology or included a technology component. In Europe, for example, you can’t get a patent on business processes that solve an administrative problem. Although, there have been processes that were patented that focused on creating a unique user experience, such as an online catalogue experience. Additionally, business methods have been patented in the areas of financial models, data analysis, tracking and measurement, system and process automation, software implemented solutions, and many other areas.
What’s the best advice for CEOs to assure success with the business method patent application process?
Success is a function of the creativity of your team and your attorney’s skill and experience. Identify potential areas for protection by identifying what problems your team has solved and what business advantages it has created. Analyze the potential value of each item so you can perform a cost-benefit analysis. Not all ideas are worth protecting. However, do not undervalue patent applications directed to what you think are business methods. They are often protectable, and they can be very valuable.
RICHARD E. CAMPBELL is a partner and head of the Patent Prosecution and Counseling Group at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at firstname.lastname@example.org or (619) 515-3289.
Employees are more effective when they understand the business and how their individual performance contributes to achieving the company’s objectives. That’s the findings of a recently updated communication study conducted by Watson Wyatt Worldwide. The goal of the study was to identify which communication practices deliver the best return on investment (ROI). Among the 335 participants surveyed, 60 percent worked in global organizations. Given the trend toward globally diverse companies, executives must now communicate across a broad spectrum of culturally diverse employees to drive higher corporate returns.
“Organizations are more global than they have ever been,” says Lisa O’Driscoll, San Francisco’s communications practice leader with Watson Wyatt Worldwide. “The communication effectiveness of a global company is often dependent on the company’s ability to understand the different cultural contexts and reference points within the employee population.”
Smart Business spoke with O’Driscoll about how executives can communicate effectively across a culturally diverse staff.
How does executive communication play a role in engaging employees and driving ROI?
Despite conventional wisdom that immediate supervisors play a role in driving retention and engagement, strong senior leaders who communicate effectively and frequently are a more important factor. We’ve found that highly engaged employees receive communication from senior management far more frequently than less-engaged employees.
How can executives communicate effectively across a global organization?
No matter what their location across the globe, committed employees are proud to work for their companies and motivated to help drive success. Commitment is essential to retaining high-quality employees and delivering long-term financial success, but commitment alone is not enough. Employees also need focus and direction, something that Watson Wyatt calls ‘line of sight.’ Simply stated, creating line of sight between executives and employees means communicating in ways that allow employees to understand the organization’s business goals, the steps that must be taken to achieve those goals and how they can contribute to achieving these goals.
How can CEOs create a line-of-sight communications plan?
For U.S. companies, communication is often northern-America-centric, so executives must adjust by starting the conversation with an employee value proposition tailored to all employees globally, not just those in the home country. Senior management and mid-management should trained on effective communication techniques and managing multicultural and multi-country teams. A global communication strategy should align the firm's business objectives with the employee value proposition while providing the platform for localization that reflect different cultures and local business conditions.
In all cases, companies need to develop a sustainable communications strategy that supports their mission, aligns employees with the business strategy and allows them to understand their role.
What elements comprise an effective line-of-sight communications plan?
First, no one strategy fits all companies, so each needs to decide what type of company it wants to be and how that supports its external brand and strategy. One company may be comfortable being a U.S.-based company with offices abroad, while another organization may want to be a true global organization with country heads running different business units.
In all cases, companies need to develop a communications strategy that supports their mission, is sustainable, aligns employees with the business strategy and allows them to understand their role.
What are the best tools for effective global communication?
Global communication requires the use of several tools. For example, many companies have a large dependence on e-mail. While e-mail is effective, it’s not the same as face-to-face communication between an executive and employees. In some cases, employees are receiving thousands of messages a day, so naturally it’s easy to see why e-mail can lose its effectiveness. It’s also hard to communicate a strong sense of leadership through e-mail. To maximize time and efficiency, new technology can help executives engage their employees through more personal communication. Blogs, podcasts, webcasts and teleconferences all have their place as part of an effective communication strategy. In considering tools, companies should consider company culture, local culture and, of course, the content of the communication.
What ROI increases can a CEO expect from establishing an effective communications plan?
Companies with highly effective communications plans had a 57 percent higher return to shareholders and a 19.4 percent overall increase in market premium during the five-year study period. During that same time, companies with effective communications plans were 20 percent more likely to report lower turnover rates than their competitors without a plan. Our statistics at Watson Wyatt show that the cost of turnover is roughly 48 percent to 61 percent of the annual wages for that position. Many companies brag about employee loyalty and their low turnover rates. Our study shows that committed employees actually drive shareholder return and take employee loyalty to a whole new level.
LISA O’DRISCOLL is the San Francisco communications practice leader at Watson Wyatt Worldwide. Reach her at (415) 733-4304 or email@example.com.
When Dana Kammersgard added CEO to his title in March 2006, there were plenty of challenges to overcome.
Besides lacking experience in the governance aspects of being a small public company, his chief financial officer resigned. And that wasn’t all.
“We had a class-action lawsuit alleging securities fraud filed against us, and in April 2006, a large customer announced that they were awarding a significant piece of business to a competitor,” Kammersgard says. “Over the course of my first five months in the CEO’s chair, I got five year’s worth of experience.”
Kammersgard had served as both president and chief technical officer of Dot Hill Systems Corp. prior to assuming the CEO’s chair following the retirement of his partner and his fellow co-founder of Artecon, a predecessor company to Dot Hill.
While some CEO responsibilities were new to Kammersgard, managing through the extreme competition in the technology storage business was not. There’s been considerable consolidation of firms within the industry, and margins in the business tend to be thin while revenue growth is slow because of lengthy selling cycles.
Although the company was profitable from 2003 through 2005, Dot Hill’s bottom line reversed direction, and the company went into the red just as Kammersgard took the helm.
He says that he had no choice but to re-position Dot Hill in order for the firm to become profitable again. He calls his quest “the quiet revolution” because the company didn’t need to be rebuilt, just refocused.
To accomplish the initial steps, Kammersgard prioritized attracting new and different customers, acquiring a new senior leadership team capable of competing in a volume-driven business and maintaining the firm’s low-cost operating model while improving margins, with the goal of once again delivering a profit for shareholders.
In 2002, after a selling cycle that lasted 18 months, Dot Hill was awarded a new contract from existing customer Sun Microsystems that was eventually estimated to be worth $10 million to $30 million in annual revenue to the firm. With so many eggs in one basket, the high-risk, high-rewards business of enterprise customer relationships had a roller-coaster effect on the entire company when the deal was won, and then subsequently lost.
“Having the benefit of hindsight over the past year, there’s nothing I would do differently now,” Kammersgard says. “There’s an entire generation of storage companies that failed to win a big customer and didn’t survive. You don’t have any financial viability and you aren’t a player in this business unless you win a big customer.
“So winning Sun Microsystems was absolutely the right thing to do, taking 18 to 24 months to make the business partnership successful was absolutely the right thing to do, but it’s the nature of the beast that things change. So having one customer make up such a large part of our portfolio of business is no longer absolutely the right thing to do.”
At its peak, Sun Microsystems was 88 percent of Dot Hill’s revenue. Today, it is 77 percent. Kammersgard says that he knew he would always need large customers to achieve market share and brand prowess, but diversifying Dot Hill’s customer base would leave the firm less vulnerable in the event of customer loss. In addition, securing more second- and third-tier customers would provide the added benefit of shorter and less complex selling cycles and higher margins.
In order to demonstrate to his team that winning new revenue is vital to repositioning the firm, Kammersgard says that he spends 30 to 40 percent of his time out on the road in front of customers. Having face-to-face time with customers allows you to build client relationships, but it also affords you a better understanding of their needs.
In addition, all of his executive team spend extensive time with customers. Kammersgard credits much of the firm’s success in adding 14 new original equipment manufacturer customers during the past year to listening to customers’ suggestions, focusing on solving their problems and the teamwork of his new senior leadership team.
He says that his best practice is to assemble his management team following customer visits to download information and to create a pipeline of customer feedback and ideas.
In fact, it was a customer’s suggestion that Kammersgard says resulted in a decision that paid big dividends.
“We had a customer who demanded that we move our manufacturing offshore to China,” Kammersgard says. “I had always been predisposed to manufacture domestically, but the customer convinced me to outsource. The decision to offshore our manufacturing has resulted in better margins, as well as better control over our costs, and we’ve been able to develop a new client offering in the contract manufacturing space.
“We’ve also been able to secure an additional new strategic customer relationship. Over time, we believe we’ll be able to leverage this new capability into additional new client agreements, and it will give us better control of our costs and profits. None of that would have happened, if I hadn’t listened to our customer.”
Focusing on the customer
While losing a major contract was a blow, Kammersgard says that he has been able to salvage the strategic engagement model that was designed for the Sun Microsystems contract implementation and leverage the model with the firm’s new OEM customers. That change has resulted in faster new contract implementations and realizing additional revenue more quickly.
“Instead of just signing the contract with a new customer and walking away, we developed a holistic approach to working with our new OEM customers,” Kammersgard says. “We have a peer-to-peer relationship for every aspect of sales and marketing. We make joint sales calls together, we work trade shows together, and we develop case studies together. What we found is that we can do a much better job of selling our products because we know our products better than our partners do. So we are right there, side by side with our customer’s sales representative, presenting to the end user. This has resulted in a much faster revenue ramp.”
Kammersgard says that in the past, Dot Hill was more focused on developing new technology and believed that engineering could be the driving force behind the firm’s success. Today, he says that he has learned that developing new technology is a requirement for business achievement but not necessarily a differentiator. Without customers, even the best technology will not guarantee success.
“I used to think that once we made the sale, we were done,” Kammersgard says. “What I’ve learned is that you have to put in even more effort once you’ve received a signed contract in order to get the most from the opportunity.”
The power of teamwork
Kammersgard says Dot Hill is like a 23-year-old start-up. “We’re quick and agile, and we’re not paranoid like a company that’s been around a long time, but we have the advantage of having more seed money available to us,” he says.
“To foster that type of culture, we need to hire people who have the right personality for our firm, which is low on politics and high on inclusion.”
Kammersgard says that having an agile company is the right posture for a firm in such a competitive industry, where success is often driven by the need to make technological changes quickly while rapidly adapting to customer suggestions and requirements.
With thin margins, the company must also run a high-performance environment where everyone has to stretch because there are fewer people to do the work.
He says the key is having a senior management team that is selected for its high bandwidth and the ability to work as a cohesive team. Since taking the CEO position, Kammersgard has hired a new CFO, a new executive vice president of operations and a new senior vice president of engineering. Finding the right people, in most cases, required starting with a large number of candidates.
“When we need to hire a senior executive, we’ll do a nationwide search, and we may start with as many as 30 to 50 candidates,” Kammersgard says. “We’ll do lots of interviews, and everyone on the team is involved. Having interviews with so many different team members is good for us and for the candidate so both sides can assess the fit. Eventually, we’ll narrow the choice down to two or three candidates that we think will fit in to our environment and from there, I’ll make the final selection.
“We also need great teamwork to get the most from such a small team, and we needed to integrate new executives this past year and build our executive team,” he says. “So we hired an outside facilitator to help with team development, and we go on an off-site team-building excursion every year like a river-rafting trip. The adversity that we’ve faced has also helped develop our team, and now, I think we’re stronger than ever.”
Kammersgard says that he relies on cross-functional teamwork among managers and staff members to help drive productivity, so he requires everyone on the team to know each other’s jobs. That requirement has helped raise the bar on productivity, which helps maintain a low cost-to-sales ratio.
He says that he’s learned major lessons from making several key new hires to Dot Hill’s management team since becoming CEO.
“Increasing sales is all about having the right team with the right product to sell,” Kammersgard says. “We have a phenomenal head of sales and marketing who has really been responsible for our plan to acquire new OEM customers and our change in focus away from engineering to customers, but we almost didn’t hire him. We had made an acquisition, and we had already decided to keep our existing sales VP when we met with Phil, who was with the company we were acquiring. After listening to Phil present his business plan, I started thinking that maybe we were keeping the wrong guy. What I learned from that scenario is to always keep an open mind about these kinds of things; if there’s a better candidate out there, then you need to make a move.”
Prior to becoming the chief executive officer, Kammersgard had also been acting as the chief operating officer for Dot Hill in addition to his formal role as president of the firm. Initially, he tried to continue performing all of his former duties along with his new CEO responsibilities, but he soon discovered that he couldn’t be both tactical and strategic at the same time without something suffering.
“When I hired new heads of engineering and operations and could finally focus on the CEO role, I was surprised to find how much I wasn’t getting done,” Kammersgard says. “I’ve learned that you can’t have success as a CEO without having the right team around you and that when you try to do everything yourself, you leave gaps that don’t get covered.”
Under Kammersgard’s leadership, much has been achieved in his quest to reposition Dot Hill, but he’s the first to admit that there’s more work to be done. Dot Hill’s net revenue was $239 million in 2006, the same as it was in 2004, and many of the new customers are still developing a revenue stream. Following a lengthy and expensive investigation, although not settled, the firm has been able to put the class-action lawsuit behind it, and Kammersgard says that he feels positive about the future under his new senior leadership team.
“Although we’ve had a relatively volatile 2007, we’re making good progress, and there’s a lot of positive momentum,” Kammersgard says. “There’s stuff that happens that you just can’t control. When you’re in the trenches working every day, it’s hard to look up and see the progress.”
HOW TO REACH: Dot Hill Systems Corp., www.dothill.com
Each year, more than 500,000 people in the U.S. are treated for burn trauma, according to the Web site of the American Burn Association (ABA). Work-related accidents, car crashes and home fires are frequent causes of burns that can result in cosmetic damage, loss of physical function and emotional scarring. More than 60 percent of burn patients are treated in one of the country’s 125 specialized burn treatment centers, according to the ABA.
“Burns are an equal-opportunity offender,” says Dr. Peter Grossman, co-director of the Grossman Burn Center at Western Medical Center Santa Ana. “In a split second, people’s lives are changed. Our goal at the burn center is to return patients to their pre-injury status as quickly as possible and to make certain that the treatment isn’t as bad as or worse than the initial injury itself.”
Smart Business spoke with Grossman about the unique nature of burns, and how Orange County executives benefit from the presence of a specialized burn center.
Why are burns a unique trauma?
First of all, they are a progressive injury. After the initial trauma occurs, the tissue damage can actually worsen over the next few days, so it’s important to take some initial treatment steps and then continue to evaluate the degree of the injury before deciding on a complete course of treatment. Also, the body typically wants to overheal a burn. This overhealing process creates excess scar tissue, so it’s important to begin treatment with a cosmetic outcome in mind and to control how much scar tissue is created in the process.
Second, whether we like it or not, appearance is important in our society and the physical scarring that can accompany a burn can be socially ostracizing for a patient. Burn victims often develop post-traumatic stress disorder and they need support in coping with the fact that they may have experienced a life-changing event.
Third, burn treatment may take years or even decades in order to completely restore function and to reconstruct the affected areas. It is helpful if the patient can stay with the same physician over the course of the entire treatment period.
What is unique about the specialized care in a burn center?
Burns often are treated by general surgeons who are focused on healing the wounds and restoring function. Subsequently, they release the patient to a plastic surgeon for cosmetic restoration. When plastic surgeons see a patient who has been through the functional restoration process independently, our hands often are tied because the damage caused by not incorporating cosmetic restoration with functional restoration has already been done.
When general surgeons remove skin to complete a graft, they often remove the healthy tissue at a deeper level than a plastic surgeon will. This can cause more pain and scarring at the removal site than is necessary and we don’t want to create a wound to heal a wound.
We bring in a psychologist from the onset and we engage multiple specialists as needed, using a team-based approach to the treatment. Our philosophy is to treat the whole patient. We believe that we achieve both better and faster results when the medical professionals approach patient treatment on a cohesive basis.
One of the greatest advances in burn care is not as much technological as it is philosophical. We now know that early removal of the burned skin and covering it with a graft or replacement tissue decreases bacteria and restores healthy blood flow to the area, which increases the positive outcomes. To achieve this, we use an operating room.
Is burn treatment a surgical procedure?
In burn centers, we take a very aggressive approach to treatment. It is more comfortable for the patient to have the burned skin removed under general anesthesia. Because we are a specialized burn center, we don’t have to compete for operating room time and we also find that using a surgical approach actually shortens hospital stays and assists with cost management.
How does having a burn center benefit local businesses and the community?
Because so many burns result from work-related injuries, business professionals can achieve peace of mind knowing that their injured employees will receive state-of-the-art care. Having a specialized local burn center reduces medical costs for employers and it is often a consideration for prospective employees when they think about relocation to the county. Burn centers used to have a reputation as dark and dreary places, now we help patients return as close as possible to their complete pre-injury status as quickly as we can.
DR. PETER GROSSMAN is co-director of the Grossman Burn Center at Western Medical Center Santa Ana. He is certified by the American Board of Plastic Surgery. Reach him at (714) 956-2876. For more information, visit www.westernmedicalcenter.com/ HospitalServices/GrossmanBurnCenter.
In January 2004, Doug Hutcheson accepted a promotion to CFO and executive vice president of Leap Wireless International Inc., just three days before the company filed for bankruptcy.
What makes the move even more unusual is that Hutcheson didn’t have a background in financial management.
Many of the company’s problems were tied to less-than-advantageous financing agreements requiring aggressive customer acquisition thresholds, which, in turn, led to disproportionately high expense levels.
Hutcheson says that someone needed to step up to the challenge.
“I had the industry background and understood the business model,” says Hutcheson. “The company needed someone to complete the job, or it was likely that the continued operation of the business would be in jeopardy. It wasn’t easy, but when the music stopped, there was only one right answer.
“I think that sometimes you have to do what is right, not necessarily what is easy. That’s how I feel about my decision to take the position here at Leap Wireless. It would have been easy to say no; the right thing was to say yes.”
The company emerged from bankruptcy, and in January 2005, Hutcheson was named president and CEO.
Hutcheson says that he found many things to salvage at Leap Wireless, including a unique niche in the marketplace: Providing pre-paid wireless services to demographically underserved customers a business model that has so much potential, Hutcheson refers to it as “pixie dust.”
He says he kept the same basic model and strove for cost-efficiency, value for customers and a strategic investment model designed to continue the needed expansion at a digestible and affordable pace.
Rebuilding a company
“We had excellent customer data; there were nice trend lines and good numbers on new customer acquisition,” says Hutcheson.
“The data spoke to where the strengths were. However, you had to be a keen observer and accept that the people issues would have to be right in order to achieve financial success.”
Repositioning the company as a low-cost provider and solving the people problems would come through a companywide restructuring that eliminated $140 million in annual operating expenses during the next four quarters. To accomplish the goal, Hutcheson used both an internal and external team that reviewed every item on the expense lines. He listened to all of their recommendations as to where to make cuts and used data and a stepped-process for implementation. “Restructuring greatly accelerates the number of difficult decisions you have to make,” says Hutcheson. “You don’t know that every recommendation you are given is right. I make evidence-based decisions and look at the hard data first. Intuition is the last element I consider, and I use that to apply velocity to the process.”
He says he breaks down most major decisions into smaller ones, takes them sequentially and waits to assess the impact before making more. “You have two choices as a CEO when you have to cut back 30 percent in operating expenses,” says Hutcheson. “You can cut the entire 30 percent from one area, or you can break it down and take 25 percent from smaller line items. I don’t like to eliminate entire functions because I think that it rips the company apart.”
The bankruptcy aided Hutcheson in his turnaround efforts by providing the opportunity to renegotiate the troublesome financial agreement covenants. The financial benefit was that related costs dropped 50 percent over the next three quarters.
The reorganization reduced the employee count from 2,300 to 1,200. Hutcheson says that he was able to keep the remaining core group of personnel intact through the difficult days of the restructuring process by providing them a great deal of information about what was happening and continuing to assure them that turning the company around was an achievable goal.
Armed with a reduced cost structure, Hutcheson began to focus on returning to growth by rebuilding a senior management team to help take the company forward. He augmented the retained group of 17 leaders by hiring eight new senior managers from outside Leap Wireless.
“I looked for people who had a general management philosophy, so they can relate their functional expertise back to the overall needs of the business,” says Hutcheson. “I also looked for people from outside the industry because I wanted to break old habits. Lastly, this business runs on the details, so I wanted people who were willing to really understand what happens on the front lines.” To assess the candidates, Hutcheson spent time asking them about their experiences and philosophies, looking for a match. He says that the group ended up being exceptionally strong, and he has learned that a CEO’s success lies in the ability to manage strong people.
“I think that the way to manage strong people is to give them clear goals and expectations, give them what they need to do the job and let them go to it,” says Hutcheson. “The secret is to give them the latitude and to keep them busy. People are either clamoring to get control, or hoping someone else will take it. When everyone is very busy, they aren’t worried about getting control because they can’t take on any more responsibility and they aren’t getting in each other’s way.”
Part of Hutcheson’s profit formula calls for alternating periods of investment and the addition of new markets with periods of new customer and market assimilation.
This disciplined approach has enabled Leap Wireless to continue to expand while maintaining a low-cost infrastructure. Hutcheson says that by not pushing the company beyond its limits, he can stretch the bandwidth of the firm’s management infrastructure, but not to the breaking point.
He has also implemented a more planned, organized approach to growth.
“In February 2005, we won $285 million in new market licenses,” says Hutcheson. “Everybody wanted to just jump in and start doing things, so I pulled everyone back. Now we take 60 to 90 days to draft our business plan when we go to open a new market.”
Hutcheson says that his growth plans contain clear, time-bound goals of what has to be achieved, and they are specific in assigning responsibility for results to individual staff members. “I like to be specific about doing things the right way, not the easy way, because people will play to the edge of the box,” says Hutcheson. “As an example, you can’t just say, ‘Go sign 5,000 subscribers.’ You have to specify the cost for getting the 5,000 subscribers. The business plan defines the risk that the corporation is willing to take.”
Hutcheson completes his business plan by outlining the resources that will be provided to the staff to accomplish the task, then checks in frequently to get a sense for progress and to hold people accountable for the results. Lastly, he takes the time to thank people for their efforts and to let them know they are appreciated. “I think that you can’t ever thank people enough for what they do,” says Hutcheson. “I try to spend more energy on what’s right than wrong, because people respond to positive comments.”
Growth will continue to be part of the expectation from Leap Wireless’ shareholders because there are numerous untapped markets left to be conquered. Wireless spectrum acquisitions are awarded based upon a competitive bidding process that requires a “win” in order to expand into the market, but under Hutcheson’s watch, that win no longer comes with an “at any cost” mentality, and the firm is no longer making decisions based upon capital market pressures.
The overhead reduction efforts initiated by Hutcheson give Leap Wireless the lowest operating cost per customer in the telecommunications industry, driving success in the bidding wars. When combined with alternating periods of investment, profits have ensued, and Hutcheson has been able to finance new market acquisitions through a combination of cash and borrowing, keeping the debt load lower than in the years preceding the bankruptcy. Revenue has increased from $914 million in 2005 to $1.1 billion in 2006.
In addition, lenders are more confident in the model, so he’s been able to garner more favorable terms, reducing financing costs even further.
While Hutcheson kept the “pixie dust” that was the original business plan, he says that a big part of the firm’s financial success is tied to operational simplicity. Credit is not an issue because customers pre-pay, and the company doesn’t finance hardware for customers through long-term contracts.
In addition, Hutcheson remastered Leap’s footprint optimization plan through demographic analysis and by keeping the model simple and profitable. “We continue to find new ways to help customers pay for the service, which enables us to expand our reach, and we look for certain demographics in any new prospective service area, such as ethnic diversity of the population, the employment prospects for the area and the quality of our coverage,” says Hutcheson.
He relies on focus groups to determine additional services customers want, and following his theory of planned implementation, he always pilots any new program before offering it on nationally. Balancing customer demand for new services with a planned growth approach leads to some of his most difficult decisions.
“These are the hard decisions, and anyone that says they aren’t hard just does not understand,” says Hutcheson. “There are things that our competitors offer that our customers want, and we cannot offer those things and maintain our model not offering first-class seating on Southwest Airlines is an example of that type of decision. We are positioned as a value leader. “If we can bring it to the industry as a value leader, we go front and center. If we cannot do it cost-effectively, we pass. However, what cannot be done today can, in many cases, be done in the future as the company develops, gets better technology, or develops better relationships. Many things can be solved if you have a long enough timeline.”
HOW TO REACH: Leap Wireless International Inc., www.leapwireless.com