Coming into focus Featured

8:00pm EDT April 25, 2008

When Donald W. Hultgren became CEO of SWS Group Inc. in August 2002, the organization had just completed its first on-record year of losing money.

The company had posted fiscal 2002 revenue of $335 million, with a net loss of $6.2 million.

Hultgren had been working at the company since 2000, and he knew the company could be great again. In his mind, the reason the company was losing money was because of one problem: lack of focus.

“The company was a very strong company,” Hultgren says. “It entered some businesses that were core. It had also entered some businesses that were not core. Some of the non-core businesses were using too much capital to fight wars that we probably couldn’t win. I felt at that time that it was important to streamline the company to get focused on our core competencies and stop spending money on things in areas that were not core to our business.”

Focus, he says, is essential to building a solid business. Communicating that focus to the employees and others associated with the company was key to rebranding and rebuilding.

“If a business has a focus that is clearly understood by all of the constituents, that being the employees and the customers and the shareholders, then that focus can really help you drive the firm in the direction you want it to go,” Hultgren says. “I think it is critical to an organization to be focused on what the firm is attempting to accomplish in the marketplace.”

Evaluate the businesses in which you are involved

Hultgren’s task from that first day of work was to begin evaluating which of SWS Group’s businesses would be the best choices to keep. He says he would have been open to keeping any one of the company’s lines if he thought SWS could be a leader in that field.

Hultgren says he took his time looking at the options and didn’t make any snap judgments. He and his management team examined each business by looking at that segment’s performance for SWS, and then they looked at the competition. In evaluating the competition, he looked at those companies’ market share; then assessed whether or not the competition had any weaknesses that could be exploited.

He also considered which segments SWS had been invested in the longest and had the most expertise running.

“The approach was taking a look at the company and saying, ‘In what businesses can I be a leader?’” Hultgren says. “That turned out to be the three core businesses. And (then we asked), ‘In what businesses could I not be a leader?’ That turned out to be the non-core businesses.”

For example, SWS owned an online brokerage firm called MyDiscountBroker.com. The household names in online brokerages at the time were E*Trade and Ameritrade.

“It was pretty obvious that E*Trade and Ameritrade were not going to be beaten by MyDiscountBroker.com,” Hultgren says. “On the other side of the coin, in the clearing business for example, we are today one of the top five clearing firms in the country. That’s an area where we can see that we can be the leader in an industry and get a nice share of the market.”

Other businesses that seemed to pair well with the clearing business were the firm’s banking business and its brokerage, so those were kept, while in addition to the online brokerage, it also exited the general technology, subprime auto lending, investment management and trust services, and institutional equity and research businesses.

“It made sense to grow that bank, grow that clearing business and grow that brokerage,” Hultgren says.

Engage employees

Hultgren and his management team kept an open line of communication with employees so they would understand why the changes needed to be made. As it turns out, that was an easy sell, at least initially.

“Because the times at the firm were so difficult, we had a couple of years where employees did not get raises,” Hultgren says. “Much to my surprise, they understood, and they worked as hard as they had ever worked. It’s a unique characteristic of SWS, that employees here care for each other and care for their customers, and they really care for the firm.”

But Hultgren faced a tough hurdle with the employee base when he realized that some layoffs would be necessary. Because employees had gone so long without raises, he decided against salary cuts, as that would be too demoralizing for employees. The layoffs were among the most challenging parts of the rebuilding process.

“It is the worst part of being a manager,” Hultgren says. “Any manager would tell you that. I don’t know if there is any good way to do it; it is always difficult. It was something that needed to be done. I felt it was better to sever our relationship with some employees than cut the pay for all of the employees. I thought it was best to have the employees who were here compensated fairly.”

Hultgren says opening up communication with employees has been key to getting the company back on its feet financially. He created an environment in which employees would feel free to discuss concerns and bring suggestions to him.

“I want to hear all of the news, good and bad,” he says. “I solicit people’s opinions, and ultimately, the responsibility lies with me. I am always welcoming the help I get in the decision process.”

Hultgren started a twice-monthly newsletter for employees as a first step to opening the lines of communication. He also strongly supports a program in which employees are invited to go to a group lunch with members of senior management during the week of their birthday and ask questions. Employees can anonymously submit questions ahead of time, and Hultgren or his staff will answer them during their lunch. The questions and answers are also printed in the employee newsletter.

“Employees find that really lets them know what’s going on,” Hultgren says.

A companywide employee meeting is held annually to give employees another opportunity to interact with senior management.

“That meeting will last until the last question is asked,” Hultgren says.

He says he’s also made it known to employees that they are welcome to call his assistant and schedule a meeting to talk with him if they want to do so. Some have brought suggestions that have saved the company money; others have problems they’d like Hultgren to solve. Either one is welcome.

“Some do take advantage of it, and I very much appreciate it when they do,” Hultgren says. “I’ve gotten some very good ideas from employees.”

Hultgren has relied on his employees to help rebuild the company, and he says it has worked well. He’s proud of the progress they’ve made together.

“I really think what has really driven our focus has been basically repeating the direction of the firm over and over again,” Hultgren says. “Everyone on the management team understands the three things we’re trying to do, and I think everyone at the company has been able to absorb the three things we’re trying to do. It’s something I talk about whenever I have an opportunity, if I’m meeting with employees or meeting with shareholders. It all comes back to growing the brokerage, growing clearing and growing the bank.”

While Hultgren likes to get input, and meets with his executive team of 12 people once a week, he thinks debate that goes on for too long is distracting. Company executives recently held a strategic planning meeting and one of the items on the agenda was to decide, once and for all, if SWS was going to get involved in a particular business venture or, conversely, never talk about it again. The executives had debated it and discussed it for three years, and Hultgren thought it was time to make a final decision. In the end, the group decided against the business venture.

“You spin your wheels, talking about the pros and cons, and you never really sit down and weigh them all,” Hultgren says. “It can be very distracting. Do something, even if it’s wrong. Sometimes, you have to force yourself to set a time frame.”

Avoid past mistakes

Hultgren’s refocusing of the company has paid off. Today, SWS is coming off of fiscal 2007 revenue of $470 million with net income of $37 million.

He can now turn his focus to growing the company rather than fixing it, and one way he’s doing that is preparing for tough times.

With any business that’s directly tied to the stock market, business fluctuates. Hultgren, who added the title of president in 2007, likes to be prepared for the downturns to keep the company on a more even keel. In fact, preparing for the business’s rainy days can be a key growth strategy.

“The strategy is that in a downturn, you want to be one of the firms that still has money left,” Hultgren says. “You want to go out and accumulate either acquisitions or producers. When we first started this, we were in a bear market, and I kept telling everyone we were going to buy straw hats in the wintertime. A bear market is a good time to expand your firm if you can afford to do it.”

In fact, Hultgren sees 2008 as a potential bear year, and he’s preparing for that by looking for acquisitions. The company has announced one acquisition as a means of growth and wants to do more.

“You want to have liquidity,” Hultgren says. “You don’t want to have too much or it affects returns. You want to be there with the checkbook when times are rough.”

He says a good business opportunity has to fall within the core business and its values. Don’t be tempted to go outside of that. It won’t pay off.

“I told you we made a decision to specifically stop talking about a particular business, and the very next week, someone called me up with a business that was for sale in that area,” Hultgren says. “I was able to say, ‘No, thanks.’ No way. I don’t care how good it was; I wasn’t going to swing at that pitch.”

Hultgren feels good about where the company is now. He sees the company as poised to grow and prosper.

“We have done the things we needed to do to get the efficiencies in the company, and we are just now beginning to accelerate using the new platform,” Hultgren says. “Today, the focus is all about growth, as opposed to all about saving money.”

HOW TO REACH: SWS Group Inc., www.swst.com or (214) 859-1800