Stock options have received a lot of bad press recently, especially back-dated stock options. If options were granted strictly as an incentive to increase performance by management, that would be one thing. Unfortunately, many times these benefits to management can come at the expense of the shareholders.
“My latest study shows that some managers have reduced earnings to miss important earnings targets in order to lower stock prices,” says Dr. Mary Lea McAnally, associate professor of accounting for Mays Business School at Texas A&M University. “What this does is make their option grants more valuable, but at the expense of shareholders. This earnings management is in addition to the backdating problems that we already know about.”
Smart Business discussed these findings with McAnally for further insight into how stock prices are affected.
How can granting stock options affect share prices and the shareholders?
Conventional wisdom is that managers do everything they can to increase earnings so that stock prices rise, their reputation is enhanced, their bonuses increase and the options they hold are more valuable.
But what is less obvious is the possibility that new stock option grants might entice managers to decrease earnings or even to miss earnings forecasts. The usual reaction to missed targets is a reduction of stock value, which lowers the strike price on new option grants. This is worse than backdating in some ways, because with backdating the managers just take advantage of stock price drops. What my study shows is that, in some cases, managers cause the stock price to drop.
What can be done to prevent or at least bring these actions into the open?
A company’s board of directors is its first line of defense. Boards need to be vigilant for earnings management or manipulation and, at a minimum, need to get answers when companies miss earnings targets.
While there have been some complaints about the cost and other negatives of Sarbanes-Oxley (SOX), one great benefit is the quicker and more complete disclosure of option grants. Section 403 requires registrants to report new stock option grants to the SEC within two business days. If a company reports bad news, like a missed earnings target, and then files a Section 403 report saying more stock options have been granted to key employees, that transaction is going to be noticed.
Another benefit of SOX is the requirement that audit committees have more financially literate members. These members can take a hard look at the timing of option grants, especially when earnings are disappointing.
Are there other benefits of SOX in these situations?
In general, I believe that the benefits of SOX have been misunderstood and perhaps undervalued relative to all the costs of complying with the new rules. For example, with audit committees having more financially savvy members, firms are making better financial decisions across the board, like better hedging choices and better financing decisions. Those benefits are hard to quantify, but at least one recent study finds that the stock market assigns a premium to companies with more literate members on the board and audit committee.
Some recent corporate implosions may have been exacerbated by weak boards with less oversight, and things just spiraled out of control. Before SOX, there weren’t always the proper controls that would enable or empower managers who wanted to do the right thing.
In the aftermath of the Enron and WorldCom meltdowns, accountants did take a lot of flak. One of the silver bullets of SOX is that accounting standard-setting and oversight have come under more scrutiny. Accountants have to be more on their toes and do a better job, and SOX gives them more authority. Auditors have to be more independent. And that’s a good thing because when push comes to shove with a client, auditors can point to SOX and use that as a stick. SOX is making auditors’ jobs somewhat easier and creating a bit of a boom time for the accounting profession.
What should a business do about stock options from this point forward?
Stock-based compensation is a good tool to motivate managers and get their incentives perfectly aligned with those of their shareholders. It would be a shame if companies stopped using options or restricted stock because of negative market perceptions created by the recent scandals. But the hope is that the actions by the SEC and states attorneys general will be a clarion call. There’s no substitute for well-written policies, board oversight and financial reporting transparency.
DR. MARY LEA MCANALLY is an associate professor of accounting and research fellow at Texas A&M University’s Mays Business School. Reach her at firstname.lastname@example.org.
Periodically reviewing your cash flow projections will help you prepare for times when you’ll need additional sources of cash. Having good relationships established with banks, creditors and suppliers beforehand will help when you need a short-term business loan or the ability to access a line of credit.
“Business cash flow is one of the most important factors we look at when making a decision regarding a credit line,” says Alice Chen, senior credit analyst/Credit Team lead for Wells Fargo Bank, Houston.
According to Chen, a company may be profitable on paper but cash flow may still be negative: “The banker can help the company understand how it compares against others in its industry by examining its numbers against Risk Management Association ratios for similar businesses. These are the ratios we work with when determining whether to extend a line of credit, and for how much. Understanding the numbers will help a business determine where it might need to improve, and can help it obtain more favorable terms.”
Smart Business talked with Chen about ways companies can improve their business cash flow.
What is business cash flow?
By definition, business cash flow is the movement of money into and out of a business. It has been used to refer to net cash after operation in Uniform Credit Analysis (UCA), a cash flow model. It has also been referred to as operating cash flow as shown on the FASB 95 cash flow statement.
Bankers use the net cash after operation for their credit review process/analysis. We also watch the trends of net income and cash flow after operations for signals of potential problems. When cash flow after operation begins to lag behind net income, it’s usually a red flag.
Discuss the importance of understanding cash flow.
Here is a good example. Company ABC showed a pattern of consistent profitability and even some periods of income growth. For the last three years, net income for the company grew by 28 percent, from $15 million to $19 million. The company had consistently paid dividends and interests. One year later, the company filed for bankruptcy. Closer examination of the company’s financial statements revealed that it had experienced several years of negative cash flow from its operations, even though it reported profits. Sales reported on the income statement were made on credit, and the company was having trouble collecting the account receivables from its customers, causing cash flow to be less than the net income.
Is it getting easier, or more difficult, for companies to manage cash flow?
Easier, thanks to a wide variety of new technologies designed to help businesses make deposits faster, collect receivables faster, and more efficiently manage their banking operations overall. Combining a depository solution and payments processing solution at a single bank will usually speed up funding of credit/debit card payments. For example, Wells Fargo offers as-soon-as-next-business-day funding with a checking or depository account.
How can bankers help companies manage cash flow?
Managing cash flow means balancing cash inflow with cash outflow. Look for banks that offer a variety of cash management products to help customers in the areas of collections and disbursements and information, including, but not limited to, lockbox, payments processing, processing, cash management accounts, ACH collection, electronic desktop deposit, revolving lines of credit and other credit/treasury management products for business.
For example, a business owner can eliminate the need to go to a branch to deposit checks by using an electronic desktop deposit machine to deposit checks in his/her own office. Every check is imaged and saved. The data is then transmitted directly to the bank. This can help the customer reduce the check floating time and focus more on their core business. Customers can also request a revolving line of credit to help the cash flow during the collection period for accounts receivable.
How can a company finance business cash flow?
A line of credit can help a business during the times it is waiting to collect accounts receivables. When evaluating if a company is eligible for the line of credit, the bank always looks for a reliable measure of the borrower’s repayment ability. Cash flow becomes the bank’s primary focus when analyzing a company’s ability to repay the debt. Operating cash flow can be generated from the conversion of cash to inventory to receivables back to cash, which is also known as the short-term asset conversion cycle. Bankers review the conversion cycle closely to determine the borrower’s ability to generate cash and make a creditworthy decision. In addition, we can also use this information to help the company understand how to improve the cash flow.
ALICE CHEN is senior credit analyst/Credit Team lead, Wells Fargo Bank, Houston. Reach her at (832) 251-5531 or email@example.com.
When Earl Hesterberg arrived at Group 1 Automotive Inc. in 2005, the company resembled the United Nations more than a chain of auto dealerships.
Group 1, which operates 101 dealerships primarily located on the East Coast, West Coast and in the South, had 15 operating clusters but none were speaking the same operational language and none were really able to communicate with each other.
The problem resulted from the company’s roll-up strategy, which was quickly building the company’s scale, but the various parts weren’t operating as a cohesive unit.
“We had 15 clusters of dealerships that were all operating autonomously,” says Hesterberg, president and CEO. “That meant we had 15 different ways of doing things. So we needed a mechanism to really integrate the business and operate it with more uniformity.”
Hesterberg cut down on the layers of management by shifting from 15 operating clusters to four regions, each with its own vice president that reports directly to him.
The company’s leaders also implemented new operational software and financial practices, standardized across the entire dealership chain.
“We’ve begun to switch all our dealerships to a standard chart of accounts,” he says. “We didn’t even have them all on the same accounting format. Ford dealerships would use a Ford financial statement, Toyota dealerships use their own, and it was virtually impossible to compare performance across our dealerships on an apples-to-apples basis.”
Getting all 101 dealerships in the $6 billion chain to speak the same language has been instrumental in enabling Houston-based Group 1 to grow into new markets with minimal problems. Acquisitions are rarely easy, and Hesterberg says forming standard practices and driving them across your company is a key first step. But successful integration starts with acquiring a company for the right reasons, communicating who you are to newly acquired employees and finding the synergies to make your investment pay off.
Playing the field
Finding the right acquisition isn’t just a matter of making sure that you can align your practices. In fact, Hesterberg believes in giving his dealerships a great deal of autonomy in how they conduct their day-to-day business, so long as the metrics and technology provide a way to communicate and compare performance.
As important is making sure that an acquisition is going to fill a need your company has.
When Hesterberg and his senior managers are considering a dealership purchase, they look at two things before all else: market growth and brand growth.
“If we go into a new market, we prefer some ability for market growth, meaning a growing population,” he says. “If there is not a very strong indication of market growth, then we really have to be with one of the top brands in the industry, a BMW or a Toyota.”
It’s why Group 1 has concentrated growing in what Hesterberg refers to as the “smile around the U.S.” The vast majority of Group 1’s dealerships are located in 13 states down the East coast, across the Gulf Coast to Texas and Oklahoma, then up the West Coast, all areas with booming populations.
Hesterberg says once Group 1 has carved out a presence in an area, the goal is to begin building scale in that area. Having an isolated dealership or two in a city isn’t really cost-effective; the bang for the advertising buck isn’t good when you are advertising for only one or two locations in a city, and there is always the threat of being squeezed out by competitors who are more entrenched.
Hesterberg says the key to creating longevity in a market is to become one of the biggest fish in the pond.
“We always look at where we can make an acquisition that we can tuck into an existing operation and give us more scale,” he says. “We bought some dealerships in New Hampshire recently, about an hour north of Boston. We would not have gone into New Hampshire as an isolated venture, but we have eight or nine dealerships in Boston to give us a very powerful position in that market. We have management there, administrative help there and media buying power there.”
Once you have decided to pursue an acquisition, it’s important to find people who have local ties to the area and understand the customer base to which you will try to sell, and let them decide how to best market your business. “The dynamics of each market can be a bit different, the dynamics in terms of the demographics, the income, is it a luxury market, an import market,” Hesterberg says. “For example, some East Coast markets have been heavy lease markets, but Texas has historically not been a big lease market.”
Knowing your market and your customer base is critical, especially if you have investors looking for a quick return.
“We pay a significant amount of money for an acquisition,” Hesterberg says. “We need to start to generate a return on that investment immediately. We don’t intend to wait three or four years because that’s not fair to our shareholders, so we can’t afford to have a lot of trial and error as someone learns the market from the ground up.
“So experienced local management is a critical part of the success formula.”
Being the new boss
Another important part of the acquisition success formula is having employees who are on the same page. While having standard technology and practices can help assimilate employees quickly, it takes a great deal of direct communication from the corporate office to really give employees a sense of belonging to their new company.
Hesterberg drives Group 1’s business philosophy down to the dealer level before his company even assumes control.
“Recently, I’ve gone out and had dinner with all the dealer department heads prior to an acquisition deal closing,” he says. “It’s just to answer questions and show them that we’re real, we’re human beings.”
Throughout his business life, Hesterberg says that 90 percent of all problems he’s encountered have been due to a lack of communication from management. It’s why, from the get-go, Group 1’s management and human resources department are on-site, educating and communicating with the employees of a new acquisition.
The first order of business is to put out any rumor-driven brush fires within the employee ranks, before they turn into a raging blaze.
“They’re worried that everything is going to change,” Hesterberg says. “They’re worried about losing their jobs. That’s something we deal with early on, that we intend to work with the people who are here.”
If you’re making an acquisition, you’re probably purchasing it because it was attractive. That fact needs to be communicated to employees if you intend to keep them on board.
“When we purchase a dealership, we’re paying based on their current level of performance,” Hesterberg says. “We don’t want a dealership to go backward, so we generally keep the employee teams very much intact.”
In almost all cases, Group 1 is a larger company purchasing dealerships from a smaller entity, so the company attempts to make its new employees feel at ease by selling them on the positives of working for a large company. “Our HR department does some training early on,” he says. “We frequently find that by being a bigger company, we have benefits that hadn’t been available to some employees before, like a 401(k) plan with a matching employee stock purchase program. So that shows some of the positives of joining our team.”
After addressing the initial concerns of employees, Hesterberg says it is important to begin coaching them in the culture of your company right away.
Within several weeks of taking over, all employees have been trained on Group 1’s employee handbook and workplace harassment prevention, have taken drug tests and gone through background checks. “It sets the tone that you are working for a large organization with morals and values and ethics,” he says.
On the first day of assuming control, Group 1’s management gives employees a toll-free hotline number to report potential workplace problems. Complaints are personally reviewed by Hesterberg and summarized for the company’s audit committee, which meets quarterly.
The hotline is a way for company leaders to keep tabs on what is going on in the field. It is also designed to give employees a sense that corporate management is interested in what is going on in the field and willing to address problems. “If they’re uncomfortable with what’s happening, if they think business is being done improperly or people are being treated unfairly, they can call the number,” he says. “It can be completely anonymous. That way, there is a mechanism for people to communicate if something is bothering them. And it’s outside their normal chain of management. “Most of the time, going through your chain of management works. But sometimes, people perceive management as part of the problem. This gives them a way to report something without fear of retribution.”
Cross-pollination of ideas
Group 1’s leaders try to reach out to the company’s dealerships in multiple ways, especially in the first few months after an acquisition. But in the ensuing months and years, Hesterberg wants dealers to come to him.
Twice a year in person, and at least twice a year over the phone, Hesterberg brings all his dealer general managers together by domestic, import and luxury brands.
The meetings give Hesterberg and his senior managers a chance to find out what is going on in the field. It’s also a chance for general managers to speak to each other, spreading ideas across the organization. “They’ll compare performance data, financial statements and sales reports,” he says. “They’ll share ideas, they’ll compare performance numbers. We’ll also use the opportunity to train them.”
Hesterberg calls the general managers’ meetings Group 1’s main mechanism for sharing ideas. It helps paint a picture for what moves the company should make next.
Hesterberg says there is always strength in numbers when it comes to cultivating and spreading ideas throughout the company. You can’t have everybody speak at once, but the more minds at the discussion table, the better. “We reinforce our corporate values, we share best practices, we learn from each other,” he says. “That’s one of the advantages of having 101 dealerships. We have enough Ford dealerships, we have enough Toyota dealerships, that we can learn from each other.”
Hesterberg says that you shouldn’t expect all of your managers to have the same management style, the same demeanor or interpret every piece of information the same way. What you should expect is that they adhere to the same values and have high ethical standards. That’s the importance of communication. “We can’t expect 101 general managers to have the same personality or management style,” he says. “But we expect them all to represent the values of honesty, integrity and hard work that we have in this organization.”
HOW TO REACH: Group 1 Automotive Inc., www.group1auto.com
In 2001, Tony Grijalva was facing a pivotal decision that could make or break the future of G&A Partners. He could keep trying to build a division that his company had put a lot of time and effort into, or dissolve the model and focus entirely on a plan that he believed could really drive revenue growth. Grijalva, the company’s chairman and CEO since its inception in 1995, decided to go with his instincts. He turned his eye toward becoming a professional employer organization, which provides clients with administrative, human resource and and risk management services. The move paid off. G&A took in an estimated $215 million in revenue in 2006 and has 110 corporate employees. Smart Business spoke with Grijalva about doing the right thing and why work ethic is more important than skills.
Find the right people. Any business is driven by people, and we always try to search, identify and keep good employees. But it takes awhile to refine your internal processes in order to accomplish that.
You always look for the experience, but more than that, we look for certain attributes like personality and work ethic. We feel that the actual job can be taught, but work ethic is a key. They don’t require supervision, they have initiative and they have the drive to do the right thing at all times.
It’s also extremely critical to go around, say hello to people and talk about their daily tasks. Give them the feeling that you care. It can be about work, but it can also be about their feelings and their personal lives.
Look for stability. It’s no longer the old model where someone will stay with the same company for 20 years. You expect people to move around, and you expect people to have a broader experience.
But by the same token, I don’t want to see people that move around every six months or every year. We like to see people with three, four or five years’ experience at various jobs. That tells me that whether it was good or bad, they had the perseverance and dedication to do what they were trained to do.
Follow your heart. I think people are born leaders. But I also think there can be a deliberate effort to do the right thing so that people want to follow.
One of the definitions of leadership is that people want to follow you. The key component is integrity. Integrity is doing the right thing, even when no one is watching. When you have that, people tend to follow your steps. They want to emulate you and they want to listen to you. Some people are born with that quality. Others have to work hard at it.
We live in a capitalistic society, so the traps are always there not to do the right thing. Tell yourself what the principled thing to do is. Keep telling yourself that your principles are important.
At the end of the day, if you are principled, you’re going to prevail. Your enemies are going to respect you for it, and your friends are going to like you even more.
Don’t be afraid to grow. For a small business that grows beyond small and starts moving to the middle market, you have to realize that you are in the middle market. You need to spend money and do certain things which are different from what they were when you started. Understand your own success and realize you are in a different league. You are a little bigger and you can do things a little differently. Have a good layer of middle management, which is difficult because middle management and good management require money. But you have to make the decision: Do I invest in people in order to grow even more, or do I stay where I am and become content with that? Business is very dynamic, and things change constantly, either because of technology or new ideas. You have to constantly be looking for ways to reinvent yourself or re-engineer your processes to do better things and to diversify. That’s a constant challenge if you want to grow and compete.
Look at your industry and see the trends and understand that you want to be on the leading edge. If you don’t, it will be good for the short term, but it won’t continue. You have to be constantly vigilant.
Keep employees engaged. Evaluation is the only way you can measure where employees are. It’s critical that we align the evaluation with the job description to make sure that things are going the way you intend them to go. We try to do that every six months. It keeps them focused on results.
Make sure you keep them engaged by sharing responsibilities, empowering them to make decisions and by delegating. Sometimes, it is trial and error. As the employee develops, you start small. As they earn your trust, you keep giving them more.
Focus on being the best, and success will follow. For me, success would be being one of the best employers in town. To know that you created something that people brought to the next level, and your employees and families are well taken care of. Everything else seems to follow that. Personal success and contentment seem to be a consequence of that.
As long as you give, the receiving end will always be there. Humility is important in order to know your limitations. Understand your weaknesses so that you can seek the right help, and partner with other people that are smarter than you so your joint resources can accomplish something.
Realize that everybody makes mistakes. You want to foster the notion that mistakes are OK and not be so severe or critical of the mistake, unless it happens frequently. You can learn from those mistakes and strive not to do it again. You can have an open-door policy where consequences do exist, but candor is never penalized.
Understand that every failure is an opportunity to learn. You try to analyze the reason why things fail and dissect the problem in order to understand it. If you don’t, chances are you’ll do the same thing again.
Take it in and move on to the next item and try to do it right.
HOW TO REACH: G&A Partners, www.gnapartners.com
Industry constantly trumpets the value of innovation. Consider the path that microchips followed in the years between the introduction of the personal PC to the miniaturized music players that clip onto collars of millions of tech aficionados worldwide.
But studies show that between 50 percent and 90 percent of new products fail to reach their potential of meeting company expectations and fall ignominiously into the category of an “also-ran” product. But does innovation always need to happen within the space of a brilliantly conceived, heretofore unseen product that captures the fancy of millions?
According to Venkatesh Shankar, Coleman Chair in marketing at Texas A&M University’s Mays Business School, developers cannot expect to hit a home run with every product or service they create. “Look to add incremental value to existing lines, generating in the process a mixture of products and services that provide even higher benefit to end-users,” he says.
Smart Business spoke with Shankar about the nature of innovation in today’s competitive marketplace and how businesses can help achieve a higher rate of success with their new product introductions.
How differently can we view the concept of innovation today?
Only rarely does a company develop a good or service that creates an entirely new market or so reshapes a market that it experiences unforeseen profits for a considerable length of time. Innovation is not just coming up with a new gadget, which is the way people typically think about the concept. Innovation also can occur in business models, existing processes and overall marketing strategy. Many times, adding a few bells and whistles that are incremental in nature to the mixture of existing product lines will generate significant benefits to the bottom line.
What is really needed in most organizations is a culture of innovation that gives the kind of autonomy that allows people to become ‘intrapreneurial’; that is, a system of incentives that motivates employees to build upon the strengths of what already exists. Some of these innovations can be hybrid an innovation that combines product and service lines to create new applications.
Essentially, the concept involves the exploitation of an idea for a performance by both good and service that is perceived by customers to offer new benefits that results in monetary gains for the innovator from both the good and the service.
Where have we seen examples of hybrid innovation?
In the business-to-business sector, we see many cases in which goods marry with service offerings to create an even stronger brand. Consider Xerox, which first built copiers and printers but then added supplies, maintenance contracts, and configuration and user support. Or 3M, which has institutionalized a culture of innovation. Today, it has more than 60,000 SKUs, the result of building upon an existing slate of products. And there’s Google, which asks its work force to come up with a Googlette; a new business idea one day in the week.
In all cases, the firms have set in place an incentive system to motivate employees to contribute to the overall growth of the organization. A significant amount of revenue can be generated from a hybrid innovation; but the trick is to be clear on which of these hybrid solutions will work.
What does it take to implement such a concept?
Firstly, your staff needs to be customer-focused and approach its work with a mindset we call ‘adaptive innovation.’ Firms must closely scrutinize their customers to discover what drives their business success. In doing so, you have to be able to find your customers’ ‘pain points.’ That is, discover problem areas that exist within a client’s organization and seek solutions to those problems. Many businesses have been born to address pain points, and often such efforts have succeeded to a far greater level than attempts to create an entirely new product.
The notion requires you to align your marketing strategy to focus on customer needs and tie the innovation strategy around it. Which new products ought to be developed to satisfy market needs, how to test them, and how to quickly get new developments out into the market. This could mean encouraging your R&D team to focus solely on pain points and getting your sales and marketing team more attuned to the weaknesses in their customers’ operations. Such a mindset allows you, the product or service provider, to get out of the problem of having to develop too many products, many of which could fail. Instead, the method asks you to focus on products or solutions that can fill an immediate need.
VENKATESH SHANKAR is the professor of marketing & Coleman Chair in marketing at the Mays Business School at Texas A&M University. Reach him at firstname.lastname@example.org or (979) 845-3246.
Business leaders are always looking for tools to give them a competitive edge. If you haven’t thought about the value of networking lately, perhaps it’s time to revisit the subject.
Claudette Jasper, vice president/business development officer for Wells Fargo Bank in Houston, is one business pro who has used networking to her company’s tremendous advantage. “When I got into the business side of banking, I realized very quickly how valuable networking was,” Jasper says.
Networking has enabled her to grow her client list impressively over the years and make more business contacts than would have been otherwise possible. Jasper says that networking is all about marketing and referrals. “Networking enables you to contact potential customers and disseminate information about your products and services,” she says.
Smart Business asked Jasper how businesspeople can take full advantage of the opportunities available.
Why should businesspeople network?
Networking allows you to meet people who can give you a warm handoff to other business prospects. When you say, ‘John Doe suggested I give you a call,’ it gives you a better introduction than a cold call.
When you network, your business development efforts are multiplied. For instance, there are 20 people in my Business Resource Group, and 15 people in my 15Networkers.com group. In essence, they’re all out there helping me make new contacts.
What types of networking opportunities are available?
There are many. Some examples include:
Networking groups and chambers of commerce Sometimes you will be the only representative for your specific industry. So when someone is looking for a referral, who are they going to think of? You!
Economic development groups These provide good opportunities to learn about new businesses coming into your area.
CPAs and corporate/real estate attorneys They can advise you when new business ventures are forming and introduce you to the key players.
Existing customers A terrific and easy source of referrals.
What should someone look for in a networking group?
Scrutinize the group first. Make sure it screens new members carefully. Does it conduct one-on-one interviews with potential members? Does it require them to submit a rsum and show a certain number of years in their business and/or field? You want to make sure that any groups you join are conscientious because when you refer someone, you put your reputation on the line. You need to feel comfortable with the person you refer and confident that they will do their very best.
Why should top level management encourage employees to network?
All companies want to bring in new business and increase sales with existing customers. Networking increases an organization’s visibility, multiplies its business development efforts, resulting in increased product sales. Importantly, it fosters credibility and trust. Salespeople are not just sales officers; they are marketing officers. Top-level management should have as many people out there marketing the company as possible, using all the tools available to increase the company’s visibility and augment its other marketing efforts.
How can someone make the most out of their networking efforts?
Realize that successful networking requires a time commitment and be prepared to meet it. Many groups meet once a week, bimonthly and monthly for at least two hours. My business resource group also holds quarterly luncheons where a guest speaker presents topics for prospects and customers, providing them an opportunity to learn and network with their peers. Find out how often the groups you’re considering meet. Serving on a subcommittee also takes time, as most of these meet at least once a month as well.
Besides the time you actually spend at meetings and functions, you can enhance your networking efforts by staying in touch with other members throughout the month, often through e-mail. The idea is to keep in touch with one another and to offer useful information to your contacts. Adding a note such as, ‘I thought you might be interested in this’ can go a long way in developing a relationship.
Other possibilities may include hosting a meeting at your place of business, offering to speak or provide a speaker for a luncheon, or helping to plan a special event or cocktail party.
CLAUDETTE JASPER is vice president/business development officer for Wells Fargo Bank, Houston. Reach her at (281) 315-8990 or Claudette.D.Jasper@wellsfargo.com.
It was a message employees and customers might not have wanted to hear, but Bob Beauchamp knew it needed to be said: “Prepare for a storm, and watertighten the ship.”
It was 2002, and BMC Software Inc., a beneficiary of the technology boom of the 1990s, was foundering.
After 32 percent growth from 1999 to 2000, market shifts caused Houston-based BMC, and many other companies that provided technology solutions for corporate customers, to start to bleed money at an alarming rate.
BMC’s revenue started to decline in late 2000, and the backslide continued into 2001. “Our revenue declined 12 percent from 2000 to 2001, and 15 percent from 2001 to 2002,” says Beauchamp, BMC’s president and CEO since 2001. “Any time you’re in a large company that is going through a dramatic revenue decline, it’s almost a life-and-death situation. Statistics would show you that most companies don’t recover from that kind of revenue decline.”
The mainframe utilities and Unix tools markets that BMC had built its foundation on were turning from concrete to quicksand right before Beauchamp’s eyes. Something needed to be done, and fast.
Beauchamp sat down with his senior management and mapped out a plan that would not only save BMC from financial distress, it would identify an entirely new market in the technology solutions industry.
Trimming the fat
Beauchamp says the first order of business was the most basic: BMC had to maintain profitability. It was a tall task considering that the company’s revenue had slipped from $1.7 billion to $1.2 billion in two years.
Maintaining profitability meant, first of all, that BMC’s leaders had to identify what aspects of the business were nonessential and begin pruning them away. “We had to cast a critical eye on the noncore things we were doing, cut expenses and really, really tighten our cost structure,” Beauchamp says.
BMC’s leaders looked across the board and products, programs, people and geography. “We just had too much investment in everything, which is natural during a period of growth,” he says. “Every function of the company, we just had too many people.”
When BMC declined to $1.2 billion in revenue, it had about four times as many employees as when it first achieved $1.2 billion.
The company cut employees by eliminating services and exiting geographies. BMC left the storage management space and pulled out of countries such as Turkey. If a product or geographical connection was losing money or was not received well by customers, it was dropped.
The pruning of the unprofitable portions of BMC stabilized the company.
The next step was to start building in a smarter direction.
Identifying the space
The space in which BMC could operate in was wide open, but Beauchamp says the best course of action is to stick to what you know you can excel at. “We decided we are not going to go off into video games, home PC software and other things we really didn’t know anything about,” he says. “We decided we were going to stay true to the large enterprise customers we already supported.”
The key, he says, was to find a new market within large enterprise software that hadn’t already been exploited.
BMC’s leaders began a research effort that looked at the IT industry inside and out, not only who the industry was serving but how it was serving itself.
Beauchamp says a pattern started to develop. Across other industries, technology firms had developed software to manage, integrate and simplify day-to-day operations for a wide spectrum of businesses. “Companies like SAP and Oracle brought to the table well-defined processes, user interfaces, and most importantly, data integration,” he says. “The application space had gone from thousands of homegrown applications to standardizing on a tightly integrated suite.”
However, what technology firms had provided for other industries, it hadn’t provided for itself. “IT had put shoes on all the other children, but not on its own children,” he says. “The story of the cobbler’s children is a perfect metaphor. IT was still running with tens of thousands of home-grown applications.”
BMC had found a new market. Instead of being forced from its space by shrinking revenue, the company started to create a new demand curve for the space it was already in by providing technology solutions for customers in the technology industry itself. “First, you have to decide where you are going to play,” Beauchamp says. “Then you look at the change factors, what are the points that really drive customer angst. What is costing them money, revenue, expense, embarrassment, pain and brand image problems?”
From there, a company needs to look deeper to the causes of those problems, a major ingredient in deciding how to sell a solution to those customers. BMC hired consultants to help paint a picture of its customers’ revenue growth, market share opportunities and the overall competitive landscape of the industry. “We saw certain markets as being red hot, high-growth markets,” he says. “Within there, then you look for individual products you believe will drive revenue growth. We get very specific on what the customer’s pain points are and how to solve them.”
Winning over employees
Beauchamp says a vision for change is just that: a vision. The only way it can become reality is if the entire company buys in.
At BMC, the process started with an all-company meeting in June 2002. Still in the planning stages, all Beauchamp could tell his employees was that a change was coming. But it was an important initial step in getting everyone to buy in. “We had to change the company, one time, hard, which was to get everybody on board with a new business strategy and new service management,” he says. “It was a multiyear process.”
In that first meeting, Beauchamp told BMC’s employees that a major shift was coming. He didn’t get into details because the concept of BMC’s new market wasn’t at a point where it could be sold to employees.
After a year of work by company leaders, the plan was ready to be unveiled. “We came back and said, ‘Here it is. We’ve done acquisitions, we’ve begun to build them, but don’t stop doing what you’re doing. Just start learning the story,’” he says.
Beauchamp says a year after that, BMC started training its sales force to sell technology solutions to technology companies, producing the first real results of BMC’s rebound.
Getting those first customer wins is crucial because without them, a company cannot totally win over its employees. It’s something Beauchamp says comes with the territory of change. “A certain percentage of employees, when you say something, will say, ‘I believe you, let’s do it,’” he says. “A certain percentage will say, ‘I don’t believe you.’ Then in the middle is a big group that says, ‘I’ll wait and see.’”
No matter how much success a company generates, there will inevitably be employees it cannot keep moving forward. “There will be people that not only don’t believe in what you are doing, they don’t want it to be successful,” Beauchamp says. “They want to prove the old way was the right way. Sometimes, you just have to let them go, but fortunately, that’s not a large number of people.”
For the fence-sitters, results are what matter. The company’s employees must see that what they are working toward is having a positive effect. At BMC, the moment of truth came when sales-people started reporting back from the field. “Once our salespeople stood up and said (the customers) needed this, wanted this and liked this, and that they’re successfully installing it and using it, that they’re endorsing it, the opinions change very rapidly,” he says. “At that point, the skepticism leaves the room.”
The need to have every employee buy in to an idea is not an immediate one. When a major change is conceived, those closest to the top of a company are the ones who need to be on the same page. Lower-rung employees need to be instilled with a sense of trust that the company leaders will do right by them, so that when the time comes for them to jump aboard, more will be willing to do so. “At first, all I needed was the employees to know that we have a plan and hang on,” he says. “I needed them to have faith while a smaller group deployed those early customer wins.”
Balancing old and new
Things at BMC have settled down, and its financials are improving. The company posted revenue of $1.49 billion and net earnings of $102 million in fiscal 2006, compared to revenue of $1.28 billion and a net loss of $184 million in fiscal 2002.
Beauchamp says companies undergoing a full-scale change routinely commit one critical error. “A lot of times, those companies look at what they were doing as all bad, kind of the inertia of the old culture and the inertia of the old business is bad,” he says. “It’s not bad. It’s simply a remnant of what was once very good.”
While undergoing its shift to a new market, BMC did not totally abandon all of its former practices or products. Beauchamp divided the company into two broad areas, named “red” and “green.” Red was the area that dealt with the old practices and products BMC kept on board. Green was responsible for the new market and products.
Good idea, bad color selection. Beauchamp says employees working in the red area felt like they were stationed in a less-critical area of the company, stamping out the same old products, while those in the green area worked on the cutting edge. “They viewed red as a negative color,” he says. “It meant stop, it meant a warning. Green was all up and positive.”
Employees asked Beauchamp to come up with a new name for the red area. Company leaders settled on “gold.” “I asked our employees, ‘If we were in the gold business, which is more important: Gold coming from existing mines, or striking new gold?’” he says. “The answer is that one is not more important than the other. You need the existing mines to pay the bills, but you’d also better be prospecting for new mines.”
In fact, the gold area forms BMC’s backbone. Those working on new products occupy the company’s fringes as part of a system that allows BMC to test new products without putting the company at risk.
The company’s leaders fashioned a system that allows the research and development wing to develop and test new products and services without concern for how it will fit in to the big picture. The new product is kept separate from the larger structure of the company as its own project.
Once an idea has passed the R&D phase, BMC’s sales force takes the product to customers to see how it will be received. If it starts to catch on with customers, then it is rolled out to the larger organization.
Starting each new product as a separate R&D project allows the umbrella organization to remain stable while change is happening in small increments underneath. “We built small organizations designed to move very quickly, then build systems to on-ramp those onto the larger organization,” he says. “Larger organizations are not designed to move as rapidly. You can’t change them quickly without a lot of risk.”
HOW TO REACH: BMC Software Inc., www.bmc.com
Smart Business discussed business owners’ insurance needs and coverage issues with Kevin Riley, a partner at Godwin Pappas Langley Ronquillo LLP, to learn why constant coverage reviews are essential components of an overall business strategy and how utilizing the services of an impartial adviser like an attorney can be a wise investment.
Should business owners rely solely on their experiences and agents to understand their insurance needs and what their policies include?
Experience is not always the best teacher, and agents do not always explain fully what insurance policies do or do not cover. All too often, business owners find out after they have had a loss what their policies lack in coverage. By then, it is too late to do anything about their coverage or their losses. It is important to note that these ideas apply to owners of all sizes of business.
What can attorneys do in negotiating insurance policies and coverage issues to assist clients?
For one thing, attorneys can recognize that an insurance policy a client may already have does not cover it for a loss for which it seeks coverage. They can also identify coverage that a client needs or may not even know is available, but which it would want to have.
Here is an example. An angry employee in a small company approaches his boss after being employed for three or four years, but without getting the raise he thinks he should have received. He says he worked a lot of overtime hours for which he never received any compensation. He demands to be paid that money, and threatens to file a claim against the employer. Not all business owners are aware that they may be able to insure themselves against such situations. An attorney can bring the availability of this type of insurance to the employer’s attention, and possibly save the company substantial revenue.
The same idea holds true with sexual harassment claims, director and officer liability claims, business interruption claims, etc. If business owners have to pay the costs and expenses of such claims out of general revenue, these types of unexpected expenditures could have a dramatic and adverse effect on a company’s finances and threaten its very existence.
So an attorney is able to give the client and the insurance agent a ‘from-the-trenches’ view of insurance policies and coverage issues that confront all businesses.
At what point should business owners get attorneys involved in the insurance policy/coverage issues?
Ideally, attorneys should be involved when the principals of the business first buy insurance, or at least within 90 days of a policy renewal. In any event, business owners should consult with attorneys at least yearly so they can integrate insurance costs into their operating and forecasted budgets without running into any surprises regarding premium bills, like health care increases.
Should business owners keep attorneys apprised on an ongoing basis of significant events affected by insurance coverage?
Yes. A simple e-mail from a business owner to an attorney advising him of significant events that have occurred can help an attorney decide if they are likely to have an impact on the company’s budget or need for additional insurance in the next year. Business owners who keep attorneys involved in the insurance coverage issue can help themselves and their employees in the long run. For a small business, there is nothing worse than personnel litigation.
What criteria should a business owner apply when retaining an attorney who specializes in insurance issues?
The first is to retain a law firm or lawyer that deals with insurance issues as part of its primary practice. It is important to work with an attorney who has some working knowledge about the client’s business as well, and one who is willing to visit the company to learn more about its operations. If the law firm is not willing to allow that, find another firm. Attorneys need to be on the ground to see the business’s operation in order to provide the essential advice about insurance issues that a business owner needs to operate successfully.
KEVIN RILEY is a partner in the Houston office of Godwin Pappas Langley Ronquillo LLP. Reach him at (713) 425-7435 or email@example.com.
Born: Vicksburg, Miss.
B.S. in banking and finance, Mississippi State University; MBA, University of Texas
First job: Management trainee
Whom do you admire most in business?
Walter Johnson, who is the chairman of our board. He has been a mentor of mine for 26 years. He’s an incredible talent and never ceases to impress me. He has a genuine concern for fellow bankers and clients, and is one of the most responsive people I’ve ever met.
What is the greatest business lesson you’ve learned?
Simply put, you can never invest too much in customer service.
What are some universal truths you’ve learned about leading a business?
Remember that people want to be challenged. Some of the strongest friendships in life begin in the business arena. The vast majority of people are very loyal if you treat them right.
What are some of the most important traits a business leader needs?
A business leader needs honesty, integrity, flexibility, aptitude, motivation, attitude and commitment.
Smart Business talked to Andrew Sarne, a partner with Godwin Pappas Langley Ronquillo LLP, to learn more about how business owners can balance attorneys’ fees and the costs involved in their small contract legal disputes while retaining business relationships and goodwill.
What methods exist to prevent attorneys’ fees from ‘eclipsing’ the amount at issue?
Internally, reasonable business decisions need to be made regarding disputes that remove the emotions of the parties. Although two corporations might have a dispute, it often seems that there is a substantial likelihood they will continue to do business in the future. As such, the dispute itself can be resolved by knowing that whatever loss is taken on that deal can be made up in the future.
How can the parties resolve their disputes without incurring unnecessary legal costs?
An informal meeting without attorneys by two unemotional representatives of the respective corporations can generally yield a dialogue for resolution. Parties can also include appropriate clauses in their contracts that dictate that the matter shall be submitted to mediation (prior to litigation being commenced), arbitration, a bench trial, or be resolved by way of other creative means.
If mediation or arbitration is selected, the quality of the mediator or arbitrator is extremely important.
Assuming internal mechanisms are not available, the entities can engage counsel to attempt to resolve the matter through an alternative dispute resolution mechanism. Ultimately, a decision has to be made that the attorneys’ fees that will be invested in the dispute may very well eclipse the matter at issue. As such, a business decision needs to be weighed in comparison with those fees.
Although many contractual causes of action will allow for the recovery of attorneys’ fees, this is not always a guarantee. The party that seeks to litigate ‘to the end,’ assuming it will get its attorneys’ fees paid, may learn that this is not automatic. In fact, if the opposition is pushed too hard, they may find themselves litigating against an insolvent party.
What can an attorney do in small contract disputes that the parties involved cannot?
An attorney can, if empowered by the client, often take the emotion out of the situation, which generally drives the litigation. If the attorney is properly objective, he should explain to the client that regardless of the principles involved, the attorneys’ fees are a legitimate issue in these types of matters, and that immediate resolution tactics are more prudent than litigation tactics.
On occasion, attorneys give in to their clients’ emotions and allow the matter to escalate into such a tremendous lawsuit that, at the end of the matter, the parties would have been much better off negotiating a reduced amount on the front end versus paying out the attorneys’ fees and ultimate judgment on the back end.
Additionally, sometimes public relations issues and future business contacts can be impacted negatively.
At what point in the negotiation process should an attorney be introduced?
The attorney should always be involved from the beginning, but given clear objectives by the client.
In terms of contract negotiation, it is best for the parties to have a clear understanding of what goal they want to reach before attorneys are involved. Frequently, a client who relies solely on an attorney to provide direction for the contract can veer the project away from the intended goal by trying to protect the client.
In any event, once the attorney is involved, he should receive clear direction from the client, as all too often clients provide a contractual document to an attorney and allow the attorney to have free rein, which can destroy the goal. However, if an attorney is given proper direction and has negotiation latitude with the opposition, this is a useful tool. Additionally, the dispute resolution options mentioned above should be incorporated into any agreement.
What benefits accrue to the clients from the attorney’s involvement?
Often, in addition to reduced attorneys’ fees, a number of potential problems can be avoided by having an attorney involved on the front end of a negotiation. It is important to note, though, that other problems can also be created if attorneys are not given the proper objectives.
ANDREW SARNE is a partner with Godwin Pappas Langley Ronquillo LLP in the Houston office. Reach him at (713) 425-7405 or firstname.lastname@example.org.