Asalesperson quits, goes to a competing firm with your customer list and begins soliciting your customers. A competitor falsely advertises that your product causes injury to children. Must you sit back and wait months for your day in court while your company suffers irreparable harm? The answer to that question is a resounding “no,” according to Spencer Skeen, litigation partner for Procopio, Cory, Hargreaves & Savitch LLP. Skeen says that under these types of circumstances, executives should contact their attorneys about the potential for emergency injunctive relief.
“Injunctive relief is sometimes the only way to prevent irreparable injury to your business,” Skeen says. “It’s an effective option when a claim for monetary damages just won’t be good enough and when you need to stop someone from infringing on your rights pending trial.”
Smart Business spoke with Skeen about when CEOs should seek injunctive relief.
What is preliminary injunctive relief, and why is it beneficial?
Preliminary injunctive relief is frequently referred to as extraordinary relief because it is sudden and powerful. Traditionally, a preliminary injunction is a court order that preserves the status quo and requires one of the parties to refrain from doing certain acts pending trial. An injunction is extremely useful when there’s really no way to calculate or recover the full value of the damages suffered by your business at trial. Also, preliminary injunctions often save companies litigation costs by encouraging settlement talks. To get a preliminary injunction, the moving party must show it is likely to prevail at trial. As a result, injunction motions provide the parties with a preview of the court’s thinking. A party may want to avoid the expense of a full-blown trial if it knows the court is leaning in favor of the other party.
When should CEOs seek preliminary injunctive relief?
It’s commonly requested in cases of unfair competition, trademark, copyright or patent infringement. It is also requested in real estate and certain employment law cases. For example, if an ex-employee starts a competing firm using your company’s trade secrets, such as a customer list, it may be impossible to determine the revenue loss your company has suffered due to misappropriation of the trade secret. Preliminary injunctive relief would be appropriate in that case. You should seek an order from the court to stop the former employee from using the customer list. You can also seek an order requiring the former employee to return or destroy all copies of the list. You will have to prove the customer list was confidential and that the list had economic value due to its secret nature. In other words, you must show the list is not ordinary, publicly available information, but rather information that gives you a competitive advantage over others who do not have it.
Alternatively, let’s say a competitor falsely advertises that taste tests show its product is definitely superior to your company’s product. Obviously, this would hurt your company’s brand and trademark value, but it would be hard to quantify the amount of harm. Preliminary injunctive relief would be appropriate here as well.
Is preliminary injunctive relief an option in real estate disputes?
Absolutely. Suppose your company receives a foreclosure notice, and the trustee is alleging that your company defaulted on its mortgage payments. It may be that the lender’s payment history is incorrect, or perhaps the underlying loan agreement is subject to legal challenge. You can seek an immediate injunction to halt the foreclosure process and preserve your company’s rights in the property.
Even if your business is in fact behind on its mortgage payments, injunctive relief may still be appropriate if the trustee did not follow all procedures for a foreclosure sale. Getting the injunction to prevent the foreclosure sale may allow your company time to refinance the loan or negotiate a settlement with the lender.
What steps should CEOs take to seek preliminary injunctive relief?
First, determine the pros and cons of seeking injunctive relief. If you decide to move forward with a request for preliminary injunction, an attorney will need to file a lawsuit on your behalf. Next, the attorney will file either an application for a temporary restraining order or a motion for a preliminary injunction. A preliminary injunction can only be issued after notice to the other side and a full hearing. A temporary restraining order may be issued more quickly and without notice to the other side in some instances. However, a temporary restraining order only lasts for a brief time. Courts will often deny a request for injunctive relief if there is excessive delay in bringing the motion. So, if you think your company may need injunctive relief, you should act now.
SPENCER SKEEN is a litigation partner for Procopio, Cory, Hargreaves & Savitch LLP. Reach him at SCS@procopio.com or (619) 525-3844.
Silicon Valley is known as the birthplace of new business ideas and the home of the entrepreneurial spirit. The challenge is that even tech companies with entrepreneurial roots can struggle to maintain a competitive edge and a penchant for innovation as they grow.
Several times, one of the most famous, colorful and outspoken founders in the Silicon Valley, T.J. Rodgers, faced these same challenges.
“What’s important to sustaining growth is that you have to continue to learn as a CEO and as a company, you have to continue to drive things forward,” Rodgers says. “We started as an SRAM company, and we had a single-minded focus, which caused us not to diversify. That made us very vulnerable in 2001. What I’ve learned is that as a company, you exist to serve your customers, and you can evolve and change or simply disappear.”
Rodgers, president and CEO of Cypress Semiconductor Corp., has become famous for his business success and his expert opinions since founding the company in 1982. He testified before a senate committee in 1997, a senate judiciary committee in 1998 and, later that same year, he spoke to the Annual Cato Institute-Forbes ASAP Conference on Technology and Society about why the Silicon Valley should not normalize relations with Washington D.C. In addition, somewhere along the way, he’s grown a billion-dollar business with more than 6,000 employees, invented and patented new technologies, written a few books, and received numerous recognitions.
Given that Cypress’ core business was originally built in the ultracompetitive semiconductor industry, achieving revenue of $1.56 billion in 2007 up from $1.09 billion in 2006 is proof of Rodgers’ innovative tenacity.
At Cypress, the incubator switch is always in the on position and the company has become famous for its continual quest for new ideas. In addition to product diversification, Rodgers has sustained growth by creating and sustaining a visionary culture within the organization.
Building the incubator
Being open to new ideas always helps maintain your competitive edge.
“Start-ups have a lot of energy, and they keep you looking toward the future, so we always have two or three new companies incubating here at Cypress,” Rodgers says.
“We’re known within the Silicon Valley community as having an open door to new ideas, so sometimes we’re approached by external entrepreneurs who have an idea for a new business or internal employees who present an idea for a new product that further leverages our existing technology. Our openness to new ideas is also a powerful recruiting tool. Sometimes prospective employees approach us with an idea, and they come in as sort of a package deal. We get a new employee and a new idea; they get the chance to be entrepreneurs.”
When someone from the outside approaches Cypress with an idea for a new product, they write a business plan that defines the market the product will appeal to and the team that will be responsible for developing the product and executing the business plan.
“Our management team decides if this is something we should fund, and then we take the idea to our board for approval,” Rodgers says.
What makes the incubator structure so unique at Cypress is not only the number of internal employees who are spending their days working on new products but the flexibility of the support relationship between Cypress and the incubating company.
“Part of what gets decided before we agree to move forward is how the new company will be supported through Cypress’ infrastructure and what support they’ll provide themselves,” Rodgers says. “If they use Cypress support services, such as accounting and HR for example, we’ll bill them back for the time and materials. Since Cypress is providing the funding, if the new venture runs short of cash, it will sell Cypress additional shares to raise cash.
“Like any start-up, not everything succeeds, and you don’t always know exactly what the customer wants. I would say that maybe six out of 10 new ideas will fail.”
But Cypress has had two really big winners. One was the creation of SunPower, which got the company into the solar energy business, and the other was the creation of Cypress Microsystems Inc., which was an employee start-up that is now doing $160 million per year in revenue.
“Both of these businesses helped diversify our offerings, counterbalanced our cycles, improved our profitability, and they keep us on the leading edge of innovation,” Rodgers says.
“Creating these entrepreneurial start-up subsidiaries has allowed us to really do two things at once. Many companies have a hard time driving innovation, but with this structure, our main line managers can continue to drive our existing business, and they don’t have to worry about the fear of failure with new product development.”
Maintain a unified culture
While one of Cypress’ strengths is its entrepreneurial culture and its structure of multiple subsidiaries, Rodgers is the first to acknowledge that it’s been hard to find the balance between maintaining a culture that’s open to innovation and achieving consistency.
As the company grew, Rodgers says there have been times when not only innovation lagged but, at one point during the downturn of 1992, business results were extremely poor, partly because the company was having an identity crisis. To remedy the situation, Rodgers relied on the teachings of Jim Collins and Jerry Porras in their book, “Built to Last: Successful Habits of Visionary Companies.”
“One thing that I’ve learned is that in order to continue to drive growth and maintain innovation, the main thing is that you have to keep everybody on the same page philosophically,” Rodgers says. “It doesn’t matter that you have different structures or businesses, what matters is that everyone maintains the same set of values. That’s what holds everyone together.
“As you get larger and start acquiring other companies, it’s important to continue to think about who you are as a company because you can become a crazy quilt of different cultures. Once you achieve philosophical continuity, the technical work product flows from there.”
When Rodgers accepted the fact that his company was in the midst of a crisis seemingly from a lack of a singular vision, he traveled to each location, sat down with employees and talked to each group about what makes Cypress different. Their answers would be the key to reclaiming the company’s universal philosophy and values, a critical step to putting Cypress back on a growth track.
“I essentially put my butt in an airplane seat for six months and traveled around to 25 different locations asking each group of employees what makes Cypress different,” Rodgers says. “I was using them to write a new corporate vision, and what I found is that they frequently mentioned the same things. All I did was repeat back to them the things that they already believed about the company.
“For six months, I gathered this data, and then I reviewed it for commonalities and divided it into five categories. From there, I put the data in front of the VPs and managers for discussion, and then we rolled it out. Going through the process helped to get everybody on the same page because people who thought they were in an identity crisis, suddenly felt like they had a great deal in common with their co-workers.”
The results of the effort helped unify the company. “Now, we have a statement of core values, a unified statement of purpose, a mission statement, and we’ve stated specifically how we were going to take each business component and move it from its old position to a new posture that continues to drive revenue and profit growth,” Rodgers says. “We have one page of information that ties everyone together, and we’re out fighting the enemy not each other.”
Since the crisis, Rodgers says that he has learned his lesson. To keep the situation from repeating, he frequently meets with employees, gathers feedback and has rewritten the company’s statement of purpose 40 times. It’s the single tool that he relies on to keep everyone on the same page.
Learning from mistakes
Rodgers says a company needs to never lose sight of quality. “If I had it to do all over again and I was building a new company, from day zero, I’d hire a VP of quality,” Rodgers says. “Anyone can make a product more cheaply than the next guy. Where they fail is working quality into the process. Every company needs someone who gets up in the morning and thinks about quality, and they need to have real authority to get things done.
“You need to approach quality from a holistic standpoint, and as a CEO, you need to demand quality in every aspect of your organization, and then it will wrap itself around the manufacturing process. I was never trained in the mathematics of quality, and it took me awhile to understand it and embed it in all of our processes. Quality is the main reason that Toyota has been beating Detroit because they are perfectionists in design, and they have never given up on their quality focus.”
And if a lack of quality or any other reason leads to a mistake, don’t be afraid to admit that a mistake was made.
“That’s another thing I’ve learned through my experience as a CEO, always admit your mistakes and never stop learning,” Rodgers says. “There have been times in the history of this company when we’ve had a stellar ride and management took credit for it, so when there’s a problem, management needs to take responsibility for that, as well. People will judge you not by what you say but by your actions, so if you make mistakes, admit it.”
HOW TO REACH: Cypress Semiconductor Corp., www.cypress.com
Nothing sets a business apart from the competition like a stable of product or service names or logos. It is imperative to protect those trademarks by appropriate management and registration. In today’s global market, businesses must lay a foundation for protection in every country of interest to their business. Starting this process early provides maximum security.
Careful trademark/brand management not only builds brand loyalty, but, when used effectively, trademarks can become their own entities, symbolic of the total consumer experience when purchasing a product or service. This phenomenon makes the trademark one of the most valuable forms of intellectual property.
“There are several trademark management best practices that will protect a company’s investment in its brands,” says Kathleen Pasulka-Brown, partner and co-leader of the Trademarks & Copyrights Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. “They include: methodical brand-name selection, managed registration of all existing and prospective brand names and logos, and a carefully prepared trademark strategy with an ongoing review process that maintains the effectiveness of the brands. Mistakes in any of these areas can be costly in terms of monetary value as well as a reduction in brand value.”
Smart Business spoke with Pasulka-Brown about how to register and protect your company’s trademarks.
What is the impact of the length of the trademark registration process?
It has always taken more than a year to obtain a trademark registration. It is important to note that while a trademark can be used during the approval process, it can ultimately be declined, causing losses in marketing investment and any good will developed under the trademark. This, in turn, may translate into a costly endeavor of relabeling products and packaging. Initially, in the United States, trademark registration requests are scrutinized by an examining trademark attorney who checks to confirm whether the new mark is capable of trademark significance and whether a conflict exists between the new mark and any existing trademark applications or registered marks.
Why is the trademark selection process so important?
In the United States and many other countries, marks do not have to be identical and the goods or services do not have to be the same in order for the trademark examining attorney to find that a conflict exists. It may be enough that the marks are similar and the goods or services are related. To make certain a particular trademark is approved, a thorough search should be conducted before filing the application. However, because the confusion criteria are subjective, marketing departments may miss some of the nuances in this search. For this reason, it is preferable to have a trademark attorney perform and evaluate the search because they have access to more comprehensive databases and will evaluate the choices on a different level, looking for nuances that may create a likelihood of confusion. Last, marketing departments should select several names. This will prevent them from becoming enamored with just one, in case the more prudent decision is to move forward with another selection. It is vital to request a search in each country of interest by an attorney if you are planning to use the brand during the approval process and in order to protect the investment in the application.
What are the other benefits of trademark registration?
Besides the enhanced marketing capabilities, benefits of registering a trademark in the United States include: notice to the public of the claim of ownership of the mark by the registrant, legal presumption of ownership by the registrant, increased rights in court, use of the symbol ® and the ability to obtain enforcement action by U.S. Customs. The benefits in other countries are similar.
How can CEOs maximize the value of the company trademarks?
In order to maintain the validity and enforceability of a trademark registration or the enforceability of a nonregistered trademark, owners must police their mark, meaning that if they become aware of an infringement which happens when another party uses a similar mark they must take appropriate action. Trademark owners should also protect their mark by obtaining a domain name that is the same as their trademark. Companies should also engage watch services that will assist in the policing process. The watch service results should be reviewed by trademark counsel, which is a good way to keep an eye on competitors.
KATHLEEN PASULKA-BROWN is a partner and co-leader of the Trademarks & Copyrights Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. Reach her at (619) 525-3827 or email@example.com.
George DeVries faced the classic entrepreneur’s conundrum: How do you add enough structure to support a growing company without killing innovation?
His solution was part process, part culture.
DeVries, co-founder, chairman and CEO of American Specialty Health, relies on structure for both.
“I think that one of the things that fostered our growth is the continued evolution of our new product delivery process,” DeVries says. “We now develop new products and then deliver them to market in a very structured way. That delivery structure has helped us manage our risk, which meant that we didn’t always have to succeed with a new product in 90 days. We’ve been able to be patient waiting for new products to catch on, but in spite of that advantage, success has taken a lot of perseverance. I think, originally, one of the hardest things was selling the concept of complementary health care to customers before the customers knew the need even existed. Our success hasn’t been about risk avoidance; it has been about managing risk. We never bet the future of the company on just one product.”
DeVries founded American Specialty Health in 1987, after he had been laid off from his job. Needing employment, he listened to a friend’s idea and formed a chiropractic network while working from the spare bedroom in his condo. At the time, the notion of organizing chiropractic providers and providing insurance coverage for chiropractic visits was unheard of. As it turned out, that germ of an idea was the beginning of American Specialty Health.
Today, the company provides complementary health care coverage and services to 13.4 million members for clinical needs, such as chiropractic care, dietary services, acupuncture and massage therapy, as well as health education programs for everything from tobacco cessation to weight management and disease prevention. DeVries says that the key to growing the company to $128 million in annual revenue and 600 employees has been the creation and installation of a structured system that minimizes the risk of bringing new products to market while continuing to foster and support innovation.
While all new products start with a concept, idea generation is truly the vital component for new product development at American Specialty Health, simply because DeVries has been the industry’s trailblazer. He originated the concept for the company’s insurance coverages and educational services because it wasn’t possible to emulate the competition.
He says that he gets ideas for new products from a variety of places, and then develops them with the company’s senior management team into a working document.
“Many of our new product ideas come from the senior-management level in the company, but we also get a number of good ideas from talking to clients,” DeVries says. “I’ll be out talking with a client, and they know we’re an entrepreneurial company, so they’ll offer ideas to me. To get ideas from customers, you have to spend time with them, and you have to listen. Then, I’ll get together with one or two senior company leaders, and we’ll flush out the idea and create a detailed white paper. We drill down into the detail in the white paper, looking at every aspect of the product including the financial implications.
“We’ll look at the consumer trends and the clinical trends to see if we think there’s a market for the product, although sometimes because the idea is a new concept, there’s no data to support it, so you just have to go on intuition.”
Even though the data to support his ideas doesn’t always exist, DeVries says that the team rarely disagrees about bringing a new product to market. However, from time to time, disagreement occurs within the ranks, and getting to the next step requires DeVries to use his consensus-building skills.
“You can create consensus among the team by helping everyone understand how the product will benefit the market and why it makes sense to bring it forward,” DeVries says. “I’ve had to develop those skills because I had to sell new concepts to customers. One of our more hotly contested ideas was around development of our health coaching program. We had a lot of people scratching their heads with that one, but now the program is successful, and it’s generating millions in annual revenue.
“That program is an example of why it’s vital to have an entrepreneurial culture. We don’t work in silos, and as a management team, we can make difficult decisions come together because everyone knows that our company is all about innovation.”
While the senior management team and customers generate many new product ideas, the entrepreneurial roots of the organization inspire front-line employees to offer up new ideas, as well.
“In the case of our Silver&Fit program, which is a fitness program for seniors, that idea came from some of the folks in our marketing department,” DeVries says. “The culture is what creates that type of innovation.”
DeVries credits detailed and structured new product implementation with few launch failures and measured risk reduction. As a first step in the process, he turns the white paper over to the chief operating officer, who then builds a key process team composed of midlevel company managers. The goal of the key process team is to detail everything that will be necessary to bring the product to market.
“The key process team looks at all of the deliverables and what tools and resources it will take to make the product successful,” DeVries says. “This includes everything from the impact on customer service to the creation of marketing materials. We want to understand all of the resources and tools that will be required to support the product and the impact the service delivery requirements will have on our internal team and our customers.”
He says that this detailed look by the key process team helps to refine costs and avoid financial surprises. His next step assures that the marketplace will accept the product before the company makes a huge investment of time and resources.
“We sell all of our new products to a few early adopters who are current clients,” DeVries says. “This is an absolutely critical step before we go live. You can’t risk testing a product with new customer relationships, so you go to your existing customers. We want to see how the product is going to perform before we offer it to everyone. This step reduces our risk, and by staging the implementation, we’re able to postpone the larger costs associated with a wide-scale launch until later on.”
DeVries says that while research and development costs are fairly low in the complementary health coverage business, staging the implementation further enhances the cost effectiveness of delivering the product to customers. Also, he can refine the service delivery process for the product, which helps to assure quality for customers once the product moves beyond the beta test stage.
“I’m engaged on the sales side when we make the visit to the client requesting the trial because it shows the commitment of the organization to the new product,” he says. “Once the product is established, it’s much easier for the sales team to secure additional customers.”
Regardless of processes, successful new products are the result of having people that believe in a culture of innovation.
“One of the ways that CEOs can foster growth and create a culture that supports innovation is by hiring people who are committed to the vision and mission of the organization, especially at the senior-management level,” DeVries says. “It’s different managing and creating new products when you’re a company of three people because you can keep your hand in everything. But as you grow, whom you add to the team is vital because no one person can carry a team of 600, so your ability to assess people for a cultural fit is vital. We hire for character, enthusiasm and a positive attitude because everything else you can train. I always say, ‘Hire for character first and what’s on the resume second.’”
He says that he has no special formula for assessing character because hiring is not an exact science. However, he favors conducting multiple interviews with a candidate as a way to assess their character, and he also encourages employee referrals because current employees will refer friends who are also a good cultural fit for the organization.
DeVries says that he favors promoting from within and offering upward mobility to employees as another way to nurture the culture. Internal promotions help the staff feel engaged with the outcome and more like business owners.
“Creating promotional opportunities for the staff generates enthusiasm,” DeVries says. “Most of the entrepreneurial ideas are driven at a very high level in the company, but we wouldn’t be able to execute if not for the staff that administers the products and supports the innovation.
“One way that I check in with the staff and get a barometer on the culture is through our annual employee satisfaction survey and also by monitoring the number of referral bonuses we are paying to employees for referring their friends for employment opportunities here at American Specialty Health. I really regard employee referrals as the true litmus test of whether our culture is working. When the employees take the annual survey, they are asked to rank the attributes of the company, and I go through and read each survey along with their comments. It’s important for CEOs to listen, and we’ve made some adjustments based upon the comments and feedback we’ve received, such as increasing staff benefits. Listening to the feedback and making adjustments is an important part of maintaining the culture through the process of growing the company.”
While the culture has remained the same, the structure that supports innovation has changed and evolved over time and that evolution has been the secret to achieving growth and success for DeVries.
“We have continued to innovate, but now we handle the process of innovation in a very structured way,” DeVries says. “We’ve continued to evolve and create new products, but we wouldn’t have been able to accomplish any of it without a structured process for implementing new ideas.” <<
HOW TO REACH: American Specialty Health, www.ashcompanies.com
When Bob Calderoni was hired as the chief financial officer of Ariba Inc. in 2000, he thought he was leaving the world of restructurings and repositionings behind him.
He had seen such action throughout his career in financial management roles with companies such as Avery Dennison, Apple and IBM’s storage division, and he had tutored under accounting giant Arthur Andersen before entering the corporate arena.
But the Ariba job was supposed to be different. It was supposed to be tackling the relatively small challenge of dealing with growth at a small company.
It didn’t work out that way. “The tech bubble was literally bursting just as I was walking through the door,” says Calderoni, now chairman and CEO. “I had always worked for large companies, and I thought I was being hired to be part of a small, fast-growing company. I didn’t think I was being hired to reposition the company. It came as a surprise to all of us in the company, and I just had to deal with it.”
Six months later he was the CEO, leading the efforts to keep the lights on and blazing a new trail toward the future.
Originally founded in 1996 as a provider of software for large-scale corporate procurement functions, Ariba rose to the top by riding the late 1990s’ wave of technology investment by Fortune 500 companies.
Within the sector, the company had already achieved significant market penetration among the initially targeted client base of Fortune 500 firms. In fact, Ariba counted seven of the top 10 Fortune 500 firms as clients. No single competitor supplied a total solution to customers, and while there were battles yet to be won on the customer front, Ariba was better positioned to win big wars not smaller battles.
Calderoni says that although he previously held CFO titles, he was trained in the early days of his career at IBM to act as more of a chief operating officer than what was traditionally expected from CFOs of the era. It would take all of that experience and more to reposition Ariba for financial soundness and a new breed of midtier technology customers who required deeper solutions than software in a box and an end to technology installations that resulted in huge cost overruns.
Saving the company
As the technology boom turned into a bust, Ariba wasn’t much different than many of the other tech firms that were crumbling around it.
“The organization was in a lot of trouble,” Calderoni says. “It was a typical early stage Silicon Valley entrepreneurial firm burning through lots of cash, saddled with a lot of cost and facing a crumbling market.
“I had to stop the bleeding or nothing else was going to matter, so I was forced to eliminate 70 percent of the organization just to survive. As a CEO, you really can’t worry about the future if you aren’t even going to be there.”
To achieve the necessary cost reductions that eventually took the firm down from 2,500 employees to 700, Calderoni initially reviewed readily available competitive benchmarks for every function in the company. He compared Ariba’s operating budgets to the standard expenditure level for each function, which is usually expressed as a specific spend level as a percentage of revenue. From there, he decreased some of the planned cuts, such as in the research and development function, because he says he knew that when the tech market rebounded, he would need a new suite of client deliverables to tackle the midtier client space and to generate sales of additional services to pre-existing customers. Both moves would require additional R&D and cash investments.
“I really don’t think that you can cut too much from a company,” Calderoni says. “I’ve been hearing that for 20 years, and now that I have the benefit of hindsight, I never remember a time when I said afterward that I thought we cut too far. You have to make your cuts quickly and decisively because there are lots of ramifications within the organization when you are making cost reductions. You can’t move forward again until the veil of uncertainty is lifted.
“As we were making the cuts, I needed to listen to my staff because a CEO can’t make all of the decisions. In every organization when you are making cuts, you have to make some trade-offs and some portfolio decisions. We looked at every cut and how those functions related to our vision of building a whole e-spend, e-commerce solution and eliminated those areas that were not going to take us where we wanted to go.”
Winning on demand
Despite having to make cuts to save the company, Calderoni never lost site of innovation.
“I really worked on stabilizing the company, making us profitable and repositioning us for growth all at once it was simultaneous,” Calderoni says. “I know that a lot of people were thinking, ‘Oh here comes the bean counter, taking over and making cuts,’ but we really stepped on the gas in terms of innovation. We went from one product to 11 products within 24 months.”
The software industry was built on hefty upfront costs, long implementation schedules and big price tags. Customers wanted scalable solutions, and they wanted them now. Even behemoth Microsoft has announced plans to position that firm for the on-demand marketplace. Essentially changing the software investment platform to a pay-as-you-go enterprise for customers would mean that Ariba would need to make significant changes.
“Many people said that it couldn’t be done, they had never seen a software company reposition for the on-demand marketplace and survive the transition,” Calderoni says. “We had to redevelop all of our products, but the subscription model helped reduce cost and headaches for our customers, and that has resulted in a net gain of new customers.”
Calderoni says that he considers Ariba’s growing backlog of work and addition of new midtier customers to be further validation that the transition was exactly what the customers wanted all along. More than 75 percent of the new customers Ariba added during the fourth quarter of fiscal 2006 were small and medium-sized businesses.
“Procurement as a function needed a lot of investment,” Calderoni says. “They didn’t necessarily have the skills to maximize the efficiencies from the software. I think that many firms had learned through ERP installations that software alone would-n’t solve the problems, and we were a company that had just been pushing software.”
In answer to the need, Calderoni added a consulting division and hired more than 300 consultants who would bring solutions expertise to the customers. Seeing an opportunity for greater margin and the ability to cross-sell both subscriptions and solutions, Calderoni also says that he was filling the need for knowledge and technology among the firm’s procurement customers.
“Subscription revenue in the industry was inconsequential when I started, but everyone we competed against doesn’t exist today, and we had 15 percent growth in our subscription revenues in the second quarter of 2007,” Calderoni says. “Today, consulting is 50 percent of our revenue because customers are buying a solution.
“I knew it would be a challenge, but that’s what motivates me. I think now, consciously, overinvesting in R&D has been recognized as the right move and that we’ve proven that cost reduction and growth are not mutually exclusive.”
As Calderoni began examining what constituted the next level of growth for Ariba, it soon became clear that despite all of the initial repositioning efforts, providing a total solution to customers would require acquiring some capabilities that Ariba didn’t have in-house. From the predominately founder-led company cultures that are commonplace within Silicon Valley, Calderoni’s business acquisition view that, “it’s not important whether you build it or buy it,” may startle some.
“I am unemotionally biased when I look at acquisition targets,” Calderoni says. “My criteria for decision centers around gaps in capabilities, and those can be technical or nontechnical. That led to our biggest move, which was the acquisition of Free Markets. Free Markets brought commodity expertise and sourcing capabilities, and we provided the technology capabilities that they didn’t have.”
The acquisition also added another 400 commodity category specialist consultants to Ariba’s growing stable of experts. Each firm had its own technology platform, and Calderoni says that he used the best of both to achieve technology integration. The people side of post-acquisition assimilation plans requires a different strategy in his view.
“Only at the senior-most levels of organizations is it difficult to merge firms,” Calderoni says. “At the lower levels of the organization, people ended up in a better place so it’s usually the management teams that feel the brunt of acquisitions. I looked at who would fit best into Ariba going forward when deciding who to retain from the Free Markets management team, and there were certainly some tough calls to be made, especially early on. In some cases, the decision of who to keep and who to let go was very close.
“I leave emotions aside when I’m making decisions and just try to hire the stronger of the two individuals, but people make hiring mistakes all the time. I also act swiftly because uncertainty is bad for organizations. The staff will fill the void left by distracted leadership with ambiguity, and I think you are better off as a CEO making your decisions quickly and firmly and not worrying so much about making mistakes.”
Calderoni says that his background as a CFO causes him to lead with financial conservatism. His philosophy is that expenditure levels should match up to the corresponding stage of the organization’s development, and until firms achieve consistent cash flows, they should not take on additional debt. He says that he is also cognizant that many customers have well-deserved concerns about the stability of technology companies, and he believes that being fiscally conservative will attract new customers and increase revenue.
“In early stage firms, cash provides you with an appropriate safety net, and that’s what customers want,” Calderoni says. “We would not have been able to fund $170 million of our $300 million investment into the on-demand marketplace in cash, without having made all of those expenditure reductions early on.”
Calderoni says that it’s always about balance, and that goes for investment and debt loads. Once companies hit an emerging marketplace, only then is it appropriate to break away from a more conservative investment posture.
While Calderoni has repositioned Ariba and the firm generated revenue of $301 million in 2007 the expense level does not equal the pre-bust days. Ariba has 1,700 employees, down from the late 1990s high of 2,500, and a greater percentage of expansion costs are financed by cash from operations.
“Growth shouldn’t come by mortgaging the future of the company,” Calderoni says. “You can’t spend like a drunken sailor hoping for a better day.”
HOW TO REACH: Ariba Inc., www.ariba.com
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 firstname.lastname@example.org.
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