Distress call Featured

8:00pm EDT March 26, 2007
It could only be described as a giant leap of faith.

In January 2004, Doug Hutcheson accepted a promotion to CFO and executive vice president of Leap Wireless International Inc., just three days before the company filed for bankruptcy.

What makes the move even more unusual is that Hutcheson didn’t have a background in financial management.

Many of the company’s problems were tied to less-than-advantageous financing agreements requiring aggressive customer acquisition thresholds, which, in turn, led to disproportionately high expense levels.

Hutcheson says that someone needed to step up to the challenge.

“I had the industry background and understood the business model,” says Hutcheson. “The company needed someone to complete the job, or it was likely that the continued operation of the business would be in jeopardy. It wasn’t easy, but when the music stopped, there was only one right answer.

“I think that sometimes you have to do what is right, not necessarily what is easy. That’s how I feel about my decision to take the position here at Leap Wireless. It would have been easy to say no; the right thing was to say yes.”

The company emerged from bankruptcy, and in January 2005, Hutcheson was named president and CEO.

Hutcheson says that he found many things to salvage at Leap Wireless, including a unique niche in the marketplace: Providing pre-paid wireless services to demographically underserved customers — a business model that has so much potential, Hutcheson refers to it as “pixie dust.”

He says he kept the same basic model and strove for cost-efficiency, value for customers and a strategic investment model designed to continue the needed expansion at a digestible and affordable pace.

Rebuilding a company
“We had excellent customer data; there were nice trend lines and good numbers on new customer acquisition,” says Hutcheson.

“The data spoke to where the strengths were. However, you had to be a keen observer and accept that the people issues would have to be right in order to achieve financial success.”

Repositioning the company as a low-cost provider and solving the people problems would come through a companywide restructuring that eliminated $140 million in annual operating expenses during the next four quarters. To accomplish the goal, Hutcheson used both an internal and external team that reviewed every item on the expense lines. He listened to all of their recommendations as to where to make cuts and used data and a stepped-process for implementation. “Restructuring greatly accelerates the number of difficult decisions you have to make,” says Hutcheson. “You don’t know that every recommendation you are given is right. I make evidence-based decisions and look at the hard data first. Intuition is the last element I consider, and I use that to apply velocity to the process.”

He says he breaks down most major decisions into smaller ones, takes them sequentially and waits to assess the impact before making more. “You have two choices as a CEO when you have to cut back 30 percent in operating expenses,” says Hutcheson. “You can cut the entire 30 percent from one area, or you can break it down and take 25 percent from smaller line items. I don’t like to eliminate entire functions because I think that it rips the company apart.”

The bankruptcy aided Hutcheson in his turnaround efforts by providing the opportunity to renegotiate the troublesome financial agreement covenants. The financial benefit was that related costs dropped 50 percent over the next three quarters.

The reorganization reduced the employee count from 2,300 to 1,200. Hutcheson says that he was able to keep the remaining core group of personnel intact through the difficult days of the restructuring process by providing them a great deal of information about what was happening and continuing to assure them that turning the company around was an achievable goal.

Armed with a reduced cost structure, Hutcheson began to focus on returning to growth by rebuilding a senior management team to help take the company forward. He augmented the retained group of 17 leaders by hiring eight new senior managers from outside Leap Wireless.

“I looked for people who had a general management philosophy, so they can relate their functional expertise back to the overall needs of the business,” says Hutcheson. “I also looked for people from outside the industry because I wanted to break old habits. Lastly, this business runs on the details, so I wanted people who were willing to really understand what happens on the front lines.” To assess the candidates, Hutcheson spent time asking them about their experiences and philosophies, looking for a match. He says that the group ended up being exceptionally strong, and he has learned that a CEO’s success lies in the ability to manage strong people.

“I think that the way to manage strong people is to give them clear goals and expectations, give them what they need to do the job and let them go to it,” says Hutcheson. “The secret is to give them the latitude and to keep them busy. People are either clamoring to get control, or hoping someone else will take it. When everyone is very busy, they aren’t worried about getting control because they can’t take on any more responsibility and they aren’t getting in each other’s way.”

Disciplined expansion
Part of Hutcheson’s profit formula calls for alternating periods of investment and the addition of new markets with periods of new customer and market assimilation.

This disciplined approach has enabled Leap Wireless to continue to expand while maintaining a low-cost infrastructure. Hutcheson says that by not pushing the company beyond its limits, he can stretch the bandwidth of the firm’s management infrastructure, but not to the breaking point.

He has also implemented a more planned, organized approach to growth.

“In February 2005, we won $285 million in new market licenses,” says Hutcheson. “Everybody wanted to just jump in and start doing things, so I pulled everyone back. Now we take 60 to 90 days to draft our business plan when we go to open a new market.”

Hutcheson says that his growth plans contain clear, time-bound goals of what has to be achieved, and they are specific in assigning responsibility for results to individual staff members. “I like to be specific about doing things the right way, not the easy way, because people will play to the edge of the box,” says Hutcheson. “As an example, you can’t just say, ‘Go sign 5,000 subscribers.’ You have to specify the cost for getting the 5,000 subscribers. The business plan defines the risk that the corporation is willing to take.”

Hutcheson completes his business plan by outlining the resources that will be provided to the staff to accomplish the task, then checks in frequently to get a sense for progress and to hold people accountable for the results. Lastly, he takes the time to thank people for their efforts and to let them know they are appreciated. “I think that you can’t ever thank people enough for what they do,” says Hutcheson. “I try to spend more energy on what’s right than wrong, because people respond to positive comments.”

Operational simplicity
Growth will continue to be part of the expectation from Leap Wireless’ shareholders because there are numerous untapped markets left to be conquered. Wireless spectrum acquisitions are awarded based upon a competitive bidding process that requires a “win” in order to expand into the market, but under Hutcheson’s watch, that win no longer comes with an “at any cost” mentality, and the firm is no longer making decisions based upon capital market pressures.

The overhead reduction efforts initiated by Hutcheson give Leap Wireless the lowest operating cost per customer in the telecommunications industry, driving success in the bidding wars. When combined with alternating periods of investment, profits have ensued, and Hutcheson has been able to finance new market acquisitions through a combination of cash and borrowing, keeping the debt load lower than in the years preceding the bankruptcy. Revenue has increased from $914 million in 2005 to $1.1 billion in 2006.

In addition, lenders are more confident in the model, so he’s been able to garner more favorable terms, reducing financing costs even further.

While Hutcheson kept the “pixie dust” that was the original business plan, he says that a big part of the firm’s financial success is tied to operational simplicity. Credit is not an issue because customers pre-pay, and the company doesn’t finance hardware for customers through long-term contracts.

In addition, Hutcheson remastered Leap’s footprint optimization plan through demographic analysis and by keeping the model simple and profitable. “We continue to find new ways to help customers pay for the service, which enables us to expand our reach, and we look for certain demographics in any new prospective service area, such as ethnic diversity of the population, the employment prospects for the area and the quality of our coverage,” says Hutcheson.

He relies on focus groups to determine additional services customers want, and following his theory of planned implementation, he always pilots any new program before offering it on nationally. Balancing customer demand for new services with a planned growth approach leads to some of his most difficult decisions.

“These are the hard decisions, and anyone that says they aren’t hard just does not understand,” says Hutcheson. “There are things that our competitors offer that our customers want, and we cannot offer those things and maintain our model — not offering first-class seating on Southwest Airlines is an example of that type of decision. We are positioned as a value leader. “If we can bring it to the industry as a value leader, we go front and center. If we cannot do it cost-effectively, we pass. However, what cannot be done today can, in many cases, be done in the future as the company develops, gets better technology, or develops better relationships. Many things can be solved if you have a long enough timeline.”

HOW TO REACH: Leap Wireless International Inc., www.leapwireless.com