Gerry Proehl is a big believer in his organization’s core values. As president, CEO and director of Santarus Inc., however, Proehl says core values are meaningless if not practiced and passed on by the company’s leadership.
“The most important thing is not that you put these core values on a plaque or hang them on the wall, but that the senior management team actually believes in them and models them,” Proehl says. “If they’re not doing it and they’re just saying it, it’s not going to mean anything.”
When Proehl, who joined the San Diego-based pharmaceutical firm as a vice president in 1999, sat down with his management team in the early stages of the company’s growth, he helped develop and define a set of beliefs that is now incorporated into everything the company does. And while the leadership team at Santarus walks the talk, the fact that annual revenue nearly doubled from $26.5 million in 2005 to $49 million in 2006 has done its part in encouraging employees to buy in.
Proehl spoke with Smart Business about building collaboration and the importance of making good hires.
Q: How would you describe your leadership style?
I’ve hired some very experienced folks at the senior level, and I’ve tried to set up a team environment where we get good interaction and input, and we have open discussion, and then we make decisions. It isn’t a situation where there’s a unilateral decision-maker. People have to be able to openly share ideas, whether they’re similar ideas or whether they’re ideas in disagreement with what we’re talking about and feel comfortable that there’s no retribution if they disagree with the boss or other folks in management. We try to set up a situation where there is an open discussion among the senior team so they can raise issues, we address them and come to a decision that everybody then is supportive of.
Q: What are the dangers of being a unilateral leader?
It’s one of those things you might be able to get away with when you’re a small company because you’re knowledgeable about everything going on. The problem is that type of leadership style is very limiting if you want to really grow the company. There’s just no way to be knowledgeable enough in all areas that we’re involved with that you can make all the decisions yourself. That’s where your senior team can really play a major role.
Q: What is the danger of growing too fast?
The most important thing is being able to maintain the culture as you bring a lot of people in. We went through that at one point in 2004 when we scaled up our commercial organization. We brought in 250 people over a six-month period, and at the time, the company was only about 50 people.
You can very quickly lose control of your culture if you’re not careful. You have to make sure when you’re growing rapidly to continue to focus on really bringing in high-quality people who match the values system you’re looking for.It’s easy to get caught in a situation where you’re trying to hire so many people that you might ignore that and you bring people in because they’re warm bodies.
Trying to make sure we’re really staying true to our culture and true to our values is part of the reason we go through a rigorous process of interviewing candidates.
Q: How would you describe your interviewing process?
We’ve established five core values that really define our organization: team-work, ownership, productivity, integrity and quality. When we’re interviewing, it’s something that we always try to find in new hires.
You can train people and develop skills they don’t have, but core values that people bring to an organization are hard to change. If their values system is not the same as the values system of the company, the likelihood is that they’re not going to fit long term. We spend a lot of time in the interview process not only looking at the skills, experience and knowledge people have, but really trying to figure out their core values and how they fit with our organization.
Q: How can a values system be identified during an interview?
We put people through a cross-functional interview process, where we’ll have people from all different departments interview somebody. If a candidate is a district sales manager, they might interview with somebody from finance, somebody from commercial and somebody from human resources.
In those interviews, each of those folks is going to be asking questions to really try to identify the candidate’s core values. The commercial interviewers are going to focus all about the skills and the experience. The people in finance or HR or manufacturing are more focused on, ‘How’s this person going to fit within the organization?’
By doing that, we get a good overview of whether everybody feels comfortable that the fit is going to be right with the organization.
HOW TO REACH: Santarus Inc., www.santarus.com or (858) 314-5700
The opportunities for Mike Mellace to grow his business seem endless. But by the same token, the opportunities to overextend his resources are equally plentiful.
His company, Mama Mellace’s Old World Treats, produces and distributes specialty nuts, and as Mellace often asks, what store in the world doesn’t sell nuts?
“Whether it’s Home Depot, AutoZone, Office Depot or Neiman Marcus, they all sell nuts,” says Mellace, Mama Mellace’s co-founder and CEO. “As entrepreneurs, it’s one of the toughest things to say no, especially when you’re trying to grow your business. When we first started, we had that shotgun approach. We didn’t say no. We found we had spread ourselves so thin that we weren’t specialized at anything, and that really hindered our growth initially.”
Now, after growing Mama Mellace’s annual revenue to $10 million in just four years since its founding, Mellace whose mother emigrated from Italy in 1962 says his company’s success owes much to concentrating on its core market channels and becoming experts in those channels before expanding to others.
Mellace spoke to Smart Business about why empowerment and delegation are essential in a growing company.
Q: How can a growing company maintain service to its customers?
You have to go after the customers you think you can manage. Many entrepreneurs have the approach of, ‘Anybody who will take us will be fantastic,’ and a lot of times, we go for the biggest guys out there.
We purposely stayed away from Wal-Mart because we knew we probably wouldn’t be able to service them. They would take so much of our production that we wouldn’t be able to service any of our other customers, which leaves us counting on one customer to make up our revenue. That’s not a good scenario.
It’s being selective of your customers to the extent that you can be, not biting off more than you can chew and having a realistic expectation of what you can actually do productionwise, what your people can actually accomplish. As entrepreneurs, we get into this mindset of, ‘They can do more; they can work this many hours.’
People aren’t going to work as hard as you are. They don’t have as much invested as you do. They will work hard, but to expect them to work as hard or harder than you will is not realistic.
Q: How would you describe your leadership style?
When I was a little less experienced, I led more by fear and intimidation. Today, I have more of a servant-leader leadership style. A servant leader determines vision and values. Once you determine that, you flip the pyramid upside down and empower your people to actually implement it and to make it happen on a daily basis.
If you were to ask our employees, they would tell you they’re not afraid to fail, and they’re not afraid to make decisions. Things happen where they can’t depend on me to make a gut call. I’ve got to trust that they’re going to make the right decisions, and they know that I stand behind them.
Q: What are the benefits of empowering employees?
It does two things. An empowered employee is able to take care of your customers, which, in turn, creates more loyalty.
Unfortunately, the best example is probably the airline industry. You go to Southwest, and people can make decisions. People can put you on an earlier flight and help you with your situation. You go to one of the ones that are bankrupt, and they can’t make a decision. They sit around and say, ‘Well, I’m sorry, but that’s policy.’ Your customers end up getting frustrated and leaving. Empowered employees will create more satisfied customers at the end of the day.
It also gives them a sense of purpose, a sense of accomplishment and better job satisfaction because they feel like they can make a difference. They’re not an order-taker. They can make decisions that impact people’s lives on a daily basis.
Q: How important is delegation in a growing company?
It’s something you have to do as you grow. We’ve grown from zero to $10 million in four years. There’s a lot of change there.
When you’re small, you can handle a whole bunch of stuff, and you almost feel like you have to. You feel like, ‘Who else is going to do it? Nobody is going to do it better than me.’ You do the sales, the accounting, the production, and you coordinate all those different aspects, but as you grow, there’s just no way. You’re only one person.
You have to figure out a way to delegate and get things done, and as I’ve learned, you’re not going to be able to do it through intimidation and fear. You have to begin to empower and trust that your employees are going to be able to make the right decisions. Otherwise, you’re not going to be able to grow.
HOW TO REACH: Mama Mellace’s Old World Treats, (760) 448-1940 or www.mamamellace.com
Insurance industry surveys have confirmed that consumers would like to purchase all the insurance they need from the same insurance agency/broker. With all the different types of insurance and carriers out there, this is much easier said than done.
Most firms specialize in either personal, commercial or employee benefits insurance. Commercial insurance providers are often excited to inform people they do not provide personal insurance coverage, says Jim Sim of Westland Insurance, as if they have graduated from the personal insurance industry.
If a firm does provide several types of coverage, it is often difficult to find any firm that has adequate staff and services, says Sim. There are more than 30,000 agencies that provide insurance; 90 percent provide personal lines insurance, such as homeowners and auto, and only 10 percent provide commercial insurance or employee benefits insurance.
Smart Business spoke with Sim about one-stop shopping for insurance and the benefits of one firm providing all types of coverage.
What should a consumer look for in an insurance firm?
While consumers would like a firm that provides many different types of insurance, they do not want a personal lines agency providing commercial insurance. Often, the problem for consumers is finding a firm that provides all types of coverage from numerous providers.
A consumer should ask a firm if it provides all lines of insurance and how many employees staff each department. Proper staffing is crucial to great service. You should also ask how the employees communicate among the team. You may end up with three different insurance companies, but you want one firm that communicates well with all the companies, among themselves and with you. This ensures everyone is on the same page and that you are receiving the best coverage possible.
Finally, you want to look for a competitive firm. Insurance is a competitive industry, and you want to make sure the firm is always offering the best coverage for a competitive price.
What types of insurance should a consumer make sure a firm provides?
The three main types are personal, commercial and employee benefits.
Personal insurance: This is a very common type of coverage and includes, but is not limited to, homeowners insurance, auto, umbrella, yachts and planes.
Commercial insurance: This type of insurance is common for business and property owners. It includes liability, auto, workers’ compensation, commercial property and umbrella insurance.
Employee benefits: This type of insurance is more specific for business owners. It includes group health, long-term disability, 401(k), etc.
What is the benefit of using one firm to provide all types of insurance?
If you can use the same firm for all types of insurance, it will know you and your account. The team with which you work will know where personal stops and business starts. Using a firm that provides all types of insurance provides coordinated insurance and coverage. This helps prevent gaps or overlaps in coverage. With a team that works together to make sure you have the correct insurance, one receives efficient and cost-effective coverage. Discounts may also be offered to consumers who purchase different types of coverage from the same insurance company or provider.
Why is it important for business owners to research insurance firms and look for good customer service?
As a business owner, you want to make sure all of your assets personal and commercial are properly covered, as you have so much time and money invested in these items. With a professional firm, a consumer will be able to consult a broker or insurance agent to answer any questions you may have. You do not want to have to call an 800 number to get service from numerous different firms in various places and time zones most are out of town, state or even in another country. Rather, you want one contact team that can be reached at one number.
If you are using numerous providers from different insurance firms, is it difficult to switch to one firm?
No. The new firm should be able to review your needs and assist in the transfer, taking pressure off of you, the business owner. Once you have selected a firm, you want to make sure you meet with your team to conduct annual reviews to ensure new assets are not overlooked or forgotten. With a constant contact at an insurance firm, you can make a simple phone call or send an e-mail prior to each purchase to make sure you are always covered. With a single firm, a daunting task, such as selecting insurance providers, becomes simple.
JIM SIM is president of Westland Insurance Brokers. Reach him at (619) 584-6400 or email@example.com.
In 1982, seven people died from Extra-Strength Tylenol capsules that had been tampered with and laced with cyanide.
The way Johnson & Johnson, owner of the Tylenol brand, reacted to the crisis became a precedent for the right way to handle a crisis. Company executives made quick decisions that were based in part on company values that had been written in 1943. The company recalled 31 million bottles at a cost of more than $100 million. It ceased all production of capsules and replaced them with tamper-resistant caplets.
In the short term, Tylenol lost 27 percent of its market share, but through its customer-focused actions and quick thinking, it regained all the market share it had lost.
While this is an extreme example, it goes to show you that you have to be ready for the unexpected. At the time, there was no way for Johnson & Johnson to even imagine that someone would use its products as a way to poison people.
Johnson & Johnson executives invested the time and money needed to deal with the crisis and make the brand as strong as or stronger than it was before.
If you’ve been in business long enough, you know that the unexpected is always around the corner. A crisis is not a matter of if; it’s a matter of when.
Could anyone have predicted the tragedy of Sept. 11 or its far-reaching economic consequences? Anyone doing business in the southeastern United States probably knows firsthand what kind of economic effect a major hurricane can have on the bottom line.
Your next crisis might not even be so far-reaching. It might be a key employee who falls ill or quits that leaves you scrambling to fill in the gaps. Or maybe postage costs rise 20 percent, like they recently did, and cut into your cash flow.
Regardless of the scale of the challenge, you have to be ready for it. One of the best ways to be prepared is to have a reserve of resources both in cash and time. Set aside money each month, so that you have funds to draw on in an emergency.
Just about any crisis will require cash. If you’ve got funds to draw on, you can either get the people or supplies you need to address it, or at the very least, keep your cash flow going in the short term until you figure out a long-term solution.
The other investment to make is in time. Put time on your schedule each week to deal with the little details. This kind of investment can often let you extinguish a small fire before it becomes a raging inferno. When a big crisis hits, you can clear your schedule, but a little investment upfront can help you avoid some of the internal challenges that can get out of control.
This is also where your advisers earn their money. If you’ve assembled the right team of people, when something unforeseen occurs, you can gather them together and, as a team, plot your next move. They’ll help you avoid blind spots and resolve things quicker than you could do alone.
Regardless of whether your crisis started internally or externally, you have to lead by example. Be resilient in your pursuit of the resolution. Exhibit confidence so that others can rely on you to get the job done.
It won’t be easy things in business rarely are. But if you have taken the time to build a rainy day fund and assembled a solid team, you are well on your way to handling the next crisis and moving your company back up the mountain again.
FRED KOURY is president and CEO of Smart Business Network Inc. Reach him with your comments at (800) 988-4726 or firstname.lastname@example.org.
When Dana Kammersgard added CEO to his title in March 2006, there were plenty of challenges to overcome.
Besides lacking experience in the governance aspects of being a small public company, his chief financial officer resigned. And that wasn’t all.
“We had a class-action lawsuit alleging securities fraud filed against us, and in April 2006, a large customer announced that they were awarding a significant piece of business to a competitor,” Kammersgard says. “Over the course of my first five months in the CEO’s chair, I got five year’s worth of experience.”
Kammersgard had served as both president and chief technical officer of Dot Hill Systems Corp. prior to assuming the CEO’s chair following the retirement of his partner and his fellow co-founder of Artecon, a predecessor company to Dot Hill.
While some CEO responsibilities were new to Kammersgard, managing through the extreme competition in the technology storage business was not. There’s been considerable consolidation of firms within the industry, and margins in the business tend to be thin while revenue growth is slow because of lengthy selling cycles.
Although the company was profitable from 2003 through 2005, Dot Hill’s bottom line reversed direction, and the company went into the red just as Kammersgard took the helm.
He says that he had no choice but to re-position Dot Hill in order for the firm to become profitable again. He calls his quest “the quiet revolution” because the company didn’t need to be rebuilt, just refocused.
To accomplish the initial steps, Kammersgard prioritized attracting new and different customers, acquiring a new senior leadership team capable of competing in a volume-driven business and maintaining the firm’s low-cost operating model while improving margins, with the goal of once again delivering a profit for shareholders.
In 2002, after a selling cycle that lasted 18 months, Dot Hill was awarded a new contract from existing customer Sun Microsystems that was eventually estimated to be worth $10 million to $30 million in annual revenue to the firm. With so many eggs in one basket, the high-risk, high-rewards business of enterprise customer relationships had a roller-coaster effect on the entire company when the deal was won, and then subsequently lost.
“Having the benefit of hindsight over the past year, there’s nothing I would do differently now,” Kammersgard says. “There’s an entire generation of storage companies that failed to win a big customer and didn’t survive. You don’t have any financial viability and you aren’t a player in this business unless you win a big customer.
“So winning Sun Microsystems was absolutely the right thing to do, taking 18 to 24 months to make the business partnership successful was absolutely the right thing to do, but it’s the nature of the beast that things change. So having one customer make up such a large part of our portfolio of business is no longer absolutely the right thing to do.”
At its peak, Sun Microsystems was 88 percent of Dot Hill’s revenue. Today, it is 77 percent. Kammersgard says that he knew he would always need large customers to achieve market share and brand prowess, but diversifying Dot Hill’s customer base would leave the firm less vulnerable in the event of customer loss. In addition, securing more second- and third-tier customers would provide the added benefit of shorter and less complex selling cycles and higher margins.
In order to demonstrate to his team that winning new revenue is vital to repositioning the firm, Kammersgard says that he spends 30 to 40 percent of his time out on the road in front of customers. Having face-to-face time with customers allows you to build client relationships, but it also affords you a better understanding of their needs.
In addition, all of his executive team spend extensive time with customers. Kammersgard credits much of the firm’s success in adding 14 new original equipment manufacturer customers during the past year to listening to customers’ suggestions, focusing on solving their problems and the teamwork of his new senior leadership team.
He says that his best practice is to assemble his management team following customer visits to download information and to create a pipeline of customer feedback and ideas.
In fact, it was a customer’s suggestion that Kammersgard says resulted in a decision that paid big dividends.
“We had a customer who demanded that we move our manufacturing offshore to China,” Kammersgard says. “I had always been predisposed to manufacture domestically, but the customer convinced me to outsource. The decision to offshore our manufacturing has resulted in better margins, as well as better control over our costs, and we’ve been able to develop a new client offering in the contract manufacturing space.
“We’ve also been able to secure an additional new strategic customer relationship. Over time, we believe we’ll be able to leverage this new capability into additional new client agreements, and it will give us better control of our costs and profits. None of that would have happened, if I hadn’t listened to our customer.”
Focusing on the customer
While losing a major contract was a blow, Kammersgard says that he has been able to salvage the strategic engagement model that was designed for the Sun Microsystems contract implementation and leverage the model with the firm’s new OEM customers. That change has resulted in faster new contract implementations and realizing additional revenue more quickly.
“Instead of just signing the contract with a new customer and walking away, we developed a holistic approach to working with our new OEM customers,” Kammersgard says. “We have a peer-to-peer relationship for every aspect of sales and marketing. We make joint sales calls together, we work trade shows together, and we develop case studies together. What we found is that we can do a much better job of selling our products because we know our products better than our partners do. So we are right there, side by side with our customer’s sales representative, presenting to the end user. This has resulted in a much faster revenue ramp.”
Kammersgard says that in the past, Dot Hill was more focused on developing new technology and believed that engineering could be the driving force behind the firm’s success. Today, he says that he has learned that developing new technology is a requirement for business achievement but not necessarily a differentiator. Without customers, even the best technology will not guarantee success.
“I used to think that once we made the sale, we were done,” Kammersgard says. “What I’ve learned is that you have to put in even more effort once you’ve received a signed contract in order to get the most from the opportunity.”
The power of teamwork
Kammersgard says Dot Hill is like a 23-year-old start-up. “We’re quick and agile, and we’re not paranoid like a company that’s been around a long time, but we have the advantage of having more seed money available to us,” he says.
“To foster that type of culture, we need to hire people who have the right personality for our firm, which is low on politics and high on inclusion.”
Kammersgard says that having an agile company is the right posture for a firm in such a competitive industry, where success is often driven by the need to make technological changes quickly while rapidly adapting to customer suggestions and requirements.
With thin margins, the company must also run a high-performance environment where everyone has to stretch because there are fewer people to do the work.
He says the key is having a senior management team that is selected for its high bandwidth and the ability to work as a cohesive team. Since taking the CEO position, Kammersgard has hired a new CFO, a new executive vice president of operations and a new senior vice president of engineering. Finding the right people, in most cases, required starting with a large number of candidates.
“When we need to hire a senior executive, we’ll do a nationwide search, and we may start with as many as 30 to 50 candidates,” Kammersgard says. “We’ll do lots of interviews, and everyone on the team is involved. Having interviews with so many different team members is good for us and for the candidate so both sides can assess the fit. Eventually, we’ll narrow the choice down to two or three candidates that we think will fit in to our environment and from there, I’ll make the final selection.
“We also need great teamwork to get the most from such a small team, and we needed to integrate new executives this past year and build our executive team,” he says. “So we hired an outside facilitator to help with team development, and we go on an off-site team-building excursion every year like a river-rafting trip. The adversity that we’ve faced has also helped develop our team, and now, I think we’re stronger than ever.”
Kammersgard says that he relies on cross-functional teamwork among managers and staff members to help drive productivity, so he requires everyone on the team to know each other’s jobs. That requirement has helped raise the bar on productivity, which helps maintain a low cost-to-sales ratio.
He says that he’s learned major lessons from making several key new hires to Dot Hill’s management team since becoming CEO.
“Increasing sales is all about having the right team with the right product to sell,” Kammersgard says. “We have a phenomenal head of sales and marketing who has really been responsible for our plan to acquire new OEM customers and our change in focus away from engineering to customers, but we almost didn’t hire him. We had made an acquisition, and we had already decided to keep our existing sales VP when we met with Phil, who was with the company we were acquiring. After listening to Phil present his business plan, I started thinking that maybe we were keeping the wrong guy. What I learned from that scenario is to always keep an open mind about these kinds of things; if there’s a better candidate out there, then you need to make a move.”
Prior to becoming the chief executive officer, Kammersgard had also been acting as the chief operating officer for Dot Hill in addition to his formal role as president of the firm. Initially, he tried to continue performing all of his former duties along with his new CEO responsibilities, but he soon discovered that he couldn’t be both tactical and strategic at the same time without something suffering.
“When I hired new heads of engineering and operations and could finally focus on the CEO role, I was surprised to find how much I wasn’t getting done,” Kammersgard says. “I’ve learned that you can’t have success as a CEO without having the right team around you and that when you try to do everything yourself, you leave gaps that don’t get covered.”
Under Kammersgard’s leadership, much has been achieved in his quest to reposition Dot Hill, but he’s the first to admit that there’s more work to be done. Dot Hill’s net revenue was $239 million in 2006, the same as it was in 2004, and many of the new customers are still developing a revenue stream. Following a lengthy and expensive investigation, although not settled, the firm has been able to put the class-action lawsuit behind it, and Kammersgard says that he feels positive about the future under his new senior leadership team.
“Although we’ve had a relatively volatile 2007, we’re making good progress, and there’s a lot of positive momentum,” Kammersgard says. “There’s stuff that happens that you just can’t control. When you’re in the trenches working every day, it’s hard to look up and see the progress.”
HOW TO REACH: Dot Hill Systems Corp., www.dothill.com
"Again!” my tae kwon do instructor shouted, commanding the class to another repetition of the fighting combination we were learning. The moves were difficult, and I was already tired from a long day at work.
With each repetition, my arms and legs felt heavier, and I began to hold back, conserving my energy while hoping that no one noticed. Because I was the highest-ranking black belt, I had the senior position on the mat in front of two dozen students, a position where my every move was visible and expected to be an example for others to follow.
As my instructor moved among us, inspecting each person’s form and technique, I was careful to give my best when he was near and then rested when he walked away. In this way, I believed I was maintaining my image as the senior student without actually having to exert the effort.
It was in one of these moments of executing the movements halfheartedly that I was surprised by the whispered voice of my instructor close behind me.
“Who are you when no one is watching, Mr. Huling?”
Even now, I can recall how I felt at that moment. At the instant I heard his voice, I realized that there was no shame in being tired or unable to perform at my highest level; the shame was in trying to uphold an image that wasn’t true.
Have you ever tried this same approach? Can you remember a time when you had lost all passion for the work you were doing but put on an image of energy and false enthusiasm for the people around you? Perhaps you can remember sustaining an image in a relationship, portraying a personal connection that you no longer felt or feigning dedication to a community service project that, in truth, had become a dreaded burden.
No matter when or where it happens, the moment you shift your energy toward maintaining your image crafting your actions and your words to sustain the appearance of something that isn’t true you compromise your most valuable attribute: the content of your character.
If this is where you are, there are three important things to remember.
First, the people around you usually know the truth, in spite of your efforts to conceal it.
They have built-in radar for inconsistencies and subtle cues that tell them the smile on your face isn’t matched by the feeling in your heart.
While you may not be quite ready to resign from the job or end the relationship, you can stop exhausting yourself to convince people that everything is great. Instead, begin to be more authentic in what you say and do. Don’t say yes when you mean no, compliment only what you truly respect, and pause to consider whether each action you are about to take aligns with your personal values for honesty and integrity.
Second, if perfection were the requirement, no one would succeed. All of the people around you face their own fear of inadequacy and rejection and, like you, are tempted to create a better version of themselves through the image they want you to see.
But if you will begin to acknowledge your own imperfections that you don’t always make the right choice and aren’t always in control of every situation you will not only drop your own image and become more authentic, you’ll set others free to accept their imperfections as well.
Finally, remember that the image you are sustaining is actually a reflection of the person you want to become. When you create an image of passionate engagement with your work, it’s because you really want your work and your life to have these qualities. Instead of pretending that you love your job, channel that same energy into a written vision of what you really want, and then commit to finding an opportunity that takes you toward it.
Let this simple Latin phrase become the standard for your life: “Esse quam videre,” which means “To be, rather than to appear.” When you do, you will discover that the person you truly are is actually greater than the image you tried to create.
JIM HULING is CEO of MATRIX Resources Inc., an IT services company that has achieved industry-leading financial growth while receiving numerous national, regional and local awards for its values-based culture and other work-life balance programs. The company was recently named one of the 25 Best Small Companies to Work for in America for the third year in a row by the Great Place to Work Institute and the Society for Human Resource Management. In 2005, Huling was awarded the Turknett Leadership Character Award for outstanding demonstration of integrity, respect and accountability. Reach him at Jim_Huling@MatrixResources.com.
Over the last several years, investors have been bidding up San Diego commercial properties with reckless abandon. And every time it looks like the party may be over, along comes another investor, willing to pay even more.
Enter the Irvine Company, a savvy real estate company with a history of owning and maintaining quality office buildings throughout Orange County. In May, Irvine purchased Equity Office Properties San Diego portfolio including 15 buildings within the University Towne Centre (UTC) sub-market. Now in escrow on another eight office properties at Bridge Pointe Corporate Center, Irvine is poised to control the lion’s share of the UTC Class A office leasing market. And this in addition to their dominant market-share already assembled in downtown San Diego.
So what does it mean when The Irvine Company drives down the freeway to play “Monopoly” with San Diego’s best office buildings?
“The Irvine Company is different from other institutional investors,” says John Jarvis, a principal and senior vice president with Irving Hughes. “They have tremendous free cash flow, little or no debt, and a massive portfolio of fully depreciated office buildings throughout Orange County. I don’t think they even try to calculate an IRR when they buy these buildings. I think they are happy to have found a place nearby to reinvest their Orange County earnings.”
Smart Business spoke with Jarvis about the Irvine Company’s move into San Diego.
Why are so many people concerned about the Irvine Company’s recent investments in San Diego?
There has been a lot of talk lately about record high prices being paid by institutional investors for San Diego properties. The Irvine Company is a natural lightning rod for that attention for two reasons: volume and price. Since 2003, Irvine has spent close to $2 Billion in San Diego. Their targeted purchase of Class A office properties will put them in a position to control over 62 percent of the Class A leasing market in UTC and 58 percent of downtown. In addition to the sheer volume, Irvine continues to pay top dollar for quality properties, setting record high prices on many of their purchases. Pacifica Tower in UTC is estimated to have sold at $572 per square foot. Never in the history of San Diego has one landlord made this kind of play and had this kind of concentration of ownership in our Class A office properties.
Why is this creating anxiety for San Diego companies?
At the end of the day, the Irvine Company is a smart real estate investor. And there is only one way that Irvine, or any other real estate investor, earns a return on these purchases, and that return is from the office rent that our clients pay.
So companies are expecting Irvine to raise rents?
Yes, everyone expects Irvine to raise rents. But it’s no slam dunk. We have been vocal in the local press about the dysfunction in the commercial real estate market today the lack of solid market fundamentals, such as robust job growth and positive net absorption that could justify this unprecedented investment activity. Instead, we see rampant speculation, with institutional investors trading buildings at ever-increasing prices predicated on ‘proforma’ rents that may or may not ever be realized. And here is the key point that people are missing: Whether we are talking about the Irvine Company or any other investor, just because an investor pays a high price for their property doesn’t mean they can raise your rent. It doesn’t work that way.
Then what is going to happen?
Econ 101 rents don’t follow prices. Prices follow rents. And the only reason rents will rise is when tenant demand exceeds the supply of space, and we don’t see that today. The good news for San Diego is that The Irvine Company is a long-term owner. They didn’t buy these irreplaceable assets for what they can generate in income in the next two to three years. Unlike the institutional speculators, Irvine will take a long-term view, put capital into these buildings to fix deferred maintenance and improve the quality of their assets. Irvine understands the market for tenants, and yes, they are going to try and push rents. It’s our job to push back, and to use our collective bargaining on behalf of tenants of all sizes to make sure that rents don’t move unless and until the market supports it.
Let’s not forget that in San Diego there is currently 4.65 million square feet of sub-lease space, and that number is steadily increasing. People are surprised to learn that the average time on the market for available space is a shocking 15 months! These are important market facts, and they don’t point to rising rents. Like we’ve said all along, the only things that will eventually drive up rental rates are robust job growth, positive net absorption and the good old rule of supply and demand.
JOHN JARVIS is a principal and senior vice president with Irving Hughes. Reach him at email@example.com.
You were just assigned a new IT project. Do you have the resources in terms of manpower and expertise to get it done within the required time frame and allotted budget?
If you’re unable to meet any of these requirements, the project may be a prime candidate for outsourcing. Now, will you outsource the entire project or just parts?
“Many decision-makers agonize over whether or not to outsource. But if we view it as one of several options, it makes the process easier,” says Eileen D. Heveron, Ph.D., vice president, information technology, National University, San Diego.
Smart Business asked Heveron, who has successfully outsourced numerous projects of her own, how executives and chief information officers can spend more time focusing on requirements upfront when considering outsourcing arrangements.
How can a company determine whether to outsource part of a project or the entire process?
Analyze your core competencies. Ask yourself why you are considering outsourcing and then ask again. Get down to the real nuts and bolts of the project, and consider carefully what parts of the project or process that you have the core competencies to handle.
If you have the capabilities within your staff to handle the entire process, within the timeline expected, to provide the deliverables under the budget provided, then don’t outsource.
If you can handle some but not all aspects, break the project or process down into discrete segments and ask yourself if another organization could do particular parts or segments cleanly or if you should build that capability internally.
For example, say you have an upcoming technology project. You’ve determined that you don’t have all the right players on board to make it happen and that it would take nearly a year to recruit, hire and get the right people with the right expertise and experience up and running and merged with your staff. You only have six months to finish the project. Outsourcing to an organization that does this type of work for a living makes sense.
What are some perceived negatives about outsourcing? Are they valid?
As with any business partnership, agreement or arrangement, there are pluses and minuses with outsourcing. Some of the negatives include:
- This is a contract, with contractual obligations for both parties. If the arrangement goes awry, it is sometimes difficult to fix without legal intervention.
- These are not your employees, so you will interact differently with them than with your own employees.
- Outsourcing does not necessarily save an organization money.
- Poor quality is often a perception, but in reality, you can have poor quality with your own staff as well as in an outsourced situation.
All of these can be realities, but they can all be overcome if the CIO and other executives go into outsourcing with the proper partnership attitude.
How should the company monitor the arrangement?
There are several considerations:
- If you’ve decided to outsource and have selected a vendor, check its references thoroughly with other organizations that have used its services in a similar way or for similar projects.
- Examine the contract length and understand what the ‘bail out’ language requires, especially in the way of timing.
- Vendors will provide you a service level agreement (SLA). This agreement indicates what they will do, such as provide you with 99.99 percent up-time of a network or a hosted application arrangement, with agreed upon maintenance windows, etc. If you want five or six ‘9s,’ meaning 99.999 percent or 99.9999 percent up-time, you will probably have to pay more.
- Vendors should meet with you, in person or by phone, almost daily while the service or project is getting under way then weekly, then biweekly, then monthly, as everything moves along. Updates should include everything that is in your SLA.
What about end-user/customer satisfaction?
You can internally monitor specific items within the SLA, such as up-time, the time it takes from first report to final solution of a problem and similar metrics. You can also perform spot checks with your end users to gauge their satisfaction. You can take what you learn and provide feedback to the vendor and, together, you can make changes to the arrangement with the staff if necessary.
If the arrangement is no longer working, consider any contractual issues that may be involved with ending it. Always have your own end-of-agreement plan in place before you enter into an arrangement in the first place. This will help prepare you for either bringing the services back in-house or seeking another vendor.
EILEEN D. HEVERON, Ph.D., is vice president, information technology, National University, San Diego, Calif. Reach her at (858) 642-8145 or firstname.lastname@example.org.
Business leases are one of the most important contracts a company will sign. They set out the obligations and rights that will govern tenancy for a substantial time period.
A poorly negotiated lease may result in inconvenience, financial hardship and a disruption of your business. At worst, you could be held captive by a lease if you haven’t carefully negotiated every facet of your tenancy, starting with the rate calculation.
“When shopping for office space and the landlord tells you he is asking $4 per square foot for the space after you recover you feel pretty good when the rate ends up being settled at $3.20 per square foot,” says Jason Hughes of Irving Hughes in San Diego. “It’s not every day that you can negotiate a 20 percent savings, so you may feel satisfied with the final number. But what about those ‘something extra’ costs that surface later?”
Smart Business spoke with Hughes about the psychology of landlord negotiations and the importance of professional representation when hammering out a business lease.
How have lease negotiations tipped in favor of landlords?
Five years ago, a landlord hoped to rent out his building for $2 per square foot and would have given a tenant six months of free rent and a lot of money to improve the space yet now that same landlord wants $3.50 per square foot with no free rent and half of the improvement money. The economics are nearly three times as good for the landlord, or one-third as good for the tenant.
Where does the psychology come into play?
It can be mentally satisfying when you buy something at a deep discount. Getting a deal is one of the pleasures in life. But some landlord markups are done with the sole intention of ending up at the ‘discounted’ rent price. Should that make you feel good?
Let’s say the landlord is asking $4 per square foot for a space and settles at $3.20 per square foot. Do you feel less taken? Or think of it another way: Would you feel better if most of the other properties nearby were asking for the same rate?
Doing business with respectable people who are problem solvers rather than problem makers is worth a premium. But what if you’re paying premium for a problem maker who also provides poor property management and packs operating expense pass-throughs to their tenants with season passes to the Padres and Chargers as well as cases of wine and Cuban cigars?
What is the basis for the landlords’ rent calculations?
While most people understand inflation, they cannot comprehend the annual inflation levels that commercial property owners incorporate into their rental increases. The U.S. inflation for the last 10 years has averaged less than 3 percent compounded, yet commercial owners have increased rents closer to 15 percent compounded per year.
These extravagant inflation averages make sense to landlords because their math has been reverse-engineered. The landlords pay whatever they need to in order to secure the purchase of the property, then they look back into the rental rates required in order to support the purchase price. Supply and demand, positive or negative net absorption, job gains or losses those notions don’t have one iota of influence over this rent calculation. These landlords are operating in a vacuum, so why should they be concerned about worldly issues like employment data?
How can a tenant combat this tilted playing field?
The negotiations favor the house or in this case the building and its owner. Not unlike Las Vegas, the house wins far more than it loses.
It’s very important for tenants to play the game with all of the advantages available. This is where tenant representatives are invaluable. While they may not have all of the aces up their sleeve, they are able to see the cards being held by the landlord.
For example, regardless of how much a landlord is asking in rent, it is important to know how long the space in question has been vacant. Additionally, is the building well run, and will the tenant actually enjoy being in the building in several years? Or worse yet, does the landlord in question nickel-and-dime tenants to death in order to work his yield?
The way to combat this growing problem called ‘arbitrary landlord markups’ is to be represented by someone smarter, better educated and craftier than the landlords. Office leases are labyrinths of staggering complexity, requiring an expert advocate to protect tenants from being skewered with myriad hidden costs. Tenants often don’t even know the questions to ask, much less the answers. They need competent help.
JASON HUGHES is a principal at Irving Hughes Inc., in San Diego. Reach him at email@example.com or (619) 238-4393.
With everything it takes to run a business, defining corporate values can often be low on the to-do list.
But what will you, your managers and your employees refer to when faced with an ethically challenging situation? Making up the rules as you go shouldn’t be an option.
Smart Business spoke to Ginny Beneke, vice president of regional operations and marketing at National University, about the importance of setting a precedent and sticking to it.
Where should an ethical mindset begin in a company?
The important thing about an ethical organization is that it has to start at the top. Just like anything else, it’s a business practice, but it’s really a cultural principle that sets a foundation of what is right and wrong. Then, within the different departments, you would implement that as an organization.
It’s important that it’s done through training both for internal purposes and external purposes, such as customer service. It’s relevant for the external and for training internally to have corporate core values that you all believe in, and then to reinforce those through correspondence, communications, meetings, business practices and policies, and customer service. So it’s really setting the clear expectations of what it means to be ethical in that organization and then reinforcing it through training and your practices.
At the end of the day, it’s not always the easiest thing to do, but it’s what’s fair and what’s right and helps people feel good about working there. And customers like to be treated fairly: instead of just getting the good deal, they’re treated fairly and justly. We all like to feel that way, whether it’s within our own organizations or dealing with other organizations.
Can defining ethics sometimes become an afterthought?
It can. People tend to think about their businesses too much. They’re busy creating the deal and creating the business model. They sometimes forget to create an overall principle and underlying ethical foundation. You also have to create a model upon which to base your decisions and your business policy: how you want people to treat each other and how you want people to treat their customers. Because it has to work both ways. You can’t expect your employees to treat your customers right and with respect, and then not do that internally within your own organization. It has to be ingrained within both areas of the company.
What are some roadblocks?
How you define ethics may be different for different people. It’s very hard to say what is right, what is wrong. People may have a different opinion on that and set different boundaries. Sometimes an owner will overlook setting boundaries. If you think about it, it’s very hard to manage those principles within your business. It’s almost like tough love these are things we have to want in an organization, how we treat people, how we talk to people, the decisions we make making sure that it’s fair and ethical. It’s a very tough thing, because it’s something that’s not normally taught, but it’s something that does provide an important structure in the company.
Are there resources for someone wanting to create an ethical organization?
We took the Ritz Carlton training program on customer service. So there are training programs around customer service and there are training programs around organization design. Stating your values and then incorporating them into both internal and external training are important. Going outside the company creates a benchmark against what’s there and how you can use that information within your company.
How can ethical values be clearly stated and encouraged?
A lot of companies have values cards that employees carry with them. Our values are stated on our Web site.
To clearly set expectations is important, whether that’s on a card or whether it’s just reinforced by the owner or CEO. Make it a part of orientation training for new employees and ongoing training.
There should be employee rewards for good customer service. If someone does something really nice, he or she gets what we call an A+ card. It reinforces the values of respecting and appreciating other employees and creating good customer service relations between them.
We also do a lot of rewards and recognition. It’s not just that people get things done, it’s the attitude and the way they treat people. So it’s important to ingrain your values in a lot of things that are done throughout your organization. This attitude should also be reinforced in business practices, meetings, the way you conduct meetings, and so on.
It’s a tough thing to do it can be as tough as running a business but at the end of the day I think we all want to feel good about having the opportunity to do what’s right.
GINNY BENEKE is vice president of regional operations and marketing at National University. Reach her at (858) 642-8357 or firstname.lastname@example.org.