Securing the future Featured

8:00pm EDT March 26, 2009

When Ken Xie founded his third company, Fortinet Inc., in 2000, he couldn’t possibly foresee that within the first couple years he’d hit a downturn or that within the first decade he’d be facing one of the worst economies in history.

But because he put together a solid business model, he’s in a better position than most to deal with the difficult economic conditions.

“When you have the money, people will give you the money, but when you need the money desperately, people look at you as a troubled company, so you should build a good model on the foundation and a cash cushion there, and that will give you the freedom to look more at the long-term goal from the beginning,” the president and CEO says.

While Xie is fortunate in that his business provides Internet security, and there’s always an Internet threat out there so it makes his business more likely to withstand the current economic crisis, he says there are certain principles that you should abide by to make sure you have that solid foundation and are able to do the best you possibly can in turbulent times.

“The first thing really is try to be thinking long term instead of more short term — I need to deliver this quarter, next quarter, these results to the board,” he says.

Xie looks at the next two to five years in front of him and what positions he needs to move his company in to be successful in that time frame.

“Once you’re thinking long term, the benefit is you can avoid some kind of short-term, quick decision like laying off some people to do some other things that will hurt your long-term goal,” he says.

The way to think long term is to be willing to invest in your product, your people and your culture right now in order to position yourself for success when the market turns.

“There’s some short-term slowdown, but that’s the best time to invest in the technology and the people, and after a few quarters, things will turn around, and you have more resources, and you can grow faster,” he says.

Doing these things has allowed Fortinet, despite the recession, to stay cash flow positive, grow about 30 percent each year and bring in more than $200 million in revenue last year. Additionally, Fortinet has racked up numerous honors in its short history for its rapid growth and quality products, and Xie himself was named a Northern California Entrepreneur of the Year by Ernst & Young in 2006.

“You can look at the data and the awards that we have,” Xie says. “We keep growing quite fast, but the key is good people and thinking long term, and it’s better to invest in the technology right now.”

Invest in your product

One of the reasons Xie has been so successful is that he is constantly looking to improve upon his product, and he won’t take shortcuts to do so. In fact, of the nearly 1,100 employees at Fortinet, about half are research and development engineers.

“That’s probably the highest percentage in our space,” Xie says. “We believe that investing in the technology innovation is key for the long-term growth and the next generation for how we can do better. That’s why the reputation we have in the field is that our technology is the best.”

You may think that having half your staff dedicated to R&D isn’t smart in this kind of a market, but remember that even though the economy is rough, things continue to change and eventually the outlook will be more positive, and you need to be ready to move when that happens.

“The area we play in, the level of security is changing really quickly because of a lot of new technology and a lot of obligation can come up, so you have to follow the change,” Xie says.

For example, one chip that Fortinet makes takes a one- to two-year commitment to make and is much more costly than some software solutions that may be quicker. But, by committing to this chip, it better positions the company for the long term instead of trying to capture temporary market share right now.

“You can really differentiate from your competitor and have a bigger advantage,” he says.

The key is that you have to know what you want your company to be and what kind of products you want to have. For example, Xie wants Fortinet to be a leader in its space, so when he goes to make decisions about what products or technologies to invest in, he balances how a decision will help him achieve that goal.

“If you have this kind of goal, you can come back to it and say, ‘How can I do better?’” he says. “Maybe it’s not laying off people. How can I make my earnings this quarter? How does the whole market grow long term, and how can we position ourselves better and grow faster and have market share and provide a better solution?”

By asking these questions instead of jumping to the quick solutions, it helps keep Fortinet from falling into deeper problems through quick fixes.

“Sometimes I see management that maybe tries [to do short-term fixes] to impress their manager or board,” Xie says. “They can save some costs or grow quick, and then they get in trouble after a quarter or two because they made short-term decisions, but if you can set a model and say, ‘Let everyone understand that we’re going to take a long-term look,’ that’s a better way instead of trying to do some quick, short-term [decision] with results but maybe suffer more long term.”

Invest in your people

In addition to investing in your products, Xie says that investing in people is absolutely critical, even during downtimes.

“We’re still hiring people and giving the salary increases,” he says. “That’s the best time to build a better team and make the current team more happy. That’s more important than saving a little money right now. We want to invest the money into the future.”

By investing in hiring and keeping good people right now, you’re positioning yourself to have a leg up on your competition when times get better.

“It’s easy to cut some costs by laying off some people, but the people know the company, know the product, know the customer and have been with the company for quite some time — it’s valuable,” he says.

With so many larger organizations cutting people, Xie says right now is also a great time to snag talent that those large organizations have unloaded.

Simply having a job isn’t enough though to keep people truly happy. Give people the authority to make decisions and don’t micromanage them. For example, the business model Fortinet set up is designed to do just that. For every dollar that comes in, 30 cents can then be used. So if the sales team needs money for marketing, they can only spend 30 cents on the dollar, and they can’t use it until it actually comes in, but they get to choose how to spend it. With operations in about 100 countries around the world, it’s important to give them some leeway.

“For certain countries, marketing is more important, or some other countries, support is more important, or in another country, you have to invest in another channel,” Xie says. “We give the people the freedom to allocate themselves so they have the best model to fit in to their local environment and have the maximum input so the more they can generate the revenue, the more money resources they can spend.”

This kind of model can also promote teamwork as people collectively make decisions, and teamwork is something that’s very important to Xie, who used to be a professional volleyball player.

“From my point of view, to be successful, you have to work together, whether it’s in engineering or any team sport, you have to work together,” he says. “Team play is very important as opposed to how he does for himself.”

One way to encourage a team atmosphere is showing employees how they can contribute to the larger team in the future.

“We do a lot of promotions internally so people feel they have a career path and are taken care of,” he says. “I think building a team environment, that’s an area that we try to focus on.”

Invest in your culture

On top of investing in your technology and your people, you need to invest in your culture — both with money and time.

One way to do this is to continue giving your employees their merit-based bonuses, and this isn’t just for your top people. Instead of just Xie or a top manager deciding who gets what, each department has its employees rank each other on a scale of 1 to 5 and these numbers determine who gets the highest bonuses as opposed to managers automatically getting them or Xie deciding himself. This system is also done anonymously so that there aren’t any hard feelings between co-workers over how one particular person may or may not have scored another.

“Instead of the CEO or manager saying, ‘How much do I like you?’ his performance will be decided by all the other peers in the department,” Xie says. “He has to keep his work visible to other people and departments so they know how he’s working with other people, so in the end, his bonus will be decided not by his manager but by his people.”

He says it’s also important to be open with your employees and make yourself visible to them.

“Be more open and more trusting of the team because, in the end, you can’t do this yourself,” Xie says. “You have to depend on other people and also people need to realize how they can accomplish the whole thing together. It’s being a team player.”

Xie walks around his offices most days so that his people get used to seeing him. He eats with them and chats with them, and doing this builds a rapport with them.

Beyond just chats and meals, he says it’s important that everyone feel like information is open to them. If a group is having a reporting meeting, he encourages them to open it to everyone so anybody can know what’s going on.

“People can see how things are going, whether it’s a good thing or a bad thing, and the challenges they’re facing,” Xie says. “Then other people can give some advice or help, so that’s quite important.”

Along that same line, share information with employees on a regular basis.

“Provide a daily report so the company generates a lot of good reports and a lot of details are shared with them, so they all understand how we’re doing there,” Xie says. “Some report once a quarter, once a month, but for us, we have a lot of daily reports. … This daily report helps them understand what’s the target and helps them stay close with the model, and everyone can agree.”

By doing these things, your people will feel better about your company, and you’ll be able to focus on the long-term strategy, which will help you weather the current economic storm and position yourself for future success.

“The most important value for the company is investing in the technology and the culture,” Xie says. “This is the best time to hire the people and make them part of the team, and then you can invest for future growth.”