Northern California (1069)

Wednesday, 26 March 2008 20:00

Behavior study

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Nelson Chan loves to play mystery shopper.

Despite his wife’s protests, the president and CEO of Magellan Navigation Inc. frequently poses as a would-be consumer to observe the behavior of customers at retail chains throughout Northern California. It’s not that the GPS-unit manufacturer doesn’t designate enough resources for market research; it’s just that Chan is obsessed with understanding his customers, which he says is the key to success in business.

In a similar vein, the executive also analyzes the behavior of his management staff members by revisiting their personal objectives at employee-led quarterly reviews. The exercise sets a tone of accountability that has helped the company and its 475 employees worldwide push Magellan’s total market share from 1.9 percent in the second quarter of 2006 to 5.7 percent in the second quarter of 2007.

Smart Business spoke with Chan about how to foster such accountability by pushing back on decisions and practicing transparency.

Don’t be afraid to push back. I really like decisions to be made at a different level than always having to be at the CEO level. Decisions made at the lower level are better made.

When decisions are pushed up to me, and I don’t think it’s the right place, I push back.

It’s listening to them and basically saying, ‘Guys, this decision should not be coming to the CEO’s office. This decision should be made by you,’ whether I’m talking to my staff or multiple levels below in the organization.

You’re just encouraging their behavior if you don’t push back. The fact that people come to you and expect you to make decisions all the time, and you do it — well, guess what? That reinforces that.

There are a lot more decisions that really should be made at other levels in the organization. It’s even healthier for the organization — not only is it a scalability issue but also a knowledge-level issue.

There are many people, if you hire smart people, that can make much more intelligent decisions than if they filter all the way up to the CEO. It’s not healthy if employees don’t feel empowered and don’t feel like they’re held accountable.

Hold employees accountable. When people succeed, you reward them. You reward them lavishly, and you reward them publicly.

When people don’t perform, you do the opposite. If they don’t perform consistently, you have to make changes. Those are also made very public.

If you say you hold people accountable, you have to show you hold people accountable, which means you have to fire people, and you have to reward people.

I have a quarterly meeting with my staff where they stand up and they basically review their objectives. They tell me, ‘Here’s what I’m committed to do this quarter.’

Likewise, they spend time reviewing the objectives from the previous quarter that they committed to the organization. They get a chance to grade themselves and say, ‘Based on this objective, I said I would do such and such. This is how I would grade myself whether I did or didn’t do it and why.’

The whole idea there is having very specific, measurable, achievable objectives that are black or white, whether you did them or not. There are no shades of gray. You’re standing up there and holding yourself accountable to your peers and the company on whether you achieved them or not.

They are doing that not just for me as their direct management but also to their peers, which I think is even more important. When you commit, it’s not just committing to your boss but to your organization and your peers.

This is a team sport. That peer pressure is very important. Sometimes, it’s even more important than any other pressure you can get.

Practice transparency. When I talk about transparency, it’s really no hidden agendas. We don’t come into a room and try to have a strategic decision and people are having different agendas. We’re all trying to achieve the same goal.

A lot of it has to be basically aligning your goals and objectives. You want to make sure that the management team as well as the employee base all understand what your goals and objectives are and also what your values are.

[It’s also] communicating to employees the status of the company. Be open and forward with them with both the good and the bad. Not everything’s rosy.

It makes life a lot easier. It makes a lot less politics. Everybody knows where they stand. It makes getting to the point much quicker and much easier.

Keep moving. A lot of people get into an analysis-paralysis issue, where they feel like they need to have all of the information before they make a decision.

In life, unfortunately, you don’t have all of the information, and you’ve got to know when you’ve got to make a decision. At the end of the day, if you don’t make a decision, a decision’s actually made for you, whether you like it or not.

I like to sail. If you’re moving [in a sailboat], it’s much easier to change course and change direction than when you’re sitting still.

The same goes for business. Even though you may be making the wrong decisions, you get a lot of feedback, and you get a lot of data that says, ‘Hey, this is wrong. You need to change course.’

If you’re moving in the wrong direction, it’s much easier to turn because you’ve got momentum that allows you to change course.

HOW TO REACH: Magellan Navigation Inc., (408) 615-5100 or www.magellangps.com

Wednesday, 26 March 2008 20:00

Individual growth

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Ed Trevis wants to provide consistency and long-term relationships to his customers. And to do that, the president and CEO of Corvalent Corp. has to start by retaining employees at his company, a designer and manufacturer of industrial mother-boards that posted 2006 revenue of $12 million.

“If you tell everyone in the world you are going to supply longevity and consistency and you have such a high turnover in your company, then it does-n’t match,” he says.

Trevis retains employees by finding people who want to grow and challenging them.

“Stability is created when you create a situation where you are part of the team and you have been challenged by learning,” he says.

Smart Business spoke with Trevis about how to evaluate employees and how to help them grow with your company.

Q. How do you evaluate employees?

We have tried several things in the past with very little success. We used to have performance evaluations. Today, we have adapted our own version of a system called Catalytic Coaching, a career development process developed by Gary Markle from Energage.

We don’t necessarily look only at the past performance, but we focus (on) the future. We are always looking at present and future performance.

Employees, in most cases, really don’t care about what happened in the last 10 to 12 months. The new process allows them to recap their past achievements and disappointments but doesn’t focus on it. What has been recognized was recognized then.

To sit down with an employee and say, ‘In the last 12 months, you have been bad or good,’ is not necessarily the focus of our future career development process. We are into designing a process where an individual looks at the future and does not focus on the past.

We are not here to rate people. We are here to work with people that want to grow and develop themselves. So far, we have seen better results.

Q. How do you look to the future without focusing on the past?

We take the past as basically an experience standpoint. We aren’t necessarily telling the individual in the past what he has done but actually concentrating on the future. ‘These are things we need to get done in the future. These are things we can see you grow into.’

We help the individual identify what the plan is for the future. We don’t tell them what to do, but we help them identify and get back to what they think would be the things they want to do in the future to grow in our company.

Q. Why did you change your process of performance evaluation?

People hate to be rated. It’s not a theme that anybody appreciates. I’ve seen many performance evaluations that, if you had to ask an employee an hour later after the performance review what would he remembers, the only thing he’d remember is his raise. That is not something that creates accountability or excitement or willingness to grow and loyalty.

What we’ve found is that if you work on a process with an individual over several sessions where you define the individual’s ability,

define a path for growth and let the individual come back and tell you how he or she is going to get that done, then it creates accountability and excitement and responsibility.

Part of the performance and growth evaluation is defining where we are going from here, not what we have done.

Q. What is a pitfall to avoid in business?

Most CEOs are made to be the visionaries and give directions to the company. Most CEOs make mistakes in their career of not empowering people at the time they need to be empowered. They micromanage or get into a situation that they don’t delegate or hire the right people.

Sometimes, you have to stop and listen. That’s another problem I see in CEOs. They don’t quite listen as much as they should listen. That’s a big mistake.

You come quickly to a solution, based on your experiences, in every single part of your company that you don’t stop, listen and look for solutions. Many people walk into your office with a problem, and if every time they walk into your office with a problem, you give them a solution, then that becomes a behavior. I realized, in the past, I forgot to ask the question, ‘What would you do?’

I always tell my direct reports, ‘Tell your own people, too. Before you come to my office with a problem, think of a solution.’

I like my direct reports to have a conflict conversation with me or between their peers to analyze problems and solutions. Don’t be afraid of conflict. Argue a position and discuss, but always keep honesty and common sense and professionalism behind it.

HOW TO REACH: Corvalent Corp., (888) 776-7896 or www.corvalent.com

Sunday, 24 February 2008 19:00

Departure planning

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Every business owner knows that one day they will exit their business — either on their own accord or involuntarily. However, many fail to properly prepare for their departure. One issue that every business owner should address as part of their exit strategy is how to maintain their current standard of living upon exiting their enterprise.

Early in the exit planning process it is important to develop a contingency plan for the business and assemble a team of advisers who can help identify strategies to meet your personal financial goals.

“The cost of hiring a team of experts is typically recovered several times over through the benefit of the increased selling price of your business and maximum personal financial security,” says Sandro Rossini, senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank.

Smart Business spoke with Rossini about how business owners can most effectively transition into a comfortable retirement, the importance of having a customized financial plan in place and what type of service and performance standards one should expect from investment professionals.

What’s the first piece of advice you would give to founding owners about exiting their business?

The first step is to determine who is going to run the company upon the founder’s death, disability or retirement. If a decision is made to exit the business, the founder must decide between liquidating the business, selling the business to a non-family member or maintaining ownership of the business within his or her family. One-third of businesses don’t get passed along to the second generation. If you want the business to remain in the family it is important to evaluate the capabilities and interest of your children. This process can never be started too early.

How can a business owner most effectively transition into a comfortable retirement?

Just as an owner might hire a team of professional advisers, such as engineers, attorneys and CPAs, to build a successful business, it is important to hire a team of professionals to build a solid personal financial plan. The first step is choosing a financial planner.

Upon exiting a business, why is it so important to have a customized financial plan in place?

The main reason is so that you can maintain your standard of living. By having a plan in place, financial strategies can be developed to establish cash flow and reduce the tax impact of the sale of your business. It is critical to develop a customized financial plan because everyone’s financial circumstances are different. One person might have all of his net worth tied up in his business, with no other assets to speak of, while another person might have significant assets outside of her business. A certified financial planner can help you customize your plan so it meets your specific objectives.

Why is it important to get outside help when planning a financial strategy?

Switching from earned income to investment income is a whole new way of living. You are shifting expenses, such as for cars, travel and entertainment, from corporate expenses to personal expenses. This requires a complete evaluation. Working with a business broker, business attorney, CPA, financial planner and investment adviser should be part of your strategy.

What type of service and performance standards should one expect from investment professionals?

It is best to start with an evaluation of all your options with multiple professionals. Getting a referral from a trusted colleague that has gone through a business sale is always a good way to start. You should expect the planning process to be intense and require multiple meetings. All of the professionals you are working with should provide you with plenty of attention and be thoroughly committed to meeting your needs.

It is important to understand the compensation structure of the individuals with which you are working. For example, many stockbrokers carry the certified financial planner, or CFP, designation but are compensated only when you purchase a product from them, whereas other certified financial planners charge a fee and may not have the incentive to sell you a particular product. Part of setting your performance standards involves understanding what motivates your team.

SANDRO ROSSINI is senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank. Reach him at (415) 477-3212 or sandro_rossini@comerica.com.

Sunday, 24 February 2008 19:00

Breaking the mold

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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.”

Unemotional acquisitions

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.”

Fiscal conservatism

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

Sunday, 24 February 2008 19:00

Patent litigation

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Often, it pays to ask for a second look at a decision made by the U.S. Patent and Trademark Office (USPTO). That second look is called “re-examination.” Reexamination is an administrative procedure by which the USPTO may be asked to take a second look at an issued patent, according to attorneys with the law firm of Munck Butrus Carter, PC. Re-examination may be granted based upon patents or printed publications that the USPTO missed during original examination or even on the same prior art references based on a change in the law or positions adopted by the patent owner.

Smart Business spoke with E. Leon Carter and Daniel Venglarik about how a company that has been sued for patent infringement should consider seeking reexamination concurrently with defending the patent litigation.

How does re-examination help a company that has been sued for patent infringement?

In the best-case scenario, re-examination can serve as an insurance policy against an unfavorable verdict. Last year the Federal Circuit [the appeals court that handles all patent appeals] reversed a jury verdict of over $100 million because the USPTO subsequently held the patent to be invalid in a concurrent re-examination proceeding. In a worst-case scenario, the threat of re-examination can provide additional settlement leverage, particularly if the patent owner has to protect a royalty stream being paid by licensees of the patent(s) being asserted. Once re-examination has been granted, many courts will stay the litigation pending the outcome of the re-examination at the USPTO, at least delaying the outcome if not avoiding trial altogether. Such stays may be obtained not only in federal district courts but also at the Federal Circuit, which has stayed appeals from district court judgments until the re-examination proceedings at the USPTO caught up and then vacated the judgment based on the re-examination outcome.

Can anything be done in re-examination that could not also be done in litigation?

In defending patent litigation, invalidity of the patent(s) being asserted must be proven by clear and convincing evidence, a much higher burden of proof than required for re-examination. Moreover, technical arguments and technicalities on issues such as priority are much more likely to be understood and accepted by an examiner at the USPTO than by a lay judge or jury. And the USPTO currently measures the quality of its work by how many patent applications it rejects in a given year — and are almost eager to invalidate patents being asserted in litigation.

On the other hand, re-examination is limited to certain types of invalidity defenses, while a broader range of such defenses are available during litigation.

Can re-examination harm my litigation defense?

Some big firm litigators will cite the potential for an ‘unfavorable’ claim interpretation at the USPTO to interfere with the litigation as a reason for not seeking reexamination — without citing a case in which that actually happened.

In truth, during re-examination, the USPTO automatically adopts the broadest reasonable claim construction for the sole purpose of considering validity, while a litigation defendant remains free to argue a narrower interpretation to attempt to avoid nfringement, and thus, have their cake and eat it, too.

Litigators also worry about ‘ruining’ the best prior art if the patent survives reexamination. However, prior art that fails to prevail under the lower standard of proof applicable to re-examination seems unlikely to succeed when the standard of proof is dramatically raised during litigation. In addition, re-examinations can last much longer than the typical patent litigation, such that the jury trial may be over long before the USPTO issues a final ruling on validity over the same prior art reference.

How do I use re-examination as part of my litigation strategy?

Your litigation team should work closely with the patent attorneys handling the re-examination. The patent attorneys on the re-examination are more likely to locate the best prior art than any search firm(s) hired by your litigation counsel, so get the patent attorneys involved early. Make certain that the litigators and patent attorneys actually consult with one another on a regular basis to ensure that the arguments for re-examination and the invalidity contentions within the litigation are consistent and to avoid overlooking invalidity arguments that are not immediately evident.

A tactical decision should be made early in the litigation regarding whether to seek re-examination early so that the litigation might get stayed or to wait instead until claim construction proceedings begin so that the patent owner’s claim construction contentions may be used to good effect in the re-examination.

Finally, never forego re-examination simply because someone else already tried and failed. The reversal of the $100 million verdict described earlier resulted from the last of a series of five re-examinations on the same patent, where the first three were denied outright.

E. LEON CARTER and DANIEL E. VENGLARIK both practice law for Munck Butrus Carter, PC, Dallas. Carter is a member of the firm's litigation section with over 20 years of trial and litigation experience. Reach him at lcarter@munckbutrus.com. Venglarik works in the Intellectual Property section as a patent attorney registered before the United States Patent and Trademark Office. Reach him at dvenglarik@munckbutrus.com.



Tuesday, 29 January 2008 19:00

Patent case venue

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There is a new leader in the number of patent suits filed in district courts. According to E. Leon Carter and Daniel E. Venglarik of the Dallas, Texas-based law firm of Munck Butrus Carter, P.C., in 2006, the Eastern District of Texas passed the Northern District of California in number of patent suits filed; in 2007 the Eastern District of Texas surpassed the Central District of California to become the top patent venue in the country.

As a result, some Northern California companies have found themselves in patent disputes in the unfamiliar environs of Marshall, Tyler or Texarkana, Texas — which can sometimes be a disconcerting twist. However, recent trends reveal that the negative view of some of the Eastern District and its handling of patent cases is unwarranted.

Smart Business spoke to Carter and Venglarik about the significance of how patent cases are shaping up in the Eastern District of Texas.

Who’s filing patent cases in the Eastern District of Texas?

Although criticized as a ‘patent troll’ haven in 2007, the Eastern District of Texas has continued to see patent cases brought by a variety of domestic and foreign tech companies, such as Motorola, Sharp, Fujitsu/Hitachi, LG Electronics and Hewlett-Packard, to name a few.

Other patent infringement plaintiffs during that time include medical device and pharmaceutical companies, such as Medtronic and Aventis, energy sector companies, such as Weatherford and Halliburton, defense contractors, such as Raytheon, universities, such as CalTech, and ‘niche market’ enterprises, like Callaway Golf and Reebok. Even the harshest critics acknowledge that about 60 percent of recently filed Eastern District of Texas patent suits were not brought by so-called trolls.

A predictable process governed by local patent rules [modeled after those pioneered in the Northern District of California], experienced patent jurists and comparatively fast disposition times continue to attract all types of enterprises seeking to enforce their patent rights.

Do patent cases ever get transferred out of the Eastern District of Texas once filed there?

Venue is an issue that is not unique to patent cases, and is therefore controlled by the regional circuit — the Fifth Circuit, for the Eastern District of Texas — rather than by the specialized patent appeals court in Washington, the Federal Circuit. Recently, the Fifth Circuit overruled an Eastern District of Texas venue order in a products liability matter, stating in essence that the plaintiff’s choice of venue is not controlling. Rehearing of that decision has been requested, and a subsequent venue order in an Eastern District of Texas patent case suggests that patent venue will not necessarily be decided in the same manner as general venue due to factors such as the existence of local patent rules and fast disposition times. Nonetheless, the Fifth Circuit’s decision has the potential to improve the odds of removing a patent dispute from the Eastern District of Texas for Northern California companies in particular, since the Northern District of California has similar local patent rules and disposition times.

What else can be done to get patent cases out of the Eastern District of Texas?

Another mechanism for effectively changing forum in a patent dispute is to request reexamination of the asserted patent(s) at the

USPTO, and then request a stay of the district court proceeding until that re-examination is concluded. Unlike other top patent venues, this tactic had little success in the Eastern District of Texas — until recently. Several Eastern District of Texas decisions in the past year granted stays for pending reexaminations.

Who’s winning patent cases in the Eastern District of Texas?

Out of nine Eastern District of Texas patent jury trials in 2007, the patent owner at least partially prevailed on both infringement and validity in only four cases, one of which was subsequently overturned by the judge. That overall win rate of 33 percent is about half the national average. Factor in bench trials and summary judgments in favor of the defendants and the Eastern District of Texas has become, as one commentator states, ‘demonstrably where bad patent cases go to die.’

How long do patent cases last in the Eastern District of Texas?

The Eastern District of Texas’s fast and firm trial settings — which can save both sides as much as $1 million in litigation costs — continue but are slipping slightly due to increasing volume. Trials in 2007 were of cases that had been pending about 16 to 20 months. Looking forward via recent scheduling orders, however, trial settings are generally at about 20 to 24 months.

How often is the Eastern District of Texas ‘getting it right’?

While the ‘right’ outcome always depends on one’s perspective, rates of reversal on appeal are telling. In 2007, the Eastern District of Texas continued its seven-year streak of extremely low reversal rates on judgments, discovery orders and claim constructions. The two judges that handle more than half of the Eastern District of Texas patent cases were never reversed in 2007.

LEON CARTER is a trial attorney and DAN VENGLARIK is a patent attorney with Munck Butrus Carter, P.C., each practicing in the firm’s Dallas and Marshall, Texas, offices. Reach them at lcarter@munckbutrus.com and dvenglarik@munckbutrus.com, respectively.



Tuesday, 29 January 2008 19:00

The Clayton file

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Born: Akron, Ohio

Education: Bachelor’s degree, business, Boston University; MBA, University of North Carolina at Chapel Hill

What’s your biggest business challenge?

The biggest challenge is always making sure you have the right people doing the right things and that they work together well. In that process, you’re never perfect. Recognize when it isn’t working and do that quickly. Make the tough decision, and get on with it because if you don’t, you’re going to lose credibility with the rest of the team for not having made the right decision. More importantly, the team dynamics aren’t optimal, and, as a result, you’re not driving performance as you could. That’s a never-ending lesson. It’s never perfect. You think you’ve got it licked but things change.

The second one is understanding my role. I’ve always believed that technically I’ve understood what my role was, and I believe I’m a good leader, but there are days when I haven’t been as good of a leader because of pressure, stress, problems, and there are days when I haven’t been as out-front as I need to be. Those days you need to hitch up your britches, put on a happier face, and get out in front and lead the organization.

What was your first job?

I taught tennis during high school. I migrated, like many kids, into day-camp counselor and that kind of stuff. I worked one summer in a Ford automobile factory. Out of undergraduate school, I went to work as a manager in training for McDonald’s. I’ve been a GM, and I understand exactly what they do and how hard it is and the challenges they have.

What’s your favorite board game?

Clue. I just like trying to figure out puzzles and solving them faster than the other guy.

Fast fact: Clayton was previously the head of Burger King’s North American operations before taking the helm at Jamba Inc.

Wednesday, 26 December 2007 19:00

Jerry Kline

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Jerry Kline is the kind of guy who loves to promote people who work for him, but he also likes to hire new people into those positions. It sounds contradictory, but not to Kline, chairman and CEO of Innovative Interfaces Inc. Kline, who built the $70 million integrated library system company from the ground up, appreciates the history his current employees carry, but he also understands that new employees can bring fresh ideas to the table. By working hard to retain a large core of employees while occasionally peppering the mix with fresh faces, he keeps his 310 employees motivated with a path to promotion while working to carve out new challenges. Smart Business spoke with Kline about how to balance your hiring system and why sometimes you just have to let someone go.

Balance the hiring of internal and external people.

I believe in hiring from within where we can. We’ve been able to retain bright people, keep them motivated and give them a path. In our industry, where we are evolving, having the history and knowing why we made past decisions is very helpful.

But it’s also important to bring people in from the outside for fresh ideas. Just because we’ve been doing things a certain way doesn’t mean it’s the best way to go forward. So both are important.

When you’re looking at each situation, we can always bring in people from the outside, so if there is a chance someone can step up internally, we tend to default to that. If we see there is someone who clearly can do the job or deserves a chance to do it, then that’s what we do.

Seeing that there are people who have been here a long time sets an example for everyone. I see way too much turnover in IT companies, and as a customer to other IT companies, seeing new reps and policies all the time can be really disruptive. From that angle, retention and consistency are important.

Still, sometimes we have to bring in somebody new because there is no clear-cut inner hire — and that’s when we do it. So start by asking the question, ‘Is there somebody within the organization that fits this job so we don’t have to train someone?

Hire for retention. We’re looking for people who want to be here for a while. We are looking for people who are not trying to do a hit-and-run.

You have to look at their history — have they always bounced around every two years or had they been somewhere a long time, and then maybe hit a few situations where it wasn’t working? We have a lot of people here who are perceptive and can understand that you look at people’s situations and figure out what they’re likely to do. For example, are they tied to the area, or are they just moving in and moving out?

I learn things about this company every day, so certainly somebody who has been here for a year is still at a point where they are learning a heck of a lot. Somebody that’s been here two years is just starting to really give us the return, so if they’re jumping ship that quickly, that’s not so great.

Go ahead and delegate. The challenge for me was learning where I should stay involved and where I bring the right people in to let them go. Going from a one-person, two-person, 10-person company to 300-plus employees, you find out that if you’re going to lead, it has to be a different kind of leadership.

In most places, I turn things over to people who can run the day-to-day operations without me, and I get more involved in areas where I can make a difference. You can’t do everything when you’re mediumsized, and when you’re coming from somewhere where you were very small, you probably did do everything.

But you learn from your mistakes, you learn that if you are going to be directing every decision, then every decision is going to come to you, and your directors will start turning to you for everything, and you don’t want that — and can’t do it, frankly. You learn that if you’re going to grow, you need to turn over the leadership on a lot of things to other people and, even if it’s not exactly as you would do, you have trust in them.

Set the standard for your employees. I’m actively involved in the company every day, talking with our employees and customers, and that keeps me knowledgeable about what is going on.

My interest, excitement and passion for what we are doing helps keep them motivated. It lets them know that this is interesting stuff, it’s applicable and touches many people. Showing that enthusiasm for what we do, and coming in and talking to customers and talking to the staff here, makes me knowledgeable to a deep level where I can talk about where we’re going, and that helps.

Have front-line employees help you evolve.

Talking to your people that are out-front every day is important, I don’t know a better way to keep on top of it. Having working executives here in the office as my decision-makers — the ones who are talking to our customers on a day-to-day basis — and allowing them to shape our direction based on those conversations is really important.

I watch companies where decisions are made at a board of director’s level, where they may not even understand the business, and that’s one way to go, but I don’t think it’s the best way.

Having the people who are making these decisions working here every day, saying, ‘This is going to work for the next while, but we need something new next year,’ and trying to make those decisions of what we can start changing next month, that’s the key to staying ahead. It’s more than sitting down and talking at a high level about where the company needs to be in five years; it’s knowing that the company needs to be different every year and, even without knowing exactly what that means, having those people in the front in positions where they can quickly make the decisions when they see what changes have to be made.

HOW TO REACH: Innovative Interfaces Inc., (510) 655-6200 or www.iii.com

Wednesday, 26 December 2007 19:00

Tough love

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Douglas Bergeron has a management style that has been compared to a bull in a china shop.

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.”

Decentralize decision-making

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.”

Reward performance

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.

Quickness counts

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

Sunday, 25 November 2007 19:00

Minding employee contributions

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Employee benefit plans subject to the Employee Retirement Income Security Act (ERISA) with 100 or more eligible participants at the beginning of the plan year are generally required to have an annual audit. For some companies, though, this important function can be an afterthought that can later rise up to bite them.

“Many companies view these audits as a commodity,” says Paul O’Grady, partner-in-charge of the benefit plan practice group at Armanino McKenna LLP. “Prudent employers treat them not as a commodity but as an essential component of the organization’s process for monitoring its duties and responsibilities for its benefit plan under ERISA.”

The Department of Labor generally requires an audit for large plans (100 or more eligible participants at the beginning of the plan year). Although, in limited circumstances, small plans may also be subject to the audit requirement.

Smart Business spoke with O’Grady about how taking a proactive rather than a reactive approach to employee benefit audits can turn this required task into an integral part of an organization’s employee benefit oversight function.

What are the responsibilities of benefit plan sponsors?

The primary fiduciary responsibility of the plan sponsor is to run the plan solely in the best interests of the participants and to administer the plan for the exclusive purpose of providing benefits and paying plan expenses. This includes diversifying the plan’s investments to minimize the risk of large losses and carefully following the terms of the plan documents consistent with the provisions of ERISA. Fiduciaries who do not act in the best interests of plan participants can be personally liable to restore losses to the plan and/or to restore profits resulting from improper use of plan assets.

What does the audit encompass?

There are two types of benefit plan audits that can be performed under the current ERISA regulations. The first type, a limited-scope audit, requires that the plan investments be certified as to their completeness and accuracy by a trust company or similarly approved entity and allows the auditor to apply limited procedures to the plan investments. As a result of the limited testing of investments, a limited-scope audit provides less auditor assurance and is generally less expensive to perform than a full-scope audit.

A full-scope audit applies more extensive procedures to the plan investments and includes audit procedures relating to the existence, valuation and completeness of the investments. Plans that are required to file with the Securities and Exchange Commission — generally, plans that offer employer securities as an investment option to the plan’s participants — must perform a full-scope audit and must also file form 11K with the SEC.

What are the pitfalls of treating this audit as a commodity?

Companies may look to the low-cost provider to perform the audit. While cost is an important consideration, experience offering these types of audits, which are very specialized, is crucial and can proactively identify potential problem areas. The Employee Benefit Plan Audit Quality Center of the American Institute of Certified Public Accountants provides an auditor selection tool to help companies choose an auditor.

Plans can run into trouble in areas such as the timely remittance of participant contributions. Participant contributions must be remitted to the plan as soon as they can reasonably be segregated from the employer’s general assets and no later than the 15th business day of the month following the month of withholding. I’ve seen instances where sponsors have been required to remit amounts in the tens of thousands to restore lost earnings to the plan as a result of failing to remit participant contributions in a timely manner.

Additional pitfalls range from problems applying the definition of participant compensation, which impacts participant and employer contributions to the plan, to a lack of understanding surrounding the investment fees being charged to participants. I’ve seen companies pay fines as high as $50,000 per year for failure to comply with a plan’s operational requirements or for failing to administer the plan properly. Misunderstanding the application of these and other rules can become a costly oversight for a company.

How can companies mitigate issues before a benefit plan audit?

Companies should stay current and engaged with their third-party administrative service providers and plan auditor throughout the year to stay informed of problem areas and ongoing regulatory developments, such as the recently passed Pension Protection Act.

Companies can arrange for an operational review, which will take a look at the plan from an operational perspective and provide feedback covering items that need to be corrected. Companies can also utilize technical resources, such as the Department of Labor Web site and the Employee Benefit Plan Audit Quality Center, which are good means for staying current. Finally, plan sponsors should be receiving periodic training on the workings of these plans.

PAUL O’GRADY is partner-in-charge of the benefit practice group at Armanino McKenna LLP in San Ramon. Contact Paul at (925) 790-2766 or Paul.OGrady@amllp.com.