Northern California (1069)

Tuesday, 29 January 2008 19:00

Take your time

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Just once has Maryles Casto hired someone on her own — and she’ll never do it again. Casto, founder, chairman and CEO of Casto Travel Inc., has long trusted others in her 200-employee, full-service travel management firm to help her hire. But when she found a young woman who embodied the many things she thought she wanted in an employee — a graduate degree and a shining resume — Casto ignored those who said she wouldn’t fit in and hired her anyway. After just six months, she realized she couldn’t ignore how poorly the woman blended in with the culture and had to make a change. Lessons like that have helped Casto learn that success is a result of the culture at her travel company, which had 2007 revenue of about $150 million, and that comes directly from who she hires.

Smart Business spoke with Casto about why you have to hire first and then grow, and how consistent kindness keeps employees happy.

Take the time to hire right. The most important thing you can do for your company is bring in the right team, and you have to make the time. If I’m interviewing someone, I won’t just slot 10 minutes, I will slot probably an hour and a half.

I walk them around, I introduce them to everybody, and I’m watching how they interact. You’re watching them, and they’re also watching you.

I want them to interview me. I want them to know that this is going to be their home and take the time to get to know the company. It takes awhile, but how much you put in is what you get out of it.

You need to feel that you belong in the company, and it takes a little while for both parties to really feel that blend. Very rarely have we made a mistake. Sometimes it will take two months before we will hire somebody, but we make sure that we interview everybody, and they come back a few times.

One person told me, ‘I’ve never been interviewed this way,’ and I said, ‘Well, you’re getting to interview us, as well.’

If you can’t take the time to interview the person that is joining your firm and is going to be part of the future, then you’re not worth working for.

Slow growth to meet quality. I was here when the valley was just exploding and had to make a very quick choice that I wanted to be part of the explosion. I had a very small window, so I started hiring people just to fill bodies because of the growth.

That was a big mistake because I couldn’t service the explosive growth and finally had to say, ‘No more business.’ I had to stop growing until I could refocus and get the right people because I wasn’t taking the time and effort in interviewing and hiring, I was just hiring.

I learned I can’t do that — not if what I say is that quality is important, and we’re the best at this and that. I learned that if you say you are going to do something the right way, stick with it.

Be consistently kind. The most important thing in leadership is ethics and kindness. You have to be kind to everybody and communicate with them. It’s not when we’re doing well, it’s when something happens to employees that we really show we are a different company by taking care of them — and that builds loyalty.

You show your kindness in how you deal with people daily, and people respect that and respond to it. It’s not one day you are this and the other day you are not; that confuses people, and it’s very hard on them.

But if you consistently make your decisions with compassion, people understand that. They trust that you’ll guide this company, and that this company is the most important thing, and then you get them to buy in.

Make your word count. If you have to choose between integrity and the easiest way to do something, you have to really look at it and say, ‘How should we be doing this based on who we are?’

My father used to always say, ‘Your word is your honor,’ and I really believe that. If I give my word, that’s the way it should be, and you can’t do anything otherwise. You know what’s right and what’s wrong, and you have to do what you feel is right.

If you take pride in what your name is, you take pride in what you do. That should be your guideline.

Let employees leave with dignity. I’ve had to let people go, and I make sure I personally do it because it has to be done in a way that takes into consideration who they are and what they’ve done for the company. I make them understand that it’s not about them, it had to be done.

Help them in any other way you can in trying to secure another job or giving them a good recommendation. Don’t just cut them off because they left.

After they’ve gone, I’ve called and said, ‘How are you doing, and what can I do to help you?’ I’ve had people who left and who are still really good friends and have called us and come back and visit.

HOW TO REACH: Casto Travel Inc., (800) 832-3445 or

Tuesday, 29 January 2008 19:00

Family first

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If it’s the day before a three-day weekend, the employees of Kelmoore Investment Co. Inc. will be getting out of work early. Chairman Ralph Kelmon allows them to leave early to show that he cares about them and that he realizes how important they are to the company.

“If they are going someplace, they can get a head start and they can not be in the thick of traffic,” Kelmon says.

Kelmon says his company, a licensed general securities broker/dealer with $250 million in assets under management, does everything it can to accommodate a family-comes-first mentality.

Smart Business spoke with Kelmon about how a family atmosphere helps Kelmoore succeed and how he deals with bad decisions.

Q. How has the family atmosphere benefited the company?

We’re small, so it would be nice if all work were linear. There are times I need something extra, so they will all pull together to make sure we get projects that we promised out on time.

They will stay extra and do extra things because I’ve made an investment in extra, if you will. It all comes back. Basically, because I’ve made a heartfelt gesture toward them, they make heartfelt gestures toward me as well as providing the work they can. There is an aura of they actually want to please me, and they want to please the company.

Q. How do you handle bad decisions?

As soon as I think we’re wrong, I open up discussions of what we ought to do. ‘What do you think? If this isn’t working, what do we need to do?’ Get contributions from people. Basically, tell them that the blame goes to me.

Leadership means you take the blame. Leadership also means that when there is credit, the credit goes to everyone.

Human nature is that people are afraid that the risk/rewards, in some businesses I have been in, in the past, if you were to blame, you certainly would not be anxious to contribute again.

For us, I need my whole 20-cylinder engine pumping and not being afraid that when I walk down there, I’m going to go, ‘Well, you missed this.’ If anyone missed it, I missed it. If it is working well, then we were very successful in doing what we do.

Q. How do you communicate your message?

I manage by walking around. I do have an office, but it is not the kind of executive office where I call people in. I actually go to each one of their stations, talk to them and ask them how they are doing.

I will ask salespeople what the messages on the phones are. I will ask the performance people, ‘Are you having a good day; what do the numbers look like?’ Basically, I try to lead by saying, ‘Is there anything I can do to help you? Is there anything I can do to make your job easier?’ If, in fact, the best thing I can do is get out of your way, then I will get out of your way.

Q. Why is walking around more productive than sitting in your office?

They can see in my voice and in my heart that I want this to be a successful operation, and I want the success not only for me but for them, and that the big effort is a ‘we’ effort. We can make it happen — I can’t make it happen by myself — and how important they are to me.

They have direct access to me, so whatever they’d like to talk about, it’s not going to be they have to wait for their yearly review or whatever to talk. I look to see if people have something bothering them. I try to keep as few secrets as possible, so they are used to dealing with confidential information — what I am trying to accomplish and what the goals are and how we are doing on them, I think they ought to know that daily if I could do that.

Q. Has being open been a drawback at your company?

If you try to keep secrets, there’s a human nature around it where people want to know stuff. Part of leading people is to keep them as productive as possible. There is no productivity in the currency known as gossip. There is no allowing people to think that they have some kind of edge on information.

Do I keep what I pay people a secret? Yes, I do that. That is a privacy deal between the company and them. Other than that, what we are trying to accomplish or what is facing us, most good, intelligent employees kind of know what is going on.

The more you keep them in the know, the more time they can be productive and keep the machine going.

HOW TO REACH: Kelmoore Investment Co. Inc., (877) 285-1026 or

Wednesday, 26 December 2007 19:00

Mortgages and the economy

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Burdened by weaknesses in the real estate sector, the economic outlook for the first half of 2008 is sluggish.

The housing sector, however, is expected to rebound later in the year, providing a boost to the economy as a whole.

One of the factors behind the recent real estate slump was the widespread availability of subprime mortgages. These types of loans will be harder and harder to come by in the future, says Comerica’s chief economist Dana Johnson.

“We’re not going to go back to a sub-prime mortgage market that was as wide open and that allowed a lot of reckless behavior on the part of both borrowers and lenders,” he explains. “There is going to be more of a continuing restraint on the purchases of homes.”

Smart Business spoke with Johnson about his economic outlook for 2008, the impact of the subprime mortgage industry and the overall strength of California’s economy.

What is your economic forecast for 2008?

I’m expecting the economy to grow sluggishly this winter and then accelerate over the course of 2008. I’m projecting growth over this winter — the fourth quarter of 2007 and the first quarter of 2008 — to be around 1.5 percent at an annual rate and then accelerate by the end of the year to about a 2.5 percent rate of growth.

The credit crunch has already extended and intensified the recession in housing, and housing is going to be a big drag this winter. All of the turmoil in the credit market will also be a constraint on the economy. For these reasons I think we’re going to have a pretty sluggish pace of growth for a while.

The drag from housing, however, will slow, and we’ll find a bottom sometime in the spring or early summer, and then things will level off or perhaps gradually improve a bit.

How will the meltdown of the subprime mortgage industry affect the economy?

It’s had a very clear and direct impact already in reducing the ability for people to buy houses, which has intensified the pullback in homebuilding and accelerated the decline in home prices. The key issue beyond that is whether the decline in home prices is going to cause consumers to spend more cautiously. So far, there is not much evidence of a big spillover to consumer spending. With consumer spending holding up OK, it looks like the spillover effect has been limited, and this is one of the reasons that I think the overall economy is going to avoid recession.

Foreclosure rates have been especially high in California. Do you believe the housing market will rebound in the upcoming year?

No, I don’t. House prices in California have begun to fall but are still far higher relative to income than anywhere else in the country. It looks to me like there are a lot more adjustments that have to be made in the price of houses in California relative to incomes in California relative to houses elsewhere. California has relied more than any other state on the subprime mortgage market, which is not going to fully recover for years. The adjustments in home sales and prices are going to continue to be very difficult in California all through 2008. We’re talking multiyear adjustments where house prices will not hold up as well in California as they do in other states.

In what ways does the California economy differ from other regions of the country?

The California economy is in many ways a microcosm of the U.S. economy. The distribution of jobs by industry in California looks very similar to the national averages in many respects. There are two areas, however, that look different: It has a leading position in various knowledge-based sectors as well as the life sciences industry.

How important is the health of California’s economy to the United States’ as a whole?

California’s economy makes up approximately one-eighth of the overall U.S. economy, so its health is vital. The California economy is intimately integrated into the rest of the economy; we don’t tend to see the sharp regional differences that we once had. The U.S. economy’s performance is going to look like California’s, and California’s performance will look like that of the U.S. California doesn’t move in lockstep with the U.S. economy but, given its size, its diversity and the fact that the distribution of jobs is so similar to the distribution of jobs by industry in the rest of the economy, what happens in California tends to happen nationally and vice versa.

DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 828-5970 or through the bank’s Web site,

Wednesday, 26 December 2007 19:00

Helping employees retire early

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CEOs face monumental challenges when navigating issues surrounding their aging work force. In order to avoid the predicted brain drain caused by retiring baby boomers, many CEOs are orchestrating knowledge transfers between retiring employees and less-experienced workers, while other executives face retention issues with younger employees, as middle-aged managers stay longer and limit opportunities for up-and-comers. The best solution for CEOs is to control when workers retire.

As it stands today, the baby boomers are in control of their retirement dates and many aged 55 to 65 are choosing to stay on the job longer because they just can’t afford to leave or are anticipating limited access to affordable medical insurance. The more employers step in to help solve some of the problems facing prospective early retirees, the more they’ll be able to control their exodus.

“There are many issues facing employees who might like to retire early,” says Jon Joss, senior retirement consultant with Watson Wyatt Worldwide, San Francisco. “Without 401(k) oversight, retirees are forced to manage their own asset portfolios and the volatility of the financial markets doesn’t portend enough income stability for prospective retirees. If CEOs want to get a handle on the issues and control the timing of employee retirements, they really need to provide more assistance to potential early retirees.”

Smart Business spoke with Joss about what CEOs can do to support early retirees and exercise better control over the egress of middle-aged workers.

How can employers provide more stable retirement income to early retirees?

In order to help employees retire early, employers should consider offering annuity options under their 401(k) or other defined contribution plans. Over the past few years, financial services firms have introduced insurance products to help fill the hole left by the winding down of traditional plans, where vested participants are promised a lifetime monthly benefit at retirement. The growth of 401(k) and other defined contribution plans place the investment management and draw down burden on employees as retirees receive a lump-sum benefit when they leave. Consider offering employees the choice of several annuity plans and the option to invest all or part of their defined contribution retirement assets into the program. Because employees will feel more secure receiving a guaranteed income and relieved from the burden of managing their investment portfolio, they may retire earlier.

Offering annuities as an option can also keep scarce knowledge workers on the job longer or assist with retaining younger workers who frequently say they want guaranteed retirement benefits. By leveraging their purchasing power, employers may be able to offer retirees better annuity programs than those they could purchase on their own. The Pension Protection Act has provided some good guidance around the selection and protection to employers for offering annuities, making employers feel more comfortable.

Should employers offer planning assistance to prospective retirees?

Employers can provide modeling tools that will help prospective retirees determine how much money they’ll need to retire and their projected income levels resulting from a variety of portfolio investment scenarios. Employers can also continue to make those tools and investment advisory services available to employees once they retire. This type of assistance provides reassurance to prospective retirees, because navigating the volatile investment markets can be treacherous enough.

How can employers help employees obtain medical coverage before they reach the age for Medicare eligibility?

There are several options that employers can consider to help prospective early retirees obtain affordable health coverage. Under one strategy, the employer can create a defined contribution type plan used to pay health care premiums for the employee based upon a length of service formula. For example, let’s say that an employee has 20 years of service, the employer can allocate $1,000 per service year, or $20,000, and place that money in a separate account, or leave it unfunded and use it to pay for medical premiums. Or the employer can place the funds in a Health Savings Account that the employee can use to meet deductibles and uninsured expenses. Another option is to make the company’s group health coverage available to early retirees.

By leveraging their group buying power, employers can offer retirees more affordable, guaranteed coverage with no eligibility requirements. Employers can decide if they want to contribute all or part of the premiums, and some of the cost could even be covered by the defined contribution plan allocation. There’s a great deal of flexibility available to employers in meeting this need.

What other health care assistance might early retirees need?

CEOs should consider maintaining the claims administration for early retirees and, if they decide to extend group health coverage, offer HMO or PPO options, which will help retirees manage their costs and achieve greater financial security. The more financially secure employees feel, the sooner they’ll retire.

JON JOSS is a senior retirement consultant with Watson Wyatt Worldwide, San Francisco. Reach him at (415) 733-4466 or

Wednesday, 26 December 2007 19:00

The Bergeron file

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Born: Windsor, Ontario, Canada

Education: Bachelor’s degree, computer science, York University, Toronto; master’s of science, University of Southern California

What is the greatest business challenge you’ve faced, and how did you overcome it?

When I bought VeriFone, the company was losing a lot of money. HP didn’t really want the company and the employees were demoralized and both the customers and the investors had lost faith in the company. In addition, the management team was awful and needed to be replaced. We were able to turn things around and turn a $5 million acquired investment into a company that has a $5 billion market-cap value.

Whom have you most admired in business and why?

That would have to be Larry Ellison, the founder of Oracle. He’s unconventional and challenges the status quo on a lot of levels. People said that the database market was saturated and that Oracle was no longer a player, then the bubble burst and nobody believed that he could turn it around. Then when the issues with PeopleSoft came up, he forged ahead. I love people who just don’t accept the answer ‘no.’ He’s been around a long time and has survived many cycles in the technology industry.

What is the greatest business lesson you’ve learned?

It’s all about the execution, and you’re nothing as a CEO without the right people around you. CEOs think that picking the right strategy is the most important thing, but great ideas die because of faulty execution. Execution is more important than strategy, and having the right people to execute the strategy is most important of all.

Sunday, 25 November 2007 19:00

Pasquale "Pat" Romano

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When 2Wire Inc. — the telecom company Pasquale “Pat” Romano co-founded in 1998 — was just about to take off, the wheels almost came off. It was March 2001, and the venture investing community decided to hide behind a rock for a year, Romano says, and companies were shutting down left and right because the funding pipeline had vanished. That turned out to be a blessing in disguise for 2Wire because by securing one strong financial backer when most companies had none, the company obliterated its competition. As president and CEO of 2Wire, Romano weathered the storm and grew his company to 1,400 employees and 2006 revenue of $242 million after three straight years on the Inc. 500 list of the fastest-growing privately held companies in America. Smart Business spoke with Romano about how to scale your company as it grows and why you have to invest early in infrastructure.

Think big, so you’ll be ready when you are big.

One of the biggest things you should try to avoid is not putting in infrastructure — an organizational structure — in advance of needing it. You can go too far with that, you can put in Fortune 100 infrastructure when you have no revenue, and that’s a mistake, but you do need to hire talent that’s way ahead of where your business needs are.

If you do that early, you can’t micromanage. Even in the early phases, you can’t be the guy who calls all the shots because no one who’s senior enough to take the ball to mid- or large-scale will want to work in that environment. They have to work as a partner with you; they cannot just work as a task executer.

So if you hire right early, you have a much better shot at scaling a company. And you have to hire all functions. Another pitfall is that companies in their early phases don’t invest in the operational infrastructure.

Again, you can go way overboard on spending money on complicated systems and overhiring in areas you don’t need early on. However, the critical functions — good finance organization, a good operations organization, a good IT infrastructure so people can get their work done — all those things need to be healthy and need to be adequately focused on early.

The tendency in the early stages is it’s all about product, product, product. Well, you’re building a business, not a product. If you focus on those things, it dictates your leadership style to some degree because you’re forced into dealing collaboratively with a lot of partners around the table that you will run this future large enterprise with while it’s small and try to get it there.

If you want team-oriented culture, one good way of getting it is to hire people who are as good as you are.

Scale your communications. When you start a company, you can fit it in your conference room. Communication with employees in general is implied. You see the entire employee population every day. So you form the usual bonds. When you’re working really hard to get something off the ground, the bonds naturally form.

When you get bigger, which is the goal, you want to continue with that, but it doesn’t scale indefinitely. You have to add in some form of informal communication, or people will lose track of what’s going on with the company.

One thing I’ve always done is have regular company all-hands meetings, where we talk about the status of the business.

We’re really open internally with the information flow — inclusive of some things that are sensitive to the outside world. We tend to have an environment of ‘trust your employees’ with things. We give pretty unfiltered information to the employees about the financial performance of the company, products that are coming, so they can connect what they do at their desk every day to what the outcome will be if they take a particular action.

That’s the key: Making sure they get a grass-roots sense of the drivers of the business.

Don’t get too hands-on. You need to be very involved [with the operations] but very carefully involved. If it ain’t coming off the rails and it’s not broken, you put in the metrics to monitor it and tell you if it’s coming off the rails early.

But don’t mess with it in a micromanaging way if the metrics are telling you everything is going well. You need to be looking at all the details.

With a mid-sized company like us, there are tons of programs. There are so many programs running simultaneously. Is any one going to make or break the company? Probably not. When you’re in your early phases, can one make or break the company? Sure, because you’ve probably only got one or two. So you need to be fairly heavily involved but not intrusive, unless there’s a problem. Then you have license to get in and make sure the problem doesn’t extend as soon as possible.

Let your employees stretch. If your business is successful, good people will be attracted to it because good people like to work for winning teams. Doing good at your day job in terms of making the company successful is going to make it easier to hire.

Even now, we still use equity ownership in the company as a motivator because there is a direct, long-term relationship between a person’s contribution and the value of that equity. Money’s not everything, but it’s nice to know that if you push hard and everybody else pushes hard, then you win.

Here’s another factor: Do you let your people stretch, or do you put them in a box? People like to get measured by as large a yardstick as possible, and they like as much latitude as possible to take opportunities outside their initial job description — as long as they’re getting their day job done — and be able to stretch.

If you keep people challenged in general, you get a reputation for being able to grow employees. One corollary is that if you have good employees, other good employees want to work there. The key is maintaining the quality of your existing employee population.

If you allow substandard performance to persist in your organization and dilute down, the intangible feeling when a candidate comes in to interview — that you’re a high-caliber team — you are diluting your ability not only to execute with that team but to attract good people. So you need to be diligent about managing the employee base.

HOW TO REACH: 2Wire Inc., or (408) 428-9500

Friday, 26 October 2007 20:00

Jerry M. Kennelly

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When business at Riverbed Technology Inc. grew from $2 million in revenue in 2004 to $23 million in 2005, Jerry M. Kennelly was ecstatic. But when it jumped to $90 million in 2006, he had a problem. Sure, Kennelly, Riverbed’s chairman, president and CEO, was tickled with the results, but suddenly the staff that he and Steve McCanne started with was unable to keep up with the demands. As a result, he had to make some tough decisions about the wide-area data services company. With employee numbers mushrooming to almost 500, Kennelly had to put his personal affection for the people he started with aside and make some management changes to fit the scale of the company. The result has been a company on pace for 2007 revenue of $225 million. Smart Business spoke with Kennelly about why hard work boosts morale and how today’s leader is less of a general and more of an orchestra conductor.

Keep a high-energy atmosphere to boost morale.

If you don’t have a lot of hard work, it’s impossible to have high morale. If people don’t have a lot to do, then there is this ho-hum, lazy attitude about the place.

There are companies where you get to sit in beanbag chairs and get free food, but what happens, over time, is the high performers don’t want to work in that environment because it becomes a slower environment — like a kindergarten or a college dormitory. High performers want to be proud, see success and move forward.

Success is a tonic; people like to feel successful. We have aggressive challenge targets that go out to the teams, and early on, we made the cultural point that it wasn’t about making money but about being focused on our customers and on winning as a team. Those values will endure through ups and downs financially. It’s an unselfish goal to be focused on your team success, so it’s uplifting — as uplifting as you can get for a commercial enterprise. We’re not feeding starving children or anything, but it’s a higher-level goal than, ‘How is the stock doing?’ and they respond to that. I call it psychic income — feeling like you’re part of something good — and psychic income is important.

Make tough decisions to move forward. If people can’t perform here, we ask them to leave. If you don’t do that, you’re not demonstrating a performance environment.

At the end of the day, it’s all about performance; it’s not about free coffee and doughnuts. Those people get in the way of other employees, and people resent having someone in their way.

As we were growing, some of the senior staff wasn’t the exact right fit to go forward as a bigger public company, and you become close to those people, but it was important for the business that I change out those positions, and that’s where a lot of companies stumble.

When you go from 20 employees to 500, there are people who have individual skills that just don’t scale up. They work well for that person or for managing a small group, but when you extrapolate doing that at a larger scale, with hundreds of employees, you can’t imagine that person, either their personal energy or intellectual capacity, dealing with the bigger challenge.

When someone does leave, we treat them very honorably. We respect people in general, but also, every other employee is watching, and they say, ‘God, if they did that nasty thing to Bill or Mary, they could do that to me.’

Give employees the instruments to succeed. I’m not the general ordering the forces; I’m more like the conductor of an orchestra getting people to share their talents with us. What’s coming from their brains is what we want, and what causes burnout is when you’re held responsible but you have no control. We hold people responsible, but we give them control, the resources to do their job.

You try to have people be the masters of their own fate, so you say, ‘Mr. Sales Manager, your job is to deliver this amount of sales revenue,’ and we hold them liable to that. But we say, ‘To do that, we have resources to help you, here’s your budget for the quarter, here’s a guy who can help you with leads,’ so you hold them responsible, but you also give them resources and control.

Hire carefully, even — and especially — during growth. Over the years, you develop a network of people that you know, but that doesn’t mean hire someone just because you knew them. You know 10,000 people, but maybe there’s a half dozen that you’d want to work with again. You can build a core from that, and then start doing it the old-fashioned way: recruiters, networking and recommendations. You have to be careful and take every hire very seriously.

It’s the everyday work blocking and tackling of building a company, so have multiple interviews for every candidate. There’s an old saying, ‘When it comes to hiring, a single person’s opinion is like no opinion at all.’ So have at least three, sometimes as many as 10, people interview each candidate. Then, you do it the old-fashioned way: Hire one person at a time.

Be careful with advice. The challenge for any CEO is you have a lot of people giving you advice, and there’s the 20-80-100 percent rule in dealing with advice. In any given situation, informed people will give you the right advice 80 percent of the time. It’s the common wisdom of them saying, ‘When this happens, you do this.’

The problem is, it’s wrong 20 percent of the time. So your job as CEO is to figure out, ‘Am I in the 80 percent chance where I should take this advice, or is there something about my company, my industry, my particular situation that puts me in the 20 percent case?’ And I have to think of the right answer for myself.

It’s a subtle thing that a lot of leaders don’t appreciate, but that’s the key to the job. There’s no place to hide at the top, so you have to decide when to deviate from the basic advice.

HOW TO REACH: Riverbed Technology Inc., (415) 247-8800 or

Friday, 26 October 2007 20:00

The MacKenzie file

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Born: Blairgowrie, Scotland

Education: Higher national diploma, mechanical and production engineering and an ordinary national diploma in electrical/electronics engineering, Fife University, Scotland

What’s your biggest business challenge?

Walking into a brand-new job on Day One. It’s horrible. It’s an uncomfortable, horrible, yucky thing. Everyone’s looking at you and just goes, ‘Well, I’ll wait to see what he wants.’ Overcoming it is just very quickly getting everyone on board. When you’re walking in to facilitate what’s broken and working, the people have low morale and self-esteem. I feel so sorry for them. As fast as possible, get around to every person and tell them, ‘You’re not an idiot, and it’s a brand-new Day One of a culture change.’ Dig in because if you think about the enormity of the challenge, you won’t get there.

What’s the best business lesson you’ve learned?

I’m stupid. I know nothing. I’m not a clever person. I don’t have the knowledge. I do my job, and we have to employ the other people who are good and have the knowledge to do their job.

What was your first job?

I come from a working-class family, and my dad had to work two jobs to try to get us through school. At 14, I started to work in hotels at dish washing, assistant waiter and learn silver-service waiting, and did that all through school and college to help the family out. My first job after college, I had a unique opportunity, I could either become a head waiter of one of those five-star hotels or go into a brand-new start-up, but you weren’t allowed to start as an engineer. You had to start as a technician on the line, even with all your engineering qualifications, and it paid less than the head waiter. I had been through college to get the engineering qualifications and chose the latter.

Tuesday, 25 September 2007 20:00

Investment options

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Aleveraged recapitalization of one’s business provides liquidity for owners while retaining ownership and management control.

Typically, the three key elements in obtaining financing for a leveraged recapitalization are consistent cash flow, a strong business plan and a solid management team. With these components in place, it is often in an owner’s best interest to do a recapitalization rather than sell the business outright.

“Leveraged recapitalization offers business owners looking for personal liquidity some significant, distinct advantages over the sale of their business to a private equity firm or to a strategic buyer,” says Mike Silva, senior vice president and group manager of Comerica Bank.

Smart Business spoke with Silva about leveraged recapitalization, how companies can benefit from such a transaction, and why more and more companies are taking advantage of recapitalizations.

What is leveraged recapitalization?

A leveraged recapitalization involves a bank or other financing source lending money to a company to finance a distribution to owners so they can diversify their net worth. If you look at the typical business owner who owns a $40 million revenue business, the bulk of his or her assets are tied up in the company. He or she typically has the company and a house, but no other significant liquidity. Leveraged recapitalization allows owners to take cash — often a significant amount — out of their business and put it in the market and have it professionally managed.

Who are the best candidates for leveraged recapitalization?

The best candidates are companies that are established and have consistent, stable cash flows demonstrated over a period of three to five years. Generally, they have in excess of $20 million in annual revenue and/or an EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) greater than $5 million. Also, it helps if there exists some level of assets that can be used as collateral within the business.

How can a company benefit from leveraged recapitalization?

Leveraged recapitalization allows owners to take some money off the table without selling the business in its entirety or losing an interest in the business to a private equity firm. In many scenarios, private equity is a good avenue for obtaining liquidity. However, owners will end up with just a fraction, or possibly none, of their company, which will be controlled by outsiders.

Leveraged recapitalization is a way for a business owner to realize liquidity while still retaining 100 percent control of the business. Also, the financing process is quick: typically six to eight weeks. Finally, this type of financing can be done discreetly and with confidentiality, which means that day-to-day operations will not be impacted and morale will not be affected.

In what ways does leveraged recapitalization differ from private equity financing?

Typically, if a company were going to explore an outright sale to a private equity firm or a strategic buyer, it would hire an investment banker who would put together a book. The investment banker would then market the book to get as many potentially interested parties as possible. Soup to nuts, the auction process would take a minimum of six months. And over this time, there is a book on the street. Competitors and employees know that the business is for sale, which can negatively impact client relationships of the company and potentially demoralize the employee base. Doing a leveraged recapitalization provides liquidity to the owner, but is much more discreet. In all likelihood, the business owner, his or her financial advisers and the bank are the only parties that will be aware that financing took place.

What risks are involved in leveraged recapitalization and how can they be mitigated?

Any time you put additional debt on a business, its cash flows are stressed. After the recapitalization there will be requirements on the cash flow that weren’t there before. This can cause liquidity problems as well as hamper a company’s ability to grow. Everyone involved with the transaction needs to feel comfortable that the amount of debt put on the company is workable, both in a best-case scenario and a downside scenario.

Why has the use of leveraged recapitalization increased over the past decade or so?

Historically, leveraged recapitalization was frowned upon by commercial bankers and institutional investors. The concept of a business owner taking a considerable dividend out of a company’s holdings generated concerns that there would be a loss of interest in day-to-day operations.

Lately, however, the fears associated with leveraged recapitalization have largely dissipated. Banks have become more comfortable with cash-flow lending: lending without underlying asset support. Recapitalization transactions have increased more than 1,000 percent over the last nine years, from $4 billion in 1997 to $49 billion in 2006. In the past, the only way for a mid-sized business owner to get liquidity was to sell the business to someone else. Leveraged recapitalization allows a business owner to leverage the company while retaining management control.

MIKE SILVA is senior vice president and group manager of Comerica Bank. Reach him at or (415) 477-3274.

Sunday, 26 August 2007 20:00

Jim Steele

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Jim Steele doesn’t want any of the lip service employees often give bosses. Steele wants to know exactly what’s going on, and he

finds that out by regularly getting on the front line with his team at inc. To Steele, president of worldwide sales and

distribution, the only way for a leader to really know the company is to see the trends up close and listen to the people who are fighting

the battles every day. That’s why he spends a big portion of his time at the on-demand customer relationship management services

company speaking to customers and getting feedback from its 2,000 employees. So far, the results are solid: Company revenue grew

nearly 60 percent to $497 million for fiscal year 2007. Smart Business spoke with Steele about getting in the trenches with his team

and what you can learn from your employees.

Go to battle with your team to get better answers.

My style is to be down in the trenches and

side by side with the sales team. I always

tell them, ‘I’m down here to help you guys

communicate to the customer and to negotiate deals.’ That means considering myself

the face of the company and being side by

side with my team and not making them

feel like, ‘Oh, jeez, the boss is coming, so

we have to put on our best face,’ then giving me a lot of lip service on everything.

I would rather hear what’s really going

on, and I don’t want them to think the boss

isn’t listening or doesn’t care. From my perspective, if I can show good listening skills

and really understand the issues, then the

team feels better for getting those issues

teed up and feels better about their

chances of success because someone at

the top cares.

Learn from your employees. All the things that I do with them as far as coaching, I also ask

from them. I ask them, ‘What could I have

done better to help you make this sale,

what would you like to see me do to help

you with this customer, what can I do to

make you, the company and the team more


I don’t stand on protocol because of my

position in the company. I’ve got to earn

people’s respect every day. I don’t put

myself above anybody and say, ‘Well, I’m

the president, so you have to listen to me.’

I want to truly understand what the issues

are; I have to make sure that I’m always

open to new ideas so that I’m not stuck in

my old ways.

Don’t brag. You have to be unselfish and

modest and not do all the talking. I can’t tell

you how many times I’ve seen executives

just spending time talking about all the

things they’ve done and how great they are.

Nobody really cares. When I’m out with my

team or customers, I want to know about

their families and their kids and just kind of

break down those barriers.

People want to know that you care about

them as people and don’t just see them as some part of the system that is there to generate revenue for you. I think employees

are a lot more loyal when they feel a connection to their leader. I know I am. That’s

the key thing, be unpretentious.

Inspire confidence. People want to deal with people that are stable and can inspire confidence. Show them that you’re not frantic

— it’s good to have a high sense of urgency,

but you don’t want to be frenetic about it

and make everyone think that you’re in crisis mode.

You have to present yourself as someone

who is calm and cool and collected under

fire because if you can alleviate some of

that pressure from your team, it really

makes them feel like you’re taking some of

the load off of them.

Focus on the victories. When anybody does

anything that either helps drive additional

revenue, helps drive better customer success or somehow enables better teamwork

or morale, I want to make sure that they get

credit for it.

People need a lot of positive reinforcement, they’re putting their necks on the line

every day, and the positive reinforcement

from their peers and management is what keeps them going. When we get praise from

our customer, it’s like we’ve been given a

million dollars; there’s just nothing better.

Promoting any praise we get is a great

way to boost morale and commitment and

loyalty. It’s one of the things that we do all

the time because it’s cheap to do; it doesn’t

cost you anything. It takes a little bit of

time, but the return is so high that it just

amazes me when people don’t do that on a

regular basis.

Be an evangelist for the company. We’re like evangelists. We continually tell people who

we are and what our vision is and what our

values are. We’re the face to the customer,

and if they look at us and they don’t think

that we’re inspired and excited about this

model, then they’re going to question, ‘Is

this really the right way to go?’ The way

that we beat the other guy is we become an

army of evangelists that are so excited

about selling and using our own products.

Make sure you’re getting there with metrics.

There are a lot of people who say they care

about their customers and their people, but

we track it religiously. We always look for

proof points on that, and we communicate

that to everybody.

The metrics are the validation points. You

can have all these great values and visions

and methods, but unless you can actually

track the progress of it, you’re not putting

the points on the board.

We have a site where you can look at any

of our systems on any given day and see

how many transactions are going through,

and you can see the response time. These

are important metrics that anyone can see.

It’s like the power plant; if your lights are

out, you can’t fake it. Before, we’d always

take things anecdotally and say, ‘I’ve heard

this 25 times,’ but now we have this site

where it’s all right in front of you accurately. If you’re not close to the customer, if you

don’t work to get feedback and do something with it, that’s death.

HOW TO REACH: inc., (800) 667-6389 or