Logical growth Featured

8:00pm EDT May 15, 2006
The world of business thrives on relationships. Companies are made or broken by their associations and connections with employees, clients and competitors, a fact that H.K. Desai has leveraged to his advantage.

Desai, president, CEO and chairman of QLogic, an Aliso Viejo-based producer of storage network components, has developed a growth strategy built upon two relationship-centric practices: building partnerships and making acquisitions. With offices around the country and abroad, and more than 800 employees, the company’s two-pronged growth strategy is driving great success.

A collaborative effort
In the world of information technology, nothing is static. Today’s cutting-edge innovations are at the top of tomorrow’s old-and-outdated trash heap. To complicate matters, technology doesn’t function in a vacuum — to remain competitive, IT products must be compatible with multiple vendors’ products, in addition to being scalable and updatable.

And that is why, says Desai, no company can do it all alone.

“If you want to continue growing in this business, you have to have partnerships,” says Desai. “You cannot do everything yourself. You cannot develop all the technologies, you don’t have enough resources, and sometimes if you have a technology and a product, you don’t have a sales channel as good as somebody else’s. So what we do is we work with a partner.”

QLogic’s partnerships are an example of the company’s dedication to customer service, as the partnerships often originate from requests from clients. Rather than set out to develop partnerships that may or may not be what customers actually need, QLogic listens to its customers and develops partnerships based on specific client requests.

“OEMs say, ‘I’ve got this problem here, and I need about two or three technology companies together,’” says Desai. “They say, ‘I need these solutions, and you guys don’t have it. You don’t have all the technology I need, the other guys don’t have it, so I want you to work with these partners and develop this.’”

And QLogic does. Rather than saying, “That’s not what we do,” or choosing to focus on other, less-demanding clients, QLogic makes an effort to meet the needs of those customers — even if that means partnering with a competitor or developing a technology that only fits a very narrow specialty.

“We really help our customers solve their problems,” says Desai. “I think that we bring solutions to the customers which they could not have done with either of the partners, either of the suppliers [alone]. And when we work jointly to bring the solution to the customer, we solve two problems. We solve the customer’s problem, and we bring growth to both partners.”

And the opportunity for growth for both partners — or some other benefit, such as increased market share or brand recognition — is one the most important deciding factor that QLogic examines before entering into a partnership. If all of the partners and clients won’t see gains or improvements from the partnership’s efforts, then the project will fail.

“Whenever we work with a partner, I always tell the team it has to be a win-win situation,” says Desai. “And if it is not wa in-win situation, the partnership will never work.”

By carefully reviewing each opportunity, Desai says the company has never had a failed partnership.

Once QLogic executives have decided that a partnership is the right opportunity, the project leaders — on QLogic’s side, the leaders are often marketing and engineering executives, and sometimes, Desai — share ideas and develop a cohesive vision for the project. This step is one of the most important factors in the success of the project, second only to ensuring that everyone involved will benefit from the partnership.

Says Desai: “As long as the top-level management, either the CEO level or the executive level, whatever the partnership is, [they] have to agree on what they’re trying to do, and then they have to drive both organizations.”

Using phone and in-person meetings, the project’s leaders discuss their goals and thoughts on attaining them, then decide on a joint project goal and a system for attaining it. Desai says as long as the project’s leaders agree on goals and methods, it’s easy to gain employee buy-in and drive the partnership through the organization.

While solutions are often created based on the request of a single customer, the resulting product or system will usually work for many customers, current and potential. Marketing is needed to ensure that those customers are aware of the new product. Marketing people from both companies work together to figure out what technical knowledge is needed to use the products, then bring in the appropriate technical people from both companies to solve those issues.

Partnerships have proven to be a very successful growth avenue for QLogic. Not only do the collaborations feed into the company’s growth by helping it identify customer needs and develop new products, but collaborations also improve the company’s customer relations — clients know that QLogic is willing to do whatever it can to meet their needs.

Acquired success
Desai also uses acquisitions as growth strategy to create long-term success.

And while the potential benefits of acquisitions are greater than those of partnerships, the challenges are also greater, something Desai learned first-hand. Of the five finalized and established acquisitions QLogic has completed in the past 10 years, four have been successful. The fifth acquired company closed after eight months.

“We figured out that it’s not the right culture and the right measures we thought about, so we said, ‘OK, take your losses and quickly get out,’” says Desai.

The company learned from its mistake, and now it only looks at acquisitions that meet three strict criteria.

The first is that acquisitions must be made for the company’s technology, never for the company’s market share alone. New markets can be developed at a relatively reasonable cost, and QLogic is a technology company — if a company offers market share without a solid product at its foundation, the acquisition will never work.

The second criterion is that the company must ensure it doesn’t encroach on its customers’ space. After all, there are few bigger turn-offs than becoming a direct competitor to your customers.

And the third criterion is that the acquisition should help QLogic remain focused on its core business, help it expand its core business or help it move to an adjacent market.

An acquisition starts with QLogic’s three-year plan.

“[We say] this is our strategy for the next three years, and one of the strategies is, we want to expand in an existing market, for example, or we want to go and invest in the adjacent market,” says Desai. “Then the team can go and look at how they’re going to fulfill these strategies.”

The team then finds two or three companies that fit the three-year strategy and that meet the acquisition criteria, and presents the options to Desai and QLogic executives. After that, each potential acquisition is studied in-depth.

“The team of people — it can be 10 to 12 people at engineering or marketing levels —- go and look at the technology, where they have it, how far they are, what the technology is,” says Desai. “They look at culture, they look at the locations. They look at a lot of different criteria. Then they come back and give a presentation to the CFO and me, and say, ‘This is what we have to look at it ... this is how we looked at it, and these are the pluses and minuses.’ Then we jointly decide as a consensus which company we should go after.”

Once the best potential acquisition has been selected, Desai and QLogic’s CFO get involved and contact the company to begin talking.

To complete due diligence, QLogic has developed two processes — a pre-acquisition process and a post-acquisition process — to help ensure that every criterion is met and that everything gets done. Each process has a dedicated team, and each team has an evolving checklist that has to be completed, either before the acquisition can be completed or to ensure that the transition goes smoothly.

One important item on the pre-acquisition checklist is the acquired company’s culture. This is something Desai often looks at himself, to ensure that the two companies’ cultures will be a good fit.

“For example, the team environment [is important],” he says. “QLogic is very heavy into the team. We don’t like the silos. And we can figure that out pretty quickly whether these guys are going to match or not, talking to people.”

Once the acquisition and the checklists have been completed, the biggest acquisition challenges begin to emerge: How will the new acquisition operate? How will it be managed? Will all of the employees be integrated?

The answers are decided on a case-by-case basis, says Desai. In some cases, the owners want to cash out and leave the company, while others stay on to run the company.

And depending on the acquired company’s size, management team and structure — whether it would function as its own business unit or as part of the larger QLogic unit — QLogic’s acquisition management style ranges from very hands-on to very hands-off. But it always integrates support functions, such as finance and human resources, into the central structure, creating, at least in part, corporate unity.

This partner-and-acquire strategy is driving strong growth. QLogic’s net revenue has increased from $216.9 million in 2000 to $571.9 million in 2005, and it has continued to broaden product offerings. And given the strategy’s success, Desai doesn’t plan to change a thing.

“We want to continue the growth in our core business, we want to continue expanding, and we will continue looking at new markets, adjacent markets,” he says. “We’ve done extremely well.”

How to reach: QLogic, www.qlogic.com