In 2004, Arthur Rhein had a difficult choice to make.
He could stick with the electrical component distribution business his company, Pioneer Standard, was founded on, which at best would have meant slow growth, or he could take a risk by transforming the organization to take advantage of new opportunities in the software field.
“With all of the pressures on business profitability and globalization, U.S. industry has gone through a phase where we’ve had to recognize new realities,” says Rhein, chairman, president and CEO of the company that, in 2004, changed its name to Agilysys Inc. “The reality is, markets change. Companies have to change and adapt. As we looked at the industry we were in, which was primarily the electronic component distribution business, and we looked at what had occurred, we recognized that we had better opportunities in the enterprise computer solutions business.”
One thing became clear: The company had to change.
“There was no epiphany,” Rhein says. “There was no bell that rang. It was an evolutionary understanding that things were, and had, fundamentally changed.”
While the growth potential was promising, it was still a difficult choice to divest the company from its foundation.
“It was a very emotional decision,” says Rhein. “I’ve often said it was far more difficult emotionally than it was intellectually. It was divorcing ourselves from the roots of the company.”
Rhein sold the distribution portion of the business and said goodbye to many people he had worked with for more than 15 years.
Once the decision was made, Rhein became the lead change agent setting goals for the company, communicating that vision to employees and relinquishing responsibility to those who could better handle it.
Set clear goals
For Rhein’s vision to succeed, he had to create a series of goals that his employees could rally around and that others invested in the future of the company could use to gauge the success of the transformation.
“I wanted to choose goals that were broad enough that our entire organization could identify with, as well as other constituencies our shareholders, as well as Wall Street,” Rhein says. “So, I tried to achieve a balance between trying to develop a set of goals that were easily understood, yet were aggressive enough and measurable enough that we could, in essence, review a report card and keep it concise.”
To identify goals to meet those needs, Rhein turned to his most senior employees.
“I don’t think you can do it in a vacuum,” he says. “I don’t think you can sit in a room and decide for yourself what those goals are. I like to think that we deal in a very collegial fashion in this company. We’re pretty open with each other. You’ve got to involve your management team and listen to them. Sometimes they know better than you do.”
The team bandied about a number of ideas about before settling on the few that would carry the team through the change.
“At one time we had probably 20 different measures on the board,” Rhein says. “And picking out the ones we thought were among the most important not necessarily the most important ones people could feel good about, and at the same time, we could measure them and report back to ourselves how well we were doing.”
There was no magic formula for picking the goals that were the best ones to carry the company forward.
“Other than utilizing your management team to develop the list, when you’re done, it’ll just feel right, or it should feel right,” Rhein says. “There was no empirical way of doing it. When we got all done, we said, ‘Gee, this feels pretty good. This looks like it covers it all.’”
And there is one more reason for involving the senior leaders.
“You come to a shared vision,” Rhein says. “It’s much more effective than trying to impose a vision. It becomes much easier to lead as opposed to having you be the individual with the single vision that you have to convince people of.”
Some of the key goals were growing sales faster than the markets the company participated in, growing profits faster than sales, increasing operating profit to 3 to 3.5 percent, driving return on capital to 10 to 12 percent and reducing the debt-to-total-capital ratio to 35 percent.
“We tried to get a decent balance so that these were lofty goals,” Rhein says. “Some people might have thought of them as stretch goals. They still had to be achievable, and we had to be able to measure them, whether it was empirically, because it was a specific set of numbers, or by taking surveys of our employees.
“As the leadership, we understood this was a radical change. As such, people really needed to understand that this wasn’t business as usual. It wasn’t what was in vogue because we all read the same new book that came out six months ago. This was the leadership of the company, not just me that decided we needed to take the company in a different direction.”
Get employee buy-in
For Rhein’s transformation to work, he had to explain what the changes were and, perhaps more important, how employees affected those goals. Rhein tasked his top 180 or so senior managers with conveying the message throughout the organization.
“We not only told them what the goals were, we then told them we expected them to discuss them with their subordinates,” Rhein says. “We gave them a series of talking points, how they should go about explaining and helping our team understand that this is the new direction that we were taking, and here are the goals we’ve set for the near term, as well as some longer-term goals.”
The more employees understood, the better off the company would be. And although he may not deliver the message with the frequency he did in the early days of the change, the message has become more ingrained throughout the organization.
“We take an annual survey of our employees,” Rhein says. “We were getting fairly good feedback that our employees were getting more comfortable, that we were being open and informative, and they could better understand our strategy.
“I don’t want to say they understood it. I don’t want to say it was 100 percent effective. It wasn’t. But the combination of things we were doing was confirmed not just in the first survey. We’ve taken it each year. We’ve gotten positive feedback in terms of the percentage of people that are able to respond that they understand our strategy.”
Rhein says not every employee needed to understand the goals or even why those specific goals were selected.
“I didn’t think it was appropriate, nor did I think it was of value, to review why,” Rhein says. “‘Why’ would have meant pointing out what was wrong with the company. I wanted to emphasize what was right. We had wonderful people. They were skilled, they were talented and they were capable of changing.
“I assumed the posture that if they didn’t understand and this may sound self-serving, and I don’t mean it to be they just had to accept that leadership understood that we were moving in a different direction.”
A lack of understanding was something Rhein could live with. Challenging the change was not.
“You need to identify the laggards, the people who are resisting the change in your management team, the people who don’t really want to do it or they don’t buy the premise,” says Rhein. “You need to identify them quickly, and you need to move them out of the organization quickly.”
It’s not hard to identify those employees, he says.
“You just have to listen to people,” Rhein says. “You can tell. Your management team can tell who among their respective reports are not really following through. You can tell people who are rather reluctant. It’s in their words, their deeds, as well as body language.
“You have people working against the flow, and it will take longer. By allowing them to remain in the company, it fosters seeds of doubt with those who recognize these are people who are not part of the program. If you take quick action, you’re also telling the organization, once again, this is not business as usual.”
It’s not always easy to do, but you must rid the company of those people as quickly as possible.
“Although I acknowledge that it was a few, there were people in the organization that I absolutely should have moved out sooner,” Rhein says. “In deference to either their years with the company or the personal relationships with their management or even me (I allowed them to stay too long). With the benefit of hindsight, I should have moved quicker in not only identifying the people, but also ferreting them out.”
Rhein knew that making grand changes in the business meant significant changes to the leadership team. For example, he wanted the new company to grow through acquisitions, and while it had made a few, it was not Rhein’s area of expertise.
“During the period leading up to the beginning of the transformation, I did an assessment of the skill sets within the company and recognized my management team needed to be augmented,” Rhein says.
Bringing in an acquisition expert and putting him on the executive committee meant relinquishing control of some aspect of the company. And that’s something that’s not always easy for executives to do.
“It is the most difficult for the individual leaving the job to truly leave the job,” Rhein says. “It has to do with the evolution of your responsibility as you move up within an organization. Typically when you start with an organization and you are successful at what you’re doing, you’re usually at the level of an individual performer a top salesperson or a sales manager. Most of the time you’re dealing with, ‘I have achieved.’ You can point to very specific things you’ve done that are easy for you to get your arms around and feel that sense of reward. Somewhere in moving from an individual performer to a manager, you move to the ‘We have done it.’ It’s no longer ‘I.’
“At the early stages of that ‘we’ is the royal we. The person who is using that is really emphasizing the first person. You really must move to ‘we,’ where it is a shared execution. You don’t own it, you participated in it. That’s a very tough transition for managers to make. You’re leaving behind your security blanket.”
Even if executives can make that transformation, Rhein says they must take it one step farther.
“There is one more level, which is ‘they,’” he says. “For me, ‘they’ is not a royal we. It’s the organization. On a day-to-day basis, I don’t do much to move the needle forward or to move the marble across the table. I am influencing people; I am motivating people. It’s soft. I may visit a customer. … I don’t close the order. I’m there as a show. I’m there for my title. My sales team closed the order. They just used me as a tool in the process.”
Rhein’s changes have led the company to rapid growth. In the three years since he began the transformation, the company has increased revenue from $1.17 billion in fiscal 2003 to $1.74 billion in fiscal 2006. In that same time period, net income went from a $42 million loss to a profit of $28 million.
“We are certainly very proud of our accomplishments,” Rhein says. “We are humble in that we recognize that a lot of things had to come together. Without the entire organization’s commitment and hard work and dedication, we would not have accomplished what we set out to accomplish three years ago.”
HOW TO REACH: Agilysys Inc., www.agilysys.com