Fed missed warning signs in 2007 as crisis gained steam

WASHINGTON, Mon Jan 21, 2013 — Top policymakers at the Federal Reserve felt for most of 2007 that problems in housing and banking were isolated and unlikely to tear down the U.S. economy as they ultimately did.

Even as crisis signals started flashing red with the freezing of credit markets during the summer, Fed officials believed the troubles would be moderate and short-lived, according to transcripts of the 2007 meetings released on Friday after the customary five-year lag.


U.S. Treasury Secretary Timothy Geithner, then president of the New York Federal Reserve Bank, said during an emergency telephone call on August 10 of that year that most of Wall Street was still doing fine.

“We have no indication that the major, more diversified institutions are facing any funding pressure,” Geithner said according to the transcripts, which total 1,370 pages. “In fact, some of them report what we classically see in a context like this, which is that money is flowing to them.”

Similarly, Fed Chairman Ben Bernanke underestimated the risks of a looming financial blow-up.

“I do not expect insolvency or near insolvency among major financial institutions,” he said in December 2007.

By then, the Fed had already launched emergency liquidity measures and begun cutting interest rates, which by December 2008 would be brought all the way down to effectively zero.

How Bill Darling’s pragmatism and straight talk got Darling Homes through the housing crisis

Bill Darling, Chairman and CEO, Darling Homes

As the U.S. housing bubble started to burst in late 2006, Bill Darling monitored the situation from his home base in Dallas with deep concern. Homebuilding markets were collapsing around the country — first in California, then in the Southwest, then in several other economically vulnerable pockets around the United States.

“We first heard about it happening out on the West Coast in 2006,” says Darling, chairman and CEO of Darling Homes, which today employs 190 and generates $176 million in annual revenue. “Then we heard about it in other markets. Our own sales didn’t really start to slow until six to nine months after we’d first started hearing about it around the rest of the country.”

In fact, says Darling as he recounts those dark days, the “slowing” of sales that Darling Homes experienced was actually more like a dead stop for his company, which builds homes in the Dallas-Fort Worth and Houston areas.

“It was like the faucet shut off in our sales offices,” Darling says. “Sales stopped in Dallas first, and then about 90 days later in Houston. Obviously, we weren’t totally shocked by these developments because we’d been seeing this happening elsewhere in the country. But we didn’t have any idea how severe it would be until ’08, when the larger financial crisis started impacting the whole economy. That’s when we started to realize we were in for something maybe a lot deeper than a typical housing downturn.”

There were no maybes about it; it would go a lot deeper indeed.

“Our main metric that we use is housing starts,” says Darling, who co-founded the company with his brothers Bob and Steve in 1987. “In our markets, we determined that by 2008 both of them were off 75 percent. Obviously, we had a huge challenge on our hands. We had to figure out how to guide a 21-year-old company with responsibilities for our 250 associates’ families through the most difficult housing market in more than 60 years. From the CEO’s standpoint, I had to figure out, first, how do we survive this? And then, eventually, as we began to see that we actually were going to survive, how do we start thriving again?”

Set benchmarks

As Darling Homes’ sales started plummeting in 2007, the company’s leadership team pulled itself together to decide how to address the unfolding crisis. They quickly determined that it would be critical for them to be realistic in their assessment of the situation and forthright and transparent in communicating with their staff about the gravity of the problem — and how they planned to get the company through it.

“One of the most important things was that, as a CEO, I knew this was significant, and it was going to be deeper than other downturns in the past,” Darling says. “So it was going to be very important for me and the rest of our management team to be realistic, not just your typical optimistic executive management team.”

Darling and his team put together a multipart plan based on a series of benchmarks, with actions to take depending on how deep the company’s sales plunged.

“We had action plans outlined to execute if we saw our results tick to certain levels,” he says. “The way it worked was if we saw sales fall off and margins start to get eroded, and we found ourselves missing budget by a certain percentage, then we would implement the first part of the plan, which would consist of various cost-cutting measures. We didn’t go super-deep with these benchmarks at first because we didn’t know how deep the downturn was going to get.”

Ultimately, Darling Homes’ leaders found it necessary to create a series of action plans for four declining benchmark levels — four levels of “Defcon,” as the company referred to them internally.

“As the market took us to each of these levels, we executed some operational types of restraints to measure up with those kinds of results,” Darling says. “Those restraints would be, first of all, cost-cutting measures internally — operational costs, belt tightening. Then, after that, as it got deeper, it went to cutting benefits, unfortunately. As it got even deeper, we had to get into some personnel issues.

“And it even went as far as the remaining employees having to take a cut in salary for a period of time.

“Here we were, from one end of this downturn to the other. We started with 240 employees, and we eventually went down to 140. And those that were left were making less money with fewer benefits.”

Retain key people

Two other crucial elements of Darling Homes’ survival-and-turnaround plan were clear communication, both internal and external, and keeping the company’s management team intact.

“A real key in the whole downsizing plan was communication,” Darling says. “Communication internally, communication with our vendors, communication with our developer friends and partners. There was no way we could communicate too often about what was going on.

“Our executive management team and leadership team needed to do the same with the rest of the Darling Homes team. We did some all-hands-on-deck conference calls for the bigger issues and written communication for some of the updates in between those bigger calls. On a regular basis, we kept the executive management and the leadership teams on their toes to offer guidance to any of their associates who wanted to know what was going on.”

Retaining key management personnel was important because Darling Homes’ executives felt it would make it easier for the company to spring back quickly once its markets began to recover.

“We wanted to make sure to keep our management team in place because we knew at some point in time the markets would turn around for us,” Darling says. “Going into this, we knew there were going to be some companies that weren’t going to survive this downturn, but we felt that we could, and if we did, we wanted to be able take advantage of our two platforms in Dallas and Houston.”

The management team’s clear, forthright communication with staff benefited Darling Homes in several ways.

“As some people left that had been with the company for a long time, as difficult as that was, we got responses from them saying that they appreciated the openness and the caring attitude and that we kept them as informed as possible,” Darling says. “And they said they’d be ready to come back when things turned around. And it was certainly appreciated by the rest of the management team, because they were well-prepared and knew how to address their associates’ questions.”

As a result, some employees indeed have returned as Darling Homes’ fortunes have begun to turn back around.

“We’ve started hiring again this last 12 months, and a good percentage of people have come back,” Darling says. “We have a special culture at Darling Homes. It was special going into the downturn, and it’s only been strengthened during the downturn because of the way we handled it, particularly being upfront with our communication. So not only have we attracted past employees back, we’ve also maintained our subcontractor base, and we’ve maintained our developer relationships and taken those to another level.”

Keep it real

Darling says if he were to offer a few key pieces of advice to CEOs facing a similar challenge, they would be to avoid excessive optimism, to see and call things exactly as they are, to create a solid, well-thought-out plan, to follow through with the plan, and to communicate the plan clearly and openly to everyone involved.

“Most of us CEOs are very optimistic people,” Darling says. “We always think that things are going to get better. But you’ve got to be realistic first and optimistic second. Also, it would be a mistake to just take the problem into the boardroom and work it from there. If you do that, no matter what type of plan you come up with, you run the risk of coming across as secretive. You can scare people and lose their confidence by not being upfront and communicative with your operating team. There’s a real danger there.”

But the plan itself is the most important element, according to Darling.

“The benchmark plan we came up with was invaluable to us,” he says. “It’s a document that we put together as an executive team. And we executed it step by step as we hit each benchmark. If the results were there, we implemented the part of the plan related to it. You’ve got to stay true to your plan and make the difficult decisions as they become necessary. Be realistic, put a plan in place, stay true to the plan and communicate it clearly.”

Darling Homes’ executives knew they had turned the corner about a year ago when credit facilities came back into play and banks started lending them money again, enabling them to start building and hiring again.

“At that point, we knew the worst was over for us and we could start planning our growth and take advantage of the platforms that we’d been able to enhance during the downturn,” Darling says. “We knew then that it was time to move from our heels back to our toes. We have a surplus of credit lines available to us now. They wouldn’t be here if we weren’t doing things right.”

How to reach: Darling Homes, (469) 252-2200 or www.darlinghomes.com



Bill Darling

Chairman and CEO

Darling Homes

Born: Tucson, Ariz.

Education: Bachelor’s degree in marketing, University of Arizona

Looking back over your years in school, what business leadership lessons did you learn while you were there?

I played baseball in college, and football, basketball and baseball in high school. I think I learned a lot about my leadership abilities through sports. I’ve always seen myself as a quarterback.

What was your first job, and what important business lessons did you learn from it?

My first job was as marketing director and promotion director of the Dallas Tornado soccer team in 1975. My first two bosses — in the Dallas Tornado job and in the real estate business right after that — were two of the best marketing people I’ve ever been around. I learned from them how important marketing and promoting your service is.

Do you have a business philosophy that you use to guide you?

Surround yourself with people smarter than yourself, and treat people the way you want to be treated. Those philosophies have built one of the finest cultures a company could have at Darling Homes today.

What trait do you think is most important for an executive to have in order to be a successful leader?

Optimism, because you go through goods times a lot more often than you go through downturns. Of course, if you just keep doing things the same way during downturns, you’re going to struggle. There has to be a balance on that optimism during difficult times.

How do you define success in business?

When a team comes together and executes a plan and grows as a team while the members grow as individuals at the same time.

What’s the best advice anyone ever gave you?

Keep your nose clean. You’ve got to be able to wake up every day and look at yourself in the mirror and feel good about yourself. That was from my dad.

How paying attention during downturns can improve results in boom periods

Merrill Dubrow, President and CEO, M/A/R/C Research

Everyone knows the economy has been challenging, difficult, irritating and many other things in the past few years. When did it start to affect your enterprise? When did you start feeling business was a little soft? For us at M/A/R/C Research, it was July 2008. The interesting thing for me is that was more than four years ago.

In my opinion, the last four years have been the most difficult that my generation of business executives will ever face. Since I always wanted to be a professional athlete, I think of this environment as my seventh game of the World Series, my Super Bowl, my NBA final.

In some ways, this is my quest. There is no better way to see how good you are as a business executive, strategist, leader or motivator than to see the results you have had during the current economy.

I also believe there have been tremendous lessons during this time. Here are a few I wanted to share with you.

1. Don’t hire ahead of the curve. I have made this mistake more than once. This volatile economy has taught me many things and at the top of the list is this one. I don’t want any of our staff working 60 hours a week consistently, but occasionally, this type of extra effort will be needed.

Before we have traction with a new strategy or a new revenue stream, we need to find a way to use internal resources. Once the revenue starts to roll in, then we can add staff — not before.

2. You have a new best friend. Not everyone wants or needs a new best friend, but this is one everyone should have. I am actually not talking about a person; your new best friend is LinkedIn. You need to be a power user and understand all the benefits associated with this amazing tool.

LinkedIn is the single most important business tool I use daily. With industry contacts changing jobs frequently, it’s critical to stay in touch and know where they are. LinkedIn is the largest business database that exists, and the basic version is free.

3. You need to be relevant. You need to be relevant to your staff, your clients and the industry you are in. If you aren’t relevant to your staff or clients, they eventually will leave.

You need to be considered an innovator or thought leader in your industry. If you are, this will give you a tremendous lift over your competitors and protect you during economic declines.

4. Don’t let clients pigeonhole you. This is one of the more painful mistakes that companies make. When we have senior leadership meetings and discuss clients and partnerships, our team gets confused with longevity as a core reason they consider a client a partner.

Longevity is great with any given client, but if they are using only one of your services or think of you for only one solution even though you sell 10, are they really a partner? I say no, and we have changed our thinking and spent months strategizing about increasing revenue with current clients and expanding our service offerings to them. And, thankfully, it has worked.

5. Expect the unexpected. What are you going to do when your largest client has a layoff? Or you lose a significant amount of business to a small competitor? Or your top salesperson leaves? All of these things are real. They can happen. Are you prepared? Do you have a solution ready that you could implement quickly? If not, sudden events like this could cost you a lot of money.

Merrill Dubrow is president and CEO of Dallas-based M/A/R/C Research, one of the top 25 market research companies in the United States. Dubrow is a sought-after speaker and has been writing a blog for more than six years. He can be reached at [email protected] or (972) 983-0416.

How Jim Geiger piloted Cbeyond into the cloud computing era

Jim Geiger, Chairman, President and CEO, Cbeyond Inc.

For most of its first decade of its existence, Cbeyond Inc. was a growth machine, achieving double-digit revenue advancements year after year. But four years ago, the IT telecommunications firm’s growth engine was stalled by a double dose of bad news: the onset of the recession and an incursion by cable companies at the low end of Cbeyond’s market. This malignant combination began to smother Cbeyond’s year-over-year growth rate, which gradually fell into low single digits.

“Our customers are small businesses, and the recession was tough on them,” CEO Jim Geiger says. “Many of them went out of business. The incidence of financial default and bankruptcy was significant over the past several years.

“Also, a lot of these folks are Subchapter S corporations. Their income flows to them personally, so they’re very concerned about all the uncertainty and the issues surrounding their tax liabilities. All of these things that have become political fodder of late are very real around the kitchen tables of our customers.”

The emergence of cable companies as players in the market has exacerbated Cbeyond’s recession-fed slowdown.

“That’s the other aspect that has been difficult for us: the emergence of cable as a competitor,” Geiger says. “I hesitate to say ‘competitor’ because cable only competes with us at the lowest end of our market. But at that end of our market, they have been very effective and have caused us to react.”

Gradually, the twin challenge of the recession and the cable companies’ encroachment started sending trouble signals to Geiger and his leadership team.

“Our incidence of business failure in our base started increasing, and the cancellations due to financial duress in that time frame literally doubled,” Geiger says. “Our bad debt expense has increased. And while we still have a very small churn rate — in the neighborhood of 1.5 percent of our customers per month — it used to be only 1 percent. And just about all of that increase in churn has been because of increased business failures and business contractions.”

Alarmed by the slowdown in growth, Geiger and his leadership team started looking for ways to turn the trend around. And throughout the last two years, as a new technological opportunity began to materialize, they shifted their company’s business strategy to capitalize on it.

Adjust and adapt

Geiger and his team realized that Cbeyond would need to change and adapt in order to get the company’s growth rate back on track. Some of the changes they made were small and incremental: running Cbeyond in a more lean, cautious fashion; competing more on price; and introducing greater flexibility in the company’s product and service offerings.

“Those are some adjustments we made to our core business, adjusting as any business would, and we continue to focus on them,” Geiger says. “We’re conservatively capitalized, and we don’t have any debt, so this slowdown never threatened our future. It just threatened the fairly gaudy growth rates that we had experienced for most of our history.”

One other change Cbeyond made was more substantial, however: It started offering cloud-based telecommunications and computing services.

“In that same time frame, about 2010, technology took a leap forward and virtualization became economical,” Geiger says. “Along with greater bandwidth and access rates, this allowed us to start focusing on a different piece of the marketplace. This was exciting to us. Of course you’ve heard the overused phrases ‘cloud computing’ and ‘cloud services.’ Everybody wants to be offering cloud services today. But, indeed, we are.”

Geiger explains Cbeyond’s move into the realm of cloud-based technology in terms of “boxes.”

“It’s as simple as this,” he says. “There are boxes that companies — small businesses as well as large ones — used to have on their premises. When I say boxes, it may have been a firewall, it may have been a PBX [private branch exchange] or a key phone system, it may have been a server that ran some piece of their company’s automation.

“But now these boxes can be housed in a data center out on the Internet, if you will — out in the cloud. And we recognized this as a very natural strategic extension for us.”

One benefit of extending its business into the cloud is that Cbeyond is now attracting a different breed of customer: businesses that are slightly more, as Geiger terms them, “upmarket.”

“With companies that have a real technology dependence, if they don’t have access to their systems, they’re basically out of business,” Geiger says. “Professional service firms, doctors and dentists — who happen to be two of our biggest verticals — as well as attorneys, accountants, small manufacturing — these are companies that really depend on technology. They have knowledge workers. In many cases, they have multiple locations or at least remote workers. And they are willing to outsource. So we’re able to come in now with our new products and channels and offer a much broader package of capabilities to our customers.”

Cbeyond’s new set of offerings is also attracting larger companies with greater revenue and more employees as prospective customers.

“We’re now able to access a larger wallet of spending capacity of these slightly larger customers,” Geiger says. “Whereas our average customer used to have 12 employees, our new customer has somewhere in the 20s. And these newer customers have been growing, so I would say probably that average will end up being about 30 employees.”

Shift strategies

The result of these changes is a redefined, repositioned Cbeyond. The company, which was launched in 1999 as a small group of entrepreneurs to solve technology problems for other entrepreneurs by providing them with basic IT and communications packages, is now a cloud-based, broadband Internet, Web-hosting telecommunications firm with 2,000 employees and projected 2012 revenue of $485 million.

Additionally, Cbeyond now has offices in 14 markets across the United States and four data centers in Atlanta, Louisville, Dallas and Las Vegas.

“The positioning of the company is really a lot different now than it had been,” Geiger says. “In the past, we had really good, broad solutions for a rather simple bundle of communication services. Now we’re a much more rich service provider in technology services.

“Our positioning now is to be a technology ally for small businesses. We’ll do the hard stuff, the heavy lifting: make sure that your data is always available to you, that it’s accessible over an adequate piece of bandwidth, that it’s up and running 24/7, that it’s protected, that there aren’t any viruses, that the operating systems of the servers and devices are all up-to-date and patched. We’re really acting almost as an outsourced CIO to our small-business customers.”

To get itself moving toward that goal, Cbeyond did a great deal of research to determine what types of cloud-based products and services it should offer its customers.

“While we knew that this was the direction we were going in, we weren’t so certain about which specific product offerings our small businesses would be interested in buying,” Geiger says. “So we did a ton of primary research. We talked to about 7,500 small businesses, both existing and prospective customers. We gathered a bunch of data, and then we went to work developing products to satisfy what we understood the market to be.”

Two of the primary results of all that research are Cbeyond’s new TotalCloud Phone System and TotalCloud Data Center. Both products are aimed at giving small-business customers greater flexibility in concentrating on their core business operations and not having to directly concern themselves with the operation of their communications and IT systems.

“The TotalCloud Phone System gives our customers the ability to have remote workers anywhere, with many different types of phones, and it gives them all of the same types of phone capabilities they would have if they were on a phone system in the same building — four-digit dialing to co-workers, transfer, etc., etc.,” Geiger says. “And it takes the job of taking care of the system’s uptime and performance and makes it our problem instead of our customer’s technical person’s problem. You can wash your hands of it once it’s in our care.

“Our TotalCloud Data Center is a similar offering for servers — for computing power. It enables our customers to outsource their servers. We’ll take their servers and house them in the cloud, and we’ll connect them securely and be responsible for their operation systems. Also, many of our customers have certain compliance regulations for their data today, which aren’t easy for them to figure out, and we can do that for them.”

Cbeyond’s leaders project that these new services will represent a quarter of the company’s revenue by the end of 2013, and that Cbeyond will be back to double-digit revenue growth by that time.

“These are very popular services, and they’re growing fast in popularity,” Geiger says. “They represent a material amount of our growth opportunity.”

Take quick action

Once Geiger had a clear picture that an economic downturn was deeply impacting the company, along with a new group of competitors nipping away at his company’s market share — it was crucial to be decisive and act quickly.

“If your gut tells you to make a change, do it sooner rather than later,” he says. “Follow your instincts and make the changes you need to make right away. Don’t waste a lot of time trying to improve the status quo. When you start to feel things shifting in a major way, don’t wait. React and respond.”

Trusting one’s intuition is a theme that Geiger keeps circling back to.

“It’s a mistake to fall into the trap of always listening to the experts,” he says. “One of the things you have to constantly remind yourself of is that no one knows more about your business than you do. If that isn’t true, then you need to find a new line of work. But assuming it is true, you absolutely have to trust yourself and your own instincts — and don’t listen to the experts.”

Lastly, Geiger says, a leader faced with the type of challenge that Cbeyond faced has to keep an eye out for opportunities and always be poised to act, to move forward quickly and forcefully.

“You have to have a high level of aggressiveness,” he says. “I think the level of aggression with which we embarked upon the change wasn’t enough at first. We were a little more hesitant than we could have been. And we’d necessarily be further along today had we had acted sooner.

“Of course, a lot of people could say that about many different aspects of their business. But if you see changes starting to happen and you feel it and you believe it, it’s probably true. As the often-said quote goes, the only constant is change. So you have to embrace it and act decisively and rapidly.” <<

How to reach: Cbeyond Inc., (866) 424-2600 or www.cbeyond.net



Jim Geiger

Chairman, president and CEO

Cbeyond Inc.

Born: Syracuse, N.Y.

Education: Bachelor’s degree in accounting and pre-law, Clarkson University, 1981

What was your first job, and what business leadership lessons did you learn from it?

In my midteens, I had a mentor who lived down the street from me. He ran a successful produce business. His name was Frank Mento. I worked at a farmer’s market unloading produce from rail cars and tractor-trailers. Frank started out with a single truck and would get up at some ungodly hour like 2 o’clock in the morning and go down to the farmer’s market, pick the best produce and deliver it to his customers personally. He was an advocate for his customers. The quality was all that mattered. He didn’t think in terms of short-term profit; he thought in terms of long-term relationships.

Do you have a central business philosophy that you use to guide you?

We’re very metric-driven at our company, and I’m personally very focused on creating systems that give us the best chance to meet those metrics: management systems, talent identification and development systems, incentive systems. I find that when all of those things are consistently defined, communicated, understood and implemented, that’s the fastest route toward the success of the business. Also, I have a coach: I’ve used the same consultant for the past 16 years, and he has helped me design those systems and be true to them.

What trait do you think is the most important one for an executive to have in order to be a successful leader?

Trust, which flows from integrity. We have a lot of long-tenured employees, and I’m very proud of their continued support and commitment to the company. We’ve gotten to where we are because there’s a tremendous amount of shared values and cross-commitment and trust.

What’s the best advice anyone ever gave you?

Listen to your customers, listen to your employees and do what they tell you. Frank Mento taught me that.

How the recession impacted lending and the ability to get a commercial loan

H. Jesse Garcia, Senior vice president, group manager of the commercial lending office in Palo Alto, Calif., Bridge Bank

Coming out of the downturn, many private companies had not been able to get venture capital funding and had to look internally or to commercial banks to get capital or leverage.

“As the economy comes back and commercial banks have more capital at their disposal, things are improving regarding the ability to get commercial loans,” says H. Jesse Garcia, senior vice president and group manager of Bridge Bank’s commercial lending office in Palo Alto, Calif.

Some companies may have stressed their banking relationship during the recession and will likely go out into the marketplace, after returning to profitability, to look to get more from a new banking relationship. Understanding what qualifying conditions commercial banks are looking for will prepare companies to work better with their commercial banks and leverage what they have to offer.

Smart Business spoke with Garcia about the lending climate and the criteria commercial banks use to qualify loans.

What do commercial banks offer to private companies without venture capital funding?

Commercial banks can offer a variety of loans, including lines of credit backed by accounts receivable, equipment financing, term loans, acquisition loans and commercial building loans where a business buys the building in which it works to facilitate its business.

Commercial banks qualify non-venture capital-funded companies on three main factors:

  • Historical performance, which includes profitability, cash flow and its record of servicing loan payments;
  • Secondary sources of redemption, which could include accounts receivable or inventory, but could also be fixed assets or assets that the owner pledges; and
  • The business owner’s personal guarantee, including the strength of his or her personal assets.

When looking at these three criteria, a borrower generally could have a deficiency in one area and mitigate it by strengthening another to improve the chances of getting a loan.

From a lending perspective, what is the difference between closely held businesses and venture-backed companies?

Typically, closely held businesses have a much smaller group of individuals holding the company, and these individuals don’t want to sell a portion of it to bring in capital. Depending on the market, companies could be limited on sources of capital because of their narrow market share. Normally these privately owned companies need to run with a much leaner finance and strategic group, and the main focus of the owner is building the business and knowing their industry. Owners often lean on their commercial banker, CPA and other advisers for resources to grow the business. More successful private businesses have a more cohesive core of professionals around them who are extensions of their finance group.

What should these private business owners look for in a commercial bank?

They should be looking for an experienced banker and a bank that’s focused on commercial lending. Lending to privately owned businesses is a niche in banking and it takes a very keen eye. Experienced bankers can guide you through many loan products or ways to leverage the company — some more limiting than others, depending on your rate of expected growth. Being able to have a banker who understands the pitfalls of products helps owners make more appropriate choices when thinking about how to leverage their company with commercial banking debt.

Also, owners often want to work with a bank that understands the landscape of other professional service providers who can help their business. Many companies don’t have the wherewithal to bring in strategic financial consultants, so it can be helpful to be guided to the right professional service providers.

Is the old adage, ‘Banks only lend money to those companies that don’t need it,’ true?

While this might be spoken tongue-in-cheek, there are people who think this might be true. It refers to the belief that banks only lend money to companies with high profits because they have more cash on hand and, therefore, a greater ability to repay. Conversely, it implies that banks aren’t there for companies that really need the money. This has been reinforced because of the lending conditions that some have perceived to become prominent following the economic downturn. However, this really isn’t the case.

Good commercial banks work with companies through many situations, and banks have really stepped up during the downturn to provide or continue to provide loans as companies push through the difficult market. One thing that may have happened during the downturn is good banks had to look internally and see what their clients’ needs were and keep resources available for them. This means they were not as outward looking and not as aggressive in pursuing new clients. But over last two years, as the economy has turned around, there’s been more certainty in the market and banks are again looking outward.

How has the underwriting for these businesses changed during the past several years?

In the commercial lending market, the types of financials and tax returns it takes to underwrite loans has not changed too much. Commercial banks have generally needed a lot of information to examine the business’s ability to pay back debt. While this is still true today, the current market is perhaps more conducive to borrowing compared to a few years ago. Banks have increased capital reserves in the recent past and as a result are more eager to lend. They are looking to diversify lending to include more commercial loans in their portfolio. Companies with adequate cash flow are attracting a lot of attention from commercial banks. There seems to be a good market for companies to get better pricing and terms than what they had two to three years ago.

H. Jesse Garcia is senior vice president and group manager of Bridge Bank’s commercial lending office in Palo Alto, Calif. Reach him at (650) 462-8512 or [email protected]

Insights Banking & Finance is brought to you by Bridge Bank

Small biz, wholesale loan growth slows

Jordan Peterson, Senior VP and Business Banking Credit Manager, PNC Bank

The growth rate of bank loans has slowed over the last three months for small to midsized businesses in general and for wholesale distributors in particular as economic and political uncertainties cause business leaders to ease up on their growth accelerators.

“We started to see a slowdown in the summer,” says Jordan Peterson, senior vice president and business banking credit manager at PNC Bank. “In July, we started seeing a lower volume of applications for loans. We’ve been talking with our bankers about what they’re seeing out on the street. It mirrors what we’ve been seeing in the economic outlook surveys, and it’s also in sync with what we’ve been hearing from our customers. They’re hesitant right now. They’re concerned about the economy.

“And they’re looking at the upcoming election and wondering what government is going to do to help small business.”

Post-recession business has resumed for some wholesale companies in some sectors, but the recovery for wholesalers has been spotty.

“Whether they’re feeling optimistic and looking to grow depends on the type of wholesaler they are and the type of industry they service,” Peterson says. “Some are doing well and are optimistic. Others are still waiting for things to improve. An example would be wholesalers that sell building construction materials. They are still waiting for things to recover and get back to normal.”

Peterson says wholesalers and other businesses looking to take out loans to grow their businesses should take a dim view of recent reports that banks are currently in a tight-fisted frame of mind when it comes to lending.

“Wholesalers and others have probably heard on the radio or seen in the papers that banks are hesitant to lend right now,” he says. “But they should know that, in fact, banks are anxious to lend to them, as long as they qualify and they’re a good candidate to borrow — as long as they have good financial information and can show that what they’re selling has good value and can clearly demonstrate how much they need to borrow and why.” <<

How to reach: PNC Business Loans and Credit, (800) 762-5684 or www.pnc.com

How Chris Maguire led SRS Real Estate Partners through a crisis by going back to basics and taking small steps

Chris Maguire, Chairman and CEO, SRS Real Estate Partners

Talk about getting hit with severe hardship right off the bat. In 2008, SRS Real Estate Partners split off to become a standalone company when its parent, Staubach Co., merged with another real estate firm. Then, a month later, the U.S. financial crisis began and flipped SRS’s world upside down.

“We sold all of the Staubach Co. assets to Jones Lang LaSalle except the retail business,” recalls Chris Maguire, SRS’s chairman and CEO. “We closed the sale in August 2008. We were just starting to adjust to life without Staubach. Then we got hit with the financial crisis.”

Virtually all U.S. business sectors were affected by the subsequent recession, but two markets that suffered especially abrupt, deep and lasting cuts were real estate and retail. And those markets are SRS’s bread and butter.

“In the real estate industry, I think anyone would tell you that of the four food groups, the retail business got hurt the most, because it’s led by consumers, and consumers got hammered,” Maguire says.

“When retailers shut their pipelines down in September and October 2008, it resulted in dramatic revenue declines for our business. Our brokerage business, peak to trough, was off 60 percent. And that went on for about two years before we were able to stabilize our business.”

The downturn was a rude shock for SRS. The company found itself thrown back on its heels with business drying up and bad economic news coming from all directions.

“We weren’t sure where the world was headed, much less how we were going to adapt our business,” Maguire says. “It was a scary, unbelievably uncertain time for our business.”

Get back to basics

As SRS’s revenue began to take a dive in the last quarter of 2008, the company’s leadership team members got together and circled the wagons. The threat level they faced was hyper-urgent. They had to find a way to rally their staff and stanch the bleeding.

“The first six months was the worst,” Maguire recalls. “Today, I remind our people all the time about that: Don’t forget how bad it was from September 2008 to March 2009. We really didn’t know what was going to happen to our business.”

The first thing SRS’s leaders recognized they had to do was to guide the company back to the basics of what had made it successful during the two decades-plus that it had operated as a unit of Staubach Co.

“What we realized we had to do was drill down to our core business,” Maguire says. “And our core business at SRS is transactions. We receive fees when transactions are executed. As long as transactions are taking place, that’s how we get paid.”

The financial crisis slammed the retail sector hard, and SRS began feeling the reverberations immediately.

“It was unlike anything I had seen in my career,” Maguire says. “We started seeing retailers who for years had been growing their business by opening new locations not only shut down their new-growth pipelines, but they also were scrambling to figure out how to get out of some of the deals they’d previously committed to.”

Therein, though, lay a key to SRS’s chances to reverse the tide and get back on its feet. Transactions were still taking place in the retail real estate business. It’s just that they were transactions of a different type than the Staubach Co.’s retail division had been used to seeing in normal economic times.

“We were clearly going from a period of growth to a period of contraction,” Maguire says. “That meant our clients were going to need help on the disposition side — getting rid of dark stores, restructuring existing leases. And our landlord clients were going to be doing a similar type of thing: Trying to figure out how to lease their centers in a very uncertain economic environment.

“So we knew the market was going to be difficult for growth. As a result, we had to focus on where the transactions would be. We had to shift from being a business focused on retailers growing to a business focused on retailers shrinking.”

Manage tough transitions

While SRS’s leaders and staff members knew retail real estate transactions were out there, uncovering them proved to be a tough learning curve for the company.

“It was rocky,” Maguire says. “Really, for 24 months, it was very tough going for us.”

Exacerbating the business problems were issues of insecurity related to SRS’s parting with its longtime parent company.

“We were not only dealing with an uncertain economic environment and a continual stream of bad news as it related to the consumer and retailers, we also were dealing with a company that for 22 years had been part of the Staubach organization and was now split off on its own,” Maguire says.

“So we got the double whammy there. It was hard enough going through an economic period that none of us have ever experienced, but to compound it, we were trying to teach our people that life is going to be OK without Staubach.”

The former football star had been an inspirational business leader, and many in the company found it difficult to adjust to having new leaders.

“It was hard for some people to grasp that, for it to sink in,” Maguire says. “Roger was an incredible leader. He had a great reputation. Being part of that company was important to people. And, well, I’m not Roger Staubach; I don’t have a Heisman in my trophy case. But I’ve been in this business for a long time, and our management team has been together for a long time.

“So we had to focus on the details, and on stabilizing our business. We had to focus on teaching our people how to deal with the market and the realities of where the transactions in the retail business were happening at that time, which were very different than where they’d been for the last 20 years.”

During the recession’s deepest depths, staff morale was a particularly tough issue to deal with for SRS’s leaders.

“We’re in a business where most of our people on the SRS side are independent contractors,” Maguire says. “They’re brokers that get paid commissions. It was hard to motivate them, as well as our own employees, when all they read in the papers every day and all they watch on TV is bad news. They walk into the office with their head down every day.

“We had to find a way to show them that, ‘Look, you can’t think about this day to day. You’ve got to ignore the bad news. You’ve got to come in here and focus on what you need to get done. We’ve been doing this for a long time. We’ve been through a number of cycles, and we will get through this. But it’s going to be tough, day to day. It’s going to be a marathon.’ And that’s clearly what it turned out to be.”

Focus on the achievable

For a few months, Maguire and his leadership team found their own morale running low, and that made it extremely difficult to motivate their staff. They learned that they would have to dig deep to find reserves of strength and hope within themselves.

“It was hard because none of us had ever experienced a downturn like this,” he says. “There were times early on when I stood up in front of our company and said, ‘Look, we’ve got to focus on our core business; we’ve got to focus on our history and our track record and the fact that there will be transactions there; if we do these things, we’re going to be OK’ — and for about six to eight months, I’m not sure I even believed it. But I had to get up there and project a positive attitude.”

Concentrating on taking small steps and improving the company’s standing little by little was an approach that began to turn the tide for SRS.

“There was nothing we could do at that time that was going to dramatically slow the decline in our revenue or stop retailers from shutting stores and from shutting off the new growth,” Maguire says.

“So we had to focus on small, achievable goals and wins. I looked at the situation and said, ‘Any progress we can make day to day is important.’ At the beginning of the downturn, five out of five days in the week were bad days. My goal initially was to just find a way to have one good day a week, then two good days a week, then three good days a week.

“Even in good times, not every day is going to be a success, and you’re going to have problems. But we really had to get our people focused on, ‘OK, what are you going to do today? How can we make a difference with these clients who we’ve had long-term relationships with, who still need our help — they just need it in a different way?’”

Not everyone was able to adapt to the new business realities that SRS faced. Some of the company’s longtime staff members found themselves unable to make the transitions that needed to be made.

“We had some people who had rode the wave for a decade,” Maguire says. “They were surfing a wave that was cruising along, and all of a sudden, that wave hit the rock shore and was gone, and those people got up in the morning and said, ‘What are we going to do?’ Our management team’s message to them was, ‘There are transactions out there. These retailers need our help. But you’ve got to get out and you’ve got to be proactive.’ And I’ll be honest with you: We had a number of people that had been very successful with our company that couldn’t hack it. And they had to go do something else.”

Be transparent

Communicating with staff is a tough thing to do when all of the news coming at you is bad, and Maguire concedes that he didn’t communicate very well at the beginning of the crisis.

“It was hard for me early on,” he says. “I like to communicate a plan: Here’s what we’re going to do, here’s our goal, here’s how we’re going to get there, here’s how the company’s doing financially.

“But everything was really uncertain. And I think probably one of my biggest mistakes early on was not communicating up front and talking about all the bad things — the bad news, the uncertainty. I had to work through that.

“My management team and others encouraged me to spend more time talking about those things: ‘Look, these are the challenges, and frankly, if this revenue decline doesn’t stop, we’re not going to have a business. So here’s what we’re facing. Let’s figure out how we can overcome it.’”

Thus, Maguire says a key piece of advice he would give CEOs facing a similar predicament is to be transparent and to convey all of the news clearly from the outset.

“Communication is the most important thing,” he says. “And not just the good news. Not just, ‘We have a plan.’ It’s much more than that. It’s, ‘Where is our business today, really? Where do we stand? Good, bad or ugly, let me know where we stand.’ And then, ‘Let’s put a plan in place to fix it.’

“One thing I’ve learned that I’m not sure I really appreciated before is that employees really want and need to know. I was concerned that if I give them too much bad news, they’re going to curl up and not be able to accept it. But the reality is people are smart and they deserve to know the real news, not just the CEO rah-rah.”

Eventually, haltingly, after rocky transitions and some shakeout, the U.S. retail business began to recover. And SRS’s business began to grow again as well. The 350-employee company now has about $45 million in annual revenue.

“For us, stabilization came when we saw the bottom,” Maguire says. “Our revenue flattened out, and then we started seeing growth. In fiscal 2010, we grew our business at just under 10 percent. Then for fiscal ’11, we were at 12 percent. And this year, we think we’ll be at 15 percent or so.

“Historically, our target has been 20 percent growth. As you get bigger, it becomes harder to hit that level because the numbers are bigger. But for us, we’d love to get back to 20 percent. It’s a bit of a stretch for us right now, but that’s our goal.” <<

How to reach: SRS Real Estate Partners, (214) 560-3200 or www.srsre.com


Name: Chris Maguire

Title: Chairman and CEO

Company: SRS Real Estate Partners

Born: Trenton, N.J.

Education: University of Texas at Austin

What was your first job, and what business lessons did you learn from it?

My first job was delivering newspapers here in Dallas. It forced me to be accountable. I had to be there every morning on my bike picking the papers up and putting them on the doorsteps of all the people in the neighborhood, because if you didn’t deliver, they weren’t happy.

Also, we had to go out and knock on doors and collect the monthly fees for the papers, and some of those people were hard to collect from, but if I didn’t collect, I didn’t get paid. So that was some early insight into how the business world works.

Do you have a business leadership philosophy that you use to guide you?

In our business, you have two things you have to protect at all costs: your reputation and your relationships. If you do that, and you build a track record, you’re always going to do the right thing.

What trait do you think is most important for an executive to have in order to be a successful leader?

You’ve got to have vision. People want to work at companies that are going to grow, that are exciting, and that can be leaders in their industries. And in order to have that, you have to have a vision that’s not Disneyland. It has to be a vision that you can actually achieve over time.

What’s the best advice anyone ever gave you?

Roger Staubach had a lot of good advice. One thing he said that has stuck with me over time is “There’s no traffic on the extra mile.” It’s about putting in extra effort and working a little harder, because most people don’t do it. Hard work doesn’t necessarily ensure success, but it goes a long way toward achieving it.

How Jim Snow and Gold’s Gym confronted an attack by discount competitors

Jim Snow, President, Gold's Gym International

When Jim Snow became president of Gold’s Gym International three years ago, he stepped into a tough challenge. The recession was in full swing, and retailers were closing left and right, leaving behind a glut of cheap, readily available retail space. This void presented a ripe opportunity for operators of tiny, low-overhead gyms offering super-low-priced monthly memberships.

The discount gyms were feasting on the opportunity, thereby cutting into the market share of many of GGI’s smaller gyms, in some cases deeply.

“It was pretty clear; when I arrived, I started holding meetings with all of my stakeholders to learn about the business environment, and this was one of the key threats to the business that everybody was searching for an answer to,” says Snow, who took the helm at Gold’s Gym International in 2009 after having worked for five years as regional vice president at Omni Hotels, a sister company of Gold’s.

In its many years of existence, Gold’s has carved out its territory as an operator and franchisor of full-service gyms: large facilities covering 40,000 to 60,000 square feet that offer a wide array of fitness services and amenities. The company, which has 700 gyms and more than 3 million members worldwide, has always fared well in the full-service segment of the fitness market.

In more recent times, GGI has also begun operating and franchising fitness-only gyms — midsize facilities covering 20,000 to 25,000 square feet that offer fewer services and amenities than the full-size gyms, at somewhat lower membership rates. These fitness-only facilities were the ones that were feeling the pinch from the rise of the discount microgyms when Snow came aboard.

“Our full-service gyms are really made up of two kinds of gyms,” Snow says. “We have the big full-service gyms with all the amenities: pools, basketball courts, group exercise programs, etc. And as we looked at the marketplace, we saw that these gyms continue to compete very well because they offer so much value.

“But then we have a segment of fitness-only gyms that are in that 25,000-square-foot range. They don’t have the basketball courts, the racquetball courts, the pools, those kinds of things. They were more susceptible to this new low-cost discount gym that was coming into the marketplace.”

The discount operators were opening scads of smaller gyms — 8,000 to 15,000 square feet — in areas near GGI’s fitness-only gyms. And because the microgyms operate on lower overhead and can therefore afford to offer super-low membership rates, they began luring Gold’s customers away.

“In those markets where they built the discount gyms, there was a lot of attrition,” Snow says. “We started feeling the effects of the low-cost gyms on our product. Sometimes it was as much as 25, 30 percent of the volume. That can be pretty significant to an operator, especially an independent operator or franchisee who’s got their entire life on the line and is personally guaranteed against everything.”

The proliferation of discount gyms had begun a couple of years before Snow joined GGI, and the company hadn’t taken any action to counter it.

“This started happening in ’07, ’08, and it grew from there,” Snow says. “I came in October of ’09, and it had not been addressed. So it was a pressing priority. It was critical that we resolve this problem.”

Weigh risks, benefits

Snow and his leadership team began looking at the idea of creating a new type of gym to compete directly with the discount microgyms that were cutting into Gold’s market share. There were pros and cons to be weighed. The weigh-in became a prolonged process. Eventually the pros prevailed.

“Once we decided to consider this opportunity, we pulled my team together,” Snow says. “My stakeholders in this were the GGI team, the senior executive team, the management team, the franchisees and the board of directors at our parent company, TRT Holdings.”

Adding a new product line to Gold’s traditional full-service line of gyms would be a major shift for a company that hadn’t changed its offerings much since its birth in Venice Beach, Calif., in 1965.

“Nothing had been added to our gym line in 45 years,” Snow says. “We’d been the same company offering the same product, basically, for a very long time. So this would be a major change in direction. We had to think it through: Should we compete in this low-cost, high-growth segment?”

There were significant risks to take into account.

“We had potential risks to GGI that we needed to work through and get everybody comfortable with, and I needed buy-in from the senior team here,” Snow says. “One of the major risks was possible damage to the brand. Not all line extensions work.

“So we went through a pretty long and arduous process of understanding this line extension before we jumped into it, because our brand is the most valuable asset we own. The Gold’s Gym brand has been around a long time. It’s a storied company. It has tremendous value, and you don’t want to damage that brand by making a mistake.”

The company also had to weigh whether it had the financial resources and manpower it would need to put a new brand into the marketplace.

“You don’t just go out and launch a brand,” Snow says. “It takes a tremendous amount of work from everybody and financial commitment. There were many questions that needed answers. Did we have the internal talent required to do it? Could we build these gyms? Could we put them up quickly? There were a lot of pieces to the puzzle when you start looking at launching a new brand like this. So we had got a lot going on here, because we’ve got a lot of divisions, and this would be a major undertaking by Gold’s if we decided to move forward with it.”

On the other side of the ledger, GGI’s leadership team also determined that the potential upside was significant.

“It seemed like an interesting opportunity,” Snow says. “As a full-service gym owner and operator, as well as a major franchiser, the low-cost gym seemed to provide a lot of advantages to our brand.”

Among those advantages: A new line of low-cost gyms would enable GGI to quickly increase its distribution of gyms across the country because the gyms could be built quickly. The gyms would be relatively easy to run, requiring only about half the management team that a full-service gym needs. In addition, they were projected to become profitable quickly.

“In the end we determined, after we’d gone through this process, that there were enough potential advantages and the risks were low enough that it warranted proceeding,” Snows says.

Lay out the plan

The next steps involved conducting consumer research studies, creating the new brand’s concept and image, creating financial models with best- and worst-case scenarios for the new line of gyms, getting the company’s franchisees on board with the new concept, and then, ultimately, presenting the idea to the company’s board of directors. It was a yearlong process in all.

“We presented it to the board of directors in the late fall of 2010,” Snow says. “We had a finance analyst who had completed a compelling set of financial models, and we presented those to the board. And the board, after quite a bit of discussion, agreed to fund the Gold’s Gym Express development on a beta-test basis. That gave us the funding mechanism we needed to move forward, to build between six and eight Express gyms.”

Over the next year, GGI wound up building six Express gyms in a variety of markets around the country to test the concept. The Express gyms offer Basic Memberships for $9.99 and Gold Memberships for $19.99 a month, as compared to the $30 to $50 monthly memberships at GGI’s full-sized gyms. All the Express gyms have performed well in their test markets.

“The beta-test gyms are performing much better than our original models projected,” Snow says. “One of the things we look at is upsell percentage: the percentage of customers who buy the Gold Membership instead of the Basic Membership because of the extra benefits that come with it, like tanning, massage, half-price drinks, and unlimited guest passes.

“Our models projected that these test gyms would have an upsell percentage of about 20 percent. We ended up with an upsell percentage over 50 percent — much higher, obviously, than we thought we would experience, and also much higher than the industry average.

“Our projections are at least a year ahead of schedule in terms of what we thought these test gyms would do. They break even much faster than we thought they would, and they’re growing to maturity very quickly, much quicker than we had projected in our pro formas. Also, they’re ranked right at the top of all of Gold’s Gyms in terms of service and customer satisfaction — and that’s coming right out of the chute.”

Based on these test-gym results, GGI decided this past spring to move forward full-throttle with development of the Gold’s Gym Express line of small, low-cost gyms.

“In the last couple of months, we made the financial commitment to move forward and to build up to 50 new Express gyms in 2013,” Snow says. “That’s where we’re at right now. We have 30 to 40 leases that we’re working on. My guess is we’ll build 10 in the first quarter of 2013 alone. And we’ve got a few gyms that will have leases done this year; we’ll probably get another six to eight done this year. Then we’ll probably get an additional 25 to 50 done next year. Our franchising division has about 30 gyms lined up right now for new franchisees.

“We’ll probably end up with between 50 and 100 Express gyms by the end of ’13, including those that will be in the pipeline. So we feel good about that. It’s right in line with our projections.”

Proceed with caution

Asked what advice he would give executives faced with similar challenges posed by low-cost competitors moving in and grabbing market share, Snow says it’s important to avoid the knee-jerk reaction of simply lowering your price and your standards to meet the competition head-on.

“Don’t jump to conclusions about discounting until you’ve researched and understood all the possibilities available to you,” Snow says. “Discounting is typically the first reaction that everybody has, and it’s typically one of the worst things you can do. Your services and your product line are based on certain things you did when you built the product to maintain certain margins.

“So just going and cutting your rates and allowing your product to stand as is, while this will probably drive some volume, will destroy your margins. And it will be very difficult to ever come back from that.”

Snow also recommends that if an executive is considering introducing a new product line that will affect the company’s overall brand, it’s crucial to avoid getting ahead of yourself and hurrying the process.

“There are times when you would like to move faster as a leader,” Snow says. “But it’s difficult to move fast until your internal teams have bought in. You can’t go forward without them. Now, not everybody is going to jump on board right away. But as long as they jump on board once the decision is made, you’ll be OK.”

In the end, as with most important tasks that businesses face, teamwork and group sacrifice were key elements that enabled Gold’s Gym International to successfully grapple with the tough competitive challenge it faced.

“There’s no problem that we would cross here in this company that any one person believes they have the perfect answer to,” Snow says. “We operate as a team. It’s a team environment. The team works together to help work through problems. We use the leadership and knowledge and expertise from all our people coming from different backgrounds to help us make the right decisions and move forward.”

HOW TO REACH: Gold’s Gym International, (972) 444-8527, www.goldsgym.com


Jim Snow


Gold’s Gym International

Born: Manhattan, Kansas

Education: Bachelor’s degree in marketing, Kansas State University

What important business leadership lessons did you learn during your time in school that you use today?

My marketing classes helped me understand the value of consumer studies, customer focus and the need to drive top-line revenues. Today, my primary role is to balance revenues, customer service, and the owners’ priorities. And everything starts with revenue. You’ve got to look for it everywhere and drive it incessantly.

What was your first job, and what important business leadership lessons did you learn from it?

One of my first jobs coming out of college was with Marriott Corp. Marriott gave me an excellent basis of training for my future career. One of the things they taught is that they expect their managers to work hard and perform at a very high level. I took that credo and told myself I’m always going to be the hardest working person I know, and I’ve tried to do that throughout my career.

Do you have an overriding business philosophy that you use to guide you?

You’ve got to have a dynamic culture that supports your associates. And you’ve got to have an organization that takes the needs of the customers into account, and a mentality that doing those things will take care of your owner’s requirements.

What traits do you think are most important for an executive to have in order to be a successful leader?

You’ve got to be transparent. You’ve got to be courageous enough to go the uncomfortable route when you don’t have complete buy-in. You’ve got to be confident in your direction. You’ve got to think big. And you’ve got to be willing to swing the bat.

What’s the best advice anyone ever gave you?

Be aggressive and set the expectations very high for your company.

How Robin Raina readied Ebix for a crisis, then made the needed tweaks to get through

Robin Raina, Chairman, President and CEO, Ebix Inc.

Robin Raina acknowledges that the last four years provided a stern test to his prudent leadership throughout the last 13 years as he turned Ebix Inc. into a highly profitable, efficient company designed to weather tough times.

The recession hit the insurance industry hard, putting many insurers out of business and forcing many others to tighten their belts drastically. As a result, companies that supply goods and services to the insurance industry felt the pinch too.

The Atlanta-based supplier of software and e-commerce services to insurers, weathered the storm better than most. Ebix made it through — not unscathed but a stronger, wiser company whose leaders have grown and learned a lot in the process.

“The insurance industry wasn’t prepared for the economic downturn,” says Raina, chairman, president and CEO. “When people are not able to pay their mortgage, insurance becomes a luxury, so insurance companies were suddenly having a hard time. As a result, they tightened their purses and started spending less money on new projects, new initiatives, new distribution media.”

At the same time that the recession forced insurers to start curtailing their spending, a handful of other developments made life tougher still for Ebix. The health reform movement put even more downward pressure on the insurance industry. Some insurance companies declared bankruptcy. Many insurers started getting acquired by other companies, shrinking Ebix’s pool of potential customers even further.

“The health reform movement created a lot of inertia in the insurance industry,” Raina says. “Around the same time, a lot of acquisitions started happening. A lot companies in the financial world — the banks who were our clients, the insurance companies who were our clients — got acquired. And some of them went into bankruptcy mode. They had lots of difficulties.”

A large part of Ebix’s business comes from setting up exchanges to streamline insurance transactions. Thus, insurance transactions are the lifeblood of Ebix’s business.

“The more policies that get written, the more transactions we do and the more money we make,” Raina says. “It’s as simple as that. And when the insurance industry shrinks, less policies are written, less prospects are offered insurance, and Ebix’s exchanges are utilized less. So you have a direct impact — an inhibiting factor in terms of your revenue growth.

“That was the biggest challenge we faced. In spite of the state of the economy, and at a time when the insurance market was shrinking, we had to somehow keep the company growing and still report profitable results.”

Lay the groundwork

To a great extent, Raina had been preparing Ebix from the day he became CEO in 1999 for the economic storm that hit in 2008.

“We didn’t just sit down and create a plan on how to respond when this thing happened in ’08,” he says. “To me, that’s a mistake. Companies have to be ready. Companies that are designed to be run when the economy is strong are not good companies, in my view. You have to have systems in place and the fundamental strength to still do well if the economy goes south.

“For us, this journey of still being able to do well in spite of the economy didn’t happen because we put our heads together when the crisis hit and said, ‘Let’s figure this out.’ We were always prepared for it.”

How did Raina and his leadership team members build Ebix to weather the recession? The ways were many. They made prudent, careful investments. They avoided growth for growth’s sake. They went after new business when it made sense to do so, and had the restraint to pull back when it didn’t. They streamlined and centralized many of Ebix’s business processes. They converted the company to paperless operations, and taught its customers to do the same.

“It’s a series of things you have to be doing,” Raina says. “The fundamental strength of Ebix has always been that we created the systems so that our business scales up as our revenue scales up. And we run a very common-sense kind of business where anything we do has to come up with a particular model operating margin.”

Fiscal restraint, careful investing and caution in executing big transactions have been key elements in Ebix’s leaders’ ability to build resilience into the company’s design.

“Many people underestimate the value of financial discipline,” Raina says. “If you have a business model where you say you want 40 percent operating margins out of everything you do, and you run into a situation where you’re offered a big revenue deal but it will take your margin down quite a bit, then don’t do it.

“Focus on what you evolved as your business model. Have the courage and the financial discipline to be able to say no to such opportunities.”

In many ways, efficiency has been built into Ebix’s model for years. This played a big part in the company’s staying power when it ran into tough times.

“We had centralized and streamlined our business operations,” Raina says. “We had converted Ebix into a paperless company, where very little paper is transacted, and taught our customers to do the same. What did that all result in? It resulted in a highly efficient company.”

Make adjustments

That efficiency served Ebix well when the recession struck in 2008. Not that it made the ride entirely smooth, but it served as a base of strength, a stabilizer to enable Ebix to traverse the rough road without breaking down.

“We were well prepared, but that’s not to say it was easy,” Raina says. “We were able keep our head high and make it through, keep growing, stay profitable and maintain our operating margins.

“Obviously, the revenue growth becomes lesser when you go through times like these,” he says. “It might not have been as good as it would have been if the economy was in good shape, but we were still able to show revenue growth.”

As Ebix moved through the storm, its leaders had to make many modifications to keep the company on course. They had to make sure the company’s existing revenue sources were secure. As Ebix’s clients were being snapped up by acquirers, they had to convince the new owners of the value of the company’s products and services. Some of Ebix’s customers’ budgets were cut, so there were issues of price sensitivity that had to be dealt with sensitively.

“The last four years have been an issue of doing small adjustments here and there, and restructuring certain things,” Raina says. “You become more controlled than you ever were. You focus back on making sure you don’t lose a single client because you know in a time like this there’s a possibility that some clients might get price-sensitive, so you have to form a different plan.

“Overall, we didn’t run into a lot of price sensitivity, fortunately. Our bigger issues had to do with the extent of overall budgets, and whether the clients had budgets that were sanctioned or not. We had a few exceptional cases where we had to come up with a solution for them because they had a lesser budget, and we had to somehow help them through that. So we did.”

Ebix managed to find ways to retain most of its customers who were hurting financially by working within their smaller budgets for temporary periods.

“You have to look at the client, and you have a choice to make at that point,” he says. “One choice is you can basically say, ‘Well, I’m not going to change anything that I do.’ The second way to look at it is you look at the client and say, ‘Are they genuine? Do they genuinely have an issue?’

“You look at how long they’ve been your client, and if you think they’ve been a sincere client, you make a decision that this is a time for you to show that you’re a true partner. You tell them, ‘I’m going to work with your present budget, with a basic assurance that as you get into better times, you’re going to come back to the normal level.’

“If they’re willing to do that, you give them a break. That’s what we did with a few of our clients because they had shown that they were true partners to us by staying with us for many years.”

Diversify your business

Asked what advice he would give other CEOs facing a similar challenge, Raina says he believes it’s critical to keep your business diversified and maintain your customer concentration as low as possible.

“It’s important to understand that you can’t have a business that is too heavily focused in any one business area or with any one client,” Raina says. “This was a key learning point for us. If you step back a few years, Ebix had a fair amount of customer concentration. If you go back to 2003, 2004, we had a situation where one client accounted for 40 percent of our revenue. Today, our customer concentration is minimal. We deal with hundreds of thousands of users, and our largest client accounts for less than 2½ percent of our revenue.

“I see publicly traded companies today who are doing extremely well — at least in the stock market they’re doing very well — and they have customers accounting for 52 percent of their revenue. To me, that’s a bad business model. It’s too risky. If one customer moves out, their entire business could be at risk. You have to diversify your business.”

Raina recommends keeping your company’s structural elements simple — your vision, your business model, your financial model — especially when the going gets rough.

“That’s the biggest mistake I see companies make: They get carried away by their own vision,” Raina says. “It’s very important to have a simplified vision, a vision you can explain in a few words, in a few sentences. If it takes longer than that to explain your business model, it means it’s not a good business model. I’m a firm believer in that.”

It’s equally important to have a straightforward financial model, according to Raina.

“You’ve got to have a very simple financial vision and a simplified way of making money,” he says. “It really comes down to this: If you can figure out that your selling price has to be a lot higher than your cost price — if you can figure out that basic fact — then you’ve arrived, in my book. Many people laugh at that statement, but too many companies ignore this. You’ve got to get down to the basics of the business.”

Lastly, Raina says that being able to learn continually and to adapt to constant change are crucial survival strategies for CEOs faced with guiding their companies through harsh economic times.

“You must keep learning all through this process,” Raina says. “Lots of managers are very proud about saying, ‘I came up with a vision a decade back, and that vision has worked very well.’ And they stick to their vision too long sometimes.

“It’s a real-time world we live in, so you have to be dynamic,” he says. “You have to be ready and willing to learn, to change, to keep evolving: the way you sell, the way you deploy, the way you market, the way you host, the way you implement services.

“To me, the key issues are simplification of your vision, simplification of your business plan, being able to spell it out to your employees and your partners, and being ready to change all the time and learn from everything you do.”

HOW TO REACH: Ebix Inc., (678) 281-2020 or www.ebix.com


Robin Raina

Chairman, President and CEO

Ebix Inc.

Born: Kashmir, India

Education: Bachelor’s degree in industrial engineering, Thapar University, Punjab, India

What important business lesson did you learn during your time in school?

Engineering doesn’t necessarily teach you everything you’re going to need in terms of technical skills because times keep changing. But what engineering does teach you is an aptitude to learn. It gives you an aptitude of knowing that everything can be understood as long as you’re willing to apply yourself. You don’t get overawed by things because you learn how to analytically think everything through.

Do you have an overriding business philosophy that you use to guide you?

Be sincere, transparent and truthful to your customers. You have to be able to talk to your clients in a very open manner through thick and thin. If you’re running into a problem, you’ve got to be able to tell them what it is. Today, in the new world that we live in, all the companies are trying to create recurring sources of revenue. We’re trying to create annuity sources of revenue. What does that mean? That means you’ve got to have clients who really want to stay with you, because that’s the only way you will get recurring revenue.

What traits do you think are most important for a CEO to have in order to be a successful leader?

Conviction and the ability to listen. These are key, because we’re not perfect, we make mistakes every day, and people have to be able to relate to you, to talk to you, and you have to be able to listen to them. Ultimately, you make the final decisions, but you have to have the ability to listen and to digest in your mind, am I doing this wrong? Maybe they’re correcting me in the right fashion. So that becomes a key.

Global economy navigating through political storms

WASHINGTON, Mon Jun 18, 2012  — A global  economy edging toward recession and confronting huge political challenges adds urgency to the G20 summit in Mexico this week for strong world leadership of the kind last seen at the height of the 2007-09 financial crisis.

“The world is facing some very difficult times, economically and financially, socially and politically,” said Charles Dallara, managing director of the Institute of International Finance.

“We need once again a global coordinated approach.”

Leaders from the 20 industrialized and developing nations, representing more than 80 percent of world economic output, are expected to deliver pledges to stimulate growth while balancing those efforts against steps to rein in budget deficits at a meeting in Los Cabos, Mexico, on Monday and Tuesday.

But there is a sense of pessimism that politicians, after spending more than $1 trillion to stimulate growth – on top of $6 trillion in central bank money printing the past four years—can offer policies sufficiently convincing to restore business and consumer confidence.

Political differences over the future shape of Europe, a U.S. Congress bitterly divided over fiscal policy and a leadership change in China, not to mention political turmoil in Egypt and violence in Syria, will all cast a troubling shadow over the meeting.

“Significantly weaker fiscal positions and entrenched divergences both among governments and within countries mean that achieving even moderate cooperation, let alone any concrete results, at the Los Cabos summit will be a huge – probably insurmountable – task,” said Oxford Analytica in a client note.

If politics disappoint and financial market turbulence escalates next week, it will rest on the shoulders of central bankers to restore some calm.