“The Bear” on Business

(Continuation of Fingernails post)

“Your rear view mirror is broken,” says your alarmed passenger.

“No worries,” you cleverly reply. “I want to see where I am going, not where I’ve been.”

Most financial reviews focus on the question of “how were actuals compared to budget?” I’m sure we’d all agree that is an appropriate question. The problem is that actual results are usually 30-45 days stale. As an example, I’ll sit in a board meeting in mid-November discussing how we did in September (the most recent month in which actuals were available).

This might not be a problem if you are the Cap’n Crunch product manager for Quaker Oats. I, however, live in the rapidly-changing Internet/telecom industry. Wasting time on how we performed two months ago is akin to getting directions to the Pepsi Center when I am heading to Frasca. It is where I have been, not where I am going.

If that is the best you can do, you are driving at night with your headlights off. It is just a matter of time before your crash.

BTW, most companies I’ve seen suffer from this dynamic. It is a reality that it takes 10-20 days to close last month’s books and assess results. Therefore, the focus during financial discussions is either on last month or on two months ago, depending on when the discussion is taking place. Most time is spent on discussing what happened in the rear view mirror, not on where the company is headed.

Disciplined operational finance capabilities are required to change this dynamic. I consider this well worth the effort–I credit it to be a major factor in the success of the companies I am involved with. I will elaborate on this in subsequent posts.

Some people get completely irritated by the sound of fingernails scraping blackboards. For others, it is a co-worker in the adjacent cube who constantly taps his fingers. For me, it is sitting through a financial presentation and talking about numbers that are already one and a half months old. I’ve thought about carrying around my own blackboard and scraping my fingernails whenever I am asked to endure this.

Okay, I know I have completely lost every reader out there. However, I’m dead serious about this. We live in the computer age for gosh sake. Excel is so advanced that I still have no clue what spreadsheet jocks are referring to when they brag about their pivot tables. I know–you are even more lost now than when I began this paragraph. I’m sorry, but I get very worked up when I discuss this topic.

Let me start with an analogy. Let’s say you are driving from your house in Denver to Boulder-based Frasca, the best restaurant in Colorado. This example is somewhat redundant in that Denver folks only bother to visit Boulder if they are having dinner at Frasca. Since driving to Boulder is a rare event for Denverites, they use a navigation system for directions.

So let’s imagine you are half way to Frasca and plug in the address. What if the navigation system says “Thank you for the coordinates. It will take about 45 days to get you directions (assuming the month-end close goes well). In the meantime, here are the directions to the Pepsi Center per your request last month.” Not much help, eh?

So now do you understand what I am talking about? (I’ll pick this up in subsequent post.)

Sometimes things are best left alone. I know that, but I can’t always help myself. If I could, I’d probably still be at Level 3.

The most ironic part of the reaction to the original “Hold On. Don’t Go So Fast” post was how self-fulfilling it was.  An undertone of the story is that operations people can be, well, overly sensitive. This is a gross generalization–and certainly doesn’t apply to many operations folks. However, there is some truth when associating certain personality traits with various career types.

Think of accountants. There is a reason they are thought to be serious, analytical, and somewhat introverted people. It is because many accountants (but certainly not all) tend to this nature. Engineers have their ways. Salespeople as well. Operations is no different. They tend to be tough on the outside but sometimes quite sensitive on the inside.  Had Vincent not chosen gangster as a career, operations might have been his profession.

To be clear, the post was not a criticism. The purpose of the post was only to point out that we push service activation people to make a solid estimate of realistic activation dates for those orders in their pipeline. This pushed operations outside their comfort zone. They live in a world of black and white–once they have all the info they need, they can tell you what will happen. It is why many choose operations as a career path. Ambiguity is bad. Incomplete information is troublesome. They want the facts–all of them. Until they get them, they hesitate to put a stake in the ground.

However, we ask of operations the same as what we ask of the sales teams (and others). Even though uncertainty lurks, we still want our activation team to put a stake in the ground. “When are outstanding service orders most likely to get installed?” It is critical to the end-to-end dynamic of accurately forecasting financials. That was the main point of the blog entry.

The blog, as I’ve pointed out, is meant to be somewhat entertaining. So instead of just dryly writing the previous paragraph, I added some color. My goal was simply to make the post a bit more fun to read. So I poked ops folks a little. Not Zayo’s or Envysion’s ops folks, just ops folks in general. I know operations professionals are very proud, and they are often sensitive about these matters. With this in mind, I added a well-intentioned clarification.

Despite all of this, a murmur of angst found its way my direction. Wasn’t this tendancy the point of how I intertwined humor into the blog entry?  I find this a bit ironic and humorous. 

To be clear, I am proud of how our operations groups are doing. Envysion is scaling dramatically, and operations is meeting the expectations of our customers every step along the way. Moreover, they work hard to maintain dependable service activation forecasts. The Zayo operations teams are responding incredibly well to their new environment. I think most would agree they are busier now than they were under their previous entities. We are working with them to structure the forecasting processes–though this is work in progress, they are showing leadership and initiative in implementing our methodology. The posts on the blog are meant to help them understand why we emphasize this so dogmatically.

So, all joking aside, thank you. I truly am appreciative. I look forward to an exciting 2008.

In my post a few days ago, I stressed the possibility that my attempt at mea culpa might worsen the situation. Perhaps that is why the Wolf’s famous “Pretty Please” clip came to mind. Well, against the better advice of anyone I might have shown this to prior to posting, let me give it a try.

Did you read my December 18th post “Hold on. Don’t go so fast.”? While, like Vincent saying, “A please would be nice” to the Wolf, I heard some rumblings that I need to show some love to our operations teams.

My post was a bit blunt but I thought I did a good job anticipating this. This is why I included: Just to be clear, I appreciate operations people immensely. For very different reasons, their job is as hard as any other. The strength of the overall organization depends on a very strong operations team. I do want the BearonBusiness.com blog to be somewhat entertaining, so please cut me some slack on the “blah blahs”.

Would the Wolf have showed this level of sensitivity? Would the Bear of circa 2001 thought it was a good idea writing this qualification? I did and thought all might be well. A few people, I’ve been told, still took offense. After consulting with the Wolf, I offer the following carefully crafted response to the Vincents of operations:

“I apologize. I’m sorry with all of my heart. Now re-read the post and get the #$*!!#$% orders turned up.”

Now, before you get further offended, think about Vincent. He seemed pleased with the Wolf’s explanation and got to work. All turned out well.

(Please keep in mind this blog is intended to be somewhat entertaining. Please cut the Bear circa 2008 a bit of slack.)

I consider rigorous tracking of operational finance metrics as an absolute necessity in running a telecom business. At a bare minimum, a company should have command and control of the following metrics:

• Dollar amount of new sales each month
• Dollar amount of sales that are canceled prior to being installed
• Dollar amount of revenue in the “pipeline” (that is, revenue that is sold but not yet installed)
• The amount of revenue installed each month
• The amount of revenue disconnected each month
• The amount of revenue that is re-priced each month (either upward or downward)

Precision is a key word here. A company should have clear and complete definitions of each term. The goal is to have no ambiguity. In future blog entries, I will describe what is meant by this.

During the past two years, I have met with a few dozen management teams. Most claim to have their arms around these metrics. A few do, and I’ve seen a few situations that left me very impressed. However, many of today’s telecom providers are (in my opinion) nowhere close to where they should be. Curiously, a few companies have admitted they don’t track these metrics, citing difficulty and a lack of resources.

I am not sure which is worse: a company that thinks it is doing this but isn’t or one that knows it isn’t but cites “lack of resources” as the reason. By the way, some of those who claim insufficient resources had plenty of dollars to fund speculative growth initiatives.

The theme of this blog is: the telecom boom, meltdown, resurgence: what have we learned? The importance of maintaining command and control of day-to-day financial management processes is a lesson that must be learned.

This post might make matters worse. But the goal is to make it better.

Have you seen the movie Pulp Fiction? If so, you probably either love it or hate it. It is one of my all-time favorite movies. So, just to put some context about what I am about to write, you might want to watch the following scene: Pretty Please. (Note: if language and violence are offensive to you, please do not open.)

Winston Wolf (the most memorable performance in Harvey Keitel’s distinguished career) fixes things. The Wolf is called in by the big boss when messy problems need to be cleaned up.

Vincent Vega (played by John Travolta in the performance that resurrected his career) and Jules Winnfield (played famously by Samuel L. Jackson) have a messy problem. The Wolf is called. “It’s 30 minutes away,” he reports. “I’ll be there in 10.” Nine minutes and 37 seconds later he arrives at the scene.

After assessing the scene, the Wolf gets to work. He is all business. This is certainly a messy problem, and there is no time to spare in fixing it. He quickly pulls a plan together and hesitates not in explaining it to the others. He barks orders to everyone around. He wastes no words. He is not concerned with any sensitivities.

At the risk of getting off track with the story, I must point out that any resemblance between the Wolf and the Bear is, in my opinion, coincidental. My nickname (which was given to me at the frenzied peak of my Level 3 stint) was because I was cuddly and lovable, not because I barked our orders without concern for anyone’s sensitivities. At least that’s how I remember it. In any case, let me get back to the story.

So the Wolf completes the instructions and murmurs to Vincent and Jules: “Boys, get to work.” Vincent is a bit taken aback and says, “Please would be nice.”

The Wolf is stunned. “Come again?” he asks Vincent, who repeats, “A please would be nice.”

Let’s just say the Wolf is is not too open to feedback. “Get this straight, buster. I’m not here to say please. I’m here to tell you what to do.” He then follows with some colorful explanations but culminates in the forever famous “So pretty please, with sugar on top: Clean the *!#**!# car.”

The Wolf, you might say, showed some love. Admittedly, this might be stretching the truth a bit; but Vincent seemed satisfied, and all worked out well.

So, I guess it’s time for me to show some love, and in a few days, that is what I will do!!!

Operations people love our sales management process. That is, they love it until it finally hits them that we are going to ask the same as them. Then they sound an awful lot like Paul Rogers of the classic rock band Free, belting out from the song “All Right Now”: “Oh, hold on. Don’t go fast. Don’t you think that love can last?”

Operations people participate in the meetings in which we expect the sales team to tell us what orders they are committing to have closed by month’s end. They smile cheek to cheek when the account execs are grilled on why they believe a particular order will get signed. “Remember,” they chime in at the most inopportune time, “it doesn’t count as sold until operations accepts it.” Then the operations people make eye connect with the engineers in the room, generating smirks all around.

That is, until we get to the discussion on service activation. “How much revenue are we gonna get turned up this month?” In a way that only a mother of an operations executive can appreciate, the answer begins, “Well, so far, we are showing only 10% of our target being installed this month.”

“Really.” I have the response memorized, “We have been above our sales targets the last five months. How can we only be showing 10%?”

And the explanations begin… “Well. On one order, we are missing a piece of information we need on the exact location of the demarc. On another, engineering hasn’t completed their design. On yet another, the customer hasn’t confirmed what day they want it.” They continue with, “blah, blah, blah, blah, blah, blah and blah.”

Just to be clear, I appreciate operations people immensely. For very different reasons, their job is as hard as any other. The strength of the overall organization depends on a very strong operations team. I do want the BearonBusiness.com blog to be somewhat entertaining, so please cut me some slack on the “blah blahs”. Now I’ll continue.

As discussed in prior blog posts, we expect our account executives to put a stake in the ground early in a month on what deals they will close. They must deal with a lot of impossible-to-know information, most notably whether they can get their customer to sign a contract before month’s-end.

We expect the same of our service activation team. We expect them to make an assessment of every order they have in their pipeline. We expect them to accurately estimate when each order will get installed. We expect them to put a stake in the ground way before all needed information is available. As they do this, (assuming proper feedback loops are in place) they will get more and more accurate as to forecasting when a sale will turn into revenue. Moreover, they will demonstrate increasing command and control over the turn-up process. This will enable the entire organization to put revenue on the books sooner AND make our customer very happy.

By the way, the sales guys smirk with the marketing guys when they see the operations folks being pinned down. I can hear them hum the rest of Free’s rock classic, “Oh, Lord above. Now they’re trying to trick me in love.”

(This is an afterthought from the blog entries of last week. It will be helpful to read those prior to reading this.)

I was accused of this. Over dinner, no less–and I ended up picking up the tab. It was roughly January 2005.

I was President and CEO of ICG Communications at the time. In a later blog, I will discuss how dire ICG’s situation was when we became involved. But for now, trust me–we had a whole lot of work to do to stop the ship from taking water.

Much of our activity focused on debt restructuring and selling off non-core assets. However, my focus was also on getting the core business healthy again. We had tremendous fiber networks, particularly in Colorado, and bandwidth was our main product. We needed to protect our embedded base of revenue. We needed to get the sales engine roaring again. We needed to install in a predictable way.

We implemented Salesforce.com. We put in place the sales methodology I described in prior blog entries. We put in rigorous methodology for tracking installations, disconnects, repricing, etc. ICG had very weak processes in place in all of these areas, so this took a lot of work.

The person who accused me of wasting resources was one of the guys on my senior executive team. The two of us and one other person had a steak dinner in Boulder to talk through some tensions we were experiencing. Only after a few glasses of wine (and a damn good steak) did he blurt it out. “Do you realize that sales, installs, disconnects, etc. are not reported in the financial statements?” is the question that I recall being asked. In fact, he pointed out, these terms are not even clearly defined in GAAP. His point was simple: “Don’t you think we need people to focus on things that are far more important to the company?”

I was a new CEO at the time and, I must confess, a bit worried when I heard it. I didn’t waver, but, inside, I did wonder. So we agreed to disagree. I felt strongly that we needed to put in place the methodology and reporting around these operational finance metrics. He got his concerns off his chest. We went on.

The strong beliefs I’ve shared throughout this blog are rooted to a fair degree in the ICG experience. I believe the processes we put in place provided focus and accountability in the organization. Our revenue was growing at 15% annually; our EBITDA was over 30% and growing quicker than revenue. And we were free cash flow positive at ~15%. Maybe this would have happened without the focus on operational finance; I doubt it, but you never know.

[Two blog entries from last week pertained to Salesforce Management Methodology. One of my very first posts in this blog pertained to the Importance of Predicting Cash Flows. An effective salesforce methodology is the crucial first step in forecasting financial results. To emphasize the relationship between last week’s two entries and my earlier post, I am going to re-print the earlier one here. For those who already have seen it, it is worth re-reading.]

Predicting Cash Flows: The Foundation of an Exceptional Company (from Nov 5, 2007)

The previous blog described the difference between “investing” and “speculating”. Investing is only possible if free cash flows can be forecasted with reasonable level of accuracy. Warren Buffett is an investor, not a speculator, so he only makes investments in companies whose cash flows he can predict with confidence.

A corollary to this principle pertains to how companies should be run. Management should make it an extremely high priority to build a strong corporate competence around how to reliably forecast cash flows. This capability should be an integral part of their culture. It should permeate the entire employee base. The goal should be to get better and better at both the thoroughness and accuracy of cash flow forecasting.

Further, management should involve the entire organization in this quest. The financial forecasts should be communicated often and in a way that makes it easy for executives and employees alike to understand. Every month, the actual results should be compared to the forecast. Was the forecast as accurate as it should have been? How could it have been more accurate?

Each month, management should update the forecast. The update should reflect that 30 days have elapsed and more is known than a month ago. Enabled by this new information, the revised forecast should be better than the old one. Moreover, if the company is getting better at projecting cash flows, this should be reflected in bettering the forward looking view.

I know what you are thinking: “your company already does this”. I doubt it, at least not anywhere close to the degree I believe it should. I am not talking about an annual budget process. I am not allowing for making loose approximations. If it feels like a bureaucratic waste of time, you can trust we are talking about two different things. If it is primarily an exercise for the finance organization, a warning bell should go off. If the balance sheet is excluded from the exercise, substantial pieces of cash flow are largely ignored. Finally, if the relationship between revenue, expense and capital is extremely hard to follow, know that your company is nowhere close to having a competency in this most critical area.

Buffett requires that he stay grounded in companies that he can reliably predict cash flows. Else, he is a speculator. Executives should require that their companies develop a core competency in accurately predicting cash flows. Otherwise, the executive is taking on more risk than he or she is required to. It is hard to overestimate the importance of this point. The executive cannot allow its employees to make decisions based on unnecessary speculation. The executive should not force investors to speculate on what should be knowable.

I feel so strongly about this point that I make it a centerpiece of every company I am involved with. We will be better at predicting cash flows than any company out there, whether in our industry or not. We will do this not just to be better than our competitors, as this is too low a bar in my mind. Our goal is to earn exceptional returns for our investors. Knowing everything we can know about our future cash flows is the foundation for doing this.

In subsequent blogs, I will discuss what management’s responsibility should be relative to its stock price. As a teaser, I will offer a provocative clue: the executive’s job should not be making the stock be as high as possible. This topic is very related to the one covered in this blog. Additionally, I will further discuss the concept covered in this blog, especially in the context of the great Telecom Boom, Bust and Resurgence.

I suspect I scared most readers away with that title.  This blog entry is a continuation of yesterday’s “Commit or Not Commit” entry.

Most sales methodologies break down the sales process into multiple stages.  For example, stage one might be “Identification”, meaning a sales prospect has been identified.  Stage two might be “Initial Meeting” and stage three “Qualification”, perhaps meaning the customer has expressed interest in the service and has a budget to spend.  Stage four might be “Pricing” and stage five “Contract Presented”, meaning the customer has received a contract.  “Verbal” is often a stage, meaning the customer indicated they will purchase.   “Closed” is the final stage.

I’ve seen processes where as many as 10 stages are defined.  Ouch.

The methodology many companies use is to assign probabilities for each stage.   The probability is the likelihood of the sale being completed by the end of the month.  For example, 25% might be associated with stage 3/Pricing; 50% with stage 4/Contract and 75% with Stage 5/Verbal.  These probabilities are typically defined in the methodology, not by the account executives.  The AEs simply identify which stage it is in.

Note that the AEs never have to put a stake in the ground.  They are not communicating what they really expect will get done during the month.  They are just telling you what stage the orders happen to be in.  They might know full well that a particular stage 4 is highly unlikely to close, but a contract was presented so 50% is the probability.  Likewise, they might not have completed pricing but, based on past relationship with the customer, they are pretty damn certain the order will get placed. 

Where will sales end up during the month?  Unclear, as the quantified number is not anything individuals are signing up for.  What specific orders are expected to get completed?  The clutter of other orders in similar stages is distracting.  Much time is wasted in staff meetings trying to weed out what is real and what isn’t.  The rest of the organization–engineering, operations, etc.–has less of a sense of the priorities.

Most importantly, accountability is weaker.  A weak salesperson has lots more places to hide.  A strong one has trouble getting the organizations’ attention on what he or she most needs.

The first thing we do when we close on an acquisition is to convert to our brand of salesforce methodology.  It allows the organization to rally around the salesforce and prospective customers.   Do not underestimate how important this is to running a healthy business.