PhotobucketMost BearOnBusiness readers probably never heard of Mike Royko. He died in 1997, presumably before the first blog was ever written. Upon reflection, I believe Royko influenced my writing style. I imagine he really got a kick on what he did for a living, in the same way perhaps that I am enjoying writing this blog.

My grandfather cherished Mike Royko. I did too. My grandpa’s interest is what led me to discover Royko.

Mike Royko was a fixture in the Chicago Tribune (and, earlier, the Chicago Sun Times), writing a column five times a week for 33 years. As he became better recognized, his columns were wildly syndicated, appearing in in 800 papers nationwide. His journalistic awards included a 1972 Pulitzer Prize for commentary, the Ernie Pyle Memorial Award, the National Headliner Award, the Heywood Broun Award of the American Newspaper Guild, and the first H.L. Mencken Award presented by the Baltimore Sun.

Mike Royko wrote about the city of Chicago. Early in his career, when he expressed interest in writing a daily column, he explained: “I said I’d use satire. There’s a lot of things people have never been told. Straight reporting doesn’t tell it. I felt nobody had ever really described what a City Council meeting was like, what aldermen were like, what a County Board meeting was like.”  I recall with fondness how Royko used satire to create very humorous situations.

An example of Mike Royko’s wit: “It’s true that Burke has long been considered the smartest of all aldermen — as well as the best dressed and having the most sleek hairstyles. But it is all relative. Being the smartest alderman in Chicago’s City Council is something like being the tallest midget in the circus.”

Royko often wrote about the first Mayor Richard Daley of Chicago. Royko reflected on Daley at the time of his death; it has been pointed out by others that the comments could be just as easily been depicting Royko himself:

“In some ways, he was this town at its best — strong, hard-driving, working feverishly, pushing, building, driven by ambitions so big they seemed Texas-boastful. In other ways, he was this city at its worst — arrogant, crude, conniving, ruthless, suspicious, intolerant. He wasn’t graceful, suave, witty or smooth. But, then, this is not Paris or San Francisco. He was raucous, sentimental, hot-tempered, practical, simple, devious, big, and powerful. This is, after all, Chicago.”

[Some of this post is paraphrased from an article that popped up when I Googled Mike Royko. Barracuda Magazine, whatever that might be, appears to have been the source.]


That is the question. Is it Commit? Or is it Best Case? If it is Commit, why? If your Commit is light, please explain. If a Commit move back to Best Case, not good. If a Commit moves to Closed, take a bow.

Though most of you have no idea what I am talking about, many know exactly what I mean. In fact, this subset has probably woken up at night in a cold sweat after hearing these questions in their sleep.  They are Zayo’s account executives (“AEs”).

I learned this brand of sales management methodology from a former colleague of mine, Neil Hobbs of Level 3 Communications. Though I didn’t realize it at the time, I have come to appreciate the incredible value of this methodology. The approach centers on the following concept: an effective AE should be able to identify those orders that he or she expects to close during a given month. ”Commit” means that the AE expects a certain order to be signed prior to the end of the month. If all their Commits are summed, it indicates the total amount of sales the AE anticipates will be booked.

The methodology, when properly implemented, requires that the AE puts a stake in the ground early in the month. That is, the salesperson is expected to foreshadow how much they will bring it during the month, even though early in the month they are dealing with a lot of unknowns. Showing little or nothing in Commit will trigger questions about why the person is anticipating bad month. On the flip side, once an item is identified as Commit, the AE has to be ready to justify why.

Confident and capable account executives appreciate this process. First, it allows them to demonstrate the command and control they have of their patch. They can show you the deals that are out there and can display they know what it takes to get them to the finish line. They get the attention they crave. Second, management can focus on helping AEs get the most-likely contracts to closure. As it becomes more clear what is holding a deal up, management rallies other organizations–marketing, engineering, finance, or operations–to help remove the roadblocks. The good AEs are able to use this to their advantage, ensuring the rest of the organization rallies around them. Orders get signed. Commission checks are beefy.

Conversely, poor AEs don’t like this methodology. If they don’t have a robust funnel, or if they don’t have command and control of their opportunities, they will be exposed.  If their Commit is light, they will need to explain the dearth of high probability deals.   Yet if Commit is populated with a weak deals, credibility is lost when the AE is asked to explain the deals.

I cannot over-emphasize the importance of a well-defined and vigorously implemented salesforce methodology.


When I was 14, I bought Steve Martin’s album “Let’s Get Small“.  I probably listened to in 50 times.  No exaggeration.  I still chuckle when I recollect some of the skits.  ”Let’s Get Small.”   “Excuuuusssse Me.”

A few years back, Steve Martin wrote in his autobiography “Born Standing Up”.  The book centers on the formulative years of his career–prior to when he achieved success.  It is well written and entertaining, but in a low-key way.  He is introspective and honest.  I enjoyed the read.

About two thirds the way through the book, he tells how he quit his main job as a TV writer for shows like the Smothers Brothers and Sonny and Cher and took to earning a living solely as a stand-up comedian.  He discussed how he would tape shows so that he could identify when he stumbled onto something that worked well.  He likened the good nights to drawing a good poker hand.   You play enough hands of cards and, through luck of the draw, aces flop your way.   Steve told how he would use the tapes from these lucky good nights to refine his routine.  This hard work, and not the luck, led to him being consistently good.

“I learned a lesson:  It was easy to be great.  Every entertainer has a night when everything is clicking.  These nights are accidental and statistical: Like lucky cards in poker, you can count on them occurring over time.  What was hard was to be good, consistently good, night after night, no matter what the abominable circumstances.”

I probably over-use the phase “blocking and tackling” as in “we want to be good at blocking and tackling”.   I use this to mean I want my organizations to do the little things consistently well.   To me, blocking and tackling is the foundation of any company.  Getting good at blocking and tackling requires commitment, dedication, and practice.   Luck will help at times, but being consistently good, day after day, is hard.   This is the lessor that the Wild and Crazy Man shared with us.

 

Photobucket

Photobucket

 

 


“Did you hear, the cops finally busted Madam Marie; for telling fortunes better than they do?” are memorable lyrics from Bruce Springteen and the E-Street’s 1973 song “4th of July, Asbury Park (Sandy).”  For those who haven’t heard this song, I recommend downloading it.

It tuns out that the fortune-teller was a real person whose full name was Madam Marie Castello, and she told her fortunes on the Asbury Park Boardwalk in New Jersey.  It also tuns out she died recently, at the age of 93.

On a posting on his Web site, Springsteen remembers Castello as a boardwalk fixture at the Temple of Knowledge.“I’d sit across from her on the metal guard rail bordering the beach, and watched as she led the day-trippers into the small back room where she would unlock a few of the mysteries of their future,” he writes. “She always told me mine looked pretty good — she was right.”Springsteen adds: “Over here on E Street, we will miss her.” Madam Marie–thank you for the inspiration you provided to the boss.


[Written in the spring of 2008, when my son Danny was 12 years old.]

Though somewhat chilly, yesterday was a beautiful Sunday morning in Boulder. I was standing on the tee box of hole #3 at BCC’s Fowler Course.  As I clutched my sand wedge, I watched as the golf ball travel through the air. It bounced just in front of the green, hopped onto it and began to roll.  It was clear immediately that it was heading toward the hole. Good pace Right line. Could it be?  I didn’t utter a word.  Neither did my playing partner, who was also standing on the tee box with a club in his hand.  I’m sure he also noticed the promising line and pace.

A slight slope from left to right stood between the ball and the pin. We watched the ball follow this slope and steer itself at the cup. Click.  We heard the ball hit the stick gently and drop into the hole. Hole-in-One. We jumped up, yelled, high-fived and even hugged one another.

The ball is sitting in my golf ball collection in my home office. It sits right next to my three eagles, including the 165 yard 5 Iron I sunk at Black Wolf Run to win $50 from my friend Lynn Refer in 1995. I decorated yesterday’s ball with a blue marker; it reads “April 29, 2008. Danny Caruso. Hole 3 at BCC. 85 Yards. 6 Iron.”

I’ve long wondered what it would feel like to get a hole in one.  I am still wondering.  As I said, I had a sand wedge in my hand.  Yet I wrote 6 Iron on the ball.   The 6-Iron belonged to my  playing partner—my son Danny Caruso–and when his ball fell into the hole, I was every bit as excited as if it was my hole-in-one.

Congratulations D-Boy. I hope some day, when I get a hole-in-one, you are standing on the tee box with me.

Post-amble: One Hole Later

Now I’m standing on the 4th tee box, a 175 yard par 3. My shot was not bad, just to the right of the green.  One hole after his hole-in-one, Danny readies his 3-wood and swings away.

It is a nice shot but heading toward a tree’s outstretched branches, which stretch over the left side of fairway. Leaves have not yet blossomed so there is mostly air where his ball is headed. If he gets through cleanly, he will be in the fairway just about 15 yards from the green.

Instead, it squarely hits a branch and ricochets hard left into the deep rough.

Oh how the world looks to a kid on the eve of being a teenager. The prior hole’s improbable eagle was long forgotten. With disdain in his voice, he reacts to the bad bounce: “I never get a break.”


Fathers of Invention of Level 3

Among the most exciting days of my career was April 1st, 1998 (ummm, yes April 1), when USA Today featured a story that unveiled Level 3 Communications.  I was an integral part of the team. The second to the last line made us especially proud: “It’s a dream team with a dream network and a killer business plan.”   I guess we should have focused more on the final line:   “Just as long as they don’t screw it up.”

Caption on the image  that appeared on the USA Today Cover (at right): Billionaires Warren Buffett of Berkshire Hathaway, Bill Gates of Microsoft, and Walter Scott of Peter Kiewit Sons’ crossed paths in 1995 at a manion in Dublin, Ireland, where they discussed the Internet. The result is James Crowe’s Level 3 Communications, a budding force in the Telecom Industry.

OMAHA — Walter Scott, CEO of Peter Kiewit Sons’, calls the group “Our Gang.” They are Warren Buffett’s billionaire and executive friends, including Scott, Microsoft CEO Bill Gates and former Coca-Cola President Don Keough.

Every two years, Buffett invites about 30 of them and their significant others to a multi-day retreat. In the summer of 1995, they gathered at a mansion outside Dublin, Ireland. The topic was the Internet. Gates and his wife, Melinda French, gave a presentation. It jarred Scott.

Over the decades, Scott had so successfully run publicity-shy Kiewit — a builder of roads, dams and other monster projects — that the company often had excess cash to invest. One investment was funding James Crowe in 1989 to build MFS Communications, a phone network that would compete against the big local and long-distance phone companies for mostly corporate business. By the time of the Dublin retreat, MFS was the biggest of the so-called alternate access carriers.

Gates told Our Gang that the Internet was going to be huge and that he was swinging Microsoft to meet it. He said the Net would threaten the traditional phone powers by sucking away data and voice traffic. Scott realized MFS, too, could be hurt by the Internet. “Afterwards, I sat down with Bill and talked with him about it,” Scott says. “My gut feeling was, if you weren’t part of it, you were going to be left behind.”

Scott flew back to Omaha with Buffett, whose office is on a floor of leased space in Kiewit’s headquarters here. Scott sat down with Crowe “and talked to him about where Bill’s head was.” Scott wanted Crowe to look into the Internet.

Crowe says, “He told me that anytime anyone’s told him there’s a risk, there’s always been an opportunity there.”

Crowe launched what MFS called Project Silver to study the the Net and what MFS should do in response. That was the genesis of Level 3 Communications. Today, Level 3 is listed for the first time as a public company on Nasdaq. It begins life with a market value of $10 billion and a loud buzz.

A revolution in the making?

Level 3′s business plan, if correct in its assumptions, could drive down the cost of long-distance phone calls to almost nothing and hasten the decline of the big phone companies.

Level 3 plans to build a global fiber-optic communication network entirely based on Internet Protocol (IP) technology. Crowe is betting that the dominant networks of the world — the ones that carry phone calls using circuit-switching technology based on a 100-year-old design — are dinosaurs.

Not everyone agrees, least of all phone company people. “There’s a bright future for IP, but it’s not a walk-away win,” says Arno Penzias, chief scientist for Lucent Technologies.

And there’s a twist to Level 3′s story that could make things interesting. Level 3 has made a dangerous enemy: Bernie Ebbers, the dynamic and powerful CEO of WorldCom.

Yet for many reasons, the industry is watching Crowe closely. After all, he built MFS into an industry power, then sold it to WorldCom in 1996 for $14.3 billion. And he has an injection of $3 billion in cash and assets from Kiewit for Level 3.

“It’s like watching him trying to make lightning strike twice,” says industry analyst Jeffrey Kagan.
In 1995, the Internet was just taking off and Project Silver team members could find little reliable analysis beyond the fact that the Net was messy, unreliable, interesting and cheap.

Crowe’s epiphany came when he flipped through an industry newsletter and saw a chart from consulting firm North River Ventures titled, Cost to Deliver 42 Page Document. Faxing it from New York to Tokyo using AT&T cost $28.83. E-mailing it over the Internet cost 9.5 cents. “That’s when I realized this was not driven by cool people on the cover of Newsweek,” Crowe says. “It was driven by economics. When we figured it boiled down to bucks, all of us took notice.”

The Project Silver team visited 20 to 30 Internet service providers (ISPs). Crowe went to six. The team concluded that to move fast, MFS would have to buy its way into the Internet. The best ISP to buy was UUNet. The path had come full-circle back to Gates. Microsoft owned 14.7% of UUNet and Microsoft Network was its biggest customer.

Crowe and Scott flew to Microsoft headquarters in Redmond, Wash., to talk to Gates. If Gates had said no, MFS would not have tried to buy UUNet. Gates gave his OK. His only condition was that Crowe had to keep UUNet CEO John Sidgmore. In April 1996, MFS bought UUNet for a stunning $2 billion.

Clash of the titans

Crowe, 48, has big facial features and a booming voice. He prefers to dress casually in a Dockers style. He’s a technology nut who wired all kinds of gadgets together in his home. He eats lunch in the cafeteria on the ground floor of Kiewit headquarters. Level 3′s offices are in one small corner of the stoic 15-story building.
People describe Crowe as incredibly focused, good at communicating a point simply, good at recognizing and hiring talented people and a voracious reader. (One of his favorite books: Snow Crash, a science-fiction novel about cyberspace, by Neal Stephenson.) “He’s very intelligent,” Scott says. “And he gets loyalty and enthusiasm from his people.”

That loyalty is what got Crowe in trouble with WorldCom’s Ebbers. WorldCom, based in Jackson, Miss., has grown by making ever-bigger acquisitions, mostly in the long-distance phone business. Ebbers needed a company like MFS, which has lots of local networks and business customers. UUNet made MFS even more attractive. Within months of MFS buying UUNet, WorldCom made its $14.3 billion offer for MFS.
Crowe did not want to sell MFS, but the offer was too good. He knew the Internet train was coming and that MFS, mostly built on the older circuit-switching technology, would have a rough time making the transition — even with UUNet’s help.

Crowe was to become chairman of the merged MFS and WorldCom, but it was clear he’d be second to Ebbers, who would be CEO. Most of MFS’ top management packed up their Omaha homes and moved to Jackson. Three weeks after the merger closed, Crowe quit and returned to Kiewit.

“I was talking with Jim (Crowe) about what he’d like to do and told him we’d be willing to support him if he was interested in starting a business,” Scott says. Kiewit has two parts. The main one is the construction business. The other one is Kiewit Diversified Group, which holds all Kiewit’s investments in companies. Those companies have ranged from small telecommunications ventures to a power company. Scott asked Crowe if he’d like to take over Kiewit Diversified Group. “I felt Jim would do more with it than I would.” Total value of the group: about $3 billion. It would become Crowe’s seed money.

Reinventing a success

The concept for Level 3 is simple: It’s MFS with a fresh start. Same business plan, but this time based on Internet Protocol (IP) technology. Crowe would use Kiewit’s money to start building a network that could carry information and voice conversations far more efficiently than any network out there, then slowly fill his fiber-optic pipelines by siphoning off business from the telecom giants.

Crowe wasn’t the only one with the idea. Around the time Crowe quit WorldCom, Qwest Communications was starting to get noticed. Based in Denver, Qwest was using money from railroad magnate Philip Anschutz to build its fiber network, which would be partly IP-based and partly circuit-switched. Anschutz put Crowe on Qwest’s board. Qwest also hired fiery AT&T executive Joe Nacchio as CEO. From the outset, Crowe told Nacchio he might start a competing business.

Just before unveiling Level 3, Crowe quit Qwest’s board. Now he’s moving Level 3 to Denver, right in Qwest’s back yard, to take advantage of telecommunications talent in that region. Relations between the two are said to be chilly. Nacchio did not respond to requests to talk about Crowe.

In the meantime, Crowe figured that if he was going to do an MFS all over again, he might as well get the MFS team back. One way or another, he got 18 of his top 20 MFS executives out of WorldCom. Most have taken the exact jobs they had at WorldCom. All were wealthy enough after MFS’ sale to never work again, but they’re in their 30s and 40s and sound thrilled to be back together for another run. Mike Frank, 44, head of Level 3′s human resources, says that at WorldCom: “My usefulness was not appreciated, and I wasn’t fulfilled.”

“I have a lot of loyalty to the guys who got me here,” says Ron Vidal, 37, another member of Crowe’s reconstituted team.

Crowe’s departure from WorldCom irritated Ebbers. But the mass exodus made him boil. The rancor runs deep throughout WorldCom. WorldCom would like nothing better than to bury Level 3 in the marketplace.
That threat notwithstanding, the combination of Kiewit’s backing, the old MFS team and Crowe’s savvy makes many in telecommunications believe Level 3 will succeed. “There’s a lot of faith,” says analyst Kagan.
Investors are expected to snap up the stock. Before the Nasdaq listing, shares were tough to come by. Peter Kiewit Sons’ stock is privately held by employees only. Kiewit Diversified was held mostly by employees and former employees, though shares could be sold publicly. With the Nasdaq listing, an official split from Kiewit and a name change from Kiewit Diversified to Level 3, the stock goes public.

It’s too soon to tell whether Level 3 can challenge some of the regional Bells or top long-distance companies. The telecom giants know about the efficiencies of IP, too, and some are building IP-based networks. They scoff at the notion that circuit-switched networks will become albatrosses. “Nobody’s stupid here,” Lucent’s Penzias says. He holds that communications will wind up being a mixture of circuit-switching and IP. “One protocol to do every job would be a step backward.”

Meanwhile, WorldCom, Qwest and others are building IP fiber networks. Teledesic and Motorola’s Celestri will create high-bandwidth IP networks using satellites by around 2003. Still, demand is exploding. Communications capacity is already in short supply for data traffic, which is growing 150% or more a year. Voice calls over IP networks, a business that barely existed in 1997, will be at least a $1 billion industry by 2002, according to Forrester Research.

Level 3 seems to be a player to watch. “It has an opportunity to be quite disruptive in the industry,” says Mark Bruneau of consulting firm Renaissance Worldwide. “It’s a dream team with a dream network and a killer business plan. Just as long as they don’t screw it up.”

 

 


Warren Buffett has a bunch of memorable quotes.  Here’s a doozy:

“Of one thing be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisers will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.”

I’d enjoy this quote more if it didn’t hit so close to home. On at least one occasion (okay maybe closer to 1,000), I have been viewed as being a bit too “enthused” about a particular business issue.  In the eyes of some, I would only accept and reward those who agreed with me, which I acknowledge was a fair critique of me in earlier periods of my career.  I believe I have somewhat addressed this derailer.  The difficult part is a fine line exists between providing clear leadership in an ambiguous environment versus stubbornly leading lemmings over a cliff.

I can think of many examples where I provided strong and stubborn leadership–but, in hindsight, should have spent more time gaining consensus and refining the plan.  I should have listened more–and made sure people around me were comfortable speaking their mind.  Some of these still sit like a lump of coal in my stomach–I wish I could do them over again. I get embarrassed when I let myself think about them.

I can think of many other examples where the strong and stubborn leadership was critical to enable a team to accomplish a seemingly outlandish objective.  Often, the naysayers easily outnumbered the believers.  Even some who helped accomplished the goal did so despite having an initial view that I was stubbornly leading them the wrong direction.  I view one of my strengths as getting groups of people to succeed in difficult and ambiguous environments.  This requires providing clear and timely direction– even if the rationale isn’t bought-off by all those involved. Buy-off requires consensus building, which takes time and compromise.

As I matured, I recognized that consensus building is important. However, I believe some business initiatives are best accomplished without waiting for a consensus to emerge. Knowing the difference between plowing ahead versus building consensus is the hard part.  In this case, slightly better than 50/50 doesn’t cut it.  A good leader has to make the right call the super-majority of the time.


The year was 1997. Worldcom finalized its acquisition of MFS Communications four months earlier. Within days of the closing, most of the MFS executive team parted ways. I was one of the most senior ex-MFS’ers.  I knew more about MFS’ day-to-day business than perhaps anyone who remained.

Worldcom discovered a problem. The context is arcane, so bear with me.

Long distance telephone companies pay local telephone companies to originate and terminate phone calls. The rate to do this has been very high due to historical reasons tied to the breakup of AT&T.  These high access rates were the mechanism for using long distrance revenue to subsidize local phone companies so that phone service would be available to most Americans.    In 1997, access rates were set at approximately 2.5 cents a minute, and this expense category was Worldcom’s biggest expense. If they could cut this in half, their stock would soar. And they had a plan to do just that–acquire MFS.

MFS was leading the charge on bringing competition to local phone service. As part of how local competition worked, local phone companies exchanged phone calls with one another. If MFS’s customer needed to call Verizon’s customer, MFS would need to hand off a call to Verizon and Verizon, in turn, would deliver it to the customer. The reverse of this was also true, as Verizon’s customers would need to call MFS’ as well. Although the technology of exchanging local calls was identical to exchanging long distance call, the price was far lower–about 0.5 cents a minute instead of 2.5 cents a minute.

Worldcom’s plan was to buy MFS and route its long distance traffic through MFS’ local trunks, saving more than 50% of the fees it was paying the local telephone companies to terminate calls.  If successful, Worldcom would save several million dollars a month.

After Worldcom completed its acquisition, it discovered a flaw in its plan. It was illegal. Regulatory law didn’t allow (and still doesn’t) paying local rates for terminating intercity calls. This was news to Worldcom and not good news. A big part of their “synergy” was no longer available to them.  Oh well. I guess the due diligence was a bit rushed.

But they had another plan. From an accounting perspective, perhaps they could take a write-off based on purchase price accounting. The logic (or illogic for non-CPAs) was that this “savings” would have been available to Worldcom for the transaction but they’d simply couldn’t realized the savings immediately.   So they decided they’d write off a big acquisition expense and buried among other big acquisition expenses.  Who’d know?   By doing so, they would reflect savings on their P&L statement immediately.  The cash to pay the access charges would not be saved, but this would be an accounting reconciliation with the cost of the acquisition.   It would never hit their P&L.  EBITDA would look better, and they’d meet their synergy goals.

To implement this revised plan, Worldcom needed a subject matter expert to work with Arther Anderson to provide context for the write-off. Scott Sullivan asked me to do this. I explained the problem was not technical, it was law.   Scott viewed this as a technicality.  He further explained that Worldcom was the only account assigned to the Anderson partner also lived in Worldcom’s hometown of Jackson, Mississippi.

“Don’t worry about it,” Scott tied to assure me.   “It is not a big deal. They just need some color.”

I thought about it. After a sleepless night or too, I decided to tell Scott no.

“No problem,” was Scott’s reaction “We will get someone else to do it.  To the best of my knowledge, they took this write-off.  Thankfully, I resigned a couple of months thereafter to be part of the team that launched Level 3 Communications.


Sustainable competitive advantage (or franchise in Buffett lingo) is essential in creating long term value for shareholders.  Developing a thorough, honest, and appropriate understanding of a company’s franchise is essential.  Ensuring franchise is clearly communicated throughout the enterprise is essential.  What follows is this:  the strategic focus of all companies needs to be on how to strengthen its franchise.   Strategy is all about determining how best to fortify the franchise.

VC-backed start-ups are typically good at this. Their resources are entirely focused on “what unique competitive position do we think we can create for ourselves?”. The question is grounded in the company’s brief and clear history–to get funded, the company almost certainly had a well-thought out answer to “what is unique about us”.  Since the upstart is toddler-age, the strategic premise is both backwards-looking (what do we already have that is unique?) and forward looking (what execution is required to parlay this uniqueness into long term value creation?). A capable venture capitalist ensures the start-up stays narrowly focused on these two questions.

Larger companies can lose their way.  The meandering might be due to a misconception of what the nature of their franchise really is (and isn’t).  The other culprit is strategy straying away from franchise fortification and toward new endeavors.

“Our franchise isn’t as strong as it needs to be. Our strategic priority must be on making in stronger.”  How many times have you heard an executive say these words?  More times than not, especially in a developing industry like telecom and Interent, this should be the overarching mindset.  Instead, many companies spend their scarce strategy cycles on exciting new areas.  This results in the enterprise’s resources being directed to distractions (relative to the priority of ensuring the franchise is sufficiently strong).  Shiny new objects such as new features, fancy products, geographic expansions, or entirely new lines of business take center stage.

Companies sometimes are too casual in describing the nature of their advantage.  Let’s consider a company that convinces itself: “Our advantage is that we are great at sales”.  Many telecom companies, including a large one that I took private in 2004, developed this notion. “The network is a commodity, but we are successful because of the relationships we have with our customers.” Well, if this is believed, it follows that a company can sell most any product in most any geography.  It suggests the act of hiring more sales people is the key to earning unfair returns.  The fiber network is of limited relevance.

Many telecom companies marched down this path. Not only did they waste a lot of other people’s money, they also missed the opportunity to use their precious resources to strengthen their competitive position. The telecom meltdown provided a nasty and hasty correction. When left with no choice but to retreat to their “franchise”, most companies realized it wasn’t sufficiently strong to support the collapse of everything else.

Companies with strong franchises can branch off into new areas. However, the question of franchise strengthening should remain at the core of expansion decisions. The first set of questions pertain to readiness for branching out:

  • Do we have a sufficient understanding of our existing franchise?
  • Are we applying appropriate resource to fortify the franchise?
  • Do we have sufficient capacity to branch off without distracting from fortifying our existing franchise?
The next set of questions address the merits of specific initiatives:
  • Does our existing franchise make it materially more likely we will be successful at the extension?
  • If we are successful, does the initiative materially help fortify our current franchise?
  • For the new initiative, what franchise must we successfully develop to achieve a sustainable advantage?
  • Is it reasonable to expect that successful development of franchise can be achieved?
A for-profit business’ goal is to create an extraordinary return for its stakeholders.  Having a franchise is a must.  Understanding the franchise requires work.  Fortifying the franchise is the first priority of strategy and resource allocation.

 


I led a buyout of ICG in 2004.  We raised $8.7M from two investors.  Two years later, investors and management exited for more than $225M, which is  26X return on investment.  Not too shabby.

As you can imagine, I am often asked how.  A number of factors contributed, though my focus here is narrow.  ICG, circa 2004, was an example (among many) of a company that misunderstood its franchise.  Their franchise was deep fiber networks in certain geographies of the country. In a world where companies and individuals of all types need more bandwidth, deep fiber in select metros is a meaningful franchise.  In ICG’s case, the Colorado network, in particular, was special.  It was the most extensive network in the front range.  Moreover, the Colorado business community is skewed toward companies that need lots of bandwidth.  If you had to pick a region to have a robust and unique fiber network, Colorado would be a good choice.  ICG had several other juicy metro fiber networks as well.  Though these franchises were exploitable, they were in desperate need of fortification.   Fortunately for my team, management’s attention, and purse book, was elsewhere.

ICG’s management convinced themselves that the real opportunity was the small and medium enterprise market. Further, a well oiled sales engine (not a deep fiber network) was the most important capability needed to exploit this market.  First alarm bell: a robust sales engine doesn’t sound like much of a differentiator.  In ICG executives’ mind, this was good because they saw sales as a strong competency of theirs (circular logic perhaps?).  However, to be safe, they decided to be a pioneer in an advanced area of VoIP called Hosted PBX.  The combination of a robust sales engine and a leading edge product would become their franchise.  Note that fiber networks play a minimal role in VoIP.

To recap the strategic thinking: (1) Fiber doesn’t matter because the VoIP opportunity is with smaller enterprises; (2) Sales is the company’s competency; (3) The company will be a pioneer at VoIP; (4) VoIP success will be achieved because of an unmatched ability to sell.  This led to the following conclusions.  New York, Boston, and Chicago (where ICG didn’t have fiber networks) should be the focus, as there are more prospective customers than in ICG’s fiber markets.   The more sales people they’d hire, the more value they’d create.  This led to adding a lot of sales people, and a lot of cash burn.   Finally, the most valued technical resources were concentrated on VoIP (instead of fiber), with the hope that technical innovation would differentiate their VoIP product.  Resources that might be spent fortifying their already unique fiber properties were directed elsewhere.

When we assumed control of ICG, we aggressively scaled back activities in non-fiber markets.  Further, in the fiber markets, activities shifted to core bandwidth products–which directly exploit fiber.   VoIP was de-emphasized.  In a short period of time, we became a growing company with a solid EBITDA margin.  We had ample capital to further fortify our already strong fiber networks.  Moreover, we were generating free cash flow.   Less than two years into it, we exited with $225M in our pockets.

Those outside of telecom will probably chuckle and assume this story is unique to ICG.  They might wonder if I am embellishing (no!) or oversimplifying (a little).  Self-reflecting souls who were in the middle of the great telecom boom and bust will react differently.   They will cringe as they reflect on similar situations that hit a bit close to home.  For those still in telecom, the real question is how this reflect son your company’s existing strategic activities.  Does your company understand its franchise?  Is it focusing its resources on exploiting and enhancing its franchise?  Or is it getting distracted or diluted?