I am committed to the highest level of management ethics. I would rather see the company fail financially than see it compromise on its ethics. With this in mind, I articulate four management ethics principles that I believe capture the responsibilities management has to its investors. This post will cover the first of the four.

1. Treat shareholders as long term business partners; and view management as managing partners.

a. An enterprise must be managed with the perspective that investors (not management) own the assets contained within the company.

b. It is management’s responsibility to ensure all executive compensation and perks are clearly understood and approved by its investors.

Today I will focus on 1a. I’ve seen too many situations where management teams lose sight of their role as managers of a company. At the end of the day—and at the beginning of the day for that matter—the company belongs to the investors. A company’s purpose is to maximize value for its owners. Conversely, an enterprise does not exist to “serve” the management nor its employees. This might sound cold—but it is essential belief a for-profit enterprise must have to maintain long term success. When it loses this perspective, it begins to make inappropriate decisions which, over time, erode the viability of the business. As this happens, investors suffer but so do employees and customers.

How many of the disaster stories of the past couple of years—or during the telecom meltdown—could be attributed to management teams failing to treat their shareholders as long term business partners? Lots!

By the way, “long term” is an important part of this principle. Without doubt, short term and extraordinary high risk tactics were at the core of the housing and banking collapse. A management team that is constantly thinking about the long term treatment of their business partners will resist these tempting short term tactics.

Tomorrow, I’ll focus on 1b.

Zayo and Envysion employees: I’d like all of our folks to read this bearonbusiness series. Please encourage your co-workers to follow these posts.

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Management Ethics – 1(b) of 4 — the last one
Management Ethics – 1(b) of 4 (cont’d)
Management Ethics – 1(b) of 4
Management Ethics – the 2nd of 4 Principles
Management Ethics and the Origins of BearonBusiness

I launched bearonbusiness.com in late 2007. My early posts centered on the articulation of my approach to business.

Since I posted these, much has changed. USA has an African American president. Mayor Daley was unsuccessful in bribing officials–in this case by failing to entice the International Olympic Committee to support Chicago’s bid. Zayo has progressed from a spirited idea to a near $300M company. And the Bears have a legitimate NFL quarterback.

Yet, in the three years since bearonbusiness has been launched, much is the same. Just last week, Level 3 Communications raised yet more debt to ensure it has sufficient runway to avoid bankruptcy. Envysion is a couple big customers deals away from being an enormous success. Bandwidth is growing at a rapid pace. And Chicago Cubs fans are waiting until next year.

I am going to circle back on the early posts on management ethics. This week, I will focus on the first of the four Management Ethics principles. Perhaps next week I’ll focus on the second. As I do so, I will add color and perspective. I am doing this to share my business underpinnings with newer members to our family. I am hoping this helps orientate them to our way of thinking, accelerating their ability to play significant roles in our businesses. Long term members of our team will benefit from this review.

I would be remiss if I didn’t credit Warren Buffett’s influence in my sets of beliefs. My perspective is more that of an operator instead of Buffett’s investor point-of-view—and my articulation reflects this. Nonetheless, you can trace most of my thoughts directly to those shared so generously by Warren Buffett in his annual reports.

One additional note…. Over the weekend, some non-business friends asked “what is this blogging all about”. This question is always hard to answer. Hopefully this series will provide some foundation.

Zayo and Envysion employees: I’d like all of our folks to read this bearonbusiness series. Please encourage your co-workers to follow these posts.

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Management Ethics – 1(a) of 4
Management Ethics – 1(b) of 4 — the last one
Management Ethics – 1(b) of 4 (cont’d)
Management Ethics – the 2nd of 4 Principles
Management Ethics – 1(b) of 4

A Video Primer on Fiber Backhaul, By Stacey Higginbotham

We’ve spilled a lot of digital ink on the need for backhaul for next-generation (and even current generation) wireless networks, so while at the FTTH show in Houston, I chatted with Geoff Burke, director of marketing for Calix, a provider of optical equipment for carriers, about the mobile backhaul opportunity for both the company and its customers. CenturyLink, a rural telecommunications provider, yesterday announced that it would deploy Calix equipment in order to offer fiber connectivity for its cell towers. In the video below, Burke talks about how rural carriers can take advantage of the need for backhaul and explains how Ethernet over fiber compares with alternative technologies such as Ethernet over copper. There are doubters, of course, those that allege fiber is still too expensive for cell towers, and that cell towers don’t need the full capabilities of a fiber connection, but I believe the demand for mobile broadband will continue to grow, and so I’m putting my money on fiber.

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Got Fiber, Business?
Zayo One of Four in TMobile Deal
Fiber: the Workhorse of Bandwidth
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Zayo in the News

At Zayo, we are committed to data. Using salesforce.com, we gather data. We make sure it is accurate. We organize it. We trend it. And we analyze it.

We break out our business into manageable size business units—and we put leaders in charge of them who have end-to-end financial visibility. We expect these leaders to show command and control of the data that underlies their business.

We constantly grapple with “Value Created”. Are we creating value? If so, can we see it in the numbers—both historical and forward looking?  Are we building up durable and growing cash flow? If so, what is an appropriate EBITDA multiple for each of our businesses?

Through our business units and the data, we constantly question “conventional telecom wisdom”.  Do we have the “right” amount of sales people?  Are we pricing appropriately?    Are we walking away from business that doesn’t add much value?  Are we focusing our activities and capital on activities that create equity value?   Do we have forward-looking visibility into our true cash flows so that we will know whether or not we are being successful with our day-to-day decisions?

Are we questioning the “telecom handbook” by thinking through what “conventional wisdom” is right versus wrong?   Are we constantly probing into the key questions—either to validate that what we are doing is value-creating or to alter course toward more value creating activities.

Are we—at Zayo—developing an analytical foundation that is part of our long term competitive edge?  I hope so—because that is our goal.  To use Billy Beane as an analogy—can Zayo borrow from the Oakland A’s playbook and achieve success in creating equity value for years to come?

This is integral to what we are trying to create at Zayo.  We demand command and control over business data. We emphasize deep and broad understanding by our employees of “Value Creation”.  We frequently question and challenge conventional telecom wisdom to either validate firmly held beliefs or to identify new angles to take.    We rely on objective and thorough analysis to guide our decision-making.  Through all of this, we hope to discover a constant flow of competitive edges that allow us to create value for our stakeholders.

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Blind Side and its Relevance to Business
Blind Side and the Value of the Left Tackle
Blind Side and the Story of Michael Oher
Criteria for Measuring “Today’s Value”
Operating Culture Weaves Them Together (part 4)

The last two posts were about Michael Lewis’ book titled Blind Side. Prior to 2000, Left Tackles were treated about the same as any other offensive linemen. And offensive lineman were at the bottom of the NFL salary totem pole. All they do is block. And they are big and bulky, instead of lean and muscular. It was no surprise they got paid the least.

In the post Lawrence Taylor era, this changed dramatically. Out of nowhere, Left Tackles became the second highest paid position in football. With the benefit of hindsight, the reason is obvious. The Left Tackles protects the quarterback’s Blind Side. A great Left Tackle keeps the franchise quarterback healthy. A mediocre Left Tackle could leave the quarterback exposed to a 350 lb defensive lineman, potentially ending the quarterback’s season. Fans lose interest. Playoff money goes elsewhere. The value of the franchise suffers by millions. If you have a great quarterback, you better invest heavily to get a great Left Tackle.

A huge business lesson can be taken from this story. Over time, certain NFL coaches discovered the importance of the Left Tackle position. And they quantified its importance. That is, they quantified the relative value of a great Left Tackle relative to an average Left Tackle. And they used this intelligence advantage to sign the best Left Tackles at salaries well below their value. Over time, other teams caught on. but for several years, those who figured it out were able to prosper.

Certain coaches discovered this intelligence despite the fact that it was not obvious. In fact, conventional wisdom would have steered them elsewhere. Conventional wisdom was that running backs or receivers were more valuable. Conventional wisdom was that the lean and muscular defensive lineman was far more valuable than the big and bulky offensive lineman.

Conventional wisdom was challenged. Perhaps the ideas originated during coaches’ brainstorming sessions over pizza and beers. Perhaps the ideas were a result of highly analytical college grads looking to discover a new angle. Either way, the key was the pursuit of new ideas that create a competitive edge. What might we do different that might give us an advantage over our rivals?

A second key is perhaps more important. Analytics. Fact based financial analysis. The conviction to act on the idea—and to know how to act—comes from the quantifying the “value”. That is, a team must carefully compute the relative value of a great Left Tackle relative to a mediocre one. And, even more difficult, the calculation needs to compare the value of a great wide receiver on relative terms as well. Are we better off spending $10M on a great Left Tackle, leaving us only $5M for a middle-of-the-road receiver? Or would we create more value by spending $3M on a mediocre Left Tackle, which would leave us $12M to get a prime-time wide-out?

Developing conviction in the answers requires a strong commitment to data gathering and quantitative analysis. Your average football coach circa 1995 was unlikely to be receptive to such an approach. They were more likely to rely on the gut instincts of a 30 year lifer, who almost certainly never used excel and thought NPV was the Swedish expression “No Puck’en Vay”.

How does this apply to what you do? Are you committed to data gathering? Do you challenge conventional wisdom? Do you rely on quantitative analysis to help discover where value can truly be created for the enterprise? Or are you more like a football coach circa 1995, relying on the time-tested instincts on how to get the job done. If so, you should be worried about who is protecting your Blind Side.

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Blind Side and the Value of the Left Tackle
Blind Side and the Story of Michael Oher
Blind Side and the Culture of Zayo
Lessons from Maggie Lott
Mike Ditka’s Approach to Retail

Quarterbacks are paid a lot of money. A master’s degree in linear programming is not needed to figure out why. Quarterbacks are the key to a football team. Tom Brady, Peyton and Eli Manning, Ben Roethlisberger, Jay Cutler, and Kyle Orton. [Oops. Strike Kyle Orton from the list.]

What is the most important position after quarterback? Is it running back? Wide receiver? Kicker? Middle linebacker? Defensive end? The answer to all of these is NO.

Quite surprisingly, it turns out the 2nd most important position is the Left Tackle. You know, the big and bulky lineman whose name is called only when he commits a holding penalty. And you only notice him when the guy he is supposed to block instead gets to the quarterback with a crushing sack.

How do we know the Left Tackle is so valuable? According to Michael Lewis’ book Blind Side, Left Tackles, on average, get paid more than every position other than quarterback. They get paid millions despite being largely invisible to football fans. Owners pay them the big bucks despite gaining no “ego-stroking” value as a side benefit. That is, the owner is far more likely to invite the middle linebacker to the weekend barbecue than the Left Tackle. If the owner is courting a trophy wife, he will introduce her to the wide receiver instead of the Left Tackle.

Why is the Left Tackle so valuable? The answer is quite simple. Quarterbacks are by far the most valuable. It is devastating when the franchise quarterback gets hurt.  Quarterbacks are most vulnerable to getting hit on their blind side, , particularly if the hit was delivered by Lawrence Taylor in his prime.  Since the vast majority of quarterbacks are right handed, the blind side is to their left. As a quarterback goes to throw, he turns his body so that his back is to the left side of the field. If the 350 lb defensive lineman coming from the left gets around his blocker, the lineman comes crashing into the quarterback. Often, the QB just doesn’t see this coming because he has his back to this charging lineman. Hence, “blind side” was coined.

The Left Tackle’s job is to protect the quarterback’s blind side. A great Left Tackle is much more likely to be successful than an average one. Success helps ensure the franchise quarterback stays healthy throughout the season and playoffs. Failure could mean the QB is out for the year, leaving the team to fall apart. That is why the Left Tackle is the 2nd highest paid position in football. Their job is to protect the highest paid position.

No matter how big of a football fan/expert you are, you’d never figure this out by watching a game. Even those who were the biggest experts—coaches and general managers—were slow to figure out. In Blind Side, Michael Lewis shows that not until the 2000s did the salaries of Left Tackles begin to reflect the importance of their position.

What can be learned from this? (tomorrow)

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Blind Side and the Story of Michael Oher
Blind Side and its Relevance to Business
Blind Side and the Culture of Zayo
South Side of Chicago is the Baddest Part of Town

The author Michael Lewis is famous for Liar’s Poker and Moneyball – both are among my favorite books.

Moneyball is an extremely well-written book focused on a young general manager of the Oakland A’s by the name of Billy Beane. In the early 2000s, the small market Oakland A’s achieved surprising success. They did it despite having a payroll that was among the lowest in the league, and a fraction of big market teams such as the New York Yankees and the Boston Red Sox. How did Beane do it? Perhaps this will be a topic of a future post but first I want to discuss Blind Side, which was also authored by Lewis. You might think of Blind Side as Moneyball’s sequel.

Blind Side centered on a kid by the name of Michael Oher. An extraordinarily large kid, Michael was built to be a football player. He had a lot more than size. His speed and strength were off the charts. Making a long story short, Michael had an impoverish upbringing and struggled with grades and discipline in his early teens. He quit football after his freshman year at a Memphis public school, but was discovered by a high school coach and recruited into Briarcrest Christian School. He went to University of Mississippi and became a first round pick in the 2009 NFL draft. Today he is a rookie for the Baltimore Ravens, making $13M over a five year contract.

Oher’s story is only a backdrop for Blind Slide. The book was about more about the position that Oher plays—Left Tackle. The offensive line in football is the least celebrated positions in the NFL. Offensive lineman don’t throw or catch the ball. They don’t sack the quarterback; nor do they make interceptions. They don’t win games in the last second with a 50-yard field goal. They are big and bulky—and often have a thick layer of fat covering their sizable muscles. Offensive line is the least glorious position in the glorious game of football.

Given all of this, you’d expect that offensive linemen were paid far less than their glorious teammates. Prior to the 2000s, this assumption was accurate. But, in the mid 2000s, the relative compensation of an offensive lineman had changed in an unexpected way. The salaries for one of the offensive lineman positions—the Left Tackle—began to skyrocket. In Blind Side, Michael Lewis explains how the Left Tackle became the 2nd highest paid position in the NFL. Only quarterbacks were paid more. How could this be? And what lessons can we take away and apply to our business?

As a side note, a movie based on the Blind Side book is being released in November. Sandra Bullock, one of my favorites, is in it.

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Blind Side and the Value of the Left Tackle
Blind Side and its Relevance to Business
Blind Side and the Culture of Zayo
Bandwidth Infrastructure Story Board (First 3 of 10 Bullet Points)
The Supply Side of the Equation

Yesterday, I explained why we set up zColo. I left out the other important reason. It goes back to the post from Monday. Recall, I don’t want to end up with dropped shoulders on a stool at a seedy bar, uttering “I coulda been a contender. I coulda been somebody, instead of bum.” To avoid this fate, I depend on Zayo Bandwidth. After all, it is Zayo’s largest, fastest-growing, and most profitable business unit.

So how do I ensure ZB does well? Well, mostly I stay out of their way. But before I do so, I keep them focused on doing what they do best—so that they can continue to do it well. As I blogged a couple days ago, Zayo Bandwidth’s livelihood is tied entirely to two things: (1) is it doing a good job for the most demanding carriers? And (2) is it able to show me (and our investors) that it is creating equity value at an appropriate pace. I pretend to the ZB team that I think achieving these two things is easy. But, confidentially, I know it is hard. To repeat what I said the other day:

The word “commodity” is often associated with bandwidth. “Commodity” implies easy and low profit. …Being a great and value-creating provider of bandwidth is hard. The processes that span quoting, order taking, service activation, billing, and maintenance must be efficient. Data must be accurate. And the service needs to be reliable. Underlying all of this is command and control of financials so that it is known whether or not value is being created.

Bandwidth is booming. So if ZB does its job well, we will have happy investors. And the management team won’t end up on bar stools in a seedy bar opining “we coulda been contenders.”

To improve ZB’s odds, I ask them to stay focused. Do a great job for the most demanding consumers of bandwidth, and revenue growth will not be a problem. Show us financially that we are creating equity value, and capital will be available. Do it exceptionally well and we will acquire more fiber-based businesses so that your geographic scope will expand. Do it hyper-exceptionally well, and I will stay out of your way—which, after all, is the biggest prize of them all.

So “why else zColo?” To allow ZB to stay focused on slapping up big bandwidth for their customers in a reliable and financially-appropriate way. To allow ZB to focus on being an efficient bandwidth factory. To avoid us sitting on bar stools once occupied by Bernie Ebbers, Gary Winnick, and Joe Naccio– uttering the words “we coulda been contenders.”

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Why zCOLO?
What is Zayo Becoming?
Telephony Article: The Launch of Zayo Group

Last week Zayo announced the formation of Zayo Colocation Services or “zCOLO”, a new business unit created from the recently acquired FiberNet.

zColo is the exclusive operator of the 60 Hudson Street Meet-Me-Room and offers colocation in 60 Hudson as well as in 111 8th Avenue in New York City, and 165 Halsey Street in New Jersey. zColo also provides extensive fiber interconnects in and between these facilities.

The press release included some eloquently worded quotes:

“Zayo Group’s focus is providing bandwidth infrastructure for carriers, Internet providers, media companies and bandwidth-intensive enterprises. The colocation and interconnects acquired from FiberNet play an essential role in the networks of many of Zayo’s strategic customers.”

And:

“The creation of Zayo Colocation Services allows for single-minded focus on providing customer friendly, price-competitive, and carrier-neutral services in and between major colocation facilities. In addition, zColo will provide transparency into the financial performance of our colocation operations for our investors.”

I couldn’t have said it better myself.

So why zColo? Why not just embed the colo/interconnect business into Zayo Bandwidth? Wouldn’t it be more efficient? After all, there is such a strong tie between bandwidth and colo. After all, it is just one network. Isn’t it arbitrary how we would draw the lines anyway?

A big part of the $100M we spent on Fibernet is based on the value of the colo and interconnect business. In fact, we attributed half of the price–$50M—to this business. How do we ensure we capture this value (and more)? How do we know if we should invest further?

To us, the answers start with ensuring that Zayo becomes a great operator of the colo and interconnect assets it acquired. There are two aspects of being a great operator. First, it is doing a solid job in the eyes of your customers. We want to be the go-to provider of colo and interconnect services in the locations we are in. To do this, we need to display to our customers that we are a responsive, reliable, and dependable partner of theirs. They need to know that their bandwidth infrastructure is in capable hands.

The second part of being a great operator is doing a solid job in the eyes of investors. We want to provide a transparent view of how we are performing financially. As a result of the acquisition, $50M was invested by Zayo in the colo and interconnect business. Are we creating equity value through how we are running it? That is, is it worth more or less than $50M to our investors? To answer this question requires knowing (a) revenue growth (b) EBITDA performance and (c) forward looking cash flow results. If we know we are doing well with this line of business, we will look for opportunities to further invest. If we know we are not doing well financially, we will focus on improving our performance.

So that is “Why zColo”. We want to do a solid job for those customers that rely on us for colo and interconnect services. And we want to know—unequivocally and objectively—how we are doing financially.

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Why else zCOLO?
Zayo signs Definitive Agreement to Purchase Citynet’s Wholesale Business
Telephony Article: The Launch of Zayo Group
zTube
2009 #2 Priority: Zayo becoming a “Best Place to Work”

This question was asked by Telephony, in an article written by Ed Gubbins titled How big are Zayo’s big-city ambitions?

The Telephony article described Zayo’s origins as “a follower of less-travelled paths and lower-tier markets. A big pipe provider to places like Walla Walla, Washington or Chillicothe, Ohio.” Gubbins contrasted this to Zayo’s increased presence in big cities markets, “You’ll find it in Miami and Los Angeles and in multiple carrier hotels in the heart of Manhattan, including the major hub at 60 North Hudson”. Said Gubbins:

“The company’s 23-state, 19,000-milenetwork now reaches 129 markets, including 52 major cities.. Its base of on-net buildings is growing by 20 to 40 per month and now totals about 2,000 – that’s nearly a quarter the size of tw telecom’s footprint but more than a third bigger than Cogent Communications’. And according to one report, Zayo even tried to buy a nationwide tier-one CLEC last year. Its ambitions have grown far beyond Walla Walla, but to what, exactly?”

Though John Scarano dismissed it as “speculation”, Gubbins also pondered Wall Street Journal’s “eye-raising story” that Zayo bid for some or all of XO Communications last year. Fibernet, Gubbins observed, “prompted Zayo to add a fourth brand to its Bandwidth, Enterprise Networks and Onvoy Voice Services units: zColo.” So what is Zayo becoming?

Drum roll please….

Zayo is a provider of bandwidth infrastructure. Where we see good bandwidth assets available at a fair price, we attempt to buy them. Through multiple different, but highly focused, business units, we slap up infrastructure for those who need it. We know our livelihood is tied entirely to two things: (1) are we doing a good job for the most demanding carriers and high-bandwidth enterprises? And (2) are we able to show investors that we are creating equity value at an appropriate pace. We do these two things well, and all else will fall into place. We stumble on either of these, and we will just be the latest chapter of telecom’s “what could have been”.

Years from now, we don’t want bearonbusiness readers to run into John Scarano and me in some seedy bar, uttering the famous words of Marlon Brando in the movie “On the Waterfront:”

“You don’t understand. We coulda had class. We coulda been contenders. We coulda been somebody’s, instead of bums, which is what we are, let’s face it.”

The word “commodity” is often associated with bandwidth. “Commodity” implies easy and low profit. At Zayo, we believe being a great and value-creating provider of bandwidth is hard. The processes that span quoting, order taking, service activation, billing, and maintenance must be efficient. Data must be accurate. And the service needs to be reliable. Underlying all of this is command and control of financials so that it is know whether or not value is being created.

When a company does all this well—and when they have a good set of assets—there is money to be made. If processes are flawed, systems are convoluted, data is corrupt, or financials are murky, then the story usually has a bad ending.

So “what is Zayo becoming?”. A bandwidth factory. Nothing more. Nothing less.

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Zayo signs 11th Acquisition…
Zayo in the News
Why else zCOLO?
Zayo One of Four in TMobile Deal
Zayo signs Definitive Agreement to Purchase Citynet’s Wholesale Business