Leadership in the Era of Distraction

Herman Melville wrote Moby Dick in 1851. It's a story about the whaling industry in the 19th century, capturing the intricacies of a life at sea. In one part of the book, Melville describes a lantern that hangs from the ceiling in the Captain's quarter. No matter how rough the seas are, that lantern stays perpendicular to the center of the earth. The lantern and it's inherent stability, reveals the faults of everything around it. It is the lone symbol of stability, always perpendicular to the earth. Leadership has to provide stability, in the current era of distraction.

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Danny Meyer, the increasingly well known restaurateur (Gramercy Tavern, Union Square Cafe, and others), addresses the challenge with communicating consistent messages to his staff members, about his expectations for standards of excellence. He mentions that many of the waiters and managers in his restaurants are constantly testing him, as they push the limits of the standards he believes in. An excerpt from Meyer's book, 'Setting the Table':

"If you choose to get upset about this, you are missing the boat", Pat Cetta (Meyer's friend) noted. Pat pointed to the set table next to us. "First," he said, "I want you to take everything off that table except for the saltshaker. Go ahead! Get rid of the plates, the silverware, the napkins, even the pepper mill. I just want you to leave the saltshaker by itself in the middle." I did as he said, and he asked, "Where is the saltshaker now?"

"Right where you told me, in the center of the table."

"Are you sure that's where you want it?" I looked closely. The shaker was actually about a quarter inch off of center. "Go ahead. Put it where you really want it," he said. I moved it very slightly to what looked to be smack-dab in the center. As soon as I removed my hand, Pat pushed the saltshaker three inches off center.

"Now put it back where you want it," he said. I returned it to dead center. This time he moved the shaker another six inches off center, asking again, "Now where do you want it?"

I slid it back. Then he explained his point. 'Listen. Your staff and your guests are always moving your saltshaker off center. That's their job. It is the job of life. It's the law of entropy! Until you understand that, you're going to get pissed off every time someone moves the saltshaker off center. It is not your job to get upset. You just need to understand: that's what they do. Your job is just to move the shaker back each time and let them know exactly what you stand for. Let them know what excellence looks like to you.

Cetta is encouraging Meyer to provide the constant stability of the lantern on Melville's ship. And, he is suggesting that he accept the fact that there will always be instability around his attempts to do so.

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A leader has to know where their center lies. They have to know it, talk about it, and never lose sight of it.

In our current era of distraction, where everyone is moving the saltshaker or being coaxed to do so, the only constant is the leader and their knowledge of what is important. The great leaders in this era, like the lantern in Melville's book, are stubbornly consistent, adhering to their center, despite the storms around them.

Acquisitions in Enterprise Technology

I've spent enough of my career in Mergers & Acquisitions in technology to have a sense for why companies, particularly in enterprise software, acquire (or choose not to). There are a variety of reasons that tend to have much more to do with the acquirer than the acquired company. (Note: most acquisition targets misunderstand this point)

There are typically 3 drivers of an acquisition in enterprise technology:

1) Revenue growth. Typically, a company will not acquire with this as a sole purpose. Because if the strategic fit is lacking, then the revenue will soon dissipate.

2) New Customers. An acquisition target could bring new clients to the acquirer, either in terms of the geography or buyer (think Chief Marketing Officer vs. Chief Information Officer)or industry.

3) Synergy with existing products. This means that the acquirer will have a broader opportunity to sell their existing products, due to the customers, footprint, or route to market from the acquired company. Note: this factor alone is typically most important in justifying an acquisition.

In my view, all three of these drives must exist for an acquisition to make sense. Number three is probably most important, followed by number two. The two of those together ensures that number one (revenue growth) can sustain itself. I rarely see enterprise acquisitions for the purpose of talent alone (i.e. acqui-hires).

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This brings us to Oracle's recently announced acquisition of Micros Systems (MCRS). In their 10-K filing, Micros describes themselves as:

MICROS Systems, Inc. is a leading worldwide designer, manufacturer, marketer, and servicer of enterprise applications solutions for the global food and beverage, hotel and retail industries...Our enterprise application information solutions comprise three major areas: (1) food and beverage information systems, (2) hotel information systems, and (3) retail information systems. The food and beverage information systems consist of hardware and software for point-of-sale and operational applications, ecommerce, back office applications, including inventory, labor and financial management, gift cards, and certain centrally hosted enterprise applications.

Simplified, Micros is a combination of hardware and software, servicing the hospitality industry. Let's look at this versus the acquisition criteria I cited above:

1) Revenue growth. At $1.3B in revenue, Micros will increase Oracle's top line from $38B to $39.3B (~3%), even if Micros does not grow organically. So, it hits that check box.

2) New Customers. I'm skeptical this brings Oracle any new customers. The hospitality industry as typically used alot of Oracle database, and their acquisition of ATG awhile back filled out their retail penetration.

3) Synergy with existing products. I don't see any obvious synergy here, for the reasons I alluded to in #2.

It would appear that Oracle is buying Micros, simply for the top-line revenue growth. They only had to pay 4x revenue for Micros due to its poor relative profitability (50% gross margins vs. the 90% that Oracle is accustomed to on software).

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I believe Oracle is trying to solve the revenue problem that is created by the opex vs. capex problem that I alluded to here. But, this is short sighted. To go back to where I started, I don't believe that an acquisition creates shareholder value, unless it checks the box on revenue growth, new customers, and product synergy. Then again, has Oracle every really cared?

It is interesting to note that what IBM is divesting (commodity hardware and retail store systems), Oracle is acquiring.

Career Decisions

The Village Vanguard is one of the oldest jazz clubs in New York. A beat writer wandered into the Vanguard one afternoon in the middle of the week, to sample some of the local sounds. Surprisingly, coming out of a break, Wynton Marsalis walks out on stage and starts to play “I don’t stand a ghost of a chance with you”. At the climactic moment of the song, someones cell phone goes off. The patron with the ringing phone, very embarrassed by the episode, quickly runs out of the place. However, Wynton, ever the professional, immediately launches into an improv riff, based on that cell phone ring.

It was an interruption in a moment of glory, but the improvisation was even more special. Nothing was going to stand between Wynton and success, in that moment.

There are three traits of resilient people:

1) They confront staunch reality

2) They find meaning in what they do

3) They have the ability to improvise

Each of those were present at The Village Vanguard that day. This is the type of resiliency and flexibility that it takes to build a meaningful career.

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I've had a number of discussions with people that are pondering a change in their career. While I appreciate the opportunity to share my thoughts and advice, I often find that I learn as much, if not more, from the discussions. Here is a framework for career decisions, that I have developed through these discussions:

a) Understand and write down your career goals. A 5-year and 10-year view are helpful as a guide. If you don't know where you are going, it is impossible to chart a course. That doesn't mean that the goals won't change/evolve, but all career decision points can use the written goals as a guidepost.

b) Never CHOOSE to take a lateral move. A lateral move is anything that does not change the scope or level of responsibility that you have. When you change roles for an increase in responsibility/scope, your career moves forward. When you take a lateral, I'd argue that you move backwards. There are situations where a lateral move is wise, because it is part of a larger career plan (i.e. skill and experience building). However, that being said, I still don't think people should CHOOSE a lateral move.

c) Careers advance when a person distinguishes themselves. Unique contributions, recognized and rewarded by an internal support group, create moments of distinction. You must decide where you have the best opportunity to distinguish yourself. Note: the environments with the most challenges often present the best opportunity to distinguish oneself.

d) Career growth in most mature companies is a product of i) your performance appraisals, ii) your executive support (i.e. are those that can promote you, personally invested in your success?) and iii) the opportunities available to you (largely dictated by a and b). You must consider where you have the best support and how confident you are in that support. To some extent, this is about managing career risk.

e) In a career, you will largely get whatever you ask for, assuming letters (c) and (d) above. This puts the responsibility on the individual to have clarity of their goals/desires and to share them...and to then be reasonably patient. This then puts the responsibility on their bosses to keep them challenged.

f) All risks that you choose to take must have clear and meaningful upside. If you can capture upside opportunity, without taking risk, even better. Don't ever let risk/reward get out of balance. For example, if you currently are employed and have equity built up (unvested equity, salary level, relationships, etc.), I would generally not advise that you simply walk away from that equity. Find a way to trade it up.

g) Don't ever make a career move for the 'promise' of a job. If you are being told to take 'job A' for now, and then you'll get 'job B' in 6-12 months, then you should assume that 'job B' will never materialize. I see many people consider this, even when they know that 'job B' is the only reason they would take the role. Yet, they don't realize that the promise of 'job B' is very different from 'job B' itself. It comes back to managing career risk. As the saying goes, 'Good judgement comes from experience, which comes from bad judgement.' Use good judgement and please don't ever take the 'promise' of a job.

h) The primary reason to take a role is to work with a great manager and a great team. Together, they determine nearly all of your happiness in a job. This means letting go of your assumptions about title and money. Making this tradeoff will pay off in surprising ways. Note: I stole this one from somewhere.

i) Consider the qualitative aspects and implications: Will you travel more or less? Is that good or bad? Will you be in the same city as the headquarters? Is that good or bad? Is there an expectation that you relocate? If not now, will there be one in the future? Is that good or bad?

j) When you are on the wrong hill, it is enticing to simply leap off. Before you do, please re-read (a)-(i). There is rarely a reason to make a critical decision quickly. In fact, if you are getting pressure to do so, I would question the intent of those that are pressuring you.

k) You are more invested in this decision than the company you are leaving AND the company that you may be going to. They are only as invested in you as your recent performance or your promise of performance. Never forget that.

***

Career success is all about careful planning, unvarnished commitment, having a positive attitude and resiliency. The better you are, the more times you will face a decision point. Hopefully, this framework helps you through the decision process.

Reversion to the Mean

I believe in timeless advice. Whether we admit it or not, there are some things that we learn through the years (typically from a parent or grandparent) which stand the test of time. The power of compound interest comes to mind. So does the suggestion of buying a home, rather than renting. As we all know, when you are done renting, you have nothing. Whereas, if you buy a house with a mortgage, then all those payments create equity/ownership over time. Why then, are so many companies deciding to pay rent for their enterprise software? Are they defying timeless advice?

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Jeremy Grantham is one of the greatest investors in modern times. He is the cofounder and chief investment officer at Grantham Mayo van Otterloo (GMO), which has over $100 billion in assets under management. His investing philosophy is based on a simple truth that he has observed: markets always revert to their long term averages. Grantham calls this phenomenon Reversion to the Mean, and GMO will often take positions betting on this phenomenon, when asset prices deviate from their historical ranges.

We sit in the midst of the largest debt driven credit bubble in the history of finance. As the Federal Reserve has aggressively expanded the money supply, there is an unprecedented amount of cash sloshing around the system.

David Einhorn, in his oft quoted talk at the Buttonwood Gathering, described it as follows:


"My point is that if one jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have, and it gets to a point where it's not a question of diminishing returns but it actually turns out to be a drag. I think we have passed the point where incremental easing of Federal policy actually acts as a headwind to the economy and is actually slowing down our recovery, and I am alarmed by the reflexive groupthink of the leaders which is if we want a stronger economy, we need lower rates, we need more QE and other such measures."


Quick translation: too much of anything can become a bad thing, and right now, there is too much cash, too little interest earned on cash, and that is creating a cascading set of events.

Jamie Dimon, in his annual letter to shareholders, appropriately pointed out that all of this cash in the system has resulted in corporate cash balances increasing to 11.4% of assets, up from 5.2% in 2000. In a cash rich world, everyone is hoarding cash.

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So, what does this mean for corporations? As any economist will tell you, the problem with too much cash, is finding a way to put it to productive use. And, ironically, despite the large amounts of cash in the system, every company that I visit has no or limited money for new projects. It's survival of the fittest, fighting for the few precious dollars available. But, how can this cash scarcity co-exist with the macro data? Well, the fact is that the cash is in the companies, but it's tucked away on the balance sheet (see Dimon comment above). When a company wants to avoid spending cash in the short term, this is when you see a shift from Capital Expense (capex) to Operating Expense (opex). Said another way, there is a decision to rent instead of buy. Let's check the definitions that I recall from my days of studying finance and economics:


Capital Expense
These are large projects requiring significant investment of cash. They are expected to help generate revenue or reduce costs for more than a year. Assessing capex is a matter of a) assessing the initial outlay, b) projecting future cash flows, and c) evaluating the future cash flows to assess ROI.

Operating Expense
These are costs not directly related to making the core product or delivering the core service of the enterprise. Opex is NOT variable (like materials) and instead, they tend to be fixed in the short-to-mid term.

So, why are companies trying to move everything from Capex to Opex?

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Corporations have decided that they have something better to do with their cash than invest in new projects: they want to buy back stock. Some recent testaments to this fact:

Darden Restaurants sells Red Lobster to Golden Gate Capital for $1.6 billion, promising to use $700 million to buy back stock.

Cisco Borrows $8 Billion in Bond Sale to Help Finance Buybacks

Microsoft Plans $40 Billion Buyback

Oracle Approves $12 Billion Buyback

And, IBM, has done a fair share of buybacks

In aggregate, in the first quarter alone, companies spent a record $160 billion on stock buybacks. Best viewed in a chart:

Companies have spoken. This is how they want to use their cash for now. Is this a new normal or will there be a Reversion to the Mean?

***

Clay Christensen interviewed Morris Chang, the founder of TSMC, awhile back, asking about companies that refuse to spend capital. Clay said to Chang, “Every time a new customer outsources to you, he peels assets off of his balance sheet, and in one way or another puts those assets on your balance sheet. You both can’t be making the right decision.”

“Yes, if you measure different things, both can be right,” Chang replied. “The Americans like ratios, like RONA, EVA, ROCE, and so on. Driving assets off the balance sheets drives the ratios up. I keep looking. But so far I have not found a single bank that accepts deposits denominated in ratios. Banks only take currency. There is capital everywhere,” Chang continued. “And it is cheap. So why are the Americans so afraid of using capital?”

The answer to Chang's question is that companies are choosing to spend it another way. But, lets look at a simple example of what happens, when a company makes this decision. Here is a simple example (based on real events) of a company that needs to acquire $5 million of supply chain software to run their business. Option 1 is when the company rents the software (an Opex model), while Option 2 is when the company uses Capex to fund the project.

This company chose Option 1. Option 1 is a poor financial decision for the company, granted it may be good from the narrower view of the purchaser. But, what happens when this cumulates across a company? If this same decision was made 10 times in a company, suddenly they have boat anchor of $30M/year of Opex. And, as mentioned above, this is fixed in the mid-to-short term.

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The obsession with Opex is not sustainable. This is not a viable way for companies to grow their cost base. That being said, it's happening due to the cash excess driving stock buybacks and other uses of money. A recent JP Morgan Chase report stated, "the other side effect of elevated dividends and share buybacks is that these distributions to shareholders may reduce the long term potential of the company to grow relative to the alternative of capital spending."

As Grantham would do, I'm betting on a Reversion to the Mean. At least, that's what timeless advice would tell me to do.

Take the Horse off the Chart

“If I had asked people what they wanted, they would have said faster horses.”- Henry Ford

Whether or not Henry Ford actually said this quote, that has been long attributed to him, is debatable. But, the spirit of the quote, certainly permeated Ford's approach to innovation. He was less concerned about what customers said they wanted, and much more focused on what he felt customers needed, whether they knew it or not. This forward-looking approach is at the heart of an innovative culture.

The first Ford Model T was introduced in 1908. While other automobiles had been available to purchase for over a decade, this was the first car that could be afforded by the masses. This is why most people remember the Model T and not the Model A, which was actually the first automobile produced by Ford. The Model A, first brought to market in 1903, was a 2-cylinder vehicle, but it was not affordable for all. Hence a key learning point on innovation: form, function, and price are often equally important.

Ford's reputation as an innovator was cemented by the 38 years of innovation that followed the Model A. Ford quickly ramped up to 1 million cars sold by 1915. The first Ford truck arrived in 1917 (it had a Model T engine), followed by an enhanced 8-cylinder Model A in 1932. Then, came the Ford Mercury in 1938 and the Jeep in 1941. Thirty eight years of innovation, never once looking back.

The product roadmap is an all too familiar chart seen across product development companies today. It doesn't matter if its hardware, software, machines, or even consumer packaged goods; everyone has a view of where the product is today and where it will go in the future. The challenge most successful companies face, which is well documented by Clayton Christensen in The Innovators Dilemma, is the trade-off between sustaining innovation (enhancing/improving your current products) versus investing to build transformative products, that attack new opportunities. The former is very easy, while the latter is technically difficult, not to mention the inherent cultural challenges.

If Ford had been pre-occupied with sustaining innovations, there would have been a horse (albeit a better horse) on his roadmap chart circa 1903.

Since we all agree that is ridiculous, then why iso many companies fail at this task? Culture, inertia, existing client requests, existing skills, etc., are among the reasons.They all make this hard, but that doesn't mean that its not necessary. Next time you are in a meeting where you see a team falling into this trap, use the phrase, "Take the Horse Off the Chart".

I'm interested in your views.