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Beauty in the Eye of the Stakeholder

Beauty in the Eye of the Stakeholder

Mike Jalbert s a CEO gun-for-hire. The turnaround expert took the helm of US-based Microdyne in March 1997 when the computer adapter-card manufacturer faced bankruptcy. The company's stock had hit a low of $2 per share. In 1995 revenues had peaked at $170 million but in 1997 were a disheartening $43.6 million. The consensus of experts in the computer adapter-card industry was that the company had less chance than a balloon in a pin factory.

But Jalbert sees hope and possibility where others see red ink and disaster.

His plan for Microdyne was to make those tough decisions about which lines of business would live and which would die. In addition Jalbert would apply principles of value-based management (VBM), an approach that builds company worth by relentlessly eliminating nonvalue-producing costs and investing whatever resources are left solely in assets or projects that will grow to be assets at a rate that exceeds market expectations. Jalbert is no VBM seer, just a businessman willing to make tough choices. But whereas gurus, self-proclaimed experts, consultants, academics and other advisers do not have to put it on the line in quite the same way as a CEO, Jalbert's knack for keeping his eye on the ball is special (see "Business Prophets Promise Profits" below). VBM principles aren't only for turnaround situations, however. For hungry corporations whose executives may have been distracted by trendy theories, here's a set of ideas that will focus the organisation's attention on value. Hunger does a good deal to focus the mind.

Stakeholders-whose wallets grow hungry in the absence of revenues and profits-sure like Jalbert's style. On December 3, 1998, just over a year and a half after his appointment as president and CEO, Microdyne was bought for $5 per share by L-3 Communications Holdings , the hot spinoff of Lockheed Martin.

That means the company's total market capitalisation grew from $36 million to $90 million during his tenure. That's a honkin' bucket's worth of value.

Value from IT

At Microdyne, Jalbert first applied VBM by looking at how the company used and invested in information technology. Then he invested heavily in the company's IT infrastructure, buying an ERP system to optimise manufacturing strategies while making those jibe with financials. Microdyne purchased Oracle Financial GLAPR software for general ledger tasks. Jalbert found the IT systems of Microdyne's telemetry division to be shockingly primitive. The division's product can gather data from moving objects such as satellites. It sells technology at the state of the art. But back on the ground the division was using desktop PCs with 286 processors, AOL dial-up accounts for e-mail and Internet access, and very limited in-house networking. Because Jalbert's strategic plan to add asset value called for a client/server setup, the aged PCs were connected to a network server. For full-time e-mail and Internet service, the company acquired a 256 frame relay.

Jalbert also invested heavily in intellectual assets, a trendy way of saying the company did some headhunting, offering sweet deals to the personnel it needed to hire or maintain. A final piece of Jalbert's turnaround strategy was to engage in a bit of competitive intelligence. "We needed to know what our peers were doing," he says. "When a company is publicly traded, you can get a lot of information by looking at mandatory documents filed with government agencies [such as the SEC]." What documents? What to look for? Jalbert slyly won't say. (For more on CI, see "All Along the Watchtower".) In Jalbert's experience, companies most often get into trouble when they have been penny-wise and pound-foolish. After startup successes and a small initial public offering of stock, closely held, low cap companies may run into trouble when competitors start cropping up. For fear of dismounting a winning horse, founders who have met success are often the slowest to adapt to change.

"Entrepreneurs can be rigid," Jalbert says. "I've gone into companies and met people who say, 'I don't believe in voice mail.'" Think Assets, Not Costs When leadership can no longer adapt to changes in the marketplace, a person like Jalbert comes in, bringing new perspectives and fresh ideas. But precisely how does an executive identify IT projects that will be perceived by the market as powerful assets and not bloodsucking costs? Howard A. Rubin, chair of the department of computer sciences at New York City's Hunter College and editor of the journal IT Metrics, says that "companies have to develop a mind-set such that IT is understood to be an asset." This belief must be held at every level of the company-finance, customer management, organisation and process operations-and since "IT must be an asset" is a credo too easily given only lip service, Rubin also offers some concrete advice for how this mind-set can actually be achieved.

* Project over time the expected ROI of any IT investment.

* Identify the separate roles of technicians and business people in any IT project.

* Track actual versus projected ROI of the project.

* Make continuous adjustments to tracking procedures that trace company culture to identify norms that resist the project.

To make his point about how companies can deceive themselves when it comes to measuring IT ROI, Rubin tells of an insurance company that developed an IT system that it presumed would increase agent productivity by 20 per cent. That figure was not pulled from a hat-pilot runs demonstrated that the work of recording, adjusting and accessing policy files that was once performed in five days could be performed in four. But executives were chagrined to learn that the expected rise in productivity never materialized. It seems the company's agents were so delighted with the efficiency of the new systems, they were taking off one day a week. So long productivity, hello golf cart.

Strictly applied, VBM smiles on strategic and long-term IT investment ventures, such as an ERP system or an e-commerce initiative. Those kinds of projects tend to become assets that add value. While quick fixes such as standardizing message systems may make the workplace a little more pleasant to inhabit, in a VBM-oriented company with competing demands for resources, the incremental improvement in productivity precipitated by a change for workers' convenience has to be demonstrable in terms of money. Such a requirement permanently removes technology-for-its-own-sake from the driver's seat in a company's IT infrastructure. It also means that squishy, distracting projects such as collaboration, team building and knowledge management better promise a solid dollar return before they show their heads in the boardroom. After all, why invest money in an organisational theory when other investments will bring a sure 10, 15 or 20 per cent better return? "Historically, IT has been perceived as a cost center," Rubin says, but applying a VBM perspective to a company requires that IT be evaluated and measured in terms of expected yield.

Hard Times, Hard Decisions, Hard Questions On board at Microdyne in 1997, Jalbert looked at the yield of the computer adapter-card line and how competition was squeezing its profit margins to zero.

After 90 days in the president's office, he decided to jettison the whole losing proposition. The adapter-card business was put on the selling block, but a sale never materialized. "We took the write-off," Jalbert says.

But Microdyne had two small lines of business (LOBs) in which Jalbert saw promise-and the company's future. One was the aerospace telemetry division, that line of satellite radio receivers that Jalbert calls "stuff for spooks." The other promising LOB, no more than a project in the works when Jalbert arrived, was a technical-aid call center and help desk operation. The new angle on that idea was to allow the call desk to be the vanguard of an outsourcing LOB. Those two LOBs became Microdyne's core businesses.

Decisions about the business are inevitably decisions about people. Jalbert believes distressed companies often have employees who know the answers to troubling questions but simply won't say or have never been asked. Jalbert makes a point of asking-it's a bit of knowledge management. In fact it's step one. To identify those folks who may hold the answers, he recommends that other CEOs ask each executive four questions: * What do you do? * What were you hired to do? * What do people think you do? * What do you want to do? If the answers make sense, says Jalbert, you know you're talking to a grounded executive. If the answers don't make enough sense, you might be talking to a potential staff cut. A lot of shareholder value goes out the door as salary in the pockets of executives who are fuzzy on their jobs or what their jobs could be.

Right now, Jalbert is trying to work a little of his turnaround magic as chairman of Transcrypt International, an electronic cryptography company and developer of mobile radio systems in Lincoln, Neb., afflicted with what well-mannered analysts call "ever-diminishing resources." In other words, the company is going into the tank without water wings. But there may be hope: Jalbert has rolled up his sleeves and expects to apply value-based management principles again.

Business Prophets Promise Profits

Value-based management has an unequivocal goal: measurable valueVBM proponents believe that value is created when capital is invested for returns that significantly exceed the cost of the capital. In other words, the manager versed in VBM will make strategic and tactical decisions to invest money only where the future returns on the investment significantly exceed the cost of money itself. Why go to the trouble of hiring, firing, buying and selling if the company is better off simply putting its dollars out on the street in the form of loans? In large companies that simple principle can be lost.

Management techniques pass in and out of vogue faster than supermodels strutting their stuff on Parisian runways. Every style has a different focus.

The seers of total quality management (TQM) will swear that the pursuit of product perfection out to the nth decimal place will earn millions-so their initial focus is always the widget itself. Business process reengineers (BPR) care less about the widget than about how the widget comes to be; they focus on process, of course. Customer management know-it-alls prophesize doom on those who do not allow customer input to marketing, design and every other business process. Kaizen has its devotees, flat organisations its disciples, collaborative work environments its partisans, and there are even zealots who'd have you believe that the only way to make a dime is to create offices without walls.

No doubt, money eventually trickles down to where it can be counted in all of these approaches. But where other managerial theories seem to visit the bottom line only after a circuitous journey elsewhere, VBM managers have their eye on the dollar from the beginning. And VBM managers know the eyes of stakeholders are looking over their shoulders.

And it works too. Scott Gillis, a partner of Marakon Associates , a small US consultancy that specialises in VBM techniques says, "The distinguishing factor of companies that effectively employ value-based management is an executive board with an unequivocal and unwavering vision of its purpose-which is to create shareholder value." Gillis points out that competing objectives such as global initiatives or growing market share can distract from what seems an obvious mission. Gillis believes that in many non-VBM companies only 30 per cent to 40 per cent of capital is actually creating value, as much as 50 per cent is value-neutral and as much as 20 per cent to 25 per cent of capital is frequently allocated in ways that are destroying shareholder value. Companies that practice VBM consistently give shareholders a 3.1 per cent higher total return relative to the average return of peers in their industry group.

Marakon's client companies have included The Dow Chemical, Bank of America , Nordstrom , The Boeing and the Bank of Montreal, organisations where those single-digit per centage gains add up to billions in equity.

Couch Potatoes Want Value Too

Need more customers?

Reach out on the Web.

Gabelli assets management has been making piles of money for its customers for years, but now it has new obligations to confront: Shareholders stare over management's shoulders ever since the company went public in February. Marc Gabelli, managing director of the company, describes the snowball effect of creating shareholder value. "If we have more customers, we'll control more assets. More assets, more profit. More profit, a higher stock price." The challenge: How to start the snowball rolling. Obtaining customers is a marketing job. Marc Gabelli is an astute businessman who needs no consultants to tell him what he knows. "You want to know what's wrong with our marketing?" he says. "Look at our Web site. It sucks!" The problem isn't the product. Gabelli's Global Interactive Couch Potato Fund earned as much as 41 per cent in one year for its investors. The Rye, N.Y.-based Gabelli organisation manages $18 billion in assets, evenly divided between accounts specially managed for deep pocket investors and Gabelli's 23 publicly traded mutual funds.

In a value-based management decision, the Gabelli organisation decided to invest some of its IPO money in IT tools. But its first investment was an intellectual asset-a guy named Raffaele Pisacane. Pisacane says he was named CTO "because we couldn't have two CIOs." Pisacane laughs. "Mario Gabelli, he's the chairman and chief investment officer. Nobody wants to change the boss's title." Pisacane has the right stuff: He worked on the consumer Web site at Standard & Poor's and on the IT architecture at the Federal National Mortgage Pisacane expects to create a similar IT architecture at Gabelli as well as a Web site.

Marc Gabelli looks forward to meeting-and retaining-customers who come to Gabelli online. "Right now we [sell to] only 20 per cent of the customer leads that come to us," Marc Gabelli says. "That's terrible." Pisacane adds, "The Web is a pervasive channel in finance. That's our strategy to add shareholder value."

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