Smokenders Kicked Its Bureaucratic Habits
October 8, 1979. It was Black Monday at the headquarters of Smokenders in Phillipsburg, N.J. In the small conference room at the end of the hallway, court-appointed trustees Tommy Thompson and Doug Hall had set up a makeshift office. They called in, one after another, the remaining 25 members of a headquarters staff that had once numbered 46. Each interview lasted about five minutes. At the end of the morning, only six of the staff still had a job, and Thompson and Hall were emotionally drained.
"It was murderous," says Maurice C. "Tommy" Thompson, Jr. "But the funny thing was that most of them were ready for it. Finally, some action was being taken."
That action was necessary because Smokenders, a company that runs eight-week seminars to help people quit smoking, had gone into Chapter 11 two weeks earlier. The immediate reason for the bankruptcy was that the September campaign to sign up new participants had bombed and there was no cash to pay the advertising bills or the course moderators. The long-term reason for the bankruptcy, says Jacquelyn Rogers, the founder of Smokenders, was the company's lack of financial management. Thompson's review of the company's financial history showed that in the first nine years of business, Smokenders never made a profit. In the last two years before bankruptcy, it lost a total of $2.7 million. Sales had peaked at $7 million in 1978 and fallen to $6 million in 1979, when the company lost $1.6 million.
Despite the company's financial woes, Rogers still speaks with pride of building Smokenders from an idea to a multi-million-dollar company: "With all due humility, I'd say that's pretty good for a housewife from Pennsylvania." A former advertising account manager, Rogers started the business in 1969 after she developed a method that helped her stop her own two-pack-a-day habit. She decided that if it had helped her -- when everything from pills to psychoanalysis had not -- her method could probably help others. The first time she gave the seminar in her hometown of Easton, Pa., she charged $3.50 a session to 23 people who had signed up. Ten years later, the rate was $295 for eight sessions and over 250,000 people had taken the course.
The course takes eight weeks to complete and during the first five weeks, participants are allowed to continue smoking. All the moderators are former smokers who have been through the course. To motivate people to stop, moderators talk about the benefits of not smoking (i.e., your breath smells good again, you wake up in the morning without coughing, you gain self-respect because you've been able to control a habit that once had control of you). One of the techniques used to break the smoking habit is a device on which a smoker records each time he takes out a cigarette. By becoming conscious of how often he is lighting up, Rogers found, a smoker can usually cut his consumption by one-third. According to an independent study of Smokenders' success rate, after 11 months, nearly 70% of those who completed the course were not smoking.
The first year Rogers gave the course, she ran the business out of her own dining room. Then she moved to an office in Phillipsburg, N.J., where her husband practices dentistry, and she started hiring people to help her cope with the mountains of paperwork -- advertising, brochures, materials for the course, questionnaires to be sent to Smokenders graduates. She bought a printing press to save on printing costs and set up a separate print shop. She hired two people to help her do the advertising in-house. And eventually she added a purchasing and distribution operation.
By 1973 she had opened chapter offices in Connecticut, Arizona, and Florida at the urging of three Smokenders graduates who wanted to spread the word to other parts of the country. She was soon swamped with requests from other grads who wanted to open their own chapters.
Because she recognized that she was more an idea person than a manager, Rogers hired more and more people to help her keep track of the business she was bringing in. The chapter managers were in charge of their own purchasing and accounting, but as the organization got bigger, Rogers noticed that this system didn't allow her to control expenses. Her managers were buying fancy mailing equipment and other purchases that she couldn't justify. The controller suggested that they bring the accounting functions into headquarters and make the managers fill out requisitions. Rogers agreed and the controller hired people to help him cover the 15 chapter offices. At this point in 1978, there were about 46 people on the headquarters staff.
While Rogers felt she had better control over spending with the new system, the people in the field saw the situation quite differently. Fay Fehd, who managed the northern California chapter, says the experience was demoralizing. She had no bottom-line responsibility and no control over money or budgeting -- not even a checking account. The chapter managers were only supposed to set up the Smokenders programs and make sure the moderators stayed close to the script that Jackie Rogers had written. And above all, they were supposed to be sending in reports -- "piddly little reports," says Fehd, "like how many people called into the office today?" She stuck with it only because she loved the Smokenders program, which had helped her kick her 27-year habit.
What Fehd knew and Rogers didn't was that Rogers had created a bureaucracy in her small company. That bureaucracy was contributing to a huge overhead that was eating Smokenders alive; most of the 46 people sitting in headquarters were pushing paper without contributing to the bottom line.
Before she'd built up her headquarters staff, Rogers had been able to keep her cash flowing from one ad campaign to the next. But now her general and administrative expenses had gotten out of hand. And although she was aware of the problem and had been looking for a good financial manager, she hadn't found anyone who worked out. She had already talked with Tommy Thompson on the advice of one of her grads, a member of a New York investment banking firm who knew that Thompson had turned around another failing company. Thompson had offered to buy the company. "But there was a big problem," says Rogers. "Tommy smoked three to four packs a day." If there was one thing Rogers was adamant about, it was that she would not taint Smokenders' reputation by hiring smokers.
Rogers' advertising costs added to her problem. In 1978, she hired a New York advertising agency and found herself spending huge sums of money on print, radio and television advertising. However, she wasn't signing up enough smokers to cover her costs. Finally, in September 1979, everything came crashing down. The campaign that was supposed to save her and the company flopped. The day she realized her precarious financial position, she put in a call to Tommy Thompson at the La Fonda Hotel in Santa Fe, N. Mex. He was on vacation there, looking for some native Indian art to add to his already large collection of Haitian art. "When she read me her figures from the last ad campaign," says Thompson, "I said, 'Jackie, not even you can do it."
Thompson knew what he was talking about not only because he had reviewed Rogers's situation, but also because he knew the business she was in. He and his partner, Doug Hall, had already succeeded once in the seminar business, taking Evelyn Wood Reading Dynamics from near-bankruptcy in 1974 to selling the company for $7 million four years later.
Doug Hall "was just a country boy" from Seattle, Wash., who hd been in the banking business before becoming one of Evelyn Wood's largest franchise owners. He describes Tommy Thompson as a super-educated financial genius with a 180 I.Q. and an M.B.A. degree from Harvard. The two hit it off immediately when they first met one night in Seattle after Hall had finished running an Evelyn Wood introductory meeting. Tommy was in town to find out whether Doug, who owned 30 franchises, was interested in joining with him to buy out the parent company. He remembers how much energy Doug had: "He was going strong from 11:30 p.m. until 4 a.m. while we had our discussion, and then he was awake two hours later to prepare for the next day's business."
Doug's memory is a little different: "Tommy surely must have thought I had a bladder problem, because every 10 minutes, I had to leave him to go to the bathroom to try to figure out what the hell he was really saying. Finally, I got so that I could translate him." And the two men became successful business partners.
When Jacquelyn Rogers declared bankruptcy after talking with her attorney and Thompson, she was losing $1.6 million on sales of $6 million, and it was the third year she had posted a loss. The New Jersey bankruptcy court appointed Thompson as chief reorganizer. Rogers put him through the Smokenders course on a one-on-one basis and Thompson succeeded in kicking the habit in 10 days. Thompson asked that his partner Doug Hall, who had also recently quit smoking, be brought in to help revive the company. As part of the reorganization, the two partners became majority stockholders.
Smokenders was tailor-made for their talents because it was the same kind of business as Evelyn Wood: The trick is to get people in the door at an introductory meeting to listen to the sales pitch. That was Doug Hall's area of expertise. He'd been doing it at Evelyn Wood for 10 years. Tommy Thompson's job was to bring some financial controls to a company that had been long on product development but short on management. The two of them were brimming over with confidence.
"I always told Jackie that we were good mechanics," says Thompson, "and that we would make her more productive." True to his word, the two focused on productivity after being appointed chief executive and operating officers. They cut out the bureaucracy and cut down on advertising and general and administrative expenses. Their financial strategy in 1980, their first year, was to concentrate on lowering the volume of the company while raising the profits -- and they were successful. Sales dropped to $4 million, but the company posted a profit of $600,000, its first in years.
Smokenders began to rise from its ashes the day Thompson and Hall drove down together to Phillipsburg and cut the headquarters staff to six people.
"When we went into that office on Monday to terminate all those people," says Hall, "we had our tennis shoes on, expecting to be running around answering phones and covering... and nothing happened. They weren't missed."
Fay Fehd concurs. "There wasn't even a ripple," she says. "They were all sitting in Phillipsburg, eating up our profit -- pushing papers. We were like the government, drowning in paper."
It didn't take long for things to get more productive. Since the field staff no longer had to waste time filling out reports, they could get on with the business of signing up new participants. Thompson and Hall dissolved the marketing department, absorbed the distribution operation into the Lafayette, Calif., offices Hall worked out of, and shut down the print shop because it was inefficient.
The biggest change came in the accounting department. "Their accounting structure was antiquated," says Hall. Although there were a lot of figures flying around about how much each chapter was spending, the company hadn't collected the data that would help it make business decisions, like cost per lead, cost per registrant, and other advertising and marketing data. Thompson replaced the 12-person financial services staff with one accountant who came from Thompson's educational publishing company, Mind Inc., in Norwalk, Conn. And then he gave every field manager his or her own checkbook and a budget, and told them to take care of their own bills.
Now that they had slashed the overhead and refinanced the business to the tune of $800,000. Thompson and Hall took their reorganization plan to the judge in June 1980 and got his approval to come out of bankruptcy. They had already begun to prove that cutting out the bureaucracy and giving bottom-line responsibility to their managers could turn Smokenders around.
Then they got advertising costs under control. Rogers had been accustomed to using an avalanche of radio and print advertising in one market at a time. Smokenders had been going into a market like New York and spending $60,000 to $250,000 in two weeks. From their days at Evelyn Wood, Thompson and Hall had learned that it was more effective to spend less money but to stay in one area for a long time -- more like spending $250,000 in 10 weeks.
Rogers's cost per registrant had shot up to 60% -- she was spending $200 in advertising for every registrant who paid $295 for the course. "That figure was just way out of sight," says Hall. "In this direct response business, we have to motivate somebody to get off his fanny and go downtown to the Holiday Inn to do something he may not really want to do. That's tough. But the real challenge is to get that fanny into a seat at the cheapest possible cost." Hall used his own advertising firm, Doug Hall and Associates, which he had started while at Evelyn Wood. Seventy-five percent of the advertising budget at Evelyn Wood had gone to TV, because the partners had found it to be more effective than radio or print advertising. So Doug Hall and Associates started turning out Smokenders' commercials for television -- low-budget, almost hokey commercials that cost $2,000 to produce. Rogers's New York ad agency had charged her $600,000 for an advertising campaign that included three slick commercials.
As Hall had proved at Evelyn Wood, commercials loaded with testimonials from people who had taken the course attracted more people.When they took the campaign to New York, they spent only $35,000 in a week and ended up being profitable. They signed up enough new participants at $295 to keep their costs down to $100 per registrant, half of Rogers's cost-per-registrant.
"When it comes to advertising campaigns," says Thompson, "Doug Hall is as great a general as Robert E. Lee." Thompson doesn't make such a bad general himself. He lowered the ratio still further by raising the price of the seminar, something Rogers hadn't done because her moderators -- many of whom had taken the course when it cost less than $100 -- put up a fuss.
Thompson and Hall, though, weren't so worried about what their moderators might think about the price as what their customers might think. Says Thompson, "We took $20 to $40 jumps on the price, looking for resistance, but couldn't find any." The standard price for the Smokenders course is now $395, $100 higher than Rogers charged. But Hall doesn't think they should apologize for that price. "If you smoke two packs a day," he says, "you'll save twice the tuition in less than a year."
Smokenders is now on its way to sales of $12 million this year with a profit of $2 million.In August, Tommy Thompson announced that Manufacturers Hanover had paid $1.5 million to buy 15% of the company. "That's going to give us the working capital we need to continue expanding the business," Thompson says happily.
As chairperson and third largest stockholder, Rogers is still a force in the privately held company. But now, instead of worrying about finances and operational problems, she's doing what she does best -- developing new programs (her latest idea is something called "DietEnders") and controlling the quality of the Smokenders program. "Tommy and Doug have taken such a load off my shoulders," she says. "And fortunately, we're in harmony, because they respect the program."
Not only do Thompson and Hall respect Rogers's program, they also respect Jackie Rogers for the hard work and energy she put into promoting Smokenders and getting it on its feet. "It's a quality program," says Doug Hall, "and Jackie never sacrificed that quality no matter what kind of financial troubles she was having."
With the promise of a second profitable year and a major investor in the bag, Tommy Thompson gets a glint in his eye when he talks about the future: Smokenders is going international, it's spinning off companies of its own, it may go public... And what of the past? Thompson thinks the reason for the turnaround is clear. "Ninety percent of Jackie's problem was overhead and advertising," he says. But Fay Fehd's emergence as the manager of the most profitable region suggests another reason: By clearing up the bureaucratic and financial problems, Hall and Thompson gave their managers a new lease on life.
"Before Doug and Tommy came in," says Fehd, "the morale was low in the field -- the advertising wasn't getting enough people in the door and I hated working with the management we had. Now my biggest problem is getting my staff adjusted to leading seminars that have twice the number of participants we used to have."