The Part-Time CEO
Meet a dentist who thought running a business on the side would be a lark
All he'd have to do, Bill Costello thought, was come up with some product, hire a sales force, buy a computer, and the business would run itself. Well, the business ran itself all right -- into the ground. At one point this dental-supply company was so directionless its sales force was trying to sell blowtorches to body shops. Considering the number of professionals starting companies these days, Costello's dilemma -- and how he responded -- is a story worth checking out. -- B.G.P.
For Bill Costello, it was easy. He had a product. He had a way to sell it. And he could still spend most of his time at his busy dental practice. In five years, he had created a $700,000 business that required him to do very little other than appear at the office a few times a week to check on orders or meet with his staff.
Like lots of people who start part-time businesses, Costello didn't think there was much difference between having a business and building a company. But the more products he brought on, the trickier it became. The more employees he had, the harder it was to know what was going on. Finally a series of jolts, some pain, and a fair amount of embarrassment began to cut through Costello's indifference to the management of his company. What ultimately saved the business was his fear of losing it.
Costello, who had grown up in western Michigan, started his dental practice in Lansing in 1970. Over the years, he noticed that patient after patient came back to him with dental bridges that required adjustments. He designed a new product to achieve a more accurate fitting, found a nearby supplier to make it, and in 1978 began selling to dentists through ads in dental journals and direct mail. At first, Costello and his wife, Betsy, addressed labels and packed boxes on the kitchen table in their spare time. But by 1983 there was no question that they had found an attractive market niche. Accu Bite Dental Inc. had become a six-person operation, a thriving little business on the side.
Still, the potential for continued growth wasn't so bright. For one thing, a competitor had recently come out with a similar product. Response to direct mail appeared to have peaked. The logical next step, Costello decided, was to begin pushing his proprietary product over the telephone. Eventually he could offer other products through the same telemarketers. Granted, it meant changing the way the business was organized -- hiring and training people, installing computers, and so on -- but those things would work themselves out.
The early telemarketing results were even better than expected -- within six months, sales were up by nearly 100%. The office, which for a time was one flight down from his dental office, was running at a hectic pace. New phones, new computers, new faces. Costello was a little overwhelmed but figured it was the price you paid for trying to accomplish a lot of things at once.
"We didn't do a tremendous amount of analysis," he says, an understatement if ever there was one. If Accu Bite had a strategy, its name was trial and error. The way the employees tell it, the place didn't even feel like a business -- it was more like a fraternity house. While Costello tended to his dental practice, the man in charge day to day was an aspiring rock musician who had been there for just a year. Most of the 30 telemarketers were still in school or recent graduates of nearby Michigan State, and nobody saw it as a place to build a career. To them this was beer money, pure and simple.
The one area in which Costello did make an investment was in the operations end of the business. He had gone out and bought an IBM minicomputer for nearly $100,000, with the idea of tracking all sorts of information, everything from customer lists to inventory.
But nobody could figure out how to get the computer to do what it was supposed to do. The managers, inexperienced as they were, didn't have any idea of the kinds of reports that would be most useful; they were barely keeping up as it was. And those in charge of data processing were equally in the dark. "We assumed we were making money," Betsy recalls, "but we didn't really know what our break-even was." And, frankly, with all the activity -- the orders, the hiring -- who cared? Not Costello. As he saw it, Accu Bite had a growing customer base, increased sales, and a spiffy new computer -- gathering a little dust, maybe, but at least it was in place.
Costello was still intent on using Accu Bite's salespeople to sell items for other manufacturers. Unfortunately, though, the big dental-products companies already had all the distributors they wanted -- which led Costello to a, well, more freewheeling approach. When Kodak wouldn't let him have X-ray film to sell, he agreed to take regular film and video cameras, which his telemarketers tried to peddle to dentists. And there was the special plastic screen they tried to talk dentists into buying to protect themselves against herpes. "We seemed to be grabbing at straws," one employee recalls. That wasn't the half of it -- Costello had his telemarketers selling a new line of blowtorches to auto body shops; later, it was a fiberglass-treatment product to boat builders.
Finally, Costello got what looked like a lucky break. In the summer of 1984 he signed a deal with a dental-supply company for an instrument that removed dental crowns. He had used the device, and he was sure his salespeople could sell it to other dentists. He was so confident, in fact, that after a brief market test, he and his operations manager plunged right in. And in anticipation of a shipment of about 2,700 units, they hired more telemarketers.
The crown remover, which they offered with an unconditional money-back guarantee, was an instant success. The most aggressive salespeople began racking up sizable commissions, and within four or five weeks, most of the units were gone. But alas, they soon started coming back. Customers had been oversold: some changed their minds, some hadn't wanted the product in the first place. By the end of October, nearly half the units were back in the warehouse.
With the surging demand for refunds -- $125,000 in all -- the company was hurting. Accu Bite had become a $1.3-million business without any cash. The Costellos managed to get a $30,000 loan from a local bank and negotiated extended payment terms with the vendor. By now, though, the fraternity house atmosphere had begun to sour. Some employees resented having to return the commission money they'd received before the crown removers had begun their return trips. They joked about Costello and the rampant ineptitude of the place. Rumors started circulating about the money the Costellos were taking out of the business, about their Mercedes and Olds 88. Betsy was annoyed: "Some of those people were out to hurt us," she says. But her husband tuned the talk out and set his sights on finding a strong new product.
A few weeks after the crown-remover episode died down, Costello, still undaunted, came up with a well-known line of diamond and carbide drilling bits for the dental market. Unlike a lot of the items he'd been selling, dentists needed drilling bits, and they needed to replace them regularly. He was determined to avoid the mistakes of the past -- the bloated inventory, the lack of focus. And, for the first time, he wanted people to feel vested in what happened. So he worked out a deal with four managers. If they sold $350,000 of drilling bits over a few months, he'd give them a special bonus -- up to $4,000 each.
They felt vested all right. In March 1985 Costello got a report showing they'd reached the $350,000 target. But Betsy questioned it. It was her job to examine bank statements, and she hadn't put her fingers on anything close to that amount. After spending several nights searching through invoices, she found that the number of orders reported were two to three times higher than what was being shipped. The payments were lower still. Accusations started flying back and forth -- even Costello couldn't ignore the fuss this time. Was the bonus incentive for orders or for payments? Nobody was really sure. Yet the message was clear: at least two managers had tried to slip one over on their boss. And they had come close to succeeding. For a guy who was hoping to turn things around, it was another slap in the face.
And that wasn't the end of it. Late one night a few months later, the data-processing manager broke through a computer security code and gained access to the financial records of the business and the dental practice. Within days the rumor mill was churning again, but this time at an even more furious pace.
If they'd gotten the facts right, it might have been less painful. But the stories were loaded with exaggerations and lies. A consultant who was working on their computer repeated the tales to the Costellos -- and he had heard them at a party. One report was that Costello was paying himself $250,000 a year. Another was that the couple was shifting Accu Bite's assets into other companies they owned, with names like Utah P & L and Tucson P & L. In fact, Costello was drawing no salary at all; Betsy, working 25 hours a week, made $6,000 a year. And those "other companies" were utilities in which the Costellos owned stock. They fired the data-processing manager, but the damage had been done. By now, even loyal employees wondered what the Costellos were up to.
The computer incident put Costello into a deep funk. "It's not something I want to relive," he says. Betsy, who's more open, remembers that "he climbed into a shell." He stopped jogging. At home, Betsy and the children tiptoed around him. And he thought seriously about going back to full-time dentistry. In the end, though, he decided to dig himself out. He didn't know how, but he'd give it a try.
You couldn't see any big changes right away, but beginning in the middle of 1985, Bill Costello started doing things he had never done before. Craig Kear, the former marketing manager, remembers the time when Costello mentioned something he had read by management guru Peter Drucker. Kear took note of it. "You could tell he was trying to come to terms with what was happening."
The truth was that Costello was doing lots of reading. During nights and on weekends, he would slip away to the business-school library at Michigan State and become a student again. The readings -- by Drucker, psychologist Frederick Hertzberg, and many others -- gave him insights into the problems he'd been fumbling with. He read about "activity traps," "expectation gaps," and "leadership vacuums" and saw himself and his company reflected there.
Employees realized something was afoot when Costello put some of his favorite articles in two-inch binders, which he gave to several of his managers. And he didn't leave it at that; the playbook, as they called it, became the basis for weekly meetings -- an introductory course in management, complete with written quizzes. People at the company gave Costello a lot of credit for his change in attitude, for taking the initiative, and for encouraging them to learn about business. "It was a major step," says Robert Stuberg, who was a salesperson and is now advertising and product manager. "It showed that Costello wasn't just dabbling -- that he really was interested in making things better."
Over the next year or so, there were many more signs of Costello's newfound interest in the company. He cut back on the dental practice and spent more time on the business. In January 1986 he hosted the first of four weekend retreats for his managers. People started out pretty skeptical of the whole endeavor. And in the beginning they spent their time rehashing all the problems -- the lack of organization, the lack of leadership, and Costello's part in the whole debacle. But before long, they were talking about the future and what they wanted to accomplish.
Betsy, for one, as head of the accounting area, was fed up with all the guesswork. If they were going to get anywhere, she said, it was time to keep tabs on the numbers and learn what they meant. "There had never been a budget before," she says. She began spending more time with the company's accountants, sorting out what systems made sense. It was the first step toward generating monthly operating reports and making better use of the computer.
In the marketing area, Kear began pushing for big changes as well. He didn't like the haphazard way the company latched onto its products -- a process he likens to "throwing blobs of paper at the wall and seeing what sticks." He wanted to study market research, to be more scientific. Other managers pushed for better training and internal communications, for more enlightened approaches to selling. But they didn't just talk about it; they created goals and action plans, and individuals took responsibility for sorting out the options. Nobody pretended to have final answers. But for once, they were defining the problems. "The great thing about all this," says Betsy, "was that we didn't have to know everything. We were creating systems, and we were all going to school together."
One of the biggest changes at Accu Bite has been the realization that there are ways -- some simple, some less so -- to identify problems before they explode. For instance, now that the computer is up and running, monitoring inventory levels and forecasting cash are part of the regimen: tools for understanding the business and for getting control. Over the past couple of years, employees have become more confident in their own abilities and in the company. "There's more interaction between people," says Stuberg. "We're tracking things and investing the resources into areas that generate results."
At the heart of the changes is a new policy of sharing information. Every month employees see operating numbers, and no details are omitted. The elaborate charts and graphs give them a complete picture of what's happening in every aspect of the business. In addition, the numbers drive a brand-new bonus system. Responsibilities have been defined, and people know that if they reach their goals, they share in the rewards.
Costello admits that the decision to open the books was scary at first. Nothing he had read suggested sharing this kind of information with employees. But in light of his unhappy earlier experience, it seemed the only way. "I wanted everyone to know how we calculated things," he says. If he didn't, he was afraid his employees would fill in the blanks for themselves -- but with the wrong numbers.
And where has all this brought Costello? A long way from where he was. For one thing, the business is doing better than ever. In the year ending October 31, 1988, sales nearly doubled to $5 million, and profits were up by more than 50%. Currently, the company has 38 full-time people. More than three-fourths of its revenues come from recent additions to the product line.
Today Costello feels so good about the company that, once again, he's cut back his involvement in Accu Bite to about 25 hours a week. But this time, his confidence is built on a healthy respect both for what it takes to grow a company and for his employees. "We've all been on a learning curve," he says, including himself among the students. Then, on reflection, "Actually, it's felt more like a fast-moving escalator."