Who's in Charge Here?
Portrait of the relationship between a founder and a professional manager
You know the syndrome: founder hires manager to be CEO and either doesn't give him any real authority or turns over the keys to the company, only to resent the hell out of the guy. Not Bob Metcalfe, founder of 3Com. This is one entrepreneur who calls his professional manager "boss," and who says he hopes one day to apply for the presidency -- of his own company. The story of how these two manage together reveals much about what it takes to make one of the thorniest business relationships work to everyone's advantage. -- T.R.* * *
Ten years ago Bob Metcalfe started a company he called 3Com Corp., but when he got venture capital financing he gave up the president's title. Soon he lost the CEO's role. Eventually he yielded the chairmanship, too. Poor Bob Metcalfe.
Poor Bob Metcalfe?
The man is now worth well into eight figures, he's acquired an education no business school could have given him, and at a mere 43 years of age he's back in line for the presidency of the company, which, by the date of his possible reascension, should be closing in on $1 billion a year in sales -- a level it never would have achieved with him in charge for these past eight years.
Metcalfe, an engineer, founded a business first and only later decided to become a businessman. That may be the hard way to go about it. He can see now where he has been, but on the way it wasn't always clear where he was going. He hadn't mapped out a route, and there were several difficult intersections to negotiate -- three of particular note -- and at least one still to go.
On the other hand, Bill Krause decided to become a businessman first, then to build a business. When Metcalfe founded his company, Krause was running Hewlett-Packard Co.'s $60-million general systems division, managing roughly 500 people, and riding the fast track to the top slot at that well-thought-of corporation. Then, with 14 years' experience under his hat, he took a 35% pay cut to be president, not even CEO, of Metcalfe's company, a dirt-ball start-up that didn't have a market for its technology. With just nine employees, including himself and the assertive founder, it wasn't obvious who or what this consummate manager, this issuer of memos and drafter of plans, expected to manage.
Was he nuts? his spouse wanted to know. There was no organization, he lacked the authority of title, and wouldn't he have to jolly the man he was bumping, who still owned a majority of the company's stock? Her skepticism was well grounded, although, as time would prove, unnecessary. Krause has always known where he was going. Unlike Metcalfe, who prefers to let his instincts guide him, Krause carefully maps his journeys before setting out.
Many entrepreneur-executive teams have attempted what Krause and Metcalfe have accomplished, and more of these partnerships have failed than have succeeded. Each party to the failure usually blames the other.
A seasoned professional arriving to manage a start-up normally wants the entrepreneurial founder gone, or at least out of the decision loop. Ambiguous arrangements, such as the one that Krause and Metcalfe cooked up, seldom work. Oh, they're OK when things go well, because when things go well it matters little who's in charge. But when losses loom? John Sculley didn't see how he could possibly turn Apple Computer around with Steve Jobs, petulant and pedantic, still underfoot.
By the same token, entrepreneurs who act largely on instinct usually admire the acquired skills that cool professional managers bring to their jobs. Seldom, though, do they trust these people thoroughly. Billy Ladin, founder of Houston-based ComputerCraft Inc., a once fast-growing chain of computer retail outlets, demoted himself to vice-president of sales and hired Paul Frison, a veteran executive, to be CEO and run the business. Except he didn't put Frison completely in charge. Ladin kept the title of chairman to himself, and when ComputerCraft lost its headway, he reclaimed the conn. "If this ship is going down," Ladin said, "it's going to be with me at the helm." Frison, they jointly decided, would swim ashore. Ladin later merged a considerably smaller ComputerCraft into Businessland Inc.
So on the surface, it's a wonder why; but somehow and against the odds, the Metcalfe-Krause arrangement has survived.
And the company hasn't done badly, either. From sales of $1.8 million during Krause's first full fiscal year (1982), 3Com's revenues rose to $252 million in the year ending May 31, 1988. Company and analyst estimates have this year's sales exceeding $350 million. Per-share profits have climbed every year since 3Com's 1984 initial public offering. Only Digital Equipment Corp. (DEC) is bigger than 3Com, which edges out IBM, in the computer-networking market.
While employed at Xerox Corp.'s Palo Alto Research Center (PARC) in the early 1970s, Metcalfe, an MIT-educated engineer, coinvented a technique for linking multiple computers and their associated terminals and peripheral devices together into what has come to be called a local area network (LAN). He called the invention Ethernet -- for the massless medium scientists once believed to be the cosmic conductor of electromagnetic radiation.
In 1973, when Metcalfe developed the technology, there wasn't much call for computer networks, largely because no one had invented the personal computer yet. Businesses that had computers were still using mainframes and minicomputers -- one per company. At the beginning of 1979, after attending an MIT alumni luncheon on starting your own business, Metcalfe resigned and returned to Boston to consult.
By then, however, the rapid evolution of information technology had already changed business computer use. DEC, Metcalfe learned, was trying to develop its own networking technology that wouldn't infringe the Ethernet patent. But why reinvent the wheel? If Xerox would permit, Metcalfe believed that Ethernet could become an industry standard for networking the growing number of PCs, minicomputers, workstations, and peripherals that were augmenting or replacing mainframes. Xerox agreed and joined DEC and chip-maker Intel Corp. as a collaborator on drafting standard Ethernet specifications.
Meanwhile, Metcalfe and another engineer incorporated 3Com Corp. -- for computer, communication, compatibility. 3Com started out as a consulting firm, because a market for Ethernet products didn't yet exist. Howard Charney, an engineer-turned-patent-attorney and a fraternity brother of Metcalfe's, joined as employee number three.
In May 1980 the DEC-Intel-Xerox collaboration was announced to the world. The collaborators would release the Ethernet standard they were devising, they said, on September 30. Also by May, Metcalfe and Charney had realized that it was time to start developing Ethernet products -- hardware and software the company could sell. To be a manufacturer, however, 3Com would need capital, which meant it needed a business plan. And it was about that time, the summer of 1980, that Metcalfe's instincts suggested that he and his engineer-colleagues would, as he puts it, "need a little adult supervision" to help them bring all of this off.
End of background.
Metcalfe will tell you, honestly and sincerely, that as a scientist, engineer, and former salaried corporate employee, his principal interests in founding 3Com were to develop and sell products and to produce wealth for himself and others. "You often hear about people whose dream it is to save the world with organic sodas because they're good for people. I just want to come clean," he says. "The company was more an end in itself than the means to something more glorious." In any case, Metcalfe insists, he did not start 3Com to run a company. Like the rest of us, however, the Ethernet inventor lives with an ego. He's no self-effacing saint.
The day Krause reported for work, Metcalfe made a great display of giving the new president his corner office. For himself, he took a conference room with no windows. Giving up the office, of course, was a cheap gesture. Giving up other founder perquisites was a good deal more wrenching.
Metcalfe met Krause in January 1981 at a lunch arranged by a common acquaintance. Metcalfe didn't know what sort of person he wanted to hire or what job he wanted to give the individual. His partners believed Metcalfe capable of doing the job himself. They weren't enthusiastic about recruiting an outsider. And if they did bring in a management pro, all three agreed, the job they offered would depend upon the qualifications and experience of the person to whom they were offering it. They considered, for instance, Metcalfe's former boss at Xerox. He would make a good president, they thought. A woman they considered from Hewlett-Packard, on the other hand, had only executive vice-presidential stuff.
The three venture capitalists whom Metcalfe had been courting since the fall of 1980 had not insisted, as they might have, that he recruit professional management as a prerequisite to closing the deal. The $1.1 million they were about to drop into 3Com wasn't a huge sum of money, even then, and technology seemed more important to the company's short-term future than management. "The company had come together," says Wally Davis, now a general partner with Alpha Partners, "largely because of Bob's renown and his technical ability." Nobody, Davis says, believed his optimistic business plan.
Another investor, Dick Kramlich, general partner at New Enterprise Associates, recalls that no one knew exactly what kind of market 3Com was going to be in back then, "So we didn't know what kind of business guy we would need."
At lunch Metcalfe immediately liked Krause. He pointed out to his partners that Krause had 14 years of management experience. "I argued that he knows how to run an organization of 500 people. We want to be an organization of 500 people, so let's bring him on." Implicit in this argument was Metcalfe's recognition that he was not the man to be running an organization of 500.
That's important. Metcalfe may not have understood then what handing over control really meant, but he at least had the inkling that it had to be done.
Charney still doubted that the company needed anyone badly enough to warrant the salary expense and the stock they'd have to give up. He recalls a cartoon someone gave to Metcalfe. A king and a queen look over their domain. King, appearing doubtful: "I'm not sure I can do this." Queen, looking stern: "Shut up and rule." Charney frequently gave Metcalfe the same advice.
Charney was wrong, as it turned out, and the stock the cofounders gave Krause on his arrival probably accounts for his still being there today. Perhaps, without stretching the argument too thin, it even accounts for the company's survival. In either case, it was a bargain.
If Metcalfe is serendipitous about life, Krause is not. In fact, he has a three-phase plan, which he divides into his "learning," "building," and "serving" phases. During the first, he had decided, he would learn how a business was run. In the second he'd build his own business. And in the third he would perform some sort of public service. Each phase would last about 15 years, taking him to retirement. With 14 years of on-the-job management training at HP behind him in 1981, Krause was ready to move to phase two.
At their first and subsequent meetings, Krause was delighted to find that although he and Metcalfe had different voices, they sang from the same hymnal. They shared the same view of how the computer industry would evolve and of the key role a networking company -- 3Com -- could play. "Here," says Krause, "was my opportunity to gain expertise in a technology that was going to change the computer industry and the way people work." More to the point, though, here was an opportunity for him to build a company almost from scratch.
Quickly, in little more than a week, they negotiated a deal. It was not what either one of them wanted. Metcalfe would be chairman and CEO; Krause, president. Metcalfe had offered the executive vice-presidency, and Krause had wanted the chief executive's title. The compromise was a mistake, but who knew then? Metcalfe took the view, naïvely, he says now, that CEO was an honorific title. "Bill was president. His job was to run the company. The chairman-CEO thing didn't appear in my mind as a conflict."
If he had tried, says Krause, he might have gotten the title he wanted. "But we were sold on each other, and it didn't seem important. Also," he adds, "there was already a team there. Bob couldn't just anoint me king. Their loyalty was to him. I had to earn it, too." Krause trusted, he says, that when the time was right, Metcalfe would relinquish the title.
The following year Krause learned that he should have negotiated harder. And Metcalfe should have agreed to bestow the title that went with the job. After all, how much harder is it to fire a CEO who screws up badly than to fire a president? The expedient decision cost both men and the company six months of grief in 1982.
In the same month that Krause joined 3Com, March 1981, the company began shipping its first hardware product. Production and sales were new experiences for people at the company, who until then had been consultants and product developers. So the office was a little nuts the day Krause arrived, his first MOST memo -- mission, objectives, strategy, tactics -- already written. "He wanted to sit down and talk about who is the customer," says Metcalfe. " 'Bill,' I said, 'we've got 42 phone messages to answer, and you want to know who our customers are. Here, take some phone slips. They're our customers.' "
In short order, Krause began hiring people: a vice-president of sales, a vice-president of marketing. "We started spending money," Metcalfe recalls. "Bill insisted that we move to a 25,000-square-foot building in Mountain View. He started recruiting people to do things Howard [Charney] and I weren't sure needed doing. . . . And we started planning. We had weekly planning meetings, monthly planning meetings. We had plans out the kazoo -- but they stopped coming true." The company began to suck cash. A second round of financing in January '82 kept 3Com solvent, but the monthly board meetings were becoming increasingly unpleasant.
"I'm running the meetings," Metcalfe recollects. "In my view, Bill is running the company, and it's not going well. In the board's view, though, Bob is running the company, and it's not going well. I think it's Bill's problem. In the board's mind, it was my problem. I didn't get it. We hired his marketing guy, his sales guy; moved into his building; followed his plan. The company was losing money, and it was my fault?"
By the summer of 1981 -- not even six months after Krause, the hired business brain, had arrived -- the company projected serious trouble. It wasn't out of money yet, but Krause's cash-flow graphs showed that it would run out before the end of the year. He had ramped up too quickly to handle business that hadn't materialized quickly enough. He had misjudged, he says, how fast he could prime 3Com's revenue pump. "I didn't have enough appreciation for running a small business out of a shoebox and a checkbook. At HP," Krause reminds himself, "I didn't have to worry about money for payroll."
When in doubt or in trouble, Krause the manager's instinctive response is to make a plan. That's one of the things that makes him a manager. So in late July the executive committee -- Krause, vice-president of engineering Metcalfe, vice-president of manufacturing Charney, and the vice-presidents of finance, sales, and marketing (which is a lot of vice-presidents for so tiny a company) -- approved Krause's "survival plan." In the short term, it tied a management pay cut and a hiring freeze to achieving four consecutive months of breakeven.
Each individual had goals consistent with the greater objective of increasing revenues. One of Krause's was to be sure that Metcalfe met his. "Bob," says Krause, "is inconsistent about priorities. He chafed against that, so we'd sit down together, and I'd say, 'Let's talk about priorities.' He wouldn't do it on his own. Together we would reorder his list, and then he would tack it up on his board. . . . People accuse me of being too pedantic. I say, 'Let's plan our work and work our plan, plan our work and work our plan.' But that's what I do."
As '81 became '82 and the company struggled under the survival plan, Metcalfe was still chairman, which in his view meant only that since someone had to preside at board meetings, the chore fell to him. The survival plan gave him tasks to perform, but he had nothing resembling a conventional job. What was Metcalfe going to do in the company? What was his role? Did he have a career path to follow?
On Krause's arrival, Metcalfe had become vice-president of engineering, a job that suited his experience and temperament. "Bob's the protagonist," says John Marman, now vice-president of 3Com's international division, "the needler, the restless one. You think you've got everything covered, and here comes Metcalfe asking, maybe we should make food processors. Bob's restless. He needles Bill, sets a fire under Charney. There's this anxiousness that keeps the company bubbling."
But Metcalfe had been displaced from the engineering slot after several months by a new hire.
In fact, it was all beginning to look quite untidy, especially Metcalfe's being CEO.
In January the three original venture investors plus others had dropped another $2.1 million into 3Com, and the company still wasn't making its revenue forecasts. Someone had to be accountable for that. "We kept asking, 'Who's in charge here?' " recalls Dick Kramlich, "and both guys would raise their hands."
The board clearly wanted one man as CEO -- in fact as well as in title. No outside director doubted that Krause was the one who should be in charge and who should, therefore, carry the title. They differed only on how to make the change. Displacing a founder is always an ordeal -- at best awkward and sometimes bloody. And frequently there are casualties. Would Metcalfe have to be carried out feet first?
Krause held the investors partly responsible for the confusion. They should have known better than to let him and Metcalfe cook up such an ambiguous arrangement. The reporting relationships were bizarre. "They gave [Metcalfe] the title," he says, "but had me reporting to the board. As CEO, Metcalfe also reported to the board. But as vice-president, he reported to me." That was OK when things were going well. But now, in the second half of fiscal '82, says Krause, it gave birth to a "two-headed monster."
Furthermore, Krause believed that Metcalfe had already promised him the CEO job. "Come on, Bob," he remembers saying, "that was part of the deal, and if it happens sooner rather than later, what difference does it make? Besides, I'm the most qualified."
Metcalfe still didn't get it. How could they -- Krause and the outside directors -- be talking about control? Krause was running the company, wasn't he? They weren't arguing over strategy or tactics. Metcalfe bought into everything Krause was doing to turn the company's earnings around. "I didn't see the two-headed monster," Metcalfe says.
What Metcalfe saw was Krause forcing the issue, letting personal ambition get the upper hand. He believed that Krause had begun to meet behind his back with investors. One venture capitalist, drunk at the time, publicly upbraided Metcalfe during a Las Vegas convention over his failure to yield authority to Krause. All of this, Metcalfe remembers thinking at the time, was "low-down, dirty, unproductive stuff."
The showdown came at the June board meeting. The board, Metcalfe recalls, said they had to make a decision. "It had always been my plan," he says he told them, "for Bill to be the CEO one day. 'This is the day,' they said."
If there was one point in Metcalfe's progression from founder to leader where he might have given up, this was it. He'd been deposed against his will. Many founders would have quit. Plenty have.
Who can say precisely what combination of factors kept Metcalfe from leaving or kept him and Krause from serious collision during the six months they wrestled with the CEO dilemma? Both men are intensely competitive. They worked until 10:00 or 11:00 every night, Krause recalls, each unwilling to go home before the other. Roughly evenly matched, they challenged each other often on the tennis court. Neither, say both, was about to quit. Both had the self-confidence that allowed them to talk their issues out in one-on-one sessions. "They used to have them in the parking lot," says Charney, "You'd see these two guys circling the building for hours."
Krause created an organizational device that helped them avoid confrontation. Krause knew, says Charney, "that he couldn't dictate to Bob. Bob wouldn't go along. So he founded the executive committee, which he chaired, and it ran the company. War would have ensued if he'd tried to exclude Bob, so he included him. That made it easier for Bob to give up power, because he was able to participate in the decisions."
Metcalfe, however, insists that he knows what kept him and Krause working together. "Greed united us," he says, only a little glibly. Metcalfe was 3Com's largest shareholder, with just under 21% of the equity. Krause, with 9%, became the second largest when he joined the company. Both knew that the departure of the other would weaken the company. If the two of them had been working on salary at Hewlett-Packard, say, and that kind of dispute arose, Metcalfe says he would have walked out. "For $50,000 a year, it wouldn't have been worth putting up with that jerk -- who, by the way, turned out not to be a jerk. That's just how I felt that week. Equity does tend to hold people together during emergencies. . . . More than once, we were a sentence away from ending the company . . . . We just didn't let it happen."
When Krause finally became CEO in June 1982, Met-calfe got a real job, too: vice-president of sales and marketing. "We doubled our sales in three months and haven't lost money since," he can brag now, clearly delighted with his performance. "I learned a lot in that job, and I did it with distinction."
The company's growth had taken off, and so, finally, had its founder's. Over the next five years Bob Metcalfe tackled three other jobs, each requiring him to learn something new. At last, he was getting into business.
Metcalfe's first undertaking after sales and marketing was the launch of a software products division. Then when a planned merger between 3Com and Convergent Technologies Inc., a maker of computer workstations and minicomputers, came unglued, 3Com elected to develop and sell its own network workstation. Metcalfe took charge of the project and created another new division for the company.
While all this was going on, the inventor-founder came to see, with a good deal more perspective than he'd ever had before, what he was doing and what he had to do. Metcalfe was doing, at last, what he'd hoped he could do by founding a company. He was learning business, how to manage, the skills of an executive. This is the way, he had come to understand, that he would finally get to run the company.
So when 3Com acquired Bridge Communications Inc. in mid-1987, Metcalfe easily took the third turn in his business career and gave up the chairman's job.
Why would he do that if what he wanted, ultimately, was to be in charge?
To avoid playing the stereotype, the role of brilliant founder who gets kicked upstairs, answers Metcalfe. "Being a non-CEO-chairman," he explains, "means the vector attached to you is out." You can't be "promoted" to president from chairman. "If I wanted the job, I decided I'd have to be an up-and-comer, not a down-and-outer. . . . The stereotype was dangerous to my aspirations."
Soon he tackled the biggest job he'd ever had at the company, running 3Com's Distributed Systems Division (DSD). It employs 20% of the company's work force and is the largest revenue producer. He still has the job today, and he is clearly enjoying himself. He and Krause at the time we talked were scrapping over inventory turns, Krause insisting that DSD's, at five turns a year, were too low. Metcalfe grins, because he's done his homework and knows he's going to prove Krause wrong. Tacked to the fabric-covered partition of his modular work cubicle is a list of eight performance objectives that could apply to the division he's running. Some of them are mutually exclusive. His job as manager of the division, he explains, is to figure out which combination works best. "It's interesting and challenging," he says, "and certainly at an intellectual level I understand the problems better than I did six months ago." What he doesn't have yet, he says, is the visceral, reflexive feel that only long experience can bring.
A few months ago Metcalfe began talking openly within the company of his desire to move up to the presidency. He has had four P&L jobs at 3Com, he points out. Three of them have been start-ups. This is the first time he's taken over an operating division. "My résumé needs this," he says, "if I'm going to be president. My board thinks of me as a start-up guy. They see me as a visionary. A visionary is someone who can't do anything else, who needs to be kept around like a child. I need to shake the start-up image, show them that I can run a big division."
His most valuable contribution to this job so far, Metcalfe allows, was his recommendation (after suitable study) that DSD should be split into three smaller units. "My boss," he reports, without even a hint of irony, "said that was a good recommendation and would figure heavily in my year-end bonus."
Not that Metcalfe's ascension to the presidency of 3Com is assured. It isn't yet.
Krause has his plan, too. It gives him at least seven more years with the company before he moves into his public-service phase. Before then, as the company hits certain growth milestones, Krause will expand and restructure 3Com's executive levels so that the management will always be in place to move the company through subsequent growth stages.
The way Krause has things laid out, three major new jobs will be created over the next two to three years -- a chief operating officer, a chief marketing officer, and a chief administrative officer. All three will report to Krause. A few years later Krause will add another management layer by naming a president whose responsibilities will embrace both operations and marketing. Then two to three years after that, as the schedule now has it, the president will also become CEO, and Krause will complete his second phase as chairman.
Obviously, says Krause, it will be the COO who should move up to the presidency. One of his most important current responsibilities, he says, is to be sure that the board has plenty of qualified candidates to choose from when it's time to fill that key slot. He ticks off nearly half a dozen names in the pipeline, only one of which is the founder's.
Metcalfe knows he's got to compete against others in his company. "I may not make it," he says. But now at least he knows where he's going.
WHAT METCALFE LEARNED FROM KRAUSE
Bob Metcalfe, the "visionary" founder of 3Com Corp., has worked for Bill Krause, the manager he hired to run the company, for eight years. What has he learned? he was asked.
* How to keep a calendar. "Bill," says Metcalfe, "is disciplined by what he says he's going to do. Also, have you noticed he doesn't seem to have many files? He has only the right ones."
* How to sell. "I came from the world of academe, where the goal was to win the argument. He came from a world where the goal was to get the order. He taught me the difference. When I'm down on this, I call it suffering fools gladly. Anyway, it's a fundamental biological change I went through under Bill's guidance. Even today, Bill's answers to customers' questions are different. My answer would be 'No.' His would be 'Yes, but. . . . ' He has a tendency to accentuate the positives and move them to the fore, so I listen to him. What he does works."
* The value of planning. "Now, I like to have plans. I even use them. Bill still wants me to plan more than I would if left on my own."
* To keep on arguing. "We don't avoid abrasion. We still abrade. We call each other on things all the time. He's commanding and pushy and can be scary, so he relies on me to call him on it when others won't. A good example is my inventory turns. He's got a feather up his ass on raising them above five times a year. He's wrong, and I'm not giving up on that."
WHAT KRAUSE LEARNED FROM METCALFE
Bill Krause, the experienced professional manager, took charge of founder Bob Metcalfe's company eight years ago. What, he was asked, has he learned from the entrepreneur?
* How to be a better public speaker. "I plagiarize his ideas, phrases, and jokes all the time -- with his permission, of course."
* What's important. "Bob has demonstrated to me the value of principles and integrity -- above all else. If people don't respect you for your integrity, then what else is there?"
* How to get people interested. "One of my weaknesses is I'm so determined that the company be successful that I don't provide enough opportunity for people to fail. For people to take risks, you have to be willing to let them fail. Also, you want them to think something was their idea. That was the genesis of our first personal computer-related product. It wouldn't have gotten off the ground if Bob hadn't bought one of the first IBM PCs and set it in the middle of our engineering group, right outside [then senior engineer] Ron Crane's cubicle. Bob didn't tell anyone to do anything, but Ron took the bait."
* How to lighten up. "Bob has a quality that John Kennedy had. He knows how to break tension with humor -- in a meeting, for instance. My tendency is to be a fairly serious kind of guy. I have also learned from Bob how to play, that you should extract from your day some fun."
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