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The toughest part of managing isn't figuring out what to do. It's knowing what to ask

1. How do I know I've outgrown my start-up team?
2. How do I continue doing what I love?
3. Which customers do I want to keep?
4. Should I take my company public?
5. How can I keep my employees?
6. Now that we're not a start-up, how do I promote teamwork?
7. How can I adapt as my market changes?
8. Should I expand into international markets?
9. How can I dominate my competitors?
10. How can I stay focused on the big picture?

1. How do I know I've outgrown my start-up team?
To hear Wells Richards tell the tale, his decision to fire a purchasing agent last autumn was clearly a company-defining experience. It sent an explicit message to his employees that top performance was the only way to ensure one's place at the company, it gave him credibility as a tough manager, and it made his mother mad as hell.

Richards, CEO of SIMOD Corp. (#247 on the 1998 Inc. 500 list), a five-year-old Pearl, Miss., telecommunications and data equipment distributor, had fired his sister. "She was shocked, and my family was shocked," recalls Richards. "It was probably the hardest thing I've ever done, but business is business."

It was a wrenching decision. "It's much easier to fire someone who is not doing their job," says Richards. "But she was trying, and she meant well."

Richards had found himself struggling with a problem not uncommon to CEOs of growing companies. When you start a company, it's difficult to identify the skills and talents your employees will need not only to help launch the company but to grow it exponentially. You're often content with hiring just about anyone who will take the leap of faith with you --relatives, friends, whoever answers the help wanted ad. And just when you think you're in a groove with your current team, internal and external forces may compel you to reevaluate your choices.

One of Richards's first hires, for instance, impressed him with an enthusiastic handwritten response to a newspaper ad. When the fellow showed up for a 7 a.m. interview, Richards hired him on the spot. "He was great for the first year and a half," the CEO recalls. Never mind that the fellow had a problem working with women and that his lunch hour took precedence over all else. "When the company was small, none of that really mattered," says Richards. But when business began booming, the employee could no longer avoid female coworkers, and his sacred lunch hour began interfering with customers' demands.

Often, members of a start-up team feel they've earned the right to a status quo working environment. "He felt he didn't have to change," recalls Richards. "But as we grew, he had to get out of our way."

Even conscientious employees can hold you back. Richards's first bookkeeper was a 20-year-old woman who worked part-time while pursuing an accounting degree. But as the company grew, Richards began to understand the folly of retaining an inexperienced employee in that role. "We were running $6.5 million through the company and doing it off QuickBooks," he recalls. "It was a nightmare." A more seasoned accountant would have realized the limitations and pressed Richards to invest in a more sophisticated software program instead of using one designed for very small businesses. "I should have dumped QuickBooks when we were at $2 million," he says. He replaced the woman with a more technology-savvy chief financial officer a year and a half ago but kept her on as the CFO's assistant. According to Richards, she quit several months later.

As for Richards's sister, a clear case of culture clash led to her departure. By the time SIMOD was four years old, Richards and his partner, Brad Cohen, had realized the need to integrate clear systems and procedures into the company's day-to-day management. It's a stage that every growing company reaches sooner or later, and one that can be extremely disruptive to employees who are accustomed to a more laissez-faire atmosphere.

Richards's sister, two years older than he, had grown accustomed to "having her fingers in every pie" and to micromanaging processes that were no longer in her job description. "She was protective of me, and she was looking out for my back, but it upset everybody," Richards recalls. As SIMOD's staff expanded and as business became more complex, it became increasingly important to Richards that everyone follow the management protocol he had created. After his sister left, he and Cohen called a companywide meeting to explain his actions. "I hope this sends a clear message to everyone," he said at that time. "In the end I probably won't have any friends." Clay Watters, one of SIMOD's top sales representatives and the company's first employee, confirms that everyone understood. "There's no favoritism here," he says. "The general message is if you do your work like you're supposed to, you'll be here for a long time."

And if you don't? Richards is clear about that as well. "I can fire you just as easily as I hired you," he claims. "I don't lose sleep over it." --Donna Fenn

2. How do I continue doing what I love?
On a 20-acre estate not far from downtown Portland, Oregon, Ray DeMarini is carving out a field where he can hit softballs. For a few hours every workday afternoon, he'll be there swinging at softballs served up by his own private pitcher, driving them to a fence 320 feet away.

No, DeMarini won't be playing hooky from his gig as founder and president of DeMarini Sports Inc. (#146 on the 1998 Inc. 500 list). Quite the opposite, in fact. He's building his field of dreams precisely because he's decided that the most important role he plays is as DeMarini's R&D arm. Founded in 1989, the company claims the distinction of making the most expensive softball bats in the world. This year, with sales poised to double from nearly $10 million in 1997, DeMarini has decided to give up day-to-day operations to focus on swinging bats every day in an effort to come up with new models. "My strength is my ability to see what will be hot products tomorrow," says DeMarini, who has been using a public park for his daily drills. "There are people more qualified to run the company."

One of them, apparently, is the company's chief financial officer, whom DeMarini hired earlier this year. Come April, he plans to hire a chief operating officer. "We'll go from entrepreneurial to professionally managed," he vows.

Like most entrepreneurs, DeMarini has grown the company by doing most of the important management tasks himself. To preserve the part of the job he loves most -- delegating hasn't come easily to him -- he's had to get up at 4 each morning. That way he can put in a conventional workday by early afternoon, when he begins his three-hour stint in the batter's box. Typically, he'll swing at as many as 200 pitches every session, calling the company's engineers by cellular phone between pitches; the next day, he gets a slightly different version of the same bat. Then it's back to hitting again. In small daily increments, a new product emerges. "There's no book you can read," says 52-year-old DeMarini. "This isn't an exact science."

Still, DeMarini's bats are more than a simple cylinder of aluminum. The company sells a patented double-wall bat that features two thin layers of aluminum, which doubles, to about six inches, the average bat's "sweet spot," the place on the barrel that provides a ball with the most pop. With a bigger sweet spot, a player can hit the ball hard with far more consistency. Now the race is on to develop bats with advanced materials such as carbon fiber, graphite, and strange aluminum alloys coded CU31, EA70, and SC500. To develop a new bat designed for hardball leagues, DeMarini has hired a 6-foot-5-inch, 250-pound protégé. "The guys who play on Friday nights just want to hit the ball," DeMarini says.

DeMarini himself began playing the game only about a decade ago, when he was working in the data processing department of a trucking company. One fateful night, asked to sub for one of the players, he swatted three home runs. Soon he was traveling 20 weekends each year to softball tournaments all over the U.S. and wondering if a superior bat could help his game. After a few years of working with a colleague to develop their own model, he discovered that plenty of other players were wondering the same thing: an ad in USA Today yielded their first flurry of orders.

Despite all that's happened since then, DeMarini hasn't lost sight of the most important contribution he can make to the company's success. "A company gets in trouble when a guy like me gets to thinking he's a businessman," he explains. "I don't love running a company. It's not my passion." Besides, he adds, "I have the best job in the U.S." Clearly, he's determined to keep it. --Stephen D. Solomon

3. Which customers do I want to keep?
Gustavo "Gus" Bessalel was working as a management consultant in Washington, D.C., when a colleague mentioned that his uncle's company was looking for someone to establish a local franchise for its discount dining card business. Seven years later, Bessalel's Transmedia franchise (#410 on the 1998 Inc. 500 list), which is in the Baltimore/Washington market, has 350 participating restaurants, 50,000 cardholders, and more than $6 million in annual revenues.

Early on, in 1994, Bessalel learned what can happen when he is less than discerning in selecting the restaurants that will be participants. He nearly ran out of money. Back then, he says, "we used to take almost any restaurant that wanted in." In the past few years, he's become more selective about which restaurants come on board and has developed a system to judge those that will be his best and most reliable customers.

The Transmedia concept is fairly simple. Restaurants "never have any cash," says Bessalel, but they do have food and drink to trade and can use some free publicity. Bessalel offers to pay a restaurant cash up front and to provide a free mention on Transmedia's Web site and a listing in the bimonthly publication of participating restaurants in return for a 50% discount on future purchases of food and beverages. A typical deal would involve an exchange of $5,000 in cash for $10,000 worth of food and beverage "inventory." Holders of the Transmedia discount dining card get 20% to 25% off the menu price. When a member purchases a meal, Bessalel gets his investment back, plus the difference between the 50% restaurant discount and the 20% to 25% discount he gives his cardholders -- less the royalty deducted by the franchisor.

Since the 1994 near disaster, Bessalel has kept a close watch on the delicate balance between the number and popularity of restaurants, the number of cardholders, and the cash tied up in inventory. If he and his staff sign up unpopular restaurants, cardholders avoid the places, the inventory sits, and no cash comes back. If they sign up too many restaurants, all the company's cash is tied up. And yet if they don't sign up enough new restaurants, cardholders will get bored and won't choose participating restaurants as often when they eat out.

But there's more to the decision about dropping a restaurant than just dollars and cents. Bessalel must also consider whether the restaurant owner is influential within the local restaurant association. How will terminating that restaurant affect other relationships? Does the owner run other, more successful restaurants in the area?

Knowing which restaurants to "fire" -- and when -- is key. One restaurant went out of business holding $35,000 of Bessalel's money. That hurt. Occasionally, some restaurants take Bessalel's money but then turn around and won't honor the Transmedia discount card when a diner presents it. That makes for irate cardholders -- and it now results in a guaranteed lawsuit. Six months ago, the franchisor started putting a provision in every contract that entitles franchisees to get a legal injunction to force a restaurant to take the card if it has accepted Transmedia's cash. Bessalel recently successfully exercised the clause for the first time.

To minimize risk, Bessalel designed a scoring system by which he evaluates every contract his sales staff brings him. Half of the score is based on the proposed deal with the particular restaurant, including such factors as the restaurant's location, atmosphere, and pricing; the other half of the score is based on the restaurant owner's creditworthiness. Bessalel also minimizes his risk by making sure his salespeople share the pain as well as the gain. If a restaurant goes out of business holding any of Transmedia's money, the salesperson on that deal eats 10% to 30% of the loss.

"Restaurants are not populated with M.B.A.'s," Bessalel says. "There are many talented and capable people running restaurants, but their business decisions tend to be based on emotion and relationships. But we have to think like bankers. After all, we're giving these guys our money up front, and we're going to have to live with them until we get our money back." --Hendrix Niemann

4. Should I take my company public?
When Joe McCall started Clarus Corp. (#95 on the 1998 Inc. 500 list), in 1991, he knew he wanted to found a software company, make it successful, and then take it public, leaving company operations to someone else. "That's what I do," McCall says. "I see a business opportunity. I start companies, staff them, fund them, then I hire a management team, turn it over to them, and go do another one."

Clarus (formerly SQL Financials International Inc.) is one of four companies McCall had started. It was a prime candidate for an initial public offering. It was going to need both an injection of capital to expand and added visibility to compete. McCall's first step in preparing for the IPO took place in August 1995, when he promoted Stephen Jeffery from vice president to president. In December 1997, Jeffery -- a Hewlett-Packard veteran -- took over the chairman's job from McCall, and in February 1998, McCall handed over the title CEO. The reasoning behind those moves? When it came time for the road show with potential investors, McCall didn't want them sold on one executive -- himself -- who was going to leave after the IPO. The underwriters agreed that the spotlight should be on Jeffery, the man who would be running the company.

"Management has inside guys and outside guys, and when you are a private company, you don't need outside guys," says Tom Berquist, a senior software analyst at Piper Jaffray, one of three underwriters for Clarus. The company's controller, for instance, was good with the numbers, but he wasn't the right one to sell the company to investors and analysts. Clarus again turned to a headhunter, this time to find a chief financial officer who could effectively talk to the outside world.

"We set out at the beginning of 1997 to behave like a public company, to be very rigorous about it," says Jeffery, who by then had also brought in two executives to head the consulting and customer service units. "We went through six quarters of 100% predictability before we took the plunge. Wall Street -- make no mistake -- will kill you if you miss."

By late May 1998, the IPO paperwork was done and the company was ready -- but the market was off. Clarus's management and board of directors had been hoping for maybe $12 a share, but that seemed unrealistic by then. They agonized. How much difference would it make to wait just a quarter or two? The payback might be better then. But it might be worse.

While the IPO process is months in the making, the go or no-go moment happens within hours of the stock's hitting the Street. On May 26, at 6 p.m., Clarus's board of directors, including McCall and Jeffery, made the call. More than anything -- more than the hope of a bigger payday if they waited -- the company needed to worry about business, not stock offerings, Jeffery said. "We could have delayed and justified it. But we had a lot of momentum, a lot invested in terms of time and effort. We wanted to get it behind us." Clarus's IPO would be a go.

The company sold 2.3 million shares at $10 a share. Clarus's stock dipped from that opening to 7 5/ 8 a few days later, rebounding through June to crest at 9 5/ 8 in July, and then dropping steadily to new lows in August. While that is certainly not a sensational performance, taking the company public was the right thing to do in Jeffery's eyes.

"It's a tremendous boost," he says of the increased visibility that being public brings. "When you are competing with companies like Oracle and PeopleSoft, the card they play against you is the 'viability' card. Your name gets circulated a lot more. The awareness creeps up. It's incredible the validation that going public gives you."

But, as McCall notes about preparing for the IPO -- which he had originally expected to take place in 1996 -- "it is a lot harder than it looks. There is nothing easy about it." --Michael E. Kanell

5. How can I keep my employees?
One Friday afternoon, C. Richard Cowan watched $600,000 walk out the door.

Cowan, founder and president of Power Lift Corp. (#2 on the 1998 Inc. 500 list), which distributes and services forklift trucks out of four locations in the Los Angeles area, had already lost about 20% of his workforce over the past year. "Now I realized that I had a catastrophe," says Cowan, recalling that fateful Friday, when five of his prized mechanics quit. "Those five represented $600,000 in annual revenues."

At that moment the fear crystallized in Cowan's mind that continued hemorrhaging could threaten the survival of his company. But the incident also set him on a mission to create the kind of atmosphere that makes it hard for employees to leave.

In 1993 Cowan had been awarded a Caterpillar distributorship, although he had no previous experience with forklift trucks. But Caterpillar seemed impressed, Cowan says, with his aggressive plans to increase its market share in the area. It was the carrying out of those plans that got Cowan into trouble. After a year in business, he bought a competitor, Clarklift of Los Angeles, which distributed a rival line of forklifts and had about 7,000 accounts, compared with Power Lift's 1,000. Clarklift had been in business for 70 years, and Cowan says that three-quarters of its 200 employees had worked there for at least 15 years. "Here a young company was going to acquire them, led by a guy with only a year of experience in the industry," Cowan says. "About 90% of Clarklift's employees knew more about the industry than I did. That caused quite an uproar."

Soon a rival distributor began recruiting Power Lift's newly acquired employees. Rumors spread that Power Lift was experiencing financial problems. The exodus began. Over a period of five months, Cowan lost about 40 employees, many of them mechanics. Mechanics are critical to the business because they make service calls. "It was like a software company losing its top software writers," he says.

But Cowan soon realized that he shouldered much of the blame himself. "I didn't have a comprehensive plan to deal with the hostility," he says. What would he have done differently? "I would have met with every single employee," he says, to reassure each worker about the importance of his or her role. Calming the hostility required a number of initiatives all focused on bolstering employee morale and participation.

Even before the troubles began, Cowan had instituted quarterly meetings at which employees could see key information about sales and profitability. Now Cowan has added an employee council, comprising people from each department, that meets quarterly to provide feedback about the company's performance and what needs improvement. "Minutes are taken," he says. "At the next meeting we go over the minutes, and people see that their concerns have been met."

To get additional input, the company surveys employees twice a year. Cowan has also instituted a 401(k) plan and a series of monthly and annual awards for outstanding individual performance.

One of the most useful strategies, says Cowan, is walking the floor and talking with employees. "I ask them, 'Do you have a few minutes?' " he says. "We talk for 15 minutes and I hear about their concerns."

Cowan's measures have done more than stop the migration of skilled employees out of the company. Thanks largely to his initiatives, 25 of the 40 employees who left after the acquisition have returned to Power Lift, which last year posted sales of $43 million. Now Cowan is acquiring another forklift distributor. "We are out there talking with each employee," he says. --S.D.S.

6. Now that we're not a start-up, how do I promote teamwork?
When Seph Barnard decided to energize his sales staff last year, he created a familiar enough incentive: adding a commission to be calculated on top of the sales staff's salaries. But the step nearly destroyed esprit de corps at Barnard's company, Tape Resources Inc. (#426 on the 1998 Inc. 500 list), which sells blank videotapes and audiotapes to businesses such as television stations and production companies. "Cracks started to appear in morale," recalls Barnard. "There was resentment over it. Tensions appeared in the office that we'd never had before."

A surprised Barnard junked the system, which had sparked resentment throughout the business. Still, that experience spurred him to rethink his compensation strategy and ultimately to institute a new incentive system that has rewarded teamwork -- not to mention pushed sales up to $4.7 million last year, about 70% above 1996 sales.

Although Tape Resources sells a commodity -- its most popular tapes, from manufacturers such as Sony, BASF, and Panasonic, carry price tags ranging from $10 to $25 -- the company has never competed on price, relying instead on service such as a guaranteed in-stock program and speedy delivery. Half of its dozen employees are salespeople, who work the phones from the company's office in Virginia Beach, Va., filling orders from repeat customers as well as from new ones corralled from direct mail campaigns and trade magazine advertising.

The commission system that started in July 1997 caused problems on a number of levels. Salespeople who once cooperated with one another became reluctant to spend time away from the phones, helping out on other tasks. They didn't like it when a colleague serviced a customer they had helped earlier, thereby taking the commission. "People got territorial over it," observes Barnard. Meanwhile, employees in shipping and other areas -- who were not included in the commission plan -- felt left out.

The spark that caused Barnard to reconsider his compensation system was a three-month period at the end of 1997 when the entire sales team worked together to win a sales contest sponsored by BASF. The award: a trip to Cancún. Having seen the entire sales staff rally around a common goal, Barnard resolved to spread the incentives for teamwork to the company's six other employees.

Barnard wanted an incentive program that worked in concert with the company's existing compensation formula, in which employees receive an extra month's pay at year's end if the company meets its financial targets. To be consistent, he added a monthly bonus, offering 10% extra pay if monthly sales are 20% above the previous year's level, 15% extra if sales are 30% higher, and 20% extra if sales are 40% higher. Sales rose at least 20% in four out of the first six months of this year -- meaning that employees got a 10% bonus.

With all employees participating in the bonus, the divisions among people and departments evaporated. "We're all in this together," says David Durovy, vice president of sales, who points out that people in the shipping department who stay late to fulfill last-minute orders deliver the kind of customer service that distinguishes the company from its competitors. "In the shipping department, the orders they get out benefit them as well as the salespeople."

Barnard now circulates a daily report on sales to every employee, enabling each one to see how he or she is doing relative to the same period a year earlier. "On a slow day," he reports, "people will say, 'We haven't gotten an order from these customers in a while. Why don't we call them?"

An extra month's pay plus monthly bonuses can be expensive, and superstar salespeople may fare better under a commission system. But Barnard believes that his company's system accomplishes its intended purpose: helping create teamwork and pushing sales and service to higher levels. "It has provided me with tremendous peace of mind that the whole machine is working well," he adds. --S.D.S.

7. How can I adapt as my market changes?
Mark Tierney's company was barely up and running when his primary market all but collapsed.

Tierney had left his job as chief executive of a subsidiary of United Healthcare in 1993 and started Network Management Services (#63 on the 1998 Inc. 500 list), or NMS, to pursue a new opportunity in the delivery of medical services. The Clinton administration's effort to reform the health care industry was leading to the creation of local alliances of purchasers who would negotiate favorable rates with medical providers. Tierney's new company, in Minneapolis, secured contracts to support the administrative technology needs of two of the first six alliances formed, called health insurance purchasing cooperatives.

When political support for the Clinton plan deteriorated, it became clear that Tierney's once-promising market of alliances was not going to grow. Tierney moved quickly to redirect his focus, which not only saved NMS but also exposed an opportunity that has turned NMS into a $7 million company. "What was a devastating blow was, in retrospect, a fortuitous positive event for us," he says.

Tierney's experience is not uncommon. Many entrepreneurs start companies in industries undergoing major change, which enables the entrepreneurs to capitalize on new opportunities. But the market can move quickly and unexpectedly in new directions, leaving Tierney and others like him with a formidable challenge: either adapt or die trying.

Tierney adapted. In order to serve a market of health care alliances, NMS had developed a software system to manage the relationship between employers who purchase health care services and suppliers of those benefits, including health maintenance organizations and other managed care vendors, indemnity insurers, and dental services. NMS designed the system so that it would offer maximum customer service by producing premium price quotes, managing complex membership data, distributing data and payments to health care suppliers, and producing health care performance "report cards" involving many buyers and suppliers.

When Clinton's push on alliances reached a dead end, Tierney looked at other markets that might welcome his company's expertise. "I think it's important for small companies to have a generic sense of who they are," says Tierney. "You don't want to get labeled too narrowly. You want to shift to meet client demand." Tierney shifted his focus to winning business from Fortune 500 companies with multiple business locations. His message to potential customers: Although it may seem easy to contract with a brand-name insurer who can offer medical coverage in every major market in which the buyer maintains offices, health care is a fragmented industry in which the most cost-effective and best care may be offered by local providers. It might be beneficial, Tierney argued, for large companies to use many health plans throughout the country.

Tierney's software was already robust enough to handle such complex arrangements. It patches together for big companies a quilt of local health plans through the establishment of electronic data "pipelines," which manage the flow of eligibility data as well as track payment reconciliations. "Employees want choice," says John M. Nehra, a general partner at New Enterprise Associates, one of two venture capital firms that invested a total of $5.5 million in NMS. "They don't want Prudential, take it or leave it. It doesn't work to sign up with one plan. You have to optimize it in each market. Employees want several choices in their market."

Cereal giant Kellogg Co. provided a breakthrough for NMS when it signed on as a customer of the year-old business, in 1994. Northwest Airlines came on board the following year. "Our early setback," reflects Tierney, "required us to scramble hard." --S.D.S.

8. Should I expand into international markets?
Patient Care Technologies Inc. (#203 on the 1998 Inc. 500 list), in Atlanta, has the hallmarks of a successful international player: an innovative software product and cost savings that have been documented by a plethora of grateful customers. Indeed, according to cofounder and CEO Dr. Mark L. Braunstein, in the company's industry, health care software, U.S. businesses "almost totally" dominate the world marketplace.

And yet Braunstein's tentative attempts to garner overseas customers -- he had two meetings with Australian companies, for example -- have convinced him that Patient Care Technologies has no business straying beyond America's borders. In fact, the $6.4 million company now routinely rebuffs any international inquiries it receives through its Web site. "We've had inquiries from Asia, but the nature of the product is such that any attempt to market it to a non-English-speaking country would entail significant product development," he explains. "We respond that we're not interested in getting into business in that part of the world. But we always encourage people to get back to us at some point in the future; perhaps our thinking will change."