FYI: From the editor

Highlights from our annual Inc 500 conference

Louisville was the site of this year's conference for the leaders of America's fastest-growing private companies, and there could have been no more appropriate location for a celebration of entrepreneurship. This is a city, after all, that has climbed steadily up our annual ranking of entrepreneurial hot spots over the past decade.

The festivities included a visit to Churchill Downs, home of the Kentucky Derby, where some of the most intensely competitive people in business learned a thing or two about competition. They were told, for example, about putting lead weights on jockeys to equalize the load carried by each horse in a race. The phrase "get the lead out" refers to the onetime practice of dumping the weights on the backstretch, thus reducing the horse's load and giving it an advantage. Now jockeys are weighed at the conclusion of each race to make sure they still have their weights. At the conclusion of this year's black-tie award ceremony, which closed the conference, no CEOs were weighed.

"[What we're going through now is] similar to the credit crunch of the 1990s. It doesn't matter that Greenspan is cutting rates to lower the cost of money if no one is lending it." --Scott Adelson, managing director of the investment-banking firm Houlihan Lokey Howard & Zukin

What a Difference a Year Makes
At the last Inc 500 conference, in Vail, Colo., people were still talking about their E-commerce strategies. This year the talk was about near-death Internet experiences, increasingly unfriendly capital markets, and the timing of the next economic upturn (second quarter of 2002, most CEOs told me). There was also discussion of resurgent inflation as Inc 500 companies find themselves dealing with rising energy and health-care costs and commercial rents that are still sky-high. Yet, once again, I came away impressed by the optimism this particular group of business leaders always seem to feel about their own companies' prospects in the coming year.

"This is a world in which everything happens real fast, but you can't bootstrap a brand real fast. You have to be patient. You have to put aside all those brand-building marketing tricks and let the brand develop by word of mouth, without anybody being able to see the fingerprints of the marketer behind it. Otherwise it all collapses pretty damn quickly." --Bill Samuels Jr., president of legendary bourbon distiller Maker's Mark, a strong brand in every sense of the term

Outsmarting the Shakeout
Carlson Wagonlit Travel CEO Andy Holloman was an early Internet devotee, having put his travel agency on the Web in 1995. His sales soared from $800,000 to $2 million a year, with Internet sales accounting for 65% to 70% of the total. But Holloman soon began to notice that almost all his com- pany's Web sales came from one-shot customers who were "driven by pennies." So he used his improved cash flow to expand in a way that might provide lasting benefits: he acquired three other local travel agencies. Meanwhile, he began reducing his reliance on Web-generated revenues. Today online sales account for just 15% of his total sales -- and Holloman hasn't become another victim of the shakeout.

"I've created the kind of company that I used to despise. And I know it's because of my micromanaging. But I can't see how else to get to the next level." --An attendee at a breakout session on "Work/Life"

The Biggest Home-Based Business in America?
Principal Technical Services Inc., in Lake Forest, Calif., is a home-based business with $14 million in sales. Ronald and June Stein started the technical-staffing company in one bedroom of their five-bedroom house and have never felt compelled to expand their facilities, although they've commandeered another bedroom for the company and installed an $11,000 phone system and multiple servers. They currently have 200 employees, only a small percentage of whom have ever set foot in Lake Forest. "I want to see how big we can get without getting a real office," said Ronald Stein. "Let's see if we can do it with $20 million."

"I know the investors are the right ones when I come away from our meeting thinking, 'These guys are really good. They can call you stupid in 50 different ways and never offend you." --Private-equity panelist Rudy Karsan, of Kenexa, explaining how he knew that he'd found the kind of private-equity investors he was looking for

The Perfect Board Member
At a session about boards of directors, Inc 500 CEO Max Carey stressed the importance of having members who will be brutally candid. In response, one person raised her hand. "I need a real asshole on my board," she said, "and since we both live in Atlanta, I'm wondering if you're available." The audience roared with laughter. "I mean, not that I'm calling you an asshole, but you seem to fit some of my needs." Carey reports that the request is "under thoughtful consideration."

"I've long been fascinated with the concept of beta testing in the software world. ... What kind of people will take time out of their busy day to go through your software for free and tell you what's wrong with it? That's a software maven. Beta testing is a great way for finding mavens. The beta testers are precisely the kind of people who will spread the word about it and whom others will turn to for advice on what to buy. What surprises me is that more companies in other industries haven't adopted the practice." --Keynoter Malcolm Gladwell, author of The Tipping Point: How Little Things Can Make a Big Difference

Where the Money Is
"The private-equity market is the only market that's still open," reported Thomas S. Shattan, managing director of the Shattan Group, a New York City investment-banking firm. "The IPO market is almost completely closed, and the high-yield market is closed except for very large deals, while banks have cut back dramatically on lending." Meanwhile, industry roll-ups and (of course) dot-coms are out of favor, but business services, financial services, and health-care services are hot. And the size of transactions is rising. "We're looking at many more $30-million-to-$50-million deals now," Shattan noted. Those deals are not available to everyone, however. "More than ever, the companies that come to market have a proven track record," he said.

Most Unusual Company Name
At this conference, it was TEOCO, the name that Atul Jain gave his software company. It stands for "The Employee Owned Company."

Just When You Thought It Was Safe to Go Back Into the Labor Pool ...

In his Friday-morning keynote, John Izzo, coauthor of Values Shift: The New Work Ethic and What It Means for Business, sounded a warning about the dangers of becoming complacent with regard to the labor market. "The talent crisis is not going to get better," he said. "It is going to deepen in a significant way. I call it the 17-37 gap. In the 17 years after World War II more children were born than in the next 37 years. And then there's the problem of early checkouts: 65% of baby boomers in their fifties say they plan to retire from full-time work before the age of 62. Meanwhile, the percentage of women in the workforce is going down. The pool of employees has suddenly turned into a puddle."

As for employee expectations, Izzo said, "the entire workforce in the United States and Canada is changing. People increasingly expect balance between work life and personal life. That view extends to both genders, all ages, and even blue-collar union and professional workers. While only 24% of us who run companies value our personal lives more than our work lives, 43% of junior managers and 82% of frontline people feel that way. So there's a real disconnect."

How to Prosper in a Changing Labor Market

Keynoter John Izzo noted that some companies have already figured out how to revamp their policies and take advantage of the changing attitudes in the workforce. Among the examples he cited:

  • A factory in Pittsburgh that employs numerous working mothers rearranged its work shifts to start after school began in the morning and to end before school let out. Not only did productivity rise, but retention rates rose, and workers at other plants began soliciting the company for jobs.
  • Time-bonus programs may soon eclipse money-bonus programs, as they already have at a small, growing company in Dallas. There the first salesperson to reach his or her monthly goal gets two days off at the end of the month, and all salespeople who hit their targets can go home every day at 2 p.m. for the rest of the month. In three months of the time-bonus program, sales went up 20% and profits 40%.
  • At another leading-edge company, employees no longer have a fixed number of vacation days. Instead they go to their team and ask for time off whenever they want it and for whatever period of time they have in mind. The team decides whether to approve the request.
  • One company makes a point of treating former employees the way colleges treat their alumni. Why? For one thing, because the ex-employees may return to the company in the future. People are increasingly moving in and out of the workforce, taking time off to raise kids, write books, or travel. The company claims that 40% of its former employees come back within two years. In addition, former workers have become excellent recruiters, sending potential hires to the company in return for being treated like valued, long-term members of the family.
  • Part-time jobs are becoming increasingly popular, as is job sharing -- including in relatively high-level positions. Some companies have even begun splitting jobs for people who want more free time. Such a trend could offer an advantage to small companies that are competing with large companies for talent. The latter are likely to resist hiring part-timers because they tend to disrupt the orderly systems on which big companies depend so heavily.

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