ACCOUNTING

The Talking Cure

Your business is failing. What better time to share your financials with your employees? No, seriously.
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Managing Change

When times are bad, smart CEOs keep their secrets. Right? No way.

Tush Nikollaj's business needed life support. Last January he gathered his upper managers in a conference room and confessed that in the space of six months, the company had gone from turning a profit to losing $130,000 a month. He drew one stark, startling graph on a whiteboard. The graph, which depicted sales, recurring revenues, and expenses, showed that Logical Net Corp., an $8-million Internet service provider based in Albany, N.Y., was likely to go bankrupt by April.

His presentation took 10 minutes. The reaction? "Three minutes of silence," recalls Nikollaj.

Sure, the hush had something to do with the bleak news. But it also had to do with what Nikollaj did that day -- something he'd never done in the company's six-year history: he distributed financial information to all the managers. Then he asked them: "What is Logical Net doing wrong? What do you think we can do to correct it?"

Nikollaj's candor was stunning for an obvious reason: Why would he choose to reveal the state of the company's financial health at a time when it was gravely ill? Aren't times of corporate crisis when a CEO is most likely to hide financial information, not only to save face but to avert employee panic? Absolutely. So what prompted Nikollaj to open up? Desperation. After crunching the numbers, he realized that the only way he could avoid bankruptcy would be if all his employees moved to cut costs and raise revenues -- drastically. To motivate swift action, Nikollaj knew he'd need buy-in. He also knew that he'd have to trim 10 people from the staff of 74, and he figured that if he laid bare the company's finances, the sacked employees would at least see the math behind the decision. He reasoned that opening the books would be just the thing. "I knew it wouldn't work if I just put my foot down and said, 'This is what we're going to do," he says.

For the first time, Nikollaj's employees were seeing the company -- on paper, at least -- from an owner's perspective: Revenues. Costs. Profits. The works. Of course, the concept of sharing such information is hardly new. Commonly referred to as "open-book management," the practice varies widely. Some CEOs share every financial detail, including individual salaries. Other CEOs share only profit-and-loss statements. But three things usually apply: Key information flows down to the rank and file, upper management educates all employees about what it means, and senior managers motivate staffers to improve the financial picture.

Staff suggestions helped Mentor Training, a $1.5-million provider of software education in San Jose, Calif., reduce its payroll costs by 30% without laying off any full-time employees. To cut down on instructor fees, for instance, the company has combined training classes for different releases of software into one, saving Mentor between $900 and $1,800 a month. And it's reduced hours by offering employees unpaid days off. Commercial Casework, a $15-million woodworking company in Fremont, Calif., saved $2,000 a month when a committee of employees -- after seeing the exorbitant bills -- found a cheaper cell-phone plan.

Open-book management has also helped companies deal with the emotional toll caused by the recession. Tiburon, a $48-million provider of public-safety systems and services, laid off 80 of its 320 employees last year. Because the staff understood the company's financial condition, the layoffs came as less of a surprise. "I even received calls and in one case a letter from terminated employees, offering condolences, knowing how difficult it was for the company and that we did the right thing," says founder and CEO Bruce Kelling. At Walk the Talk, a $4-million human-resources-consulting and publishing concern in Dallas, a rough year forced CEO Eric Harvey to cancel bonuses and cut salaries by 5%. His employees weren't thrilled, but they understood the rationale. "No one ever perceived that what happened was not just," he says.

At Logical Net the power of sharing information had a far more drastic effect: it saved the company.

You may ask yourself, How did Logical Net mismanage itself to the point of losing $130,000 a month? During its first six years, the company grew so fast that its burgeoning revenues and proportionate profits prevented Nikollaj, a rookie CEO with a background in biochemistry, from taking a hard look at expenses.

Then the Internet bubble popped. Many of Logical Net's customers said, "We can't pay you now. But keep us hooked up to the Internet. We're going to get more funding really soon."

"Really soon" never came. By summer 2000, Logical Net needed a tourniquet to stanch the cash outflow caused by its six digits in outstanding accounts receivable. In addition, telecom-industry bankruptcies cost Logical Net tons of revenues from "reciprocal compensation" -- fees it collected when telecom businesses used the company's phone or Internet lines.

Other cost pressures came from overblown expenses, expenses that, once Nikollaj opened the books, his employees were quick to find -- and cut. For example, his engineers noticed that the company spent more than $3,000 a month on an online news service that grossed less than $500 a month. So Logical Net stopped selling the service and, a few months later, formed a partnership with another provider for a few hundred dollars a month.

Meanwhile, an employee who worked as a wire installer found more wasted dollars. When it had acquired other ISPs, Logical Net often obtained the sellers' networks of phone or Internet lines. While inspecting wires in the tiny town of Fort Plain, N.Y., the employee discovered that Logical Net owned two lines that served identical functions. The excess line and others cost the company thousands each month to maintain. Logical Net promptly shut down service on extraneous wires.

For Nikollaj, an ancillary benefit to such cost-saving discoveries has been their effect on corporate culture. Employees now consider the financial ramifications of their decisions. Nikollaj recalls how, not long ago, the company needed to replace a remote-access server. He figured his engineers would spend $25,000 on a new Cisco system, an upgrade over the existing servers Logical Net had used. "Engineers always want the newer, faster model," he says. But the engineers wheeled out a system that they had in storage. Seeing such a mentality switch among his engineers has made Nikollaj downright giddy. "I've never been more excited than when I heard an engineer talk about return on investment. Except when my children were born," he says.

The sales staff underwent a similar mental shift. "It was no longer 'me for my commissions.' It was this effort to bring the numbers back to a place they ought to be," says district sales manager Randy Savage. As he and his colleagues began to examine which sales would be most profitable, they drastically reduced their efforts to sell equipment. Instead they focused on bringing in recurring revenues: namely, subscriptions to phone and Internet service. The effort paid off. So far this year, the sales force has managed to replace all sales lost to the dot-com shakeout.

The sales staff also responded to the company's collection problems. In the past, salespeople left invoicing and collection to the finance department. Now they began nudging late payers themselves and began to perform more due diligence on customers. Collections sped up by an average of 20 days.

All of which prevented Logical Net's untimely death. The radical shift in company culture and the results it engendered still stun Nikollaj. He's equally stunned by his abandonment of the command-and-control leadership style. "It wasn't easy," he admits. "I wouldn't have been able to do it if I had had any other choice."

Ilan Mochari is a staff writer at Inc.


Hands On

Friendship Pays

Pamela Gordon knows the value of networking. She's expanded her 40-person consulting and market-research company, Technology Forecasters, through referral agreements with three companies offering complementary services. When a customer needs help implementing a business strategy, Gordon refers him to the strategy and Internet-technology consultancy that's her partner. In exchange she's paid a referral fee. She has similar arrangements with a software vendor and an executive-search firm. Referral fees range from less than 5% with the software company to about 25% with the search firm. "Because we meet with the executives about their goals, we're in the perfect spot to match the client need with services that a partner of ours might be offering," says Gordon, who estimates referral fees made up 10% of her 2000 revenues. --Kate O'Sullivan


The Whole New Business Catalog

Where, Oh, Where to Begin
With a Little Help from My Friends
You Just Don't Get It
The Talking Cure
Board Stiff


Please e-mail your comments to editors@inc.com.

Last updated: Nov 1, 2001




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